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 811-04813
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Mellon Institutional Funds Investment Trust
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(Exact name of registrant as specified in charter)
One Boston Place, Boston, MA 02108
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(Address of principal executive offices) (Zip code)
Barbara A. McCann
Vice President and Secretary
One Boston Place, Boston, MA 02108
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(Name and address of agent for service)
with a copy to:
Leonard Pierce
Hale & Dorr
Boston, MA
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Registrant's telephone number, including area code: 800-221-4795
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Date of fiscal year end: 12/31/2003
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Date of reporting period: 12/31/2003
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Item 1. Reports to Stockholders.
Standish Mellon
Opportunistic Emerging
Markets Debt Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
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Mellon Institutional Funds
[Logo] Mellon
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Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
Management Discussion and Analysis
December 2003
The Emerging Market debt asset class performed well in 2003, due to both a
supportive environment for risky assets and to fundamental improvements in the
economic condition of many emerging market countries. The widely followed JP
Morgan EMBI Plus returned 28.82% for the year, while the more diversified JP
Morgan EMBI Global managed a 25.67% return. The year 2003 was the second full
year for the Opportunistic Emerging Market Fund and it returned 28.82%, over 3%
ahead of its EMBI Global benchmark. Ecuador was the best performing market with
a return of 101.48%; the country benefited from strong oil prices and good
policy implementation by the government. Other notable performers included
Brazil, Nigeria and Uruguay, all with returns above 50%. The worst performing
market and the only market to produce a negative return was the Dominican
Republic; it declined 15.33% in 2003 as a banking crisis negatively impacted the
economy in the midst of an election season. Other key markets such as Mexico and
Russia returned 11.56% and 22.38%, respectively. Argentina's bond prices also
managed to bounce back after a difficult few years and return 19.05%.
Emerging market debt was driven by three important factors for most of 2003: the
US economic outlook, the performance of the Brazilian authorities, and new
inflows into the asset class. In the first half of the year, the US economy and
Brazil's reform progress had a very supportive impact on the asset class. The US
was continuing its economic recovery but was still showing anemic signs of
growth. This kept interest rates low and pushed investors to look for higher
yields in sectors such as emerging markets debt. Meanwhile, the newly elected
Lula government in Brazil took action to reduce inflation, maintain tight fiscal
policy, and tackle much needed reform of the social security and tax systems.
This pushed spreads on Brazil bonds lower and helped other high yielding credits
in Latin America to rally as well. During this period spreads on the EMBI+
narrowed about 200 bp.
In late June the Federal Reserve cut rates by 25 basis points but disappointed
the markets with their language change in the accompanying statement. The
Treasury market subsequently began selling off by over 100 bp over the next two
months. This negatively affected emerging markets spreads as investors
remembered the fallout from the 1994 Mexico crisis that was in part caused by a
rise in Treasury yields. Spreads remained volatile until the September, when
weak inflation and employment growth indicators caused the Fed to stress that
interest rates were likely to be kept at low levels for some time. Once US
Treasury rates stabilized, emerging market spreads continued to contract,
falling by another 100bp by the end of the year. Throughout the year but
especially in the second half, new inflows into the asset class from
institutional and retail investors helped keep bond prices well supported.
Fund positioning during the year emphasized overweights in the higher yielding
countries such as Brazil, Ecuador, Venezuela and Colombia. After four years of
dramatic tightening in Russian spreads due to strong policy implementation and
favorable oil prices, we reduced our allocation to Russia early in the year.
However, in summer Russian credit spreads widened on concerns that the
government's prosecution of the powerful Yukos oil company chairman represented
a wider assault
3
on capitalism. We used that opportunity to increase our positioning. One area of
disappointment was our overweight in the Dominion Republic, which was negatively
affected by a banking scandal and poor fiscal results.
In 2004 we expect the first half of the year to be somewhat of a continuation of
the trends in 2003 with the Federal Reserve on hold and continued credit
improvement in many emerging markets. During the second half of the year the
outlook is more cautious as we expect the Federal Reserve to consider a change
in policy which is likely to impact all fixed income assets including emerging
market debt. Other factors such a large decline in the value of the US dollar,
another terrorist strike or a significant change in the economic policies of a
dominant emerging market country could pose challenges during the course of the
year.
We thank you for your continued support.
/s/ John L. Peta
John L. Peta
4
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Mellon Institutional Funds Investment Trust
Standish Mellon Opportunistic Emerging Markets Debt Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon Opportunistic Emerging Markets Debt Fund and the J.P. Morgan
EMBI Global Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
Opportunistic
Emerging J.P. Morgan
Markets Debt EMBI Global
100,000 100,000
99,650 98,879
98,200 98,402
101,550 100,776
103,682 102,313
98,559 97,013
101,551 101,357
98,473 98,043
101,926 98,097
105,739 96,843
108,943 97,998
111,162 99,811
2002 115,108 103,554
115,846 103,668
116,721 104,684
116,159 104,140
110,305 98,891
106,109 94,411
112,212 101,322
109,152 98,516
115,364 104,574
118,987 107,544
123,321 110,846
125,132 112,675
2003 129,960 116,280
133,398 118,164
141,909 124,900
147,217 130,083
146,937 130,078
142,456 125,473
145,077 128,522
149,705 133,033
151,172 133,685
153,545 135,329
158,827 139,304
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Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3/27/2001
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28.82% 17.74%
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Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
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5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
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ASSETS
Investments, at value (Note 1A) (identified cost,
$15,291,231) $15,841,193
Cash 209,882
Interest receivable 344,924
Receivable for closed forward foreign currency contracts
(Note 6) 13,111
Prepaid expenses 1,583
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Total assets 16,410,693
LIABILITIES
Unrealized depreciation on forward foreign currency
exchange contracts (Note 6) $ 7,109
Distributions payable 125,252
Options written, at value (Note 6) (premiums received,
$8,187) 7,859
Accrued accounting, custody and transfer agent fees 9,121
Accrued trustees' fees and expenses (Note 2) 777
Accrued expenses and other liabilities 28,263
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Total liabilities 178,381
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NET ASSETS $16,232,312
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NET ASSETS CONSIST OF:
Paid-in capital $15,525,572
Accumulated net realized gain 168,854
Distributions in excess of net investment income (4,825)
Net unrealized appreciation 542,711
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TOTAL NET ASSETS $16,232,312
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SHARES OF BENEFICIAL INTEREST OUTSTANDING 780,068
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NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 20.81
===========
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
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INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$206 (Note 7)) $ 745,629
EXPENSES
Investment advisory fee (Note 2) $ 46,799
Accounting, custody, and transfer agent fees 86,314
Legal and audit services 30,419
Registration fees 4,710
Insurance expense 3,995
Trustees' fees and expenses (Note 2) 2,907
Miscellaneous 5,409
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Total expenses 180,553
Deduct:
Waiver of investment advisory fee (Note 2) (46,799)
Reimbursement of Fund operating expenses (Note 2) (105,675)
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Total expense deductions (152,474)
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Net expenses 28,079
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Net investment income 717,550
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REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 1,333,270
Financial futures contracts (11,550)
Written options transactions 360
Foreign currency transactions and forward foreign
currency exchange contracts (36,127)
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Net realized gain 1,285,953
Change in unrealized appreciation (depreciation)
Investment securities 228,968
Written options (1,967)
Foreign currency and forward foreign currency exchange
contracts (4,388)
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Change in net unrealized appreciation (depreciation) 222,613
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Net realized and unrealized gain 1,508,566
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NET INCREASE IN NET ASSETS FROM OPERATIONS $2,226,116
==========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
STATEMENTS OF CHANGES IN NET ASSETS
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YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
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INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 717,550 $ 659,881
Net realized gain 1,285,953 130,459
Change in net unrealized appreciation (depreciation) 222,613 217,507
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Net increase in net assets from investment operations 2,226,116 1,007,847
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DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F)
From net investment income (694,242) (592,613)
From net realized gains on investments (1,050,575) --
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Total distributions to shareholders (1,744,817) (592,613)
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FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 11,826,248 10,547,142
Value of shares issued to shareholders in payment of
distributions declared 1,543,165 577,427
Cost of shares redeemed (4,887,894) (7,972,702)
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Net increase in net assets from Fund share transactions 8,481,519 3,151,867
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TOTAL INCREASE IN NET ASSETS 8,962,818 3,567,101
NET ASSETS
At beginning of year 7,269,494 3,702,393
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At end of year (including distributions in excess of net
investment income of $4,825 and $13,147) $16,232,312 $ 7,269,494
=========== ===========
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR THE PERIOD
YEAR ENDED MARCH 26, 2001
DECEMBER 31, (COMMENCEMENT OF
---------------- OPERATIONS)
2003 2002 TO DECEMBER 31, 2001
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NET ASSET VALUE, BEGINNING OF YEAR $ 18.39 $17.67 $20.00
------- ------ ------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 1.61 1.59 1.58
Net realized and unrealized gain on investments 3.59 0.65 0.10
------- ------ ------
Total from investment operations 5.20 2.24 1.68
------- ------ ------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1.32) (1.52) (3.90)
From net realized gain on investments (1.46) -- --
From tax return of capital -- -- (0.11)
------- ------ ------
Total distributions to shareholders (2.78) (1.52) (4.01)
------- ------ ------
NET ASSET VALUE, END OF YEAR $ 20.81 $18.39 $17.67
======= ====== ======
TOTAL RETURN+++ 28.82% 13.20% 8.94%++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.30% 0.30% 0.30%+
Net Investment Income (to average daily net assets)* 7.64% 8.83% 10.33%+
Portfolio Turnover 224% 421% 505%++
Net Assets, End of Year (000's omitted) $16,232 $7,269 $3,702
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose any of its investment advisory fee and reimbursed the Fund for a
portion of its operating expenses. If this voluntary action had not been
taken, the investment income per share and ratios would have been:
Net investment income per share(1) $ 1.26 $ 1.23 $ 1.34
Ratios (to average daily net assets):
Expenses 1.92% 2.31% 1.82%+
Net investment income 6.02% 6.82% 8.81%+
+ Computed on an annualized basis.
++ Not annualized.
+++ Total return would have been lower in the absence of fee waivers and
expense limitations.
(1) Calculated based on average shares outstanding.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 92.3%
CORPORATE -- 10.0%
ENERGY -- 4.2%
Gazprom OAO 9.625% 03/01/2013 USD 70,000 $ 77,476
Gazprom OAO 144A Notes 9.625% 03/01/2013 115,000 127,281
Petroliam Nasional Berhad 144A 7.750% 08/15/2015 405,000 486,029
-----------
690,786
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FINANCIAL -- 5.8%
Banque Centrale de Tunisie 7.375% 04/25/2012 50,000 56,000
Banque Centrale de Tunisie 7.375% 04/25/2012 30,000 33,600
Pemex Project Funding Master Trust 7.375% 12/15/2014 240,000 256,200
Pemex Project Funding Master Trust 8.625% 02/01/2022 240,000 265,800
Telefonos de Mexico SA 8.250% 01/26/2006 295,000 325,263
-----------
936,863
-----------
Total Corporate (Cost $1,615,472) 1,627,649
-----------
SOVEREIGN BONDS -- 78.8%
Dominican Republic 144A 9.500% 09/27/2006 60,000 48,600
Dominican Republic Euro Registered 9.500% 09/27/2006 15,000 12,150
Ministry Finance Russia 3.000% 05/14/2008 335,000 299,406
Nigeria Promissory Notes Series RC 5.092% 01/05/2010 460,000 174,800
Republic of Argentina 0.000% 06/19/2018 143,269 35,817
Republic of Brazil(a) 2.063% 04/15/2012 540,000 488,700
Republic of Brazil 8.000% 04/15/2014 615,705 605,700
Republic of Brazil 8.875% 04/15/2024 170,000 165,750
Republic of Brazil 10.000% 01/16/2007 65,000 72,800
Republic of Brazil 10.000% 08/07/2011 145,000 160,225
Republic of Brazil 10.125% 05/15/2027 75,000 79,500
Republic of Brazil 11.000% 08/17/2040 690,000 759,000
Republic of Brazil 11.500% 03/12/2008 415,000 481,400
Republic of Brazil 12.000% 04/15/2010 175,000 210,000
Republic of Brazil 12.250% 03/06/2030 240,000 298,800
Republic of Brazil 14.500% 10/15/2009 280,000 366,100
Republic of Bulgaria 144A 8.250% 01/15/2015 65,000 76,212
Republic of Bulgaria IAB PDI(a) 1.938% 07/28/2011 185,250 182,008
Republic of Bulgaria Series A(a) 1.938% 07/28/2024 100,000 99,000
Republic of Chile 7.125% 01/11/2012 130,000 148,414
Republic of Colombia 7.625% 02/15/2007 90,000 96,750
Republic of Colombia 9.750% 04/23/2009 190,000 209,570
Republic of Colombia 11.750% 02/25/2020 75,000 90,375
Republic of Columbia 10.375% 01/28/2033 80,000 85,800
Republic of Ecuador 7.000% 08/15/2030 330,000 255,750
Republic of Ecuador 144A 12.000% 11/15/2012 195,000 190,612
Republic of El Salvador 7.750% 01/24/2023 100,000 105,000
Republic of El Salvador 7.750% 01/24/2023 45,000 47,250
Republic of El Salvador 8.500% 07/25/2011 20,000 22,050
Republic of Panama 8.875% 09/30/2027 35,000 36,750
Republic of Panama 9.625% 02/08/2011 195,000 225,225
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
SOVEREIGN BONDS (CONTINUED)
Republic of Peru 8.750% 11/21/2033 USD 75,000 $ 75,000
Republic of Peru 9.125% 02/21/2012 115,000 128,225
Republic of Peru FLIRB(a) 4.500% 03/07/2017 200,000 178,000
Republic of Peru PDI(a) 5.000% 03/07/2017 94,000 86,950
Republic of Philippines 8.375% 03/12/2009 145,000 152,794
Republic of Philippines 9.375% 01/18/2017 220,000 237,050
Republic of Philippines 9.875% 01/15/2019 95,000 100,462
Republic of Philippines 10.625% 03/16/2025 140,000 155,750
Republic of Turkey 11.750% 06/15/2010 215,000 270,900
Republic of Turkey Senior Unsub Notes 11.875% 01/15/2030 165,000 223,575
Republic of Turkey Senior Unsub Notes 12.375% 06/15/2009 210,000 266,700
Republic of Uruguay 0.000% 01/15/2033 755 516
Republic of Uruguay 3.875% 01/15/2033 32,000 21,840
Republic of Uruguay 7.500% 03/15/2015 158,000 126,400
Republic of Venezuela 5.375% 08/07/2010 100,000 82,000
Republic of Venezuela 9.250% 09/15/2027 525,000 477,750
Republic of Venezuela(a) 2.125% 12/18/2007 95,238 90,476
Republic of Venezuela 144A 10.750% 09/19/2013 115,000 122,762
Russian Federation 5.000% 03/31/2030 1,355,000 1,304,188
Russian Federation 8.250% 03/31/2010 320,000 357,600
Russian Federation 11.000% 07/24/2018 230,000 309,925
State of Qatar 144A 9.750% 06/15/2030 55,000 77,000
Ukraine Government Senior Notes 11.000% 03/15/2007 147,002 163,539
United Mexican States 6.625% 03/03/2015 95,000 98,325
United Mexican States 7.500% 04/08/2033 170,000 175,525
United Mexican States 8.300% 08/15/2031 90,000 101,025
United Mexican States 8.625% 03/12/2008 240,000 282,600
United Mexican States 9.875% 02/01/2010 325,000 410,313
United Mexican States 10.375% 02/17/2009 115,000 145,475
United Mexican States 11.500% 05/15/2026 100,000 144,750
United Mexican States MTN 8.000% 09/24/2022 265,000 289,910
-----------
Total Sovereign Bonds (Cost $12,263,023) 12,786,839
-----------
YANKEE BONDS -- 2.6%
Celulosa Arauco Constitution 5.125% 07/09/2013 50,000 48,915
Innova S de RL de CV 144A 9.375% 09/19/2013 140,000 143,675
Salomon Bros. (Sibneft) 10.750% 01/15/2009 195,000 220,350
-----------
Total Yankee Bonds (Cost $408,852) 412,940
-----------
FOREIGN DENOMINATED -- 0.9%
FRANCE -- 0.3%
Ivory Coast FLIRB{*}(a) 2.000% 03/29/2018 FRF 1,820,000 54,119
-----------
SOUTH AFRICA -- 0.6%
Republic of South Africa 13.000% 08/31/2010 ZAR 555,000 99,338
-----------
Total Foreign Denominated (Cost $143,577) 153,457
-----------
TOTAL BONDS AND NOTES (COST $14,430,924) 14,980,885
-----------
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 5.3%
U.S. TREASURY BILLS -- 0.3%
U.S. Treasury Bill=/= 0.864% 03/04/2004 USD 50,000 $ 49,927
--------
REPURCHASE AGREEMENTS -- 5.0%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc.
and Investors Bank and Trust Company, due 01/02/04, with a maturity value of
$810,391 and an effective yield of 0.20%, collateralized by a U.S. Government
Obligation with a rate of 5.18%, a maturity date of 02/15/26 and an aggregate
market value of $827,400. 810,381
--------
TOTAL SHORT-TERM INVESTMENTS (COST $860,307) 860,308
--------
TOTAL INVESTMENTS -- 97.6% (COST
$15,291,231) $15,841,193
OTHER ASSETS, LESS LIABILITIES -- 2.4% 391,119
-----------
NET ASSETS -- 100.0% $16,232,312
===========
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
FLIRB - Front Loaded Interest Reduction Bond
FRF - French Franc
IAB - Interest Arrears Bonds
MTN - Medium Term Notes
PDI - Past Due Interest Bonds
USD - United States Dollar
ZAR - South African Rand
(a) Variable Rate Security; rate indicated is as of 12/31/03.
{*} Defaulted security.
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PERCENTAGE
OF NET
TOP TEN COUNTRIES ASSETS
- --------------------------------------------------------------------------------
Brazil 22.7%
Mexico 16.3%
Russia 15.8%
United States of America 5.3%
Venezuela 4.8%
Turkey 4.7%
Philippines 4.0%
Malaysia 3.0%
Colombia 3.0%
Peru 2.9%
The accompanying notes are an integral part of the financial statements.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Opportunistic Emerging Markets Debt Fund (the "Fund") is a
separate non-diversified investment series of the Trust.
The objective of the Fund is to generate a high total return through a
combination of capital appreciation and income. The fund seeks to achieve
its objective by investing, under normal circumstances, at least 80% of net
assets in fixed income securities issued by governments, companies and
banks of emerging markets, as well as preferred stocks, warrants and
tax-exempt bonds.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Opportunistic Emerging Markets Debt Fund was changed to Standish Mellon
Opportunistic Emerging Markets Debt Fund. In addition, the Declaration of
Trust was amended to change the name of the Trust from Standish, Ayer &
Wood Investment Trust to Mellon Institutional Funds Investment Trust. The
name changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Dividend income is recorded on the ex-dividend
date. Realized gains and losses from securities sold are
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
recorded on the identified cost basis. The 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. Net realized
gains and losses on foreign currency transactions represent gains and
losses on disposition of foreign currencies and forward foreign currency
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts usually received or
paid.
D. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
E. INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
F. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income will be declared and distributed
quarterly. The Fund's dividends from short-term and long-term capital
gains, if any, after reduction of capital losses will be declared and
distributed at least annually. Dividends from net investment income and
distributions from capital gains, if any, are reinvested in additional
shares of the Fund unless the shareholder elects to receive them in cash.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from accounting principles
generally accepted in the United States of America. These differences,
which may result in distribution reclassifications, are primarily due to
differing treatments for losses deferred due to wash sales, foreign
currency gains and losses, post-October losses, amortization and/or
accretion of premiums and discounts on certain securities and the timing of
recognition of gains and losses on futures contracts.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
G. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
H. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory and administrative
services, and general office facilities, is paid monthly at the annual rate
of 0.50% of the Fund's average daily net assets. Standish Mellon
voluntarily agreed to limit total Fund operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.30% of the
Fund's average daily net assets for the year ended December 31, 2003.
Pursuant to this agreement, for the year ended December 31, 2003, Standish
Mellon voluntarily did not impose $46,799 of its investment advisory fee
and reimbursed the Fund for $105,675 of its operating expenses. This
agreement is voluntary and temporary and may be discontinued or revised by
Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
----------- -----------
U.S. Government Securities $ 174,549 $ 373,203
=========== ===========
Investments (non-U.S.Government Securities) $26,760,526 $20,050,185
=========== ===========
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 548,758 583,270
Shares issued to shareholders in payment of
distributions declared 74,295 32,307
Shares redeemed (238,253) (429,880)
-------- --------
Net increase 384,800 185,697
======== ========
At December 31, 2003, five shareholders held of record approximately 23%,
15%, 13%, 13% and 12% of the total outstanding shares of the Fund.
All of the Fund's shares are beneficially owned by fiduciary accounts over
which Standish Mellon and its affiliates have either sole or joint
investment discretion.
16
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 were as follows:
Unrealized appreciation $ 597,629
Unrealized depreciation (57,345)
-----------
Net unrealized appreciation/depreciation 540,284
Undistributed ordinary income 250,568
Accumulated gains 41,551
Cost for federal income tax purposes $15,301,178
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
AMOUNT
----------
Distributions paid from:
Ordinary income $1,697,933
Accumulated gains 46,884
(6) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face amount at value of any
open purchased options is shown in the Schedule of Investments. This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contract or
if the counterparty does not perform under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
17
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 5,535
Options written 1 4,687
Options expired (1) (5,535)
----------- -------
Outstanding, end of period 1 $ 4,687
=========== =======
At December 31, 2003, the Fund held the following written put option
contracts:
SECURITY CONTRACTS VALUE
------------------------------------------------------------ ------------------- --------
U.S. Treasury Note 4.25% Put, Strike Price 100.94,
01/20/2004 1 $6,469
------
Total (premiums received $4,687) $6,469
======
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 4,140
Options written 1 3,500
Options closed (1) (4,140)
-- -------
Outstanding, end of period 1 $ 3,500
== =======
At December 31, 2003, the Fund held the following written call option
contracts:
SECURITY CONTRACTS VALUE
-------------------------------------------------------------------------------------------
U.S. Treasury Note 4.25% Call, Strike Price 100.94,
01/20/2004 1 $1,390
------
Total (premiums received $3,500) $1,390
======
At December 31, 2003, the Fund had segregated sufficient securities for the
open written options contracts.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Fund primarily to protect the value of the Fund's foreign securities
from adverse currency movements. Unrealized appreciation and depreciation
of forward currency exchange contracts is included in the Statement of
Assets and Liabilities.
18
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following forward foreign currency
or cross currency exchange contracts:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
-------------------------------------------------------------------------------------------------
Euro 59,000 03/17/2004 $ 74,092 $ 72,155 $(1,937)
South African Rand 730,000 01/27/2004 108,792 103,620 (5,172)
-------- -------- -------
TOTAL $182,884 $175,775 $(7,109)
======== ======== =======
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
At December 31, 2003, the Fund held no outstanding financial futures
contracts.
(7) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Fund had no
securities on loan.
(8) DELAYED DELIVERY TRANSACTIONS:
The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. This Fund segregates securities having a value
at least equal to the amount of the purchase commitment.
19
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC EMERGING MARKETS DEBT FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund may enter into to be announced ("TBA") purchase commitments to
purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Fund holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
Fund may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition
to the risk of the decline in the value of the Fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value
of the underlying securities, according to the procedures described under
"Investment security valuations" above.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is
'marked-to-market' daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. If the TBA sale commitment is closed
through the acquisition of an offsetting purchase commitment, the Fund
realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
The Fund entered into no such transactions during the year ended December
31, 2003.
20
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Opportunistic Emerging Markets Debt Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon Opportunistic
Emerging Markets Debt Fund (formerly, Standish Opportunistic Emerging
Markets Debt Fund) (the "Fund") at December 31, 2003, and the results of
its operations, the changes in its net assets and the financial highlights
for each of the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2003 by correspondence with the
custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
21
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
Trustee Trustee since Trustee, Mertens 28 None
11/3/1986 House, Inc. Trustee
and Chairman of the
Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
John H. Hewitt
P.O. Box 233
New London, NH 03257
4/11/35
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
22
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstituionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
23
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
International Fixed
Income Fund II
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
Management Discussion and Analysis
December 2003
International bond markets produced modest, positive returns in 2003in local
currency terms. However, in U.S. dollar terms the returns were significantly
higher due to the dramatic decline in the U.S. dollar. The Standish Mellon
International Fixed Income Fund II returned 21.51% for the year, after all
expenses, compared to 18.63% for our benchmark, the JP Morgan Non-U.S.
Government Bond Index.
Global bond market returns had two distinct phases during 2003 that were driven
by a series of economic, financial and geopolitical developments. During the
first half of the year, bond markets were generally strong, led by the U.S.
market. The global economy was weak, although there were signs of recovery, and
financial market participants were concerned about the possibility of deflation,
particularly in the U.S. The Iraq war and concern about North Korea's nuclear
weapons program further weighed on confidence and the growth outlook. In
addition, financial market scandals caused some investors to abandon riskier
assets such as stocks. Bonds looked like a safe bet.
During the second half of the year, global growth accelerated and confidence
returned to financial markets. The heavy fighting was over in Iraq and progress
was being made on the Korean Peninsula. The Federal Reserve had lowered rates to
their lowest level since 1958 and the combination of low interest rates and
fiscal stimulus was taking hold. The health of global companies was improving
with increasing profits and declining credit spreads. Equities were rallying
globally as were emerging market stocks and bonds. As the fear of deflation
faded, bond yields rose dramatically from the mid-year lows.
The range of returns in local terms for government bond markets as measured by
the JP Morgan Government Bond Indices was modest for the year with only 684 b.p.
separating the best market Canada (+6.04%) from the worst, Japan (-0.80%). The
U.S. component of the index returned 2.44% while European markets returned
3.76%. The U.S. dollar fell relative to all major currencies last year with the
declines ranging from 33.80% relative to the Australian dollar to 10.73%
relative to the Japanese yen. Although government bond returns were modest in
2003, corporate and emerging market bonds performed quite well. The higher
yielding segments of the bond market produced the best returns with high yield
corporate bonds and emerging market bond indices recording returns in excess of
20%. The U.S. dollar fell during the year as the mix of loose fiscal and
monetary policy and the large current account deficit made the currency
unattractive to global investors.
During this period of U.S. dollar weakness, the Fund has not been able to make
regular distributions of investment income. This is due to our policy of hedging
most of our currency exposures back to U.S. dollars. Although this policy
results in less volatility in total return over time than if the portfolio were
unhedged, currency volatility can have a
3
significant effect on the Fund's investment income. In periods when the dollar
declines as it has over the past two years, the losses from the currency hedging
activity offset the investment income of the portfolio. Conversely, when the
dollar appreciates, our currency hedging activity typically generates gains that
enhance the investment income of the Fund. Another way to view this is that much
of the Fund's reported total return -which has been very strong compared to the
Index -- is classified as capital appreciation within the portfolio.
The Fund outperformed its benchmark during the year. Our position in investment
grade and high yield corporate bonds and emerging market securities was the
largest positive contributor relative to our benchmark. Our country selection
was also positive as we were overweighted European markets and zero weighted in
Japan. Our currency exposure was positive for the year relative to the benchmark
as we had established positions in the Euro and the Australian, New Zealand and
Canadian dollars relative to the U.S. dollar and all those positions contributed
positively in 2003.
Our outlook for 2004 is favorable for international bonds. We believe that the
performance of global economies will be mixed in the coming year with the U.S.
growing above trend, Japan on trend and Europe below. Government bond yields in
the U.S. will be biased upwards but opportunities for value-added can be found
in European bonds as the European Central Bank is likely to lag any moves by the
Fed to increase interest rates. Non-government sectors such as corporate and
emerging bonds offer value in 2004 as credit quality improves. However, the
excess returns are likely to be more modest than in 2003.
We appreciate your continued support and look forward to working on your behalf
over the next year.
/s/ W. Charles Cook
W. Charles Cook
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon International Fixed Income Fund II
Comparison of Change in Value of $100,000 Investment in Standish Mellon
International Fixed Income Fund II and J.P. Morgan Non-U.S. Government Bond
Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
International J.P. Morgan
Fixed Income Non-U.S. Gov't
Fund II Bond Index
100,000 100,000
102,900 103,342
103,050 103,744
104,605 105,546
104,757 105,322
102,986 103,618
102,838 103,482
98,718 100,416
98,613 98,961
101,680 102,209
97,178 97,866
98,661 98,839
2000 100,777 101,530
98,284 98,806
96,905 97,166
96,215 96,884
94,147 94,850
96,216 96,785
100,034 100,927
100,194 100,533
99,981 100,071
94,943 96,038
95,049 96,038
93,882 95,533
2001 93,033 94,124
94,730 96,487
99,133 100,966
98,655 101,380
98,814 101,542
97,966 100,476
94,721 97,284
91,905 94,842
92,702 95,165
92,914 95,544
96,261 99,301
101,361 102,796
2002 106,727 108,842
106,036 109,534
108,002 111,312
108,533 111,995
107,736 111,855
108,799 112,318
115,067 118,766
117,724 121,002
119,423 122,565
119,965 123,183
122,163 124,951
128,161 130,865
2003 126,341 128,432
122,993 125,068
122,562 123,992
131,154 131,984
130,603 131,736
133,437 134,389
139,762 140,888
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 06/30/1999
------ ------ ----------
21.51% 11.79% 7.72%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$20,888,861) $23,479,579
Cash 23
Receivable for investments sold 63,950
Receivable for Fund shares sold 65,950
Interest receivable 578,046
Unrealized appreciation on forward foreign currency
exchange contracts (Note 6) 69,935
Prepaid expenses 8,516
-----------
Total assets 24,265,999
LIABILITIES
Payable for variation margin on open financial futures
contracts (Note 6) $ 750
Unrealized depreciation on forward foreign currency
exchange contracts (Note 6) 192,847
Payable for closed forward foreign currency exchange
contracts (Note 6) 4,023
Distributions payable 10,799
Options written, at value (Note 6) (premiums received,
$10,814) 28,766
Accrued accounting, custody and transfer agent fees 13,766
Accrued trustees' fees and expenses (Note 2) 1,019
Accrued expenses and other liabilities 30,723
-------
Total liabilities 282,693
-----------
NET ASSETS $23,983,306
===========
NET ASSETS CONSIST OF:
Paid-in capital $22,198,544
Accumulated net realized loss (768,460)
Undistributed net investment income 105,920
Net unrealized appreciation 2,447,302
-----------
TOTAL NET ASSETS $23,983,306
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 1,043,973
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 22.97
===========
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$219 (Note 7)) $ 912,118
Dividend income 1,090
----------
Total investment income 913,208
EXPENSES
Investment advisory fee (Note 2) $ 93,938
Accounting, custody, and transfer agent fees 136,017
Legal and audit services 34,827
Registration fees 19,120
Insurance expense 7,449
Trustees' fees and expenses (Note 2) 4,099
Miscellaneous 8,934
---------
Total expenses 304,384
Deduct:
Waiver of investment advisory fee (Note 2) (93,938)
Reimbursement of Fund operating expenses (Note 2) (81,282)
---------
Total expense deductions (175,220)
---------
Net expenses 129,164
----------
Net investment income 784,044
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 2,776,572
Financial futures contracts (16,828)
Written options transactions 12,379
Foreign currency transactions and forward foreign
currency exchange contracts 301,384
---------
Net realized gain 3,073,507
Change in unrealized appreciation (depreciation)
Investment securities 804,916
Financial futures contracts 17,609
Written options (18,587)
Foreign currency and forward foreign currency exchange
contracts (247,759)
---------
Change in net unrealized appreciation (depreciation) 556,179
----------
Net realized and unrealized gain 3,629,686
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $4,413,730
==========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 784,044 $ 941,984
Net realized gain (loss) 3,073,507 (971,630)
Change in net unrealized appreciation (depreciation) 556,179 3,385,918
------------ ------------
Net increase in net assets from investment operations 4,413,730 3,356,272
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F)
From net investment income (3,060,410) --
------------ ------------
Total distributions to shareholders (3,060,410) --
------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 10,008,544 12,416,156
Value of shares issued to shareholders in payment of
distributions declared 3,046,737 --
Cost of shares redeemed (11,627,410) (34,907,479)
------------ ------------
Net increase (decrease) in net assets from Fund share
transactions 1,427,871 (22,491,323)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,781,191 (19,135,051)
NET ASSETS
At beginning of year 21,202,115 40,337,166
------------ ------------
At end of year (including undistributed net investment
income of $105,920 and $43,915) $ 23,983,306 $ 21,202,115
============ ============
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR THE PERIOD
JUNE 30, 1999
YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
----------------------------------- OPERATIONS) TO
2003 2002 2001(A) 2000 DECEMBER 31, 1999
------- ------- -------- ------- -----------------
NET ASSET VALUE, BEGINNING OF YEAR $ 21.66 $ 17.83 $ 18.87 $ 19.47 $ 20.00
------- ------- ------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.77 0.73 0.73 0.98 0.61
Net realized and unrealized gain (loss) on
investments 3.81 3.10 (1.74) (1.50) (0.04)
------- ------- ------- ------- -------
Total from investment operations 4.58 3.83 (1.01) (0.52) 0.57
------- ------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (3.27) -- (0.03) (0.08) (1.10)
------- ------- ------- ------- -------
Total distributions to shareholders (3.27) -- (0.03) (0.08) (1.10)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $ 22.97 $ 21.66 $ 17.83 $ 18.87 $ 19.47
======= ======= ======= ======= =======
TOTAL RETURN+++ 21.51% 21.48% (5.31)% (2.73)% 2.84%++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.55% 0.55% 0.55% 0.27% 0.00%+
Net Investment Income (to average daily net
assets)* 3.34% 3.87% 3.99% 5.30% 5.93%+
Portfolio Turnover 192% 178% 205% 216% 91%++
Net Assets, End of Year (000's omitted) $23,983 $21,202 $40,337 $41,614 $23,999
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment advisory fee and/or reimbursed
the Fund for all or a portion of its operating expenses. If this voluntary
action had not been taken, the investment income per share and the ratios
would have been:
Net investment income per share(1) $ 0.60 $ 0.60 $ 0.68 $ 0.86 $ 0.51
Ratios (to average daily net assets):
Expenses 1.30% 1.23% 0.85% 0.90% 1.02%+
Net investment income 2.59% 3.19% 3.69% 4.67% 4.91%+
(a) The Fund has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease net investment income per share by
$0.002, increase net realized and unrealized gains and losses per share by
$0.002 and decrease the ratio of net investment income to average net
assets from 4.00% to 3.99%. Per share data and ratios/supplemental data for
the periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
(1) Calculated based on average shares outstanding.
+ Computed on an annualized basis.
++ Not annualized
+++ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 94.3%
ASSET BACKED -- 1.7%
Household Automotive Trust 2003-1A A2 1.300% 09/18/2006 USD 135,000 $ 134,992
MBNA Master Credit Card Trust 1999-G A 6.350% 12/15/2006 200,000 205,443
Whole Auto Loan Trust 2002-1 A2 1.880% 06/15/2005 64,625 64,761
-----------
Total Asset Backed (Cost $407,466) 405,196
-----------
CORPORATE -- 4.2%
BANKING -- 0.2%
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 45,000 46,125
-----------
BASIC INDUSTRY -- 0.3%
CSC Holdings, Inc. 7.875% 12/15/2007 20,000 21,100
Nalco Co. 7.750% 11/15/2011 30,000 38,979
-----------
60,079
-----------
CAPITAL GOODS -- 0.4%
Allied Waste Industries, Inc. 8.875% 04/01/2008 65,000 72,800
Allied Waste Industries, Inc. 10.000% 08/01/2009 15,000 16,200
-----------
89,000
-----------
COMMUNICATIONS -- 0.8%
AT&T Wireless Services, Inc. Senior
Notes 8.750% 03/01/2031 45,000 55,522
Salem Communciations Corp. Senior Sub
Notes 7.750% 12/15/2010 15,000 15,637
Sprint Capital Corp. 8.375% 03/15/2012 55,000 64,229
Sprint Capital Corp. 8.750% 03/15/2032 50,000 59,069
-----------
194,457
-----------
CONSUMER CYCLICAL -- 0.8%
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 25,000 26,437
Echostar DBS Corp. Senior Notes 10.375% 10/01/2007 80,000 87,700
Mohegan Tribal Gaming Authority Senior
Notes 8.375% 07/01/2011 20,000 21,800
Mohegan Tribal Gaming Authority Senior
Sub Notes 6.375% 07/15/2009 20,000 20,650
Station Casinos, Inc. Senior Sub Notes 8.875% 12/01/2008 30,000 31,050
-----------
187,637
-----------
CONSUMER NONCYCLICAL -- 0.5%
Altria Group, Inc. 5.625% 11/04/2008 75,000 76,938
Tricon Global Restaurant, Inc. Senior
Notes 8.875% 04/15/2011 25,000 30,313
-----------
107,251
-----------
ENERGY -- 0.4%
ANR Pipeline Co. 7.375% 02/15/2024 10,000 10,100
Chesapeake Energy Corp. 8.125% 04/01/2011 30,000 33,300
Halliburton Co. 144A 5.500% 10/15/2010 40,000 41,833
-----------
85,233
-----------
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------
FINANCIAL -- 0.6%
General Motors Corp. 7.250% 07/03/2013 EUR 90,000 $ 125,359
RH Donnelley Finance Corp. I 144A
Senior Notes 8.875% 12/15/2010 USD 5,000 5,625
RH Donnelley Finance Corp. I 144A
Senior Sub Notes 10.875% 12/15/2012 10,000 11,863
-----------
142,847
-----------
PUBLIC UTILITY -- 0.2%
AES Corp. 144A 8.750% 05/15/2013 25,000 27,937
Southern Natural Gas Co. 8.875% 03/15/2010 15,000 16,875
-----------
44,812
-----------
Total Corporate (Cost $922,604) 957,441
-----------
SOVEREIGN BONDS -- 1.9%
Republic of Brazil 8.000% 04/15/2014 12,314 12,114
Republic of Brazil 10.000% 08/07/2011 30,000 33,150
Republic of Brazil 11.000% 08/17/2040 60,000 66,000
Republic of Brazil 14.500% 10/15/2009 15,000 19,613
Republic of Bulgaria IAB PDI(a) 1.938% 07/28/2011 28,500 28,001
Republic of Bulgaria Series A(a) 1.938% 07/28/2024 15,000 14,850
Republic of Colombia 10.750% 01/15/2013 20,000 22,750
Republic of El Salvador 8.500% 07/25/2011 25,000 27,563
Republic of Peru 8.750% 11/21/2033 20,000 20,000
Republic of Peru FLIRB(a) 4.500% 03/07/2017 25,000 22,250
Republic of Turkey Senior Unsub Notes 11.875% 01/15/2030 10,000 13,550
Republic of Turkey Senior Unsub Notes 12.375% 06/15/2009 20,000 25,400
Republic of Venezuela 9.250% 09/15/2027 25,000 22,750
Russian Federation 5.000% 03/31/2030 20,000 19,250
Russian Federation 11.000% 07/24/2018 20,000 26,950
Ukraine Government Senior Notes 11.000% 03/15/2007 49,001 54,513
United Mexican States 9.875% 02/01/2010 35,000 44,188
-----------
Total Sovereign Bonds (Cost $463,778) 472,892
-----------
YANKEE BONDS -- 2.4%
Banque Centrale de Tunisie 7.375% 04/25/2012 30,000 33,600
British Sky Broadcasting 6.875% 02/23/2009 180,000 202,049
British Sky Broadcasting 7.300% 10/15/2006 70,000 77,943
HBOS PLC 144A Sub Notes(a) 5.375% 12/31/2049 30,000 29,908
Hutchison Whampoa Ltd. 144A 5.450% 11/24/2010 100,000 101,431
International Telecom Satellite Ltd.
144A 6.500% 11/01/2013 20,000 20,868
Ministry Finance Russia 3.000% 05/14/2008 45,000 40,219
Rogers Cable, Inc. 6.250% 06/15/2013 30,000 30,225
Royal Caribbean Cruises 8.250% 04/01/2005 15,000 15,788
Salomon Bros. (Sibneft) 10.750% 01/15/2009 30,000 33,900
-----------
Total Yankee Bonds (Cost $575,937) 585,931
-----------
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 0.1%
TREASURY NOTES -- 0.1%
U.S. Treasury Note 4.000% 11/15/2012 USD 25,000 $ 24,760
-----------
Total U.S. Treasury Obligations (Cost $24,968) 24,760
-----------
FOREIGN DENOMINATED -- 84.0%
AUSTRALIA -- 2.1%
Australian Government Series 808 8.750% 08/15/2008 AUD 585,000 496,295
-----------
CANADA -- 0.3%
Canadian Pacific Railway 4.900% 06/15/2010 CAD 95,000 73,253
-----------
CAYMAN ISLANDS -- 0.3%
Philip Morris Finance (Ci) 4.500% 04/06/2006 EUR 60,000 76,259
-----------
DENMARK -- 5.6%
Denmark Realkredit 4.000% 01/01/2006 DKK 735,000 126,898
Denmark Realkredit 6.000% 10/01/2032 3,897,702 676,098
Kingdom of Denmark 4.000% 11/15/2004 3,080,000 527,443
-----------
1,330,439
-----------
EURO -- 64.2%
Allied Domecq PLC 5.875% 06/12/2009 EUR 20,000 27,114
Allied Irish Banks Ltd.(a) 7.500% 02/28/2011 20,000 29,181
Bank of Ireland Holdings(a) 7.400% 12/29/2049 20,000 29,260
Barclays Bank PLC(a) 7.500% 12/15/2010 20,000 29,489
Bouni Poliennali del Tesoro 1.650% 09/15/2008 115,000 145,251
British Telecom PLC 6.125% 02/15/2006 20,000 26,746
Bundes Obligation Series 135 5.000% 05/20/2005 515,000 670,726
Bundes Obligation Series 136 5.000% 08/19/2005 115,000 150,403
Bundes Obligation Series 142 3.000% 04/11/2008 850,000 1,052,954
Bundes Obligation Series 143 3.500% 10/10/2008 195,000 245,265
Bundes Obligation Series 94 7.500% 11/11/2004 530,000 696,565
Buoni del Tesoro Poliennali 4.500% 03/01/2007 660,000 864,762
Daimlerchrysler International Finance 6.125% 03/21/2006 75,000 99,540
DePfa ACS Bank 144A 3.875% 07/15/2013 200,000 240,459
Deutsche Telekom International Finance
BV 8.125% 05/29/2012 40,000 61,767
Deutschland Republic 4.500% 01/04/2013 590,000 757,973
Deutschland Republic 4.750% 07/04/2028 640,000 785,242
Deutschland Republic 5.625% 01/04/2028 60,000 82,783
Dexia Municipal Agency 5.375% 04/26/2007 185,000 248,171
Eircom Funding 8.250% 08/15/2013 25,000 34,685
Eurohypo AG 4.500% 01/21/2013 50,000 63,442
European Investment Bank 3.625% 10/15/2013 50,000 59,270
FBG Treasury BV 5.750% 03/17/2005 40,000 52,094
Fort James Corp. 4.750% 06/29/2004 150,000 188,288
France Telecom 7.250% 01/28/2013 140,000 204,981
France Telecom Senior Unsub Notes 8.125% 01/28/2033 40,000 64,672
French Government 3.150% 07/25/2032 188,393 266,020
The accompanying notes are an integral part of the financial statements.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------
EURO (CONTINUED)
French Treasury Note 5.000% 01/12/2006 EUR 675,000 $ 888,790
HBOS PLC(a) 6.050% 11/23/2049 20,000 27,222
Heinz BV 5.125% 04/10/2006 50,000 65,682
Hilton Group Finance PLC 6.500% 07/17/2009 30,000 41,387
Honeywell Holding BV 5.250% 12/20/2006 20,000 26,145
Household Finance Corp. Senior Unsub
Notes 6.500% 05/05/2009 45,000 62,719
Inco, Ltd. 15.750% 07/15/2006 200,000 414,585
International Paper Co. 5.375% 08/11/2006 20,000 26,213
Italian Government 7.750% 11/01/2006 500,000 705,837
Kappa Beheer BV 10.625% 07/15/2009 20,000 26,804
Kingdom of Belgium 5.750% 09/28/2010 625,000 869,633
Kingdom of Belgium Series 41 4.250% 09/28/2013 200,000 250,069
Lear Corp. Senior Notes 8.125% 04/01/2008 20,000 28,314
Linde Finance BV(a) 6.000% 07/29/2049 180,000 227,735
Messer Greisheim Holdings AG Senior
Notes 10.375% 06/01/2011 20,000 29,069
Morgan Stanley Dean Witter 5.750% 04/01/2009 30,000 40,839
National Westminister Bank(a) 6.625% 10/29/2049 25,000 34,950
Netherland Government Notes 5.500% 07/15/2010 160,000 219,767
Netherlands Government Notes 4.000% 07/15/2005 340,000 437,312
Parker-Hannifin Corp. 6.250% 11/21/2005 10,000 13,306
Pemex Project Funding Master Trust
144A 6.625% 04/04/2010 20,000 26,049
Republic of Austria 5.750% 04/11/2007 710,000 962,261
Republic of South Africa 5.250% 05/16/2013 15,000 18,027
Sara Lee Corp. 6.125% 07/27/2007 30,000 40,768
Sogerim 7.000% 04/20/2011 30,000 42,799
Spanish Government 3.250% 01/31/2005 775,000 987,109
Spanish Government 4.250% 10/31/2007 780,000 1,014,628
Spanish Government 5.000% 07/30/2012 20,000 26,597
Telecom Italia SpA 6.250% 02/01/2012 80,000 109,612
Telelfonica Europe BV 5.125% 02/14/2013 35,000 45,273
Telenet Communication NV 144A Senior
Notes 9.000% 12/15/2013 90,000 116,654
Telenor ASA 5.875% 12/05/2012 60,000 81,666
ThyssenKrupp 7.000% 03/19/2009 25,000 34,213
Tyco International Group SA 5.500% 11/19/2008 175,000 224,624
Valentia Telecommunications Ltd. 7.250% 12/31/2049 40,000 54,111
Vivendi Environnement Senior Notes 5.875% 06/27/2008 35,000 47,147
-----------
15,445,019
-----------
GERMANY -- 4.5%
Deutschland Republic+ 6.000% 01/05/2006 800,000 1,071,452
-----------
SINGAPORE -- 2.4%
Singapore Government 3.500% 07/01/2012 SGD 1,000,000 581,675
-----------
SOUTH AFRICA -- 0.1%
Republic of South Africa 13.000% 08/31/2010 ZAR 125,000 22,373
-----------
The accompanying notes are an integral part of the financial statements.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------
SWEDEN -- 4.5%
Swedish Government Series 1037 8.000% 08/15/2007 SEK 3,100,000 $ 491,093
Swedish Government Series 1040 6.500% 05/05/2008 3,845,000 587,036
-----------
1,078,129
-----------
Total Foreign Denominated (Cost $17,707,616) 20,174,894
-----------
TOTAL BONDS AND NOTES (COST $20,102,369) 22,621,114
-----------
CONTRACT
SIZE
---------
PURCHASED OPTIONS -- 0.5%
JPY Put/USD Call, Strike Price 130.00, 05/13/2004 (USD) 220,000 1
USD Put/AUD Call, Strike Price 0.70, 04/12/2004 (USD) 520,000 33,280
USD Put/CAD Call, Strike Price 1.30, 05/19/2004 (USD) 430,000 9,030
USD Put/CAD Call, Strike Price 1.325, 01/15/2004 (USD) 410,000 10,668
USD Put/EUR Call, Strike Price 1.145, 03/5/2004 (USD) 250,000 24,782
USD Put/EUR Call, Strike Price 1.23, 03/10/2004 (USD) 440,000 13,816
USD Put/NZD Call, Strike Price 0.61 04/12/2004 (USD) 520,000 30,732
-----------
TOTAL PURCHASED OPTIONS (COST $50,337) 122,309
-----------
PAR
RATE MATURITY VALUE
------- ----------------------- ---------
SHORT-TERM INVESTMENTS -- 3.1%
U.S. TREASURY BILLS -- 0.1%
U.S. Treasury Bill=/= 0.864% 03/04/2004 USD 25,000 24,964
-----------
REPURCHASE AGREEMENTS -- 3.0%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc.
and Investors Bank and Trust Company, due 01/02/04, with a maturity value of
$711,200 and an effective yield of 0.20%, collateralized by a U.S. Government
Obligation with a rate of 5.18%, a maturity date of 02/15/26 and an aggregate
market value of $726,128. 711,192
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $736,155) 736,156
-----------
TOTAL INVESTMENTS -- 97.9% (COST
$20,888,861) $23,479,579
OTHER ASSETS, LESS LIABILITIES -- 2.1% 503,727
-----------
NET ASSETS -- 100.0% $23,983,306
===========
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - Euro
FLIRB - Front Loaded Interest Reduction Bond
IAB - Interest Arrears Bonds
JPY - Japanese Yen
NZD - New Zealand Dollar
PDI - Past Due Interest Bonds
SEK - Swedish Krona
SGD - Singapore Dollar
ZAR - South African Rand
(a) Variable Rate Security; rate indicated is as of 12/31/03.
+ Denotes all or part of security segregated as collateral.
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PERCENTAGE
OF NET
INDUSTRY SECTOR ASSETS
- ------------------------------------------------------------------------
Foreign Government 71.7%
Financial 13.1%
Communications 5.1%
Consumer Cyclical 1.7%
Capital Goods 1.6%
Basic Industry 1.5%
Consumer Noncyclical 1.3%
Energy 0.5%
Transportation 0.5%
Banking 0.4%
Technology 0.3%
U.S. Government 0.2%
-------
97.9%
PERCENTAGE
OF NET
TOP TEN COUNTRIES ASSETS
- ------------------------------------------------------------------------
Germany 23.4%
United States 11.5%
Spain 8.5%
Italy 7.6%
France 7.4%
Denmark 5.6%
Netherlands 5.2%
Belgium 5.2%
Sweden 4.5%
Austria 4.0%
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon International Fixed Income Fund II (the "Fund") is a
separate non-diversified investment series of the Trust.
The objective of the Fund is to maximize total return while realizing a
market level of income consistent with preserving principal and liquidity.
The Fund seeks to achieve its objective by investing, under normal
circumstances, at least 80% of net assets in fixed income securities, and
at least 65% of net assets in non-U.S. dollar denominated fixed income
securities of foreign government and companies located in various
countries, including emerging markets.
On June 21, 2003, by vote of the Trustees, the name of the Standish
International Fixed Income Fund II was changed to Standish Mellon
International Fixed Income Fund II. In addition, the Declaration of Trust
was amened to change the name of the Trust from Standish, Ayer & Wood
Investment Trust to Mellon Institutional Funds Investment Trust. The name
changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of trade date. Interest income is
determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Realized gains and losses from securities sold
are recorded on the identified cost basis. The Fund does not
17
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Net
realized gains and losses on foreign currency transactions represent gains
and losses on disposition of foreign currencies and forward foreign
currency exchange contracts, currency gains and losses realized between the
trade and settlement dates on securities transactions, and the difference
between the amount of investment income and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts usually
received or paid.
D. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
E. INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
F. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income and distributions from capital gains,
if any, are reinvested in additional shares of the Fund unless the
shareholder elects to receive them in cash. Income and capital gain
distributions are determined in accordance with income tax regulations
which may differ from accounting principles generally accepted in the
United States of America. These differences, which may result in
distribution reclassifications, are primarily due to differing treatments
for foreign currency transactions, futures, amortization and/or accretion
of premiums and discounts on certain securities, capital loss
carryforwards, losses deferred due to wash sales and excise tax
regulations.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
G. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
18
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
H. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory and administrative
services, and general office facilities is paid monthly at the annual rate
of 0.40% of the Fund's average daily net assets. Standish Mellon
voluntarily agreed to limit the Fund's total annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to
0.55% of the Fund's average daily net assets for the year ended December
31, 2003. Pursuant to this agreement, for the year ended December 31, 2003,
Standish Mellon voluntarily did not impose $93,938 of its investment
advisory fee and reimbursed the Fund for $81,282 of its operating expenses.
This agreement is voluntary and temporary and may be discontinued or
revised by Standish Mellon at any time.
Effective January 28, 2003, the Fund began imposing a redemption fee of 2%
of the net asset value of the shares, with certain exceptions, which are
redeemed or exchanged less than 90 days from the day of their purchase. The
redemption fee is paid directly to the Fund, and is designed to offset
brokerage commissions, market impact, and other costs associated with
short-term trading in the Fund. The fee does not apply to shares that are
acquired through reinvestment of distributions. For the period ended
December 31, 2003, the Fund received no redemption fees.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
investments, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
----------------- -----------------
U.S. Government Securities $ 5,446,405 $ 6,678,269
=========== ===========
Investments (non-U.S.Government Securities) $35,433,515 $32,686,950
=========== ===========
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------ ------------------
Shares sold 425,279 633,471
Shares issued to shareholders in payment of
distributions declared 132,785 --
Shares redeemed (495,664) (1,916,987)
-------- ----------
Net increase (decrease) 62,400 (1,283,516)
======== ==========
19
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, two shareholders held of record approximately 65% and
14% of the total outstanding shares of the Fund.
A significant portion of the Fund's shares are beneficially owned by
fiduciary accounts over which Standish Mellon and its affiliates have
either sole or joint investment discretion. Investment activity of these
shareholders could have a material impact on the Fund.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 was as follows:
Unrealized appreciation $ 2,596,495
Unrealized depreciation (53,762)
-----------
Net unrealized appreciation/depreciation 2,542,733
Undistributed ordinary income 21,739
Accumulated losses (768,911)
Cost basis of investments for federal income tax purposes $20,892,645
At December 31, 2003, the Fund, for federal income tax purposes had capital
loss carryovers which will reduce the Fund's taxable income arising from
net realized gain on investments, if any, to the extent permitted by the
Internal Revenue Code and thus will reduce the amount of distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal income tax. The capital loss carryovers are $67,233
and $686,115 which expire on December 31, 2009 and 2010, respectively.
The Fund elected to defer to its fiscal year ending December 31, 2004
$15,563 of losses recognized during the period November 1, 2003 to December
31, 2003.
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
AMOUNT
----------
Distributions paid from:
Ordinary income $3,060,410
----------
(6) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face
20
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
amount at value of any open purchased options is shown in the Schedule of
Investments. This amount reflects each contract's exposure to the
underlying instrument at period end. Losses may arise from changes in the
value of the underlying instruments, if there is an illiquid secondary
market for the contract or if the counterparty does not perform under the
contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
21
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 185
Options expired (1) (185)
-- -----
Outstanding, end of period 0 $ --
== =====
At December 31, 2003, the Fund held no written put option contracts.
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 138
Options closed (1) (138)
-- -----
Outstanding, end of period 0 $ --
== =====
At December 31, 2003, the Fund held no written call option contracts.
A summary of the written currency options for the year ended December 31,
2003 is as follows:
WRITTEN CURRENCY OPTION TRANSACTIONS
---------------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 2 $ 2,921
Options written 13 35,910
Options expired (4) (9,555)
Options closed (8) (18,462)
-- --------
Outstanding, end of period 3 $ 10,814
== ========
At December 31, 2003, the Fund held the following written currency option
contracts:
SECURITY
-------------
CONTRACTS VALUE
------------------- ---------------
CAD Put/AUD Call, Strike Price 0.74, 04/12/2004 1 $ 11,752
USD Put/NZD Call, Strike Price 0.64, 04/12/2004 1 13,832
USD Put/CAD Call, Strike Price 1.25, 05/19/2004 1 3,182
--------
Total (premiums received $10,814) $ 28,766
========
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or
22
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
upon the closing of the contract. Forward currency exchange contracts are
used by the Fund primarily to protect the value of the Fund's foreign
securities from adverse currency movements. Unrealized appreciation and
depreciation of forward currency exchange contracts is included in the
Statement of Assets and Liabilities.
At December 31, 2003, the Fund held the following forward foreign currency
exchange contracts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO RECEIVE AMOUNT VALUE DATE VALUE FACE AMOUNT GAIN
--------------------------------------------------------------------------------------------------------
British Pound Sterling 560,000 03/17/2004 $ 993,999 $ 968,251 $ 25,748
Canadian Dollar 870,000 03/17/2004 668,799 660,893 7,906
Japanese Yen 913,350,000 03/17/2004 8,530,033 8,503,211 26,822
----------- ------------ ---------
TOTAL $10,192,831 $10,132,355 $ 60,476
=========== ============ =========
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
---------------------------------------------------------------------------------------------------------
Australian Dollar 670,000 03/17/2004 $ 499,019 $ 485,515 $ (13,504)
Danish Krone 3,385,000 03/17/2004 570,632 550,935 (19,697)
Euro 3,800,000 03/17/2004 4,772,028 4,648,897 (123,131)
Singapore Dollar 1,130,000 03/17/2004 666,143 660,819 (5,324)
Swedish Krona 7,750,000 03/17/2004 1,073,774 1,042,816 (30,958)
----------- ----------- ---------
TOTAL $ 7,581,596 $ 7,388,982 $(192,614)
=========== =========== =========
FORWARD FOREIGN CROSS CURRENCY EXCHANGE CONTRACTS
MARKET MARKET CONTRACT UNREALIZED
CONTRACTS TO DELIVER VALUE IN EXCHANGE FOR VALUE VALUE DATE GAIN/(LOSS)
-------------------------------------------------------------------------------------------
Euro $288,949 Swedish Krona $288,716 03/02/2004 $ (233)
Australian
New Zealand Dollar 669,374 Dollar 678,833 03/04/2004 9,459
-------- -------- ------
TOTAL $958,323 $967,549 $9,226
======== ======== ======
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
23
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following futures contracts:
UNDERLYING FACE
CONTRACT POSITION EXPIRATION DATE AMOUNT AT VALUE UNREALIZED LOSS
----------------------------------------------------------------------------------------------------
U.S. 5 Year Note (6 Contracts) Short 3/31/2004 $(669,750) $(3,499)
-------
INTEREST RATE SWAP CONTRACTS
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a
notional amount of principal. Credit and market risk exist with respect to
these instruments. If forecasts of interest rates and other market factors
are incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Fund expects to enter into these transactions
primarily for hedging purposes including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management
technique or protecting against an increase in the price of securities the
Fund anticipates purchasing at a later date. Interest rate swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments made or received are
included as part of interest income. Gains and losses are realized upon the
expiration or closing of the swap contracts.
The Fund entered into no such transactions during the year ended December
31, 2003.
(7) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Fund had no
securities on loan.
DELAYED DELIVERY TRANSACTIONS:
The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. This Fund segregates securities having a value
at least equal to the amount of the purchase commitment.
The Fund may enter into to be announced ("TBA") purchase commitments to
purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Fund holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
Fund may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior
24
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND II
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
to the settlement date, which risk is in addition to the risk of the
decline in the value of the Fund's other assets. Unsettled TBA purchase
commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Investment
security valuations" above.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is
'marked-to-market' daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. If the TBA sale commitment is closed
through the acquisition of an offsetting purchase commitment, the Fund
realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
At December 31, 2003, the Fund did not have any delayed delivery
transactions.
25
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon International Fixed Income Fund II:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon International Fixed
Income Fund II (formerly, Standish International Fixed Income Fund II) (the
"Fund"), at December 31, 2003, and the results of its operations, the
changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which include confirmation of securities at
December 31, 2003, by correspondence with the custodian and brokers,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
26
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
27
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstitutionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
28
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
Short-Term
Fixed Income Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
Management Discussion and Analysis
December 2003
The year 2003 can be broken into two distinctly different environments for the
financial markets. The first half of the year was characterized by the war in
Iraq and a generally weak economy. The second half saw a renewed optimism in the
economy and was highlighted by a moderate rise in interest rates and a strong
equity market. The fixed income market had mixed results during the year, strong
during the first half, weaker during the second. In this mixed environment
Standish Mellon's disciplined approach to investing provided excellent relative
returns. The Standish Mellon Short-Term Fixed Income Fund returned 2.62% for the
year, surpassing the Merrill Lynch 1-3 year Treasury index which returned 1.90%.
On an absolute basis, both the return of the Fund and its benchmark are low due
to the historically low levels of short-term interest rates.
The year started on a cautious note. Early in the first quarter, the war in Iraq
seemed more likely every day and it appeared that the entire economy was waiting
on some resolution to this uncertainty. Consumer spending continued to be
strong, but there were few other bright spots. As the war commenced and was
successfully resolved, some of the uncertainty was eliminated and the stock
market improved. However, through April and May, the lack of any bounce in the
economy led people to speculate that a declining economic, deflationary
environment was possible and that drastic measures might need be taken to spark
the economy. During this time, interest rates declined to historically low
levels. It was speculated that the Federal Reserve might drop its overnight
funds target to well below 1% and even buy long-term Treasury securities to
reduce long-term interest rates. In June, the rates on two-year Treasury notes
reached a historical low of 1.08%, down nearly 50 basis points from the
beginning of the year. Longer-term interest rates declined even more
dramatically.
The Fed did eventually lower its overnight target rate to 1.00% in late June.
Although this action moved short-term rates to their lowest level yet, the move
was not as dramatic as originally expected. At the same time, economic news
began to indicate stronger growth, particularly in the capital goods sector.
This news led to a rapid increase in long-term interest rates during the summer.
While very-short term rates were held stable by the 1.00% overnight Fed Funds
target, longer-term rates began to anticipate an eventual tightening by the Fed.
The yield of the two-year note rose to over 2.10% by early September. Since that
time, the economy has continued to strengthen and the stock market has risen in
step. The bond market has also improved somewhat as the inflationary pressures
have not yet reappeared and the Fed has expressed reluctance to raising rates.
Ironically, the two-year Treasury note ended the year at roughly 1.60%, the same
level as it began the year.
In this back and forth interest rate environment, the spread sectors in the
fixed-income market continued to outperform. The deleveraging of corporations
from the prior few years and the gradually improving economy led credit spreads
to narrow to levels not
3
seen since 1997. This spread narrowing was particularly noteworthy in lesser
quality names such as those rated BBB and below.
The performance of the Fund was helped during the year by its use of high
quality spread paper. High quality spread paper, such as corporate notes and
asset-backed securities, will continue to represent a major portion of the Fund
in the coming year. Historically the Fund has been managed relatively close to
its benchmark's duration and we anticipate this will continue in the future.
We would also like to note that as of March 31, 2003, portfolio management of
the Standish Mellon Short-Term Fixed Income Fund changed from David Hertan to
Laurie Carroll and Johnson Moore. As you may recall, as of July 1, Standish
Mellon in Boston combined with two affiliates within Mellon: Mellon Bond
Associates and Certus Asset Advisors. The Fund had been managed by Mr. Hertan
from the Boston office. In conjunction with the combination, all short-term
asset management was relocated in the Pittsburgh office, under Ms. Carroll and
Mr. Moore.
We remain committed to our disciplined approach with high quality fundamental
research to generate the strong relative returns we have achieved in the past.
We appreciate the continued support of our shareholders.
Sincerely,
/s/ Laurie A. Carroll /s/ Johnson S. Moore
Laurie A. Carroll Johnson S. Moore
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Short-Term Fixed Income Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon Short-Term Fixed Income Fund and the Merrill Lynch 1-3 Year
Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
Short-Term Merrill Lynch
Fixed Income 1-3 Year
Fund Treasury Index
100,000 100,000
100,350 100,414
100,950 101,011
101,550 101,502
102,411 102,359
103,373 103,264
104,200 104,057
1996 105,076 104,941
104,612 104,498
104,458 104,405
104,562 104,492
104,771 104,706
105,558 105,458
106,036 105,874
106,354 106,237
107,362 107,200
108,763 108,408
109,679 109,238
109,542 109,238
1997 110,035 109,750
110,364 110,003
110,251 109,960
111,141 110,858
111,976 111,614
112,699 112,383
113,998 113,618
114,111 113,723
115,071 114,586
115,874 115,437
116,103 115,718
116,835 116,508
1998 117,830 117,640
117,947 117,741
118,476 118,220
119,071 118,773
119,784 119,406
120,439 120,027
121,040 120,589
122,122 122,105
123,205 123,723
122,597 124,330
122,779 124,222
123,360 124,660
1999 124,043 125,154
123,670 124,543
124,915 125,409
125,482 125,813
125,419 125,732
125,738 126,124
125,866 126,524
126,122 126,890
126,890 127,715
127,214 128,054
127,604 128,296
127,893 128,480
2000 128,091 128,432
129,016 129,288
129,677 130,089
129,274 130,428
129,744 130,964
131,224 132,323
132,246 133,159
133,132 134,143
134,632 135,107
134,908 135,832
136,361 137,117
138,033 138,753
2001 140,220 140,491
141,066 141,405
142,271 142,584
142,271 142,965
143,273 143,771
143,770 144,260
145,369 145,878
146,314 146,719
148,058 149,134
149,015 150,543
148,721 150,218
148,605 150,270
2002 149,428 150,575
149,952 151,303
148,981 150,281
150,497 151,960
151,558 152,571
152,620 153,851
154,078 155,731
154,998 156,265
156,231 157,556
156,464 157,914
156,309 157,440
157,977 158,920
2003 158,214 158,899
159,239 159,562
159,709 159,852
160,111 160,151
160,831 160,752
161,314 160,998
160,088 160,121
159,928 160,229
161,719 161,684
161,137 161,084
161,056 160,998
162,087 161,932
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 07/01/1995
------ ------ ------ ----------
2.62% 5.50% 5.61% 5.85%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$4,234,418) $4,301,571
Cash 97
Receivable for Fund shares sold 200
Interest receivable 33,174
Prepaid expenses 4,751
----------
Total assets 4,339,793
LIABILITIES
Payable for Fund shares redeemed $165,647
Distributions payable 128,004
Accrued accounting, custody and transfer agent fees 8,429
Accrued trustees' fees and expenses (Note 2) 728
Accrued expenses and other liabilities 29,236
--------
Total liabilities 332,044
----------
NET ASSETS $4,007,749
==========
NET ASSETS CONSIST OF:
Paid-in capital $3,942,834
Accumulated net realized gain 112
Distributions in excess of net investment income (2,350)
Net unrealized appreciation 67,153
----------
TOTAL NET ASSETS $4,007,749
==========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 246,705
==========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 16.25
==========
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$2,335 (Note 7)) $437,707
EXPENSES
Investment advisory fee (Note 2) $ 39,204
Accounting, custody, and transfer agent fees 69,580
Legal and audit services 31,216
Registration fees 18,390
Insurance expense 7,538
Trustees' fees and expenses (Note 2) 3,723
Miscellaneous 7,088
---------
Total expenses 176,739
Deduct:
Waiver of investment advisory fee (Note 2) (39,204)
Reimbursement of Fund operating expenses (Note 2) (98,328)
---------
Total expense deductions (137,532)
---------
Net expenses 39,207
--------
Net investment income 398,500
--------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain
Investment security transactions 650,911
---------
Net realized gain 650,911
Change in unrealized appreciation (depreciation)
Investment securities (544,868)
---------
Change in net unrealized appreciation (depreciation) (544,868)
--------
Net realized and unrealized gain 106,043
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS $504,543
========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 398,500 $ 1,450,458
Net realized gain 650,911 608,075
Change in net unrealized appreciation (depreciation) (544,868) (41,952)
------------ ------------
Net increase in net assets from investment operations 504,543 2,016,581
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1D)
From net investment income (408,533) (1,483,785)
From net realized gains on investments (915,753) (107,413)
------------ ------------
Total distributions to shareholders (1,324,286) (1,591,198)
------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 4,896,201 4,222,335
Value of shares issued to shareholders in payment of
distributions declared 1,049,509 693,884
Cost of shares redeemed (23,384,843) (24,243,994)
------------ ------------
Net decrease in net assets from Fund share transactions (17,439,133) (19,327,775)
------------ ------------
TOTAL DECREASE IN NET ASSETS (18,258,876) (18,902,392)
NET ASSETS
At beginning of year 22,266,625 41,169,017
------------ ------------
At end of year (including distributions in excess of net
investment income of $2,350 and $6,348) $ 4,007,749 $ 22,266,625
============ ============
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001(A) 2000 1999
------ ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF YEAR $20.03 $ 19.86 $ 19.57 $ 19.36 $ 19.87
------ ------- ------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.61 0.85 1.13 1.28 1.24
Net realized and unrealized gain (loss) on investments (0.10)(2) 0.38 0.34 0.21 (0.53)
------ ------- ------- ------- -------
Total from investment operations 0.51 1.23 1.47 1.49 0.71
------ ------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1.16) (0.96) (1.18) (1.28) (1.22)
From net realized gain on investments (3.13) (0.10) -- -- --
------ ------- ------- ------- -------
Total distributions to shareholders (4.06) (1.06) (1.18) (1.28) (1.22)
------ ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $16.25 $ 20.03 $ 19.86 $ 19.57 $ 19.36
====== ======= ======= ======= =======
TOTAL RETURN+ 2.62% 6.31% 7.66% 7.93% 3.67%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.30% 0.30% 0.30% 0.30% 0.30%
Net Investment Income (to average daily net assets)* 3.06% 4.24% 5.64% 6.66% 6.27%
Portfolio Turnover 186% 251% 149% 170% 147%
Net Assets, End of Year (000's omitted) $4,008 $22,267 $41,169 $45,232 $38,109
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment advisory fee and/ or reimbursed
the Fund for a portion of its operating expenses. If this voluntary action
had not been taken, the investment income per share and the ratios would
have been:
Net investment income per share(1) $ 0.40 $ 0.75 $ 1.07 $ 1.21 $ 1.12
Ratios (to average daily net assets):
Expenses 1.36% 0.78% 0.60% 0.69% 0.89%
Net investment income 2.00% 3.76% 5.34% 6.27% 5.68%
+ Total return would have been lower in the absense of expense waivers.
(a) The Fund has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to increase net investment income per share by less
than $0.001, decrease net realized and unrealized gains and losses per
share by less than $0.001 and increase the ratio of net investment income
to average net assets by less than 0.01%. Per share data and
ratios/supplemental data for the periods prior to January 1, 2001 have not
been restated to reflect this change in presentation.
(1) Calculated based on average shares outstanding.
(2) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain/loss for the period due to the
timing of purchases and redemptions of Fund shares in relation to the
fluctuating market values of the Fund.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 103.7%
ASSET BACKED -- 16.8%
Bank One Issuance Trust 2002-A4 A4 2.940% 06/16/2008 $100,000 $ 101,482
Capital Auto Receivables Asset Trust 2003-1 A3A 2.750% 04/16/2007 100,000 101,147
Capital One Master Trust 2001-7 A 3.850% 08/15/2007 100,000 101,928
Chase Manhattan Auto Owner Trust 2003-B A3 1.820% 07/16/2007 75,000 74,826
Citibank Credit Card Issuance Trust 2003-A2 A2 2.700% 01/15/2008 100,000 100,769
Daimler Chrysler Auto Trust 2001-A A4 5.400% 03/06/2006 98,146 99,772
Nissan Auto Receivables Owner Trust 2002-C A3 2.600% 08/15/2006 94,324 95,107
----------
Total Asset Backed (Cost $671,077) 675,031
----------
CORPORATE -- 37.1%
BANKING -- 17.3%
Bank of America Corp. 7.875% 05/16/2005 150,000 162,422
Fifth Third Bank 6.750% 07/15/2005 150,000 161,133
FleetBoston Financial Corp. 7.250% 09/15/2005 100,000 108,741
National City Corp. 7.200% 05/15/2005 150,000 160,817
SunTrust Bank 2.125% 01/30/2006 50,000 49,998
Washington Mutual, Inc. 2.400% 11/03/2005 50,000 50,127
----------
693,238
----------
CONSUMER NONCYCLICAL -- 1.2%
Coca-Cola Enterprises 2.500% 09/15/2006 50,000 49,864
----------
FINANCIAL -- 15.9%
Allstate Corp. Senior Notes 7.875% 05/01/2005 100,000 107,882
American International Group, Inc. 2.850% 12/01/2005 150,000 152,264
Associates Corp. Senior Notes 6.000% 07/15/2005 100,000 106,502
General Electric Capital Corp. 7.500% 05/15/2005 150,000 161,659
Goldman Sachs Group, Inc. 7.625% 08/17/2005 100,000 109,296
----------
637,603
----------
PUBLIC UTILITY -- 2.7%
Alabama Power Co. Senior Notes 5.490% 11/01/2005 100,000 106,005
----------
Total Corporate (Cost $1,440,342) 1,486,710
----------
U.S. GOVERNMENT AGENCY -- 15.7%
PASS THRU SECURITIES -- 15.7%
FHLMC Gold 5.000% 08/01/2007 89,029 91,757
FHLMC Gold 6.000% 07/01/2011 216,938 227,931
FNMA 2.250% 05/15/2006 300,000 299,998
Private Export Funding Corp. 6.860% 04/30/2004 10,000 10,173
----------
Total U.S. Government Agency (Cost $616,414) 629,859
----------
U.S. TREASURY OBLIGATIONS -- 34.1%
TREASURY NOTES -- 34.1%
U.S. Treasury Note 1.500% 07/31/2005 130,000 129,898
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ------------------------------------------------------------------------------------------------------------
TREASURY NOTES (CONTINUED)
U.S. Treasury Note 1.625% 10/31/2005 $125,000 $ 124,805
U.S. Treasury Note 1.875% 11/30/2005 180,000 180,337
U.S. Treasury Note 1.875% 12/31/2005 70,000 70,046
U.S. Treasury Note 2.000% 05/15/2006 370,000 370,072
U.S. Treasury Note 2.625% 11/15/2006 220,000 221,942
U.S. Treasury Note 5.625% 02/15/2006 250,000 269,424
----------
Total U.S. Treasury Obligations (Cost $1,363,137) 1,366,524
----------
TOTAL BONDS AND NOTES (COST $4,090,970) 4,158,124
----------
SHORT-TERM INVESTMENTS -- 3.6%
COMMERCIAL PAPER -- 3.6%
UBS Finance Ltd.=/= 1.233% 01/05/2004 143,000 142,984
----------
REPURCHASE AGREEMENTS -- 0.0%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc. and
Investors Bank and Trust Company, due 01/02/04, with a maturity value of $463 and an
effective yield of 0.20%, collateralized by a U.S. Government Obligation with a rate of
5.18%, a maturity date of 02/15/26 and an aggregate market value of $472. 463
----------
TOTAL SHORT-TERM INVESTMENTS (COST $143,448) 143,447
----------
TOTAL INVESTMENTS -- 107.3% (COST
$4,234,418) $ 4,301,571
OTHER ASSETS, LESS LIABILITIES -- (7.3%) (293,822)
-------------
NET ASSETS -- 100.0% $ 4,007,749
=============
NOTES TO SCHEDULE OF INVESTMENTS:
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Short-Term Fixed Income Fund (the "Fund") is a separate
diversified investment series of the Trust.
The objective of the Fund is to maximize total return, consistent with
preserving principal and liquidity, while seeking a relatively high level
of current income. The Fund seeks to achieve its objective by investing,
under normal circumstances, at least 80% of net assets in fixed income
securities of U.S. companies and the U.S. government.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Short-Term Fixed Income Fund was changed to Standish Mellon Short-Term
Fixed Income Fund. In addition, the Declaration of Trust was amended to
change the name of the Trust from Standish, Ayer & Wood Investment Trust to
Mellon Institutional Funds Investment Trust. The name changes became
effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
debt securities. Realized gains and losses from securities sold are
recorded on the identified cost basis.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
D. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income and distributions from capital gains,
if any, are reinvested in additional shares of the Fund unless a
shareholder elects to receive them in cash. Income and capital gain
distributions are determined in accordance with income tax regulations
which may differ from accounting principles generally accepted in the
United States of America. These differences, which may result in
distribution reclassifications, are primarily due to differing treatments
of amortization and/or accretion of premiums and discounts on certain
securities and paydown gains and losses.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
E. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expenses and the relative size of the funds.
F. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory, administrative
services, and general office facilities, is paid monthly at the annual rate
of 0.30% of the Fund's average daily net assets. Standish Mellon
voluntarily agreed to limit total Fund operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.30% of the
Fund's average daily net assets for the year ended December 31, 2003.
Pursuant to this agreement, for the year ended December 31, 2003, Standish
Mellon voluntarily did not impose $39,204 of its investment advisory fee
and reimbursed the Fund for $98,328 of its operating expenses. This
agreement is voluntary and temporary and may be discontinued or revised by
Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
----------- -----------
U.S. Government Securities $19,614,044 $24,205,637
=========== ===========
Investments (non-U.S.Government Securities) $ 3,667,964 $17,089,575
=========== ===========
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 246,481 210,440
Shares issued to shareholders in payment of
distributions declared 59,783 34,932
Shares redeemed (1,171,136) (1,206,262)
---------- ----------
Net decrease (864,872) (960,890)
========== ==========
At December 31, 2003, two shareholders held of record approximately 65% and
13% of the total outstanding shares of the Fund. A significant portion of
the Fund's shares are beneficially owned by fiduciary accounts over which
Standish Mellon and its affiliates have either sole or joint investment
discretion. Investment activity of these shareholders could have a material
impact on the Fund.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 were as follows:
Unrealized appreciation $ 72,237
Unrealized depreciation (6,560)
---------
Net unrealized appreciation/depreciation 65,677
Undistributed ordinary income 53,030
Accumulated net realized gain 74,212
Cost for federal income tax purposes $4,235,894
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
AMOUNT
----------
Distributions paid from:
Ordinary income $ 626,211
Capital gains 698,075
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(6) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face amount at value of any
open purchased options is shown in the Schedule of Investments. This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contract or
if the counterparty does not perform under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
The Fund entered into no such transactions during the year ended December
31, 2003.
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund entered into no such transactions during the year ended December
31, 2003.
(7) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Fund had no
securities on loan.
(8) DELAYED DELIVERY TRANSACTIONS:
The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. This Fund segregates securities having a value
at least equal to the amount of the purchase commitment.
The Fund may enter into to be announced ("TBA") purchase commitments to
purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Fund holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
Fund may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition
to the risk of the decline in the value of the Fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value
of the underlying securities, according to the procedures described under
"Investment security valuations" above.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is
'marked-to-market' daily and the change in market value is recorded by the
Fund as an unrealized gain or loss. If the TBA sale commitment is closed
through the acquisition of an offsetting purchase commitment, the Fund
realizes a gain or loss from the sale of the securities based upon the unit
price established at the date the commitment was entered into.
At December 31, 2003, the Fund did not have any delayed delivery
transactions.
16
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Short-Term Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon Short-Term Fixed
Income Fund (formerly, Standish Short-Term Fixed Income Fund) (the "Fund"),
at December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 2003 by correspondence
with the custodian and brokers provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
17
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the Board 28 None
c/o Decision 11/3/1986 and Chief Executive
Resources, Inc. Officer, Decision
260 Charles Street Resources, Inc.
Waltham, MA 02453
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex Street 28 None
c/o Essex Street 11/3/1986 Associates (family
Associates investment trust
400 Essex Street office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 28 None
c/o Harvard University 9/13/1989 Professor of Political
Cambridge, MA 02138 Economy, Harvard
8/5/44 University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee and
New London, NH 03257 Chairman of the Board,
4/11/35 Visiting Nurse Alliance
of Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ---------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice President 28 None
c/o Standish Mellon Asset and Chief and Chief Operating
Management Company LLC, Executive Officer Officer, Mellon
One Boston Place Institutional Asset
Boston, MA 02108 Management; formerly
7/24/65 Vice President and
Chief Financial
Officer, Mellon
Institutional Asset
Management
18
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- --------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary Senior Vice President 28 None
c/o Standish Mellon Asset since 2003 and Head of Operations,
Management, Mellon Institutional
One Boston Place Asset Management,
Boston, MA 02108 formerly First Vice
2/20/61 President, Mellon
Institutional Asset
Management and Mellon
Global Investments
Vice President and Vice President Vice President and 28 None
Treasurer since 1999; Mutual Funds
Treasurer Controller, Standish
since 2002 Mellon Asset
Management; formerly
Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon Asset
Management
Steven M. Anderson
c/o Standish Mellon Asset
Management,
One Boston Place
Boston, MA 02108
7/14/65
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual Funds
Management, Operations, Standish
One Boston Place Mellon Asset Management
Boston, MA 02108
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional, Standish
One Boston Place Mellon Asset Management
Boston, MA 02108
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund Operations
Management, since 1999; Shareholder
One Boston Place Representative,
Boston, MA 02108 Standish Mellon Asset
1/19/71 Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners; Fund
Management, Accountant, Mellon
One Boston Place Financial Corp.
Boston, MA 02108
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstituionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
19
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
Investment Grade
Bond Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON INVESTMENT GRADE BOND FUND
Management Discussion and Analysis
December 2003
The market environment improved dramatically over the course of the year. As we
began 2003, the war with Iraq, weak job growth and deflation concerns posed
considerable risks to economic growth. However, second half GDP was boosted by
prompt military action, tax cuts and another mortgage refinancing boom. By
mid-year, a pick up in growth pushed interest rates higher. However, the Federal
Reserve has tempered the upward pressure on bond yields by emphasizing their
focus on inflation over growth. With core inflation dipping to 1.1%
year-over-year, and job growth still sluggish, the Fed has little reason to
raise interest rates in the near term.
Over the past year, Treasury Inflation Protected Securities (TIPS) and
investment grade corporate bonds solidly outperformed other fixed income
sectors. As the previous year's negative events faded from the headlines and
corporate profits surged, credit spreads narrowed significantly. Similarly, as
the economic picture improved, inflation expectations rose and TIPS
outperformed. In comparison, the relative performance of mortgages and agencies
lagged. The mortgage market suffered amid sharp interest rate moves which
resulted in significant hedging costs and diminished returns. The agency sector
also suffered as Freddie Mac's accounting issues surfaced and regulatory
oversight came under harsh scrutiny.
For the first half of the year, the Fund was defensively postured with an
underweight in corporate bonds and overweight positions in mortgages, asset
backed securities and commercial mortgages. The Fund's conservative stance was a
drag on performance as we saw stellar performance in corporate bonds relative to
other sectors. However, as the economy's momentum picked up around mid-year, we
increased the allocation to credit which helped performance in the second half.
Our underweight to agency bonds for the majority of the year strongly
contributed to performance. A sizable reduction to the mortgage position was
well-timed as we avoided July's massive underperformance when interest rates
backed up and durations extended sharply. Mortgage security selection was
particularly positive in the beginning of the year as we favored lower coupon
issues that benefited from very strong demand by banks. By the end of the year,
the Fund's returns, gross of fees, had picked up considerably and we concluded
the year just ahead of the benchmark.
Looking ahead, the prospects for economic growth in 2004 appear quite good.
Solid corporate profits should spur business spending and a weaker dollar should
support higher export activity. Inventory rebuilding should also boost GDP in
the first half. With strong productivity and lots of excess capacity, a low
inflation environment should persist. In this environment, the Fed will likely
hold interest rates unchanged for most of the year. The key investment themes
are building the Fund's yield advantage and a bulleted intermediate curve
position. Among the various spread sectors, we favor corporate bonds as we find
the fundamental improvement of credit quality remains
3
solidly in place. Given a steep yield curve, we are more heavily weighted toward
intermediate bonds in the 2 to 5 year area. The Fund's overweight position in
commercial mortgage and asset backed securities emphasizes our intermediate
bias. The less-thanbenchmark weighting in mortgages also fits well with our
yield curve strategy as amortizing assets are less attractive than bullet
securities. Finally, we continue to find TIPS attractive as we expect a gradual
rise in inflation expectations given Fed policy will err on the accommodative
side in order to successfully reflate the economy.
As always, we look forward to serving you in the coming year.
/s/ Catherine Powers /s/ Marc Seidner
Catherine Powers Marc Seidner
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Investment Grade Bond Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon Investment Grade Bond Fund and Lehman Aggregate Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
Investment Lehman Aggregate
Grade Bond Fund Index
2000 100,000 100,000
101,450 102,080
102,300 103,007
103,800 104,500
104,703 105,157
105,261 105,852
106,834 107,583
108,872 109,579
2001 110,664 111,370
111,508 112,341
112,144 112,905
111,770 112,436
112,679 113,115
113,076 113,542
115,798 116,080
117,050 117,410
118,307 118,778
121,066 121,264
119,520 119,592
118,893 118,832
2002 119,651 119,794
120,699 120,954
118,428 118,943
120,310 121,249
121,311 122,279
122,336 123,337
123,777 124,825
125,759 126,932
127,443 128,988
126,776 128,400
126,534 128,366
128,929 131,018
2003 129,115 131,130
130,789 132,945
130,563 132,842
131,626 133,939
133,877 136,436
133,569 136,165
129,027 131,587
129,595 132,460
133,379 135,967
132,099 134,699
132,350 135,021
133,832 136,395
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since Inception
1 Year 3 Year 06/01/2000
------ ------ ----------
3.81% 7.12% 8.47%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$71,695,307) $72,760,189
Cash 928
Receivable for investments sold 780,089
Interest receivable 557,291
Receivable for open swap contracts (Note 6) 9,653
Prepaid expenses 4,571
-----------
Total assets 74,112,721
LIABILITIES
Payable for investments purchased $9,808,044
Payable for Fund shares redeemed 1,066,538
Payable for variation margin on open financial futures
contracts (Note 6) 781
Distributions payable 525,625
Options written, at value (Note 6) (premiums received,
$66,029) 41,422
Accrued accounting, custody and transfer agent fees 12,942
Accrued trustees' fees and expenses (Note 2) 2,476
Accrued expenses and other liabilities 30,504
---------
Total liabilities 11,488,332
-----------
NET ASSETS $62,624,389
===========
NET ASSETS CONSIST OF:
Paid-in capital $61,533,970
Accumulated net realized gain 3,644
Distributions in excess of net investment income (11,275)
Net unrealized appreciation 1,098,050
-----------
TOTAL NET ASSETS $62,624,389
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,083,153
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 20.31
===========
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$14,846 (Note 7)) $2,724,475
Dividend income 984
----------
Total investment income 2,725,459
EXPENSES
Investment advisory fee (Note 2) $ 294,499
Accounting, custody, and transfer agent fees 144,803
Legal and audit services 39,784
Insurance expense 11,857
Trustees' fees and expenses (Note 2) 10,602
Registration fees 6,960
Miscellaneous 8,262
----------
Total expenses 516,767
Deduct:
Waiver of investment advisory fee (Note 2) (222,267)
----------
Net expenses 294,500
----------
Net investment income 2,430,959
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 1,550,182
Financial futures contracts (124,507)
Written options transactions 185,609
Swap contracts 1,344
----------
Net realized gain 1,612,628
Change in unrealized appreciation (depreciation)
Investment securities (1,106,833)
Financial futures contracts 123,992
Written options (23,948)
Swap contracts 10,148
----------
Change in net unrealized appreciation (depreciation) (996,641)
----------
Net realized and unrealized gain 615,987
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $3,046,946
==========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 2,430,959 $ 3,126,579
Net realized gain 1,612,628 1,225,101
Change in net unrealized appreciation (depreciation) (996,641) 1,604,794
------------ -----------
Net increase in net assets from investment operations 3,046,946 5,956,474
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1D)
From net investment income (2,606,499) (3,279,497)
From net realized gains on investments (1,540,028) (1,358,763)
------------ -----------
Total distributions to shareholders (4,146,527) (4,638,260)
------------ -----------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 4,213,048 21,825,313
Value of shares issued to shareholders in payment of
distributions declared 2,270,143 2,339,137
Cost of shares redeemed (26,860,158) (4,946,160)
------------ -----------
Net increase (decrease) in net assets from Fund share
transactions (20,376,967) 19,218,290
------------ -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (21,476,548) 20,536,504
NET ASSETS
At beginning of year 84,100,937 63,564,433
------------ -----------
At end of year (including distributions in excess of net
investment income of $11,275 and $19,551) $ 62,624,389 $84,100,937
============ ===========
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR THE PERIOD
JUNE 1, 2000
YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
-------------------------- OPERATIONS) TO
2003 2002 2001(A) DECEMBER 31, 2000
------- ------- -------- -----------------
NET ASSET VALUE, BEGINNING OF YEAR $ 20.80 $ 20.41 $ 20.65 $ 20.00
------- ------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.69 0.89 1.27 0.86
Net realized and unrealized gain on investments 0.09 0.79 0.59 0.89
------- ------- ------- -------
Total from investment operations 0.78 1.68 1.86 1.75
------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.78) (0.91) (1.30) (0.88)
From net realized gain on investments (0.49) (0.38) (0.80) (0.22)
------- ------- ------- -------
Total distributions to shareholders (1.27) (1.29) (2.10) (1.10)
------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $ 20.31 $ 20.80 $ 20.41 $ 20.65
======= ======= ======= =======
TOTAL RETURN+++ 3.81% 8.44% 9.21% 8.87%++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.40% 0.40% 0.21% 0.00%+
Net Investment Income (to average daily net assets)* 3.30% 4.30% 6.00% 7.21%+
Portfolio Turnover 457% 391% 357% 136%++
Net Assets, End of Year (000's omitted) $62,624 $84,101 $63,564 $57,447
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment advisory fee and reimbursed the
Fund for all or a portion of its operating expenses. If this voluntary
action had not been taken, the investment income per share and ratios would
have been:
Net investment income per share(1) $ 0.63 $ 0.83 $ 1.17 $ 0.78
Ratios (to average daily net assets):
Expenses 0.70% 0.69% 0.68% 0.72%+
Net investment income 3.00% 4.01% 5.53% 6.48%+
(a) The Fund has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease net investment income per share by
$0.004, increase net realized and unrealized gains and losses per share by
$0.004 and decrease the ratio of net investment income to average net
assets from 6.02% to 6.00%. Per share data and ratios/supplemental data for
the periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
(1) Calculated based on average shares outstanding.
+ Computed on an annualized basis.
++ Not annualized.
+++ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 111.1%
ASSET BACKED -- 18.2%
Advanta Home Equity Trust 1997-2 M1 7.550% 06/25/2027 $ 112,062 $ 111,896
Advanta Mortgage Loan Trust 1997-4 M1 7.040% 01/25/2029 195,297 197,427
American Express Credit Account Master
Trust 2000-2B(a) 1.470% 09/17/2007 150,000 150,139
American Express Credit Account Master
Trust 2003-4A 1.690% 01/15/2009 875,000 858,421
Americredit Auto Receivables Trust 2001-D
A3(a) 1.470% 09/12/2006 378,496 378,727
Bear Stearns Commercial Mortage Securities
2003-T12 A3 4.490% 08/13/2039 190,000 188,608
Capital One Master Trust 1999-1 A(a) 1.303% 07/16/2007 380,000 379,832
Chase Credit Card Master Trust 2002-2 C(a) 2.020% 07/16/2007 315,000 316,390
Chase Funding Mortgage Loan Asset-Backed
2003-4 2A1(a) 1.239% 02/25/2021 803,648 803,232
Chase Manhattan Auto Owner Trust 2003-C
CTFS 2.780% 06/15/2010 225,000 222,548
Citibank Credit Card Issuance Trust 2003-
A8 A8 3.500% 08/16/2010 650,000 648,687
Citibank Credit Card Master Trust 1999-7 B 6.900% 11/15/2006 350,000 366,032
Citibank Credit Card Master Trust I 1997-6
B, PO(b) 0.766% 08/15/2006 500,000 494,369
Citifinancial Mortgage Securities, Inc.
2003-2 AV1(a) 1.219% 05/25/2033 146,746 146,702
Daimler Chrysler Auto Trust 2001-C A3 4.210% 07/06/2005 409,939 411,494
Daimler Chrysler Auto Trust 2003-A A4 2.880% 10/08/2009 315,000 316,984
Daimler Chrysler Auto Trust 2003-B A4 2.860% 03/09/2009 575,000 574,641
First USA Credit Card Master Trust 1997-7
B(a) 1.666% 05/17/2007 1,500,000 1,501,106
Honda Auto Receivables Owner Trust 2003-4
A3 2.190% 05/15/2007 250,000 250,364
Honda Auto Receivables Owner Trust 2003-5
A3 2.300% 10/18/2007 590,000 591,652
MBNA Credit Card Master Note Trust 2002-A1
A1 4.950% 06/15/2009 305,000 325,051
MBNA Credit Card Master Trust 2001-C3 6.550% 12/15/2008 225,000 243,455
MBNA Master Credit Card Trust 1997-J A(a) 1.283% 02/15/2007 350,000 350,081
Nissan Auto Receivables Owner Trust 2003-C
A4 2.700% 12/17/2007 640,000 642,100
Residential Asset Mortgage Products, Inc.
2003-RS1 AI1(a) 1.301% 01/25/2019 77,415 77,413
Residential Asset Securities Corp.
2003-KS11 AI1(a) 1.333% 11/25/2021 325,000 325,000
SLMA Student Loan Trust 2003-6 A1(a) 1.170% 06/16/2008 257,189 257,189
Whole Auto Loan Trust 2003-1 C 3.130% 03/15/2010 240,000 240,847
-----------
Total Asset Backed (Cost $11,360,465) 11,370,387
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.0%
Bear Stearns Mortgage 1998-2 B 6.750% 04/30/2030 23,591 23,532
Calwest Industrial Trust 2002-CALW A 144A 6.127% 02/15/2017 335,000 366,758
FNMA Grantor Trust 2001-T6 B 6.088% 05/25/2011 340,000 374,685
FNMA Grantor Trust 2002-T11 A 4.769% 04/25/2012 178,870 187,021
GNMA 2002-48 PF(a) 1.454% 05/15/2029 63,287 63,321
GNMA 2003-48 AC 2.712% 02/16/2020 303,174 299,874
GNMA 2003-72 A 3.206% 04/16/2018 147,666 148,225
GNMA 2003-88 AC 2.914% 06/16/2018 148,873 147,748
GNMA 2003-96 B 3 3.607% 08/16/2018 310,000 312,532
Housing Securities, Inc. 1994-2 A1 6.500% 07/25/2009 39,166 40,905
Merrill Lynch Mortgage Investors, Inc.
1996-C2 D
Non-ERISA 6.960% 11/21/2028 150,000 163,710
Permanent Financing PLC 3 1A NCL(a) 1.080% 12/10/2004 360,000 360,000
Vendee Mortgage Trust 2003-1 A 5.750% 09/15/2012 307,258 309,575
Washington Mutual 2003-AR10 A5(a) 4.107% 10/25/2033 325,000 321,796
-----------
Total Collateralized Mortgage Obligations (Cost $3,096,679) 3,119,682
-----------
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------
CORPORATE -- 26.9%
BANKING -- 4.0%
Amsouth Bank NA 4.850% 04/01/2013 $125,000 $ 124,119
Bank of America Corp. 5.250% 12/01/2015 100,000 99,748
BankBoston NA 6.500% 12/19/2007 125,000 138,870
BB&T Corp. Sub Notes 5.200% 12/23/2015 315,000 312,264
CS First Boston (USA), Inc. 5.500% 08/15/2013 175,000 180,340
Fleet National Bank 5.750% 01/15/2009 225,000 245,421
National City Corp. 6.875% 05/15/2019 375,000 432,874
SunTrust Banks, Inc. 7.750% 05/01/2010 275,000 329,351
SunTrust Banks, Inc. Sub Notes 5.450% 12/01/2017 100,000 102,920
Union Planters Bank 5.125% 06/15/2007 155,000 165,107
Union Planters Corp. 4.375% 12/01/2010 150,000 149,383
Union Planters Corp. 7.750% 03/01/2011 25,000 29,492
Wachovia Corp. 7.500% 07/15/2006 25,000 28,201
Zions Bancorp Senior Notes 2.700% 05/01/2006 145,000 145,709
----------
2,483,799
----------
BASIC INDUSTRY -- 1.6%
Cabot Corp. 5.250% 09/01/2013 165,000 163,597
ICI Wilmington, Inc. 4.375% 12/01/2008 205,000 204,229
International Paper Co. 6.750% 09/01/2011 60,000 66,706
Republic Services, Inc. 7.125% 05/15/2009 125,000 143,449
Republic Services, Inc. Senior Notes 6.750% 08/15/2011 195,000 217,970
Sealed Air Corp. 144A 5.625% 07/15/2013 80,000 81,863
Westvaco Corp. 8.200% 01/15/2030 95,000 111,379
----------
989,193
----------
CAPITAL GOODS -- 0.1%
Boeing Co. 6.125% 02/15/2033 50,000 50,165
Raytheon Co. 5.500% 11/15/2012 35,000 35,506
----------
85,671
----------
COMMUNICATIONS -- 2.5%
AOL Time Warner, Inc. 7.700% 05/01/2032 155,000 180,901
AT&T Wireless Services, Inc. 8.125% 05/01/2012 85,000 99,956
AT&T Wireless Services, Inc. Senior Notes 8.750% 03/01/2031 175,000 215,920
Comcast Cable Communication Senior Notes
NCL 6.750% 01/30/2011 185,000 205,892
Comcast Corp. 5.500% 03/15/2011 60,000 62,365
Sprint Capital Corp. 8.375% 03/15/2012 115,000 134,297
Sprint Capital Corp. 8.750% 03/15/2032 210,000 248,092
Verizon Global Funding Corp. 6.875% 06/15/2012 320,000 358,952
Verizon Global Funding Corp. 7.750% 06/15/2032 70,000 82,280
----------
1,588,655
----------
CONSUMER CYCLICAL -- 1.8%
Daimler Chrysler NA Holding 4.750% 01/15/2008 85,000 86,967
International Flavors & Fragrance 6.450% 05/15/2006 275,000 298,669
Liberty Media Corp. 3.500% 09/25/2006 75,000 75,375
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (CONTINUED)
News America, Inc. 6.750% 01/09/2038 $ 250,000 $ 279,159
Viacom, Inc. 5.625% 05/01/2007 325,000 351,386
Wal-Mart Stores 4.550% 05/01/2013 60,000 59,264
----------
1,150,820
----------
CONSUMER NONCYCLICAL -- 1.4%
Aramark Services, Inc. 7.000% 07/15/2006 95,000 103,345
Archer-Daniels-Midland 7.000% 02/01/2031 325,000 373,503
Kroger Co. 8.050% 02/01/2010 165,000 196,236
Laboratory Corp. of America Holdings 5.500% 02/01/2013 85,000 87,752
Safeway, Inc. 4.125% 11/01/2008 110,000 109,518
----------
870,354
----------
ELECTRIC -- 1.3%
Dominion Resources, Inc. Senior Notes 5.700% 09/17/2012 180,000 189,654
DTE Energy Co. Senior Notes 6.650% 04/15/2009 225,000 250,934
Niagara Mohawk Power Senior Notes 7.750% 10/01/2008 200,000 232,096
Pepco Holdings, Inc. 5.500% 08/15/2007 125,000 133,714
----------
806,398
----------
ENERGY -- 2.0%
Amoco Co. 6.500% 08/01/2007 225,000 253,053
CenterPoint Energy, Inc. 144A 5.750% 01/15/2014 275,000 287,136
Conoco, Inc. Senior Notes 6.950% 04/15/2029 45,000 51,032
Devon Energy Corp. 2.750% 08/01/2006 160,000 160,074
Halliburton Co. 144A 5.500% 10/15/2010 90,000 94,124
Progress Energy, Inc. Senior Notes 7.750% 03/01/2031 165,000 192,254
Waste Management, Inc. 6.875% 05/15/2009 135,000 150,901
Waste Management, Inc. Senior Notes 7.000% 07/15/2028 75,000 80,724
----------
1,269,298
----------
FINANCIAL -- 10.2%
Allstate Corp. 5.350% 06/01/2033 80,000 73,652
Allstate Corp. Senior Notes 6.125% 12/15/2032 65,000 66,840
Allstate Corp. Senior Notes 7.200% 12/01/2009 125,000 145,800
Archstone-Smith Trust REIT 5.000% 08/15/2007 75,000 78,694
ASIF Global Financng XIX 144A 4.900% 01/17/2013 640,000 636,078
Bear Stearns Co., Inc. 4.500% 10/28/2010 95,000 95,557
Boeing Capital Corp. 4.750% 08/25/2008 100,000 103,162
Boston Properties, Inc. 5.625% 04/15/2015 70,000 69,955
Boston Properties, Inc. REIT Senior Notes 6.250% 01/15/2013 170,000 182,417
CBA Capital Trust I 144A 5.805% 12/31/2049 325,000 335,030
City National Corp. Senior Notes 144A 5.125% 02/15/2013 375,000 370,846
Duke Realty Corp. REIT Senior Notes 7.750% 11/15/2009 150,000 176,526
Duke Realty LP REIT 3.500% 11/01/2007 150,000 150,593
EOP Operating LP Senior Notes 7.000% 07/15/2011 145,000 163,620
Exxon Capital Corp. 6.125% 09/08/2008 140,000 155,302
Ford Motor Credit Co. 6.500% 01/25/2007 85,000 90,544
Ford Motor Credit Co. 7.250% 10/25/2011 345,000 374,175
The accompanying notes are an integral part of the financial statements.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------
FINANCIAL (CONTINUED)
General Electric Capital Corp. 6.750% 03/15/2032 $ 200,000 $ 221,424
General Motors Acceptance Corp. 6.875% 08/28/2012 345,000 371,160
Goldman Sachs Group, Inc. 6.875% 01/15/2011 280,000 317,970
Household Finance Corp. 4.125% 12/15/2008 280,000 282,449
Jefferies Group, Inc. Senior Notes 7.500% 08/15/2007 195,000 219,197
JP Morgan Chase & Co. 3.625% 05/01/2008 300,000 300,604
MassMutual Global Funding II 144A 3.800% 04/15/2009 100,000 100,297
Morgan Stanley Dean Witter 6.600% 04/01/2012 285,000 318,299
Morgan Stanley Dean Witter Capital, Inc.
2001-PPM A2 6.400% 02/15/2031 251,986 274,656
Pan Pacific Retail Properties, Inc., REIT
Senior Notes 7.950% 04/15/2011 75,000 89,301
SLM Corp. 5.000% 04/15/2015 200,000 197,320
Travelers Property Casualty Corp. Senior
Notes 6.375% 03/15/2033 100,000 104,361
Washington Mutual, Inc. 4.000% 01/15/2009 70,000 70,122
Washington Mutual, Inc. 8.250% 04/01/2010 50,000 60,121
Zions Bancorp 6.000% 09/15/2015 160,000 167,760
-----------
6,363,832
-----------
HEALTH CARE -- 0.4%
Schering-Plough Corp. 5.300% 12/01/2013 130,000 132,268
Wyeth Corp. 6.450% 02/01/2024 65,000 66,612
Wyeth Corp. 6.500% 02/01/2034 60,000 61,352
-----------
260,232
-----------
PUBLIC UTILITY -- 1.2%
Appalachian Power Co. 5.950% 05/15/2033 85,000 81,762
Keyspan Corp. 4.650% 04/01/2013 95,000 93,294
NiSource Finance Corp. 5.400% 07/15/2014 100,000 101,250
NiSource Finance Corp. 7.875% 11/15/2010 80,000 95,151
Northern States Power Co. 8.000% 08/28/2012 45,000 54,865
Public Service Co. of CO 4.375% 10/01/2008 125,000 128,255
Public Service Co. of CO 7.875% 10/01/2012 45,000 54,616
Wisconsin Electric Power 5.625% 05/15/2033 130,000 126,244
-----------
735,437
-----------
TRANSPORTATION -- 0.4%
Union Pacific Corp. 3.875% 02/15/2009 250,000 248,155
-----------
Total Corporate (Cost $16,257,886) 16,851,844
-----------
MUNICIPAL OBLIGATIONS -- 2.5%
California State NCL 5.250% 11/01/2009 70,000 77,044
California State NCL 6.000% 04/01/2018 155,000 176,057
Illinois State 5.100% 06/01/2033 560,000 514,903
New Jersey Economic Development
Authority(b) 0.000% 02/15/2017 380,000 181,203
New Jersey State Turnpike Authority 4.252% 01/01/2016 625,000 597,350
-----------
Total Municipal Obligations (Cost $1,629,032) 1,546,557
-----------
The accompanying notes are an integral part of the financial statements.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -----------------------------------------------------------------------------------------------------
SOVEREIGN BONDS -- 0.5%
United Mexican States 6.375% 01/16/2013 $ 175,000 $ 181,563
United Mexican States 8.300% 08/15/2031 110,000 123,475
----------
Total Sovereign Bonds (Cost $290,114) 305,038
----------
YANKEE BONDS -- 5.9%
Amvescap Senior Notes 144A 6.600% 05/15/2005 110,000 116,457
Amvescap, Inc. Senior Notes 5.900% 01/15/2007 200,000 216,139
British Telecom PLC 8.375% 12/15/2010 105,000 127,772
British Telecom PLC 8.875% 12/15/2030 40,000 52,304
Carnival Corp. 6.650% 01/15/2028 75,000 77,003
Carnival PLC 7.875% 06/01/2027 125,000 144,149
Deutsche Telekom 3.875% 07/22/2008 160,000 160,527
Deutsche Telekom 8.500% 06/15/2010 135,000 163,231
Deutsche Telekom 8.750% 06/15/2030 180,000 229,937
Domtar, Inc. 5.375% 12/01/2013 175,000 173,166
HBOS PLC 144A Sub Notes(a) 5.375% 12/31/2049 250,000 249,235
Hutchison Whampoa Ltd. 144A 5.450% 11/24/2010 165,000 167,361
Koninklijke KPN NV Senior Unsub Notes 8.375% 10/01/2030 90,000 114,094
National Westminster Bank(a) 7.750% 04/29/2049 545,000 622,867
Nordea Bank Sweden AB 144A 5.250% 11/30/2012 205,000 209,181
Potash Corp. Saskatchewan 4.875% 03/01/2013 165,000 161,205
Province of Ontario 5.125% 07/17/2012 115,000 120,350
Province of Quebec 5.000% 07/17/2009 115,000 121,560
St. George Bank Ltd. 144A 5.300% 10/15/2015 140,000 140,110
Telecom Italia Capital 144A 4.000% 11/15/2008 385,000 387,437
----------
Total Yankee Bonds (Cost $3,638,654) 3,754,085
----------
NON-AGENCY -- 6.4%
PASS THRU SECURITIES -- 6.4%
Chase Commercial Mortgage Securities Corp.
1997-1 D
Non-ERISA 7.370% 06/16/2029 175,000 194,408
Chase Commercial Mortgage Securities Corp.
1997-1 E
Non-ERISA 7.370% 06/19/2029 300,000 333,060
Chase Commercial Mortgage Securities Corp.
1997-2 C 6.600% 12/12/2029 75,000 83,204
Chase Commercial Mortgage Securities Corp.
1998-1 A2 6.560% 05/18/2030 250,000 277,751
DLJ Commercial Mortgage Corp. 1998-CF2
B1(a) 7.058% 11/12/2031 215,000 239,518
DLJ Commercial Mortgage Corp. 1999-CG1 A1A 6.080% 03/10/2032 354,043 379,074
JP Morgan Commercial Mortgage Finance Corp.
1997-C5 A3 7.088% 09/15/2029 125,000 138,013
Morgan Stanley Capital I 1998-HF1 C 6.750% 03/15/2030 180,000 201,511
Morgan Stanley Capital I 1999-CAM1 A4 7.020% 03/15/2032 165,000 187,221
Morgan Stanley Capital I 1999-RM1 A2 6.710% 12/15/2031 370,000 415,306
Morgan Stanley Dean Witter Capital I
2001-PPM A3 6.540% 02/01/2031 350,000 389,324
Mortgage Capital Funding, Inc. 1996-MC1A C 7.800% 04/15/2006 410,000 453,526
Mortgage Capital Funding, Inc. 1997-MC2 C 6.881% 11/20/2027 310,000 344,551
Mortgage Capital Funding, Inc. 1997-MC2 D 7.117% 11/20/2007 350,000 390,367
----------
Total Non-Agency (Cost $3,878,252) 4,026,834
----------
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY -- 27.9%
PASS THRU SECURITIES -- 27.9%
FHLMC Gold 6.000% 05/01/2017 $ 485,089 $ 509,034
FNMA 4.060% 06/01/2013 125,000 118,367
FNMA 5.000% 07/01/2018 182,410 186,280
FNMA 5.500% 02/01/2033 - 10/01/2033 1,684,252 1,707,058
FNMA 6.000% 04/01/2017 - 05/01/2033 1,642,377 1,713,558
FNMA 6.500% 12/01/2015 - 10/01/2032 1,803,136 1,887,803
FNMA 7.000% 11/01/2031 - 06/01/2032 607,213 642,995
FNMA 7.250% 01/15/2010 1,115,000 1,314,625
FNMA 7.500% 02/01/2029 - 09/01/2029 31,080 33,358
FNMA (TBA)# 5.000% 01/01/2019 1,700,000 1,733,470
FNMA (TBA)# 5.500% 01/01/2034 4,095,000 4,147,465
FNMA (TBA)# 6.000% 01/01/2019 - 01/01/2032 2,015,000 2,082,753
FNMA (TBA)# 6.500% 01/01/2032 1,120,000 1,171,100
GNMA 6.500% 07/15/2032 - 10/15/2032 64,148 67,631
GNMA 8.000% 08/15/2025 - 11/15/2026 132,789 144,993
-----------
Total U.S. Government Agency (Cost $17,255,200) 17,460,490
-----------
U.S. TREASURY OBLIGATIONS -- 17.8%
TREASURY BONDS -- 2.5%
U.S. Treasury Bond 6.250% 05/15/2030 1,347,000 1,554,416
-----------
TREASURY NOTES -- 15.3%
U.S. Treasury Inflation Index Note 3.875% 01/15/2009 2,352,068 2,655,999
U.S. Treasury Note 1.500% 07/31/2005 910,000 909,289
U.S. Treasury Note 2.375% 08/15/2006 4,710,000 4,735,392
U.S. Treasury Note 3.250% 08/15/2008 1,100,000 1,106,703
U.S. Treasury Note+ 6.750% 05/15/2005 100,000 107,203
U.S. Treasury Note+ 7.875% 11/15/2004 50,000 52,861
-----------
9,567,447
-----------
Total U.S. Treasury Obligations (Cost $11,083,325) 11,121,863
-----------
TOTAL BONDS AND NOTES (COST $68,489,607) 69,556,780
-----------
CONTRACT
SIZE
---------
PURCHASED OPTIONS -- 0.0%
U.S. Treasury Note 2.63% Call, Strike Price 97.26,
01/26/2004 13,000 10,613
------------
TOTAL PURCHASED OPTIONS (COST $13,000) 10,613
------------
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
RATE MATURITY VALUE (NOTE 1A)
------ ----------------------- --------- ------------
SHORT-TERM INVESTMENTS -- 5.1%
U.S. GOVERNMENT AGENCY -- 4.7%
FNMA Discount Note=/= 1.056% 01/14/2004 $ 675,000 $ 674,730
FNMA Discount Note=/= 1.066% 01/20/2004 2,300,000 2,298,850
----------
2,973,580
----------
REPURCHASE AGREEMENTS -- 0.4%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc.
and Investors Bank and Trust Company, due 01/02/04, with a maturity value of
$219,218 and an effective yield of 0.20%, collateralized by a U.S. Government
Obligation with a rate of 5.18%, a maturity date of 02/15/26 and an aggregate
market value of $223,819. 219,216
----------
TOTAL SHORT-TERM INVESTMENTS (COST $3,192,700) 3,192,796
----------
TOTAL INVESTMENTS -- 116.2% (COST
$71,695,307) $ 72,760,189
OTHER ASSETS, LESS LIABILITIES --
(16.2%) (10,135,800)
------------
NET ASSETS -- 100.0% $ 62,624,389
============
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
NCL - Non-callable
PO - Principal Only
REIT - Real Estate Investment Trust
TBA - To Be Announced
(a) Variable Rate Security; rate indicated is as of 12/31/03.
(b) Zero coupon security.
# Delayed delivery contract.
+ Denotes all or part of security pledged as collateral (Note 6).
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Investment Grade Bond Fund (the "Fund") is a separate
diversified investment series of the Trust.
The objective of the Fund is to maximize total return, consistent with
preserving principal and liquidity, primarily through the generation of
current income and, to a lesser extent, capital appreciation. The Fund
seeks to achieve its objective by investing, under normal circumstances, at
least 80% of net assets in investment grade fixed income securities
including, but not limited to, government, agency, corporate and mortgage
and asset-backed issues.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Investment Grade Bond Fund was changed to Standish Mellon Investment Grade
Bond Fund. In addition, the Declaration of Trust was amended to change the
name of the Trust from Standish, Ayer & Wood Investment Trust to Mellon
Institutional Funds Investment Trust. The name changes became effective
July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Dividend income is recorded on the ex-dividend
date. Realized gains and losses from securities sold are recorded on the
identified cost basis.
17
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
D. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income and distributions from capital gains,
if any, are reinvested in additional shares of the Fund unless the
shareholder elects to receive them in cash. Income and capital gain
distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences, which may result in distribution reclassifications, are
primarily due to differing treatments for losses deferred due to wash
sales, amortization and/or accretion of premiums and discounts on certain
securities and the timing of recognition of gains and losses on futures
contracts.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments may include temporary book and tax basis
differences which will reverse in a subsequent period. Any taxable income
or gain remaining at fiscal year end is distributed in the following year.
E. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
F. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory and administrative
services and general office facilities, is paid monthly at the annual rate
of 0.40% of the Fund's average daily net assets. Standish Mellon
voluntarily agreed to limit total Fund operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.40% of the
Fund's average daily net assets for the year ended December 31, 2003.
Pursuant to this agreement, for the year ended December 31, 2003, Standish
Mellon voluntarily did not impose $222,267 of its investment advisory fee.
This agreement is voluntary and temporary and may be discontinued or
revised by Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
18
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
------------ ------------
U.S. Government Securities $332,431,838 $366,100,000
============ ============
Investments (non-U.S.Government Securities) $ 40,533,414 $ 22,526,557
============ ============
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 201,404 1,054,357
Shares issued to shareholders in payment of
distributions declared 110,742 113,335
Shares redeemed (1,271,678) (239,259)
---------- ---------
Net increase (decrease) (959,532) 928,433
========== =========
At December 31, 2003, two shareholders held of record approximately 67% and
14% of the total outstanding shares of the Fund. Investment activity of
these shareholders could have a material impact on the Fund.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
Dividends paid by the Fund from net interest earned on tax-exempt municipal
bonds are not includable by shareholders as gross income for federal income
tax purposes because the Fund intends to meet certain requirements of the
Internal Revenue Code applicable to regulated investment companies which
will enable the Fund to pay exempt-interest dividends.
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 were as follows:
Unrealized appreciation $1,331,784
Unrealized depreciation (241,074)
----------
Net unrealized appreciation/depreciation 1,090,710
Undistributed ordinary income 540,053
Accumulated losses (14,719)
Cost for federal income tax purposes $71,702,647
The Fund elected to defer to its fiscal year ending December 31, 2004
$15,732 of losses recognized during the period November 1, 2003 to December
31, 2003.
19
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
AMOUNT
----------
Distributions paid from:
Ordinary income $3,867,494
Capital gains 279,033
(6) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face amount at value of any
open purchased options is shown in the Schedule of Investments. This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contract or
if the counterparty does not perform under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ----------------
Outstanding, beginning of period 4 $ 86,013
Options written 20 166,809
Options expired (14) (98,499)
Options closed (5) (114,519)
--- ---------
Outstanding, end of period 5 $ 39,804
=== =========
20
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following written put option
contracts:
SECURITY CONTRACTS VALUE
------------------------------------------------------------ --------- -------
UST 2.63% Put, Strike Price 95.13, 1/26/04 1 $ 102
UST 4.25% Put, Strike Price 99.81, 1/5/04 1 2,400
UST 4.25% Put, Strike Price 99.91, 1/15/04 1 5,457
UST 4.25% Put, Strike Price 100.22, 1/27/04 1 8,037
UST 4.25% Put, Strike Price 100.91, 1/20/04 1 10,188
-------
Total (premiums received $39,804) $26,184
=======
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
Outstanding, beginning of period 4 $ 27,179
Options written 18 90,232
Options expired (4) (26,652)
Options closed (13) (64,534)
--- --------
Outstanding, end of period 5 $ 26,225
=== ========
At December 31, 2003, the Fund held the following written call option
contracts:
SECURITY CONTRACTS VALUE
------------------------------------------------------------ --------- -------
UST 2.63% Call, Strike Price 100.50, 1/26/04 1 $ 254
UST 4.25% Call, Strike Price 100.94, 1/20/04 1 2,190
UST 4.25% Call, Strike Price 100.81, 1/5/04 1 2,946
UST 4.25% Call, Strike Price 10.22, 1/27/04 1 4,887
UST 4.25% Call, Strike Price 99.91, 1/15/04 1 4,961
-------
Total (premiums received $26,225) $15,238
=======
At December 31, 2003, the Fund had segregated sufficient securities for
open written options contracts.
INTEREST RATE FLOORS
Interest rate floors purchased by the Fund entitle the Fund to receive
payments on a notional principal amount from the party selling such floor
to the extent that a specified index falls below a predetermined interest
rate amount. Credit and market risk exist with respect to these
instruments. If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Fund expects to enter these transactions primarily for
hedging purposes including, but not limited to, preserving a return or
spread on a particular investment or portion of its portfolio, protecting
against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Interest rate floors are
marked-to-market daily based on quotations from market makers and the
change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations. Realized gains or losses from these agreements
are disclosed in the Statement of Operations.
At December 31, 2003, the Fund held no open interest rate floor agreements.
21
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
At December 31, 2003, the Fund held the following financials futures
contracts:
UNDERLYING FACE
CONTRACT POSITION EXPIRATION DATE AMOUNT AT VALUE UNREALIZED LOSS
---------------------------------------------------------------------------------------------
U.S. 10 Year Note (5 contracts) Short 3/31/2004 $561,328 $(1,587)
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate and credit default swap
agreements to manage its exposure to interest rates and credit risk.
Interest rate swap agreements involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. In a credit default swap, one party makes a
stream of payments to another party in exchange for the right to receive a
specified return in the event of a default by a third party on its
obligation. The Fund may use credit default swaps to provide a measure of
protection against defaults of issuers (i.e., to reduce risk where the Fund
owns or has exposure to the corporate or sovereign issuer) or to take an
active long or short position with respect to the likelihood of a
particular corporate or sovereign issuer's default. In connection with
these agreements, cash or securities may be set aside as collateral in
accordance with the terms of the swap agreement. The Fund earns interest on
cash set aside as collateral. Swaps are marked to market daily based upon
quotations from market makers and change in value, if any, is recorded as
unrealized gain or loss in the Statement of Operations. These financial
instruments are not actively traded on financial markets. The values
assigned to these instruments are based upon the best available information
and because of the uncertainty of the valuation, these values may differ
significantly from the values that would have been realized had a ready
market for these instruments existed, and differences could be material.
Payments received or made from credit default swaps at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. Entering into these agreements, if
any, involves, to varying degrees, elements of credit, market, and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, and that there may be
unfavorable changes in interest rates.
22
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INVESTMENT GRADE BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following open swap contract:
EXPIRATION NET UNREALIZED
NOTIONAL AMOUNT DATE DESCRIPTION APPRECIATION
--------------------------------------------------------------------------------------------------
950,000 USD 4/30/04 Agreement with Citigroup Global $10,148
Markets, Inc., dated 10/30/03 to pay the
notional amount multiplied by the 1 month
LIBOR adjusted by a specified spread and
receive the notional amount multiplied by
the total return of The Lehman
Brothers, Inc. AAA 8.5 year Commercial
MBS Index.
(7) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Fund had no
securities on loan.
(8) DELAYED DELIVERY TRANSACTIONS:
The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. This Fund segregates securities having a value
at least equal to the amount of the purchase commitment.
The Fund may enter into to be announced ("TBA") purchase commitments to
purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Fund holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
Fund may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition
to the risk of the decline in the value of the Fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value
of the underlying securities, according to the procedures described under
"Investment security valuations" above.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is "marked-to-
market" daily and the change in market value is recorded by the Fund as an
unrealized gain or loss. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
See the Schedule of Investments for outstanding delayed delivery contracts.
23
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Investment Grade Bond Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon Investment Grade Bond
Fund (formerly, Standish Investment Grade Bond Fund) (the "Fund") at
December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 2003 by correspondence
with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
24
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
25
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstituionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
26
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
Opportunistic High
Yield Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON OPPORTUNISTIC HIGH YIELD BOND FUND
Management Discussion and Analysis
December 2003
Performance
Just when it looked like the high yield market might settle down and glide
through the last month of the year, bond prices moved sharply higher during
December. December's monthly return was one of seven that exceeded 2% and high
yield finished with its best year since 1991. For the month the Standish Mellon
Opportunistic High Yield Fund returned 2.32%, modestly topping the 2.26% return
of the benchmark Lehman High Yield Index. The Fund had a total return in 2003 of
21.77%, which underperformed the Index mark of 28.97%. The high yield asset
class was the star of the fixed income market in 2003 as it significantly
outperformed most competitors, with Emerging Markets coming the closest at
26.93%. High yield outperformed the Lehman Aggregate Index (+4.1% 2003 total
return) by almost 23%.
From a quality perspective the return pattern for December mirrored the one that
held steady throughout the year: outperformance by the most speculative
securities. In December, CCC and Ca thru D rated securities returned 3.43% and
3.58% respectively. The B sector was next at 2.34% and BB's followed along at
1.54%. The story for the year, as we have related repeatedly, was the same but
on a much bigger scale. Lehman's Ca and defaulted bond subindex returned 86.29%
for the year while CCC's were next in line with a stunning +60.23%. The more
mainstream rating sectors had strong but much lower returns with B's gaining
26.59% and BB's rising 19.95%. Two of the outcomes from all this performance are
worth noting: the average dollar price of bonds in the Index is nearly 103
(CCC's alone are over 94) and CCC and lower rated bonds represent 18%-20% of the
market value of every broad high yield index.
On an industry basis December's outperforming sectors were led by a price
recovery in steel (+9.21%) and late in the month gains from the cable sector
(+4.28%). Again, the standout under-performing sector (a small component of the
total market at 0.7%) was textile/apparel, which fell a further 2.09% during the
month largely due to further price deterioration in Levi's securities. For the
year, apparel/textile is the only sector reporting a negative total return at
- -3.85%. Interestingly, only one other market sector has a YTD total return of
less than 10%: steel at +9.91%, almost all of which came in December. Combined,
these two laggard sectors represent less than 1.5% of the high yield universe.
With lower quality bonds dominating returns in 2003, it follows that the
industry classifications containing a concentration of those lower
priced/higher-yielding securities would provide the bulk of outperformance. The
top performing industries were electric utilities (+52.29%), telecommunications
(+46.77%), cable TV (+46.03%, a large share from Charter) and technology
(+41.44%). All of these industries represent large components of the high yield
index universe, with each exceeding a 3.5% share, and in total they represent
about 28% of the asset class's market value.
3
Despite the huge returns in these four industries, fundamental credit
improvement within them was not universally observed. A return of capital market
access did solve almost all near term liquidity problems for many companies. But
notable large issuers such as Calpine, Charter Communications, Level Three
Communications, Lucent Technologies and Qwest Communications still face enormous
competitive threats and business execution issues. We have had limited or zero
exposure to these companies.
In examining the performance of the Standish Mellon Opportunistic High Yield
Fund against the benchmark, the major discrepancy was caused by the huge returns
from credit situations that were stressed and at low dollar prices starting the
year. Our higher-quality strategy and concentration on cash flow generating B
and BB credits was not a recipe for outperformance in 2003. Although we avoided
what few credit problems did occur, the sectors that did poorly were not
material parts of the universe. Also, positive performance opportunities from
security selection standpoint were limited to a fairly small list of industries:
of the 37 industry classifications defined in the Merrill Lynch Master Index
only six had returns above the overall return of the Index. Of the four big
outperforming sectors listed above, the Fund's portfolio had a large overweight
in the utility area; particularly in the asset-value rich pipeline operating
subsidiaries. Our exposure to the other three was limited primarily due to
fundamental credit concerns and, in the case of Qwest, a lack of audited
financial statements upon which to base a credit opinion.
Market Environment
The market commentary surrounding the huge cash flows in the market remains the
same and is substantially repeated below. High yield mutual fund flows continued
to be positive as over $1 billion was allocated in December thus increasing 2003
inflows to $27 billion. As a back of the envelope demonstration of the technical
strength of the asset class, consider that in 2003 the high yield market had
approximately $121 billion in new issuance. A bit less than half of that total
was in the form of refinancings and as such does not represent net new issuance.
Against the roughly $70 billion in net new issuance, sources of cash for the
market include about $50 billion in high yield coupon income, the aforementioned
$27 billion in mutual fund flows plus all institutional, hedge fund and
insurance company commitments not flowing to reporting mutual funds.
Wall Street of course has a ready answer for this situation: more high yield
paper. As the search for potential issuers widens and portfolio managers
continue to search for any new opportunity with yield, the quality of the new
issuance has declined precipitously. The average ratings of new deals have
fallen and CCC new issues have become a regular occurrence. Other anecdotal
signs of quality decline include: the return of zero-coupon issues, new deals of
less than $100 million, paper from industries such as sub-prime finance,
shipping, European cable and CLECs all of which were effectively banished from
the high yield primary market due to horrific default rates.
4
Portfolio Strategy and Outlook
Seemingly ever-higher high yield bond prices continue to be supported by high
levels of investor liquidity and improving trends in defaults and ratings
actions. The burning questions now are: what is likely to change this situation
and when might the change occur? Our feeling is that although spreads on high
yield securities have declined, the asset class continues to offer attractive
return opportunities relative to other higher quality fixed income options,
particularly if the default experience continues to decline. High yield
investments to be avoided, therefore, are ones that may experience credit
stress. That statement sounds obvious, but the behavior of the market is just
the opposite -- there is a huge thirst for risk and yield, and performance in
2003 was dominated by the price recovery of the most stressed situations. We
intend to invest based on sensible risk reward from a credit standpoint.
We believe that the credit stress associated with the risky crop of issues
priced in the past six months will occur sometime in the next 18 to 36 months.
Also, companies that were facing liquidity and capital market access
difficulties were bailed out in 2003 but many of those companies also have
significant business challenges that have not been addressed or improved. When
investors begin to fear the possibility that those business issues will not be
solved those credits will suffer. The other timing consideration that will
impact the market will occur when high yield buyers feel that, despite excess
portfolio cash, it is time to sell the new issues from weak credits that were
purchased in a hot market. That exercise will be the high yield portfolio
management guessing game in 2004 for those who are currently aggressively
invested.
/s/ Michael Tucker /s/ Jonathan Uhrig
Michael Tucker Jonathan Uhrig
5
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Opportunistic High Yield Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon Opportunistic High Yield Fund and the Lehman High Yield Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
Opportunistic Lehman High
High Yield Fund Yield Index
100,000 100,000
98,200 98,755
98,700 100,533
95,149 97,714
96,368 99,152
96,826 100,322
91,485 93,579
94,274 95,894
97,890 99,392
97,089 98,987
2002 97,802 99,676
97,149 98,285
98,698 100,650
99,665 102,219
99,605 101,691
96,486 94,194
95,008 90,079
96,979 92,647
96,901 91,431
97,277 90,634
101,608 96,247
102,988 97,593
2003 104,822 100,842
106,132 102,086
108,523 105,022
113,328 111,254
114,665 112,402
117,131 115,636
115,503 114,364
116,323 115,679
118,905 118,841
121,117 121,241
122,570 123,080
125,414 125,866
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 04/02/2001
------ ----------
21.77% 8.58%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$39,036,191) $41,873,727
Cash 12,978
Interest and dividends receivable 781,720
Prepaid expenses 3,525
-----------
Total assets 42,671,950
LIABILITIES
Payable for investments purchased $ 204,342
Unrealized depreciation on forward foreign currency
exchange contracts (Note 6) 74,895
Distributions payable 490,196
Payable for open swap contracts (Note 6) 11,438
Accrued accounting, custody and transfer agent fees 14,165
Accrued trustees' fees and expenses (Note 2) 1,349
Accrued expenses and other liabilities 32,207
-------
Total liabilities 828,592
-----------
NET ASSETS $41,843,358
===========
NET ASSETS CONSIST OF:
Paid-in capital $57,739,304
Accumulated net realized loss (18,542,675)
Distributions in excess of net investment income (94,915)
Net unrealized appreciation 2,741,644
-----------
TOTAL NET ASSETS $41,843,358
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 2,371,799
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 17.64
===========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$9,273 (Note 7)) $2,969,387
Dividend income 41,035
----------
Total investment income 3,010,422
EXPENSES
Investment advisory fee (Note 2) $ 148,664
Accounting, custody, and transfer agent fees 122,446
Legal and audit services 37,414
Insurance expense 9,605
Registration fees 6,675
Trustees' fees and expenses (Note 2) 5,102
Miscellaneous 7,389
----------
Total expenses 337,295
Deduct:
Waiver of investment advisory fee (Note 2) (148,664)
Reimbursement of Fund operating expenses (Note 2) (151,462)
----------
Total expense deductions (300,126)
----------
Net expenses 37,169
----------
Net investment income 2,973,253
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 1,712,319
Swap contracts (25,367)
Foreign currency transactions and forward foreign
currency exchange contracts (256,621)
----------
Net realized gain 1,430,331
Change in unrealized appreciation (depreciation)
Investment securities 2,904,188
Swap contracts 6,790
Foreign currency and forward foreign currency exchange
contracts (35,613)
----------
Change in net unrealized appreciation (depreciation) 2,875,365
----------
Net realized and unrealized gain 4,305,696
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $7,278,949
==========
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 2,973,253 $ 4,194,742
Net realized gain (loss) 1,430,331 (2,028,022)
Change in net unrealized appreciation (depreciation) 2,875,365 222,184
------------ ------------
Net increase in net assets from investment operations 7,278,949 2,388,904
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1E)
From net investment income (3,206,052) (4,225,040)
Return of capital -- (19,173)
------------ ------------
Total distributions to shareholders (3,206,052) (4,244,213)
------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 30,966,852 25,641,775
Value of shares issued to shareholders in payment of
distributions declared 2,344,012 4,167,850
Cost of shares redeemed (34,572,371) (35,115,590)
------------ ------------
Net decrease in net assets from Fund share transactions (1,261,507) (5,305,965)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,811,390 (7,161,274)
NET ASSETS
At beginning of year 39,031,968 46,193,242
------------ ------------
At end of year (including distributions in excess of net
investment income of $94,915 and $42,241) $ 41,843,358 $ 39,031,968
============ ============
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED FOR THE PERIOD
DECEMBER 31, APRIL 2, 2001
---------------- (COMMENCEMENT OF OPERATIONS)
2003 2002 TO DECEMBER 31, 2001
------- ------- ----------------------------
NET ASSET VALUE, BEGINNING OF YEAR $ 15.72 $ 16.36 $ 20.00
------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income(1)* 1.36 1.41 1.34
Net realized and unrealized gain (loss) on investments 1.97 (0.46) (1.93)
------- ------- -------
Total from investment operations 3.33 0.95 (0.59)
------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1.41) (1.58) (2.98)
From tax return of capital -- (0.01) (0.07)
------- ------- -------
Total distributions to shareholders (1.41) (1.59) (3.05)
------- ------- -------
NET ASSET VALUE, END OF YEAR $ 17.64 $ 15.72 $ 16.36
======= ======= =======
TOTAL RETURN+++ 21.77% 6.07% (2.91)%++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.10% 0.10% 0.10%+
Net Investment Income (to average daily net assets)* 8.00% 8.78% 9.46%+
Portfolio Turnover 133% 121% 191%++
Net Assets, End of Year (000's omitted) $41,843 $39,032 $46,193
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose any of its investment advisory fee and reimbursed the Fund for a
portion of its operating expenses. If this voluntary action had not been
taken, the investment income per share and the ratios would have been:
Net investment income per share(1) $ 1.22 $ 1.31 $ 1.28
Ratios (to average daily net assets):
Expenses 0.91% 0.73% 0.54%+
Net investment income 7.19% 8.15% 9.02%+
(1) Calculated based on average shares outstanding.
+ Computed on an annualized basis.
++ Not annualized.
+++ Total return would have been lower in the absence of fee waivers and
expense limitations.
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 95.8%
ASSET BACKED -- 0.1%
South Carolina Tobacco Settlement Authority 6.000% 05/15/2022 USD 50,000 $ 47,791
--------
Total Asset Backed (Cost $44,260) 47,791
--------
CONVERTIBLE CORPORATE BONDS -- 0.9%
CenterPoint Energy, Inc. 144A CVT 2.875% 01/15/2024 55,000 55,894
Lam Research Corp. CVT 4.000% 06/01/2006 135,000 138,375
Royal Caribbean Cruises Step Up Notes CVT(a) 0.000% 05/18/2021 225,000 130,500
Xcel Energy, Inc. 144A CVT 7.500% 11/21/2007 40,000 62,050
--------
Total Convertible Corporate Bonds (Cost $332,102) 386,819
--------
CORPORATE -- 79.0%
BANKING -- 1.4%
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 575,000 589,375
--------
BASIC INDUSTRY -- 11.1%
Berry Plastics Corp. 144A Senior Sub Notes 10.750% 07/15/2012 55,000 63,319
Boise Cascade Co. Senior Notes 6.500% 11/01/2010 90,000 93,884
Corn Products International, Inc. Senior Notes 8.250% 07/15/2007 75,000 82,125
Corrections Corp. of America Senior Notes 7.500% 05/01/2011 30,000 31,500
Crown Cork & Seal Co., Inc. 7.375% 12/15/2026 100,000 90,375
Crown Cork & Seal Co., Inc. 8.000% 04/15/2023 250,000 233,750
CSC Holdings, Inc. 7.875% 12/15/2007 100,000 105,500
CSC Holdings, Inc. Senior Notes 8.125% 07/15/2009 385,000 413,875
Earle M. Jorgensen Co. 9.750% 06/01/2012 100,000 111,000
Equistar Chemical/Funding 10.125% 09/01/2008 190,000 208,050
Equistar Chemicals LP Senior Notes 10.625% 05/01/2011 15,000 16,575
Freeport-McMoRan Copper & Gold, Inc. 144A Senior
Notes 10.125% 02/01/2010 75,000 86,437
Georgia-Pacific Corp. 8.875% 02/01/2010 75,000 85,500
Georgia-Pacific Corp. 144A Senior Notes 8.000% 01/15/2024 300,000 306,000
Georgia-Pacific Corp. Senior Notes 7.375% 07/15/2008 220,000 236,500
Great Lakes Dredge & Dock Co. 144A Senior Sub
Notes 7.750% 12/15/2013 115,000 118,306
Kansas City Southern 7.500% 06/15/2009 100,000 102,500
Kraton Polymers LLC 144A Senior Sub Notes 8.125% 01/15/2014 15,000 15,600
Nalco Co. 7.750% 11/15/2011 100,000 129,930
Nalco Co. 144A Senior Notes 7.750% 11/15/2011 175,000 187,250
National Waterworks, Inc. Series B 10.500% 12/01/2012 55,000 61,462
Norcraft Co. 144A Senior Sub Notes 9.000% 11/01/2011 40,000 43,200
Owens-Brockway Glass Container, Inc. 7.750% 05/15/2011 55,000 59,056
Owens-Illinois, Inc. 7.500% 05/15/2010 210,000 215,512
Pinnacle Partners 144A Senior Notes 8.830% 08/15/2004 135,000 139,894
Silgan Holdings, Inc. 144A Senior Sub Notes 6.750% 11/15/2013 85,000 85,212
Steel Dynamics, Inc. 9.500% 03/15/2009 200,000 222,000
Texas Industries, Inc. Senior Notes 10.250% 06/15/2011 210,000 237,300
US Steel Corp. Senior Notes 9.750% 05/15/2010 115,000 129,375
Westlake Chemical Corp. 144A 8.750% 07/15/2011 160,000 175,200
Williams Cos., Inc. 7.875% 09/01/2021 150,000 158,250
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BASIC INDUSTRY (CONTINUED)
Williams Cos., Inc. 7.625% 07/15/2019 USD 225,000 $ 235,406
Williams Cos., Inc. Senior Notes 8.625% 06/01/2010 70,000 78,575
Williams Cos., Inc. Series A 7.500% 01/15/2031 100,000 101,250
----------
4,659,668
----------
CAPITAL GOODS -- 5.1%
Alliant Techsystems, Inc. 8.500% 05/15/2011 100,000 110,000
Allied Waste Industries, Inc. 8.875% 04/01/2008 250,000 280,000
Allied Waste Industries, Inc. 9.250% 05/01/2021 200,000 221,250
Allied Waste Industries, Inc. 10.000% 08/01/2009 335,000 361,800
Allied Waste Industries, Inc. Series B 8.500% 12/01/2008 70,000 77,875
Esterline Technologies Corp. 144A Senior Sub
Notes 7.750% 06/15/2013 70,000 75,250
K&F Industries, Inc. Senior Sub Notes 9.625% 12/15/2010 65,000 72,881
Kinetic Concepts, Inc. 144A Senior Sub Notes 7.375% 05/15/2013 140,000 144,200
Smurfit-Stone Container Corp. 8.250% 10/01/2012 160,000 173,600
SPX Corp. Senior Notes 6.250% 06/15/2011 55,000 56,512
SPX Corp. Senior Notes 7.500% 01/01/2013 315,000 342,562
Stone Container Corp. 144A 11.500% 08/15/2006 65,000 68,250
Stone Container Corp. Senior Notes 8.375% 07/01/2012 145,000 157,325
----------
2,141,505
----------
COMMUNICATIONS -- 3.9%
ACC Escrow Corp. 144A Senior Notes 10.000% 08/01/2011 90,000 100,350
Block Communications, Inc. 9.250% 04/15/2009 400,000 430,000
CBD Media LLC 144A Senior Sub Notes 8.625% 06/01/2011 230,000 253,000
Fairpoint Communications, Inc. Senior Notes 11.875% 03/01/2010 55,000 64,075
Nextel Communications, Inc. Senior Notes 6.875% 10/31/2013 350,000 370,125
Qwest Corp. 6.875% 09/15/2033 115,000 109,250
Salem Communciations Corp. Senior Sub Notes 7.750% 12/15/2010 280,000 291,900
----------
1,618,700
----------
CONSUMER CYCLICAL -- 23.8%
Advanced Accessory Systems LLC Senior Notes 10.750% 06/15/2011 235,000 258,794
American Media Operations, Inc. Series B 10.250% 05/01/2009 125,000 133,281
Ameristar Casinos, Inc. 10.750% 02/15/2009 400,000 460,000
Argosy Gaming Co. 10.750% 06/01/2009 993,000 1,072,440
Chumash Casino & Resort 144A Senior Notes 9.000% 07/15/2010 280,000 309,400
Cinemark USA, Inc. Senior Sub Notes 9.000% 02/01/2013 75,000 84,375
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 465,000 491,737
Dex Media Finance, Inc. 144A Senior Notes 8.500% 08/15/2010 85,000 94,669
Dex Media Finance, Inc. 144A Senior Sub Notes 9.875% 08/15/2013 85,000 98,812
DirecTV Holdings LLC Senior Notes 8.375% 03/15/2013 361,000 418,760
Dominos, Inc. 144A Senior Sub Notes 8.250% 07/01/2011 105,000 112,481
Echostar DBS Corp. 144A Senior Notes 5.750% 10/01/2008 395,000 399,444
Echostar DBS Corp. Senior Notes 9.125% 01/15/2009 131,000 146,556
Entercom Communications Corp. 7.625% 03/01/2014 50,000 53,687
Entravision Communications Corp. 8.125% 03/15/2009 250,000 267,500
Gaylord Entertainment Co. 144A Senior Notes 8.000% 11/15/2013 40,000 42,200
HMH Properties, Inc. 7.875% 08/01/2008 260,000 270,400
The accompanying notes are an integral part of the financial statements.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (CONTINUED)
Horseshoe Gaming Holding Corp. 8.625% 05/15/2009 USD 190,000 $ 200,687
Isle of Capri Casinos 8.750% 04/15/2009 195,000 204,750
John Q Hamons Hotels, Inc. Series B 8.875% 05/15/2012 235,000 259,087
Keystone Automotive Operations, Inc. 144A Senior
Sub Notes 9.750% 11/01/2013 80,000 86,000
Lamar Media Corp. 7.250% 01/01/2013 20,000 21,500
Mohegan Tribal Gaming Authority Senior Notes 8.375% 07/01/2011 580,000 632,200
Mohegan Tribal Gaming Authority Senior Sub Notes 8.000% 04/01/2012 25,000 27,062
Mohegan Tribal Gaming Authority Senior Sub Notes 8.125% 01/01/2006 864,000 930,960
Moore North America Finance, Inc. 144A Senior
Notes 7.875% 01/15/2011 180,000 203,850
Panavision, Inc. Step Up Sub Notes(a)(b) 9.625% 02/01/2006 330,000 198,000
Radio One, Inc. Series B 8.875% 07/01/2011 75,000 82,687
Regal Cinemas, Inc. Series B 9.375% 02/01/2012 250,000 282,500
River Rock Entertainment Authority 144A Senior
Notes 9.750% 11/01/2011 120,000 129,000
Russell Corp. 9.250% 05/01/2010 125,000 129,531
Scotts Co. 144A Senior Sub Notes 6.625% 11/15/2013 65,000 66,787
Six Flags, Inc. Senior Notes 9.500% 02/01/2009 305,000 319,487
Spanish Broadcasting System, Inc. 9.625% 11/01/2009 175,000 186,812
Speedway Motorsports, Inc. Senior Sub Notes 6.750% 06/01/2013 250,000 258,125
Station Casinos, Inc. 8.375% 02/15/2008 65,000 69,631
Station Casinos, Inc. Senior Sub Notes 8.875% 12/01/2008 375,000 388,125
Station Casinos, Inc. Senior Sub Notes 9.875% 07/01/2010 55,000 60,500
TRW Automotive, Inc. Senior Notes 9.375% 02/15/2013 170,000 194,225
Turning Stone Casino Resort Enterprise 9.125% 12/15/2010 295,000 320,812
----------
9,966,854
----------
CONSUMER NONCYCLICAL -- 10.1%
Altria Group, Inc. 7.000% 11/04/2013 100,000 106,679
Apogent Technologies, Inc. Senior Sub Notes 6.500% 05/15/2013 85,000 88,613
Ball Corp. 6.875% 12/15/2012 200,000 209,000
Chattem, Inc. 8.875% 04/01/2008 330,000 339,900
Constellation Brands, Inc. Series B 8.000% 02/15/2008 95,000 105,450
Del Monte Corp. Senior Sub Notes 8.625% 12/15/2012 280,000 306,600
Elizabeth Arden, Inc. 11.750% 02/01/2011 125,000 148,750
HCA, Inc. 8.360% 04/15/2024 275,000 308,986
Ingles Markets, Inc. 8.875% 12/01/2011 200,000 201,000
Medex, Inc.144A Senior Sub Notes 8.875% 05/15/2013 20,000 21,500
NeighborCare, Inc. 144A Senior Sub Notes 6.875% 11/15/2013 30,000 30,525
Pathmark Stores 8.750% 02/01/2012 195,000 203,775
Rite Aid Corp. 8.125% 05/01/2010 190,000 204,250
Rite Aid Corp. 9.500% 02/15/2011 75,000 84,563
Rite Aid Corp. 12.500% 09/15/2006 215,000 249,400
RJ Reynolds Tobacco Holdings, Inc. Series B 7.750% 05/15/2006 130,000 136,500
Smithfield Foods, Inc. Senior Notes 7.750% 05/15/2013 70,000 72,800
Stater Brothers Holdings Senior Notes 10.750% 08/15/2006 445,000 468,919
Tenet Healthcare Corp. Senior Notes 6.500% 06/01/2012 110,000 105,463
Tricon Global Restaurant, Inc. Senior Notes 8.875% 04/15/2011 690,000 836,625
----------
4,229,298
----------
The accompanying notes are an integral part of the financial statements.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
ENERGY -- 14.2%
Amerigas Partners Senior Notes 8.875% 05/20/2011 USD 200,000 $ 220,000
ANR Pipeline Co. 7.375% 02/15/2024 310,000 313,100
ANR Pipeline Co. Senior Notes 7.000% 06/01/2025 25,000 25,438
Calpine Corp. 144A 8.500% 07/15/2010 125,000 121,875
Chesapeake Energy Corp. 8.125% 04/01/2011 30,000 33,300
Chesapeake Energy Corp. 8.375% 11/01/2008 150,000 165,000
Citgo Petroleum Corp. Senior Notes 11.375% 02/01/2011 170,000 197,200
CMS Energy Corp. 144A Senior Notes 7.750% 08/01/2010 50,000 52,563
CMS Energy Corp. Senior Notes 8.500% 04/15/2011 350,000 378,000
CMS Energy Corp. Senior Notes 8.900% 07/15/2008 500,000 542,500
Dynegy Holdings, Inc. 144A 9.875% 07/15/2010 385,000 433,125
El Paso Natural Gas Co. 8.375% 06/15/2032 230,000 235,060
El Paso Natural Gas Co. 8.625% 01/15/2022 350,000 364,438
El Paso Production Co. 144A Senior Notes 7.750% 06/01/2013 355,000 349,675
FirstEnergy Corp. Series B 6.450% 11/15/2011 155,000 160,649
Houston Exploration Co. 144A Senior Sub Notes 7.000% 06/15/2013 100,000 103,250
Lyondell Chemical Co. Series A 9.625% 05/01/2007 225,000 238,500
MSW Energy Holdings 144A 7.375% 09/01/2010 240,000 250,800
Newfield Exploration Co. Senior Sub Notes 8.375% 08/15/2012 100,000 112,000
NRG Energy, Inc. 144A 8.000% 12/15/2013 95,000 99,869
Peabody Energy Corp. Series B 6.875% 03/15/2013 80,000 84,400
Pogo Producing Co. 144A 8.250% 04/15/2011 75,000 83,625
Premcor Refining Group 144A Senior Notes 9.500% 02/01/2013 190,000 216,600
Reliant Resources, Inc. 144A 9.250% 07/15/2010 55,000 58,300
Teco Energy, Inc. Senior Notes 7.500% 06/15/2010 50,000 53,500
Tennessee Gas Pipeline Co. 8.375% 06/15/2032 100,000 106,125
Tesoro Petroleum Corp. 8.000% 04/15/2008 35,000 37,188
Transcontinental Gas Pipeline Corp. 6.125% 01/15/2005 175,000 177,844
Transcontinental Gas Pipeline Corp. Senior Notes 8.875% 07/15/2012 200,000 236,500
TXU Gas Capital I(c) 2.510% 07/01/2028 250,000 216,896
Westar Energy, Inc. 7.875% 05/01/2007 75,000 83,813
XTO Energy, Inc. 6.250% 04/15/2013 25,000 26,313
XTO Energy, Inc. Senior Notes 7.500% 04/15/2012 150,000 169,500
----------
5,946,946
----------
FINANCIAL -- 3.9%
Arch Western Finance LLC 144A Senior Notes 6.750% 07/01/2013 55,000 56,513
Couche-Tard Financing Corp. Senior Sub Notes
144A 7.500% 12/15/2013 75,000 78,563
Felcor Lodging LP REIT 10.000% 09/15/2008 100,000 108,000
FPL Energy Wind Funding LLC 144A 6.876% 06/27/2017 100,000 100,000
Leucadia National Corp. 144A Senior Notes 7.000% 08/15/2013 250,000 250,000
Meristar Hospitality Corp. REIT 10.500% 06/15/2009 280,000 303,800
Poster Financial Group 144A 8.750% 12/01/2011 385,000 407,138
RH Donnelley Finance Corp. I 144A Senior Notes 8.875% 12/15/2010 140,000 157,500
RH Donnelley Finance Corp. I 144A Senior Sub
Notes 10.875% 12/15/2012 135,000 160,144
----------
1,621,658
----------
PUBLIC UTILITY -- 4.1%
AES Corp. 144A 8.750% 05/15/2013 785,000 877,238
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
PUBLIC UTILITY (CONTINUED)
AES Corp. 144A 10.000% 07/15/2005 USD 143,589 $ 146,102
AES Corp. Senior Notes 8.875% 02/15/2011 123,000 134,070
Ipalco Enterprises, Inc. 8.375% 11/14/2008 155,000 173,213
Northwest Pipeline Corp. 6.625% 12/01/2007 325,000 341,250
Southern Natural Gas Co. 8.875% 03/15/2010 25,000 28,125
----------
1,699,998
----------
TECHNOLOGY -- 1.0%
Broadwing, Inc. 7.250% 06/15/2023 75,000 74,250
L-3 Communications Corp. 144A Senior Sub Notes 7.625% 06/15/2012 310,000 335,963
----------
410,213
----------
TRANSPORTATION -- 0.4%
Delta Air Lines 7.900% 12/15/2009 190,000 153,663
----------
Total Corporate (Cost $30,886,059) 33,037,878
----------
YANKEE BONDS -- 6.6%
Crown Euro Holdings SA 9.500% 03/01/2011 400,000 453,000
Donohue Forest Products 7.625% 05/15/2007 215,000 224,632
Eircom Funding Senior Sub Notes 8.250% 08/15/2013 50,000 55,375
GT Group Telecom, Inc. Senior Step Up
Notes{*}(a) 0.000% 02/01/2010 900,000 90
Ipsco, Inc. Senior Notes 8.750% 06/01/2013 25,000 27,625
MDP Acquisitions PLC Senior Notes 9.625% 10/01/2012 100,000 112,000
Norampac, Inc. Senior Notes 6.750% 06/01/2013 45,000 46,913
Quebecor Media, Inc. Senior Notes 11.125% 07/15/2011 95,000 109,963
Royal Caribbean Cruises 7.000% 10/15/2007 100,000 106,000
Royal Caribbean Cruises 7.500% 10/15/2027 255,000 249,900
Royal Caribbean Cruises Senior Notes 8.750% 02/02/2011 670,000 757,100
Stena AB 144A Senior Notes 7.500% 11/01/2013 70,000 72,100
Tyco International Group SA 6.750% 02/15/2011 35,000 38,238
Tyco International Group SA 6.375% 10/15/2011 200,000 213,750
Videotron 144A Senior Notes 6.875% 01/15/2014 95,000 98,088
Vivendi Universal 144A Senior Notes 9.250% 04/15/2010 150,000 177,750
----------
Total Yankee Bonds (Cost $2,860,865) 2,742,524
----------
NON-AGENCY -- 2.2%
PASS THRU SECURITIES -- 2.2%
Continental Airlines, Inc. 1999-1 B 6.795% 08/02/2018 77,521 65,447
Continental Airlines, Inc. 1999-2 7.566% 03/15/2020 152,627 128,668
Continental Airlines, Inc. 2000-2 8.307% 04/02/2018 330,260 293,508
GMAC Commercial Mortgage Securities, Inc.
1996-C1 F Non-ERISA 7.860% 11/15/2006 250,000 266,248
Northwest Airlines, Inc. 1999-2C 8.304% 09/01/2010 205,459 177,528
----------
Total Non-Agency (Cost $826,223) 931,399
----------
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
FOREIGN DENOMINATED -- 7.0%
EURO -- 7.0%
Eircom Funding 8.250% 08/15/2013 EUR 170,000 $ 235,856
Fort James Corp. 4.750% 06/29/2004 75,000 94,144
Messer Greisheim Holdings AG Senior Notes 10.375% 06/01/2011 200,000 290,690
Remy Cointreau SA 144A 6.500% 07/01/2010 40,000 52,098
Teksid Aluminum SpA 11.375% 07/15/2011 250,000 335,993
Telenet Communication NV 144A Senior Notes 9.000% 12/15/2013 700,000 907,306
Tyco International Group SA 5.500% 11/19/2008 480,000 616,113
Valentia Telecommunications Ltd. 7.250% 12/31/2049 285,000 385,542
-----------
Total Foreign Denominated (Cost $2,354,861) 2,917,742
-----------
TOTAL BONDS AND NOTES (COST $37,304,370) 40,064,153
-----------
SHARES
--------
PREFERRED STOCKS -- 2.0%
CONVERTIBLE PREFERRED STOCKS -- 1.5%
Ford Motor Co. Capital Trust II 6.50% CVT Pfd 2,250 125,663
General Motors Corp. Series C 6.25% CVT Pfd 2,750 88,825
Kansas City Southern 4.25% 144A CVT Pfd 160 91,460
Omnicare, Inc. 4.00% CVT Pfd 700 44,625
Tyco International Group SA 3.125% 144A CVT Pfd 210,000 287,175
-----------
Total Convertible Preferred Stocks (Cost $489,689) 637,748
-----------
NON-CONVERTIBLE PREFERRED STOCKS -- 0.5%
CSC Holdings, Inc. 11.125% Pfd 2,000 210,000
-----------
Total Non-Convertible Preferred Stocks (Cost $193,812) 210,000
-----------
TOTAL PREFERRED STOCKS (COST $683,501) 847,748
-----------
WARRANTS -- 0.0%
COMMUNICATIONS -- 0.0%
GT Group Telecom, Inc., 02/01/2010* 1,900 19
McLeod USA, Inc., 04/16/2007* 3,291 1,349
-----------
TOTAL WARRANTS (COST $87,862) 1,368
-----------
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
VALUE
SECURITY (NOTE 1A)
- --------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.3%
REPURCHASE AGREEMENTS -- 2.3%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney,
Inc. and Investors Bank and Trust Company, due 01/02/04, with a maturity
value of $960,469 and an effective yield of 0.20%, collateralized by a U.S.
Government Obligation with a rate of 5.18%, a maturity date of 02/15/26 and
an aggregate market value of $980,628. $ 960,458
----------
TOTAL SHORT-TERM INVESTMENTS (COST $960,458) 960,458
----------
TOTAL INVESTMENTS -- 100.1% (COST
$39,036,191) $41,873,727
OTHER ASSETS, LESS LIABILITIES -- (0.1%) (30,369)
-----------
NET ASSETS -- 100.0% $41,843,358
===========
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
CVT - Convertible
EUR - Euro
REIT - Real Estate Investment Trust
Step Up - Coupon rate increases in increments to maturity. Rate disclosed is as
of December 31, 2003. Maturity date disclosed is the ultimate maturity. USD -
United States Dollar
(a) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date. The rate shown is the rate at
period end. The maturity date shown is the ultimate maturity.
(b) Security is valued in good faith under procedures established by the board
of trustees.
(c) Variable Rate Security; rate indicated is as of 12/31/03.
{*} Defaulted security.
* Non-income producing security.
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Opportunistic High Yield Fund (the "Fund") is a separate
non-diversified investment series of the Trust.
The objective of the Fund is to maximize total return, consistent with
preserving principal, primarily through the generation of current income
and, to a lesser extent, capital appreciation by investing, under normal
circumstances, at least 80% of net assets in below investment grade fixed
income securities.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Opportunistic High Yield Fund was changed to Standish Mellon Opportunistic
High Yield Fund. In addition, the Declaration of Trust was amended to
change the name of the Trust from Standish, Ayer & Wood Investment Trust to
Mellon Institutional Funds Investment Trust. The name changes became
effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Dividend income is recorded on the ex-dividend
date. Realized gains and losses from securities sold are recorded on the
identified cost basis. The Fund does not isolate that portion of the
results of operations resulting from
18
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. Net realized gains and losses on foreign currency transactions
represent gains and losses on disposition of foreign currencies and forward
foreign currency exchange contracts, currency gains and losses realized
between the trade and settlement dates on securities transactions, and the
difference between the amount of investment income and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
usually received or paid.
D. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
E. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income will be declared and distributed
quarterly. The Fund's dividends from short-term and long-term capital
gains, if any, after reduction of capital losses will be declared and
distributed at least annually. Dividends from net investment income and
distributions from capital gains, if any, are reinvested in additional
shares of the Fund unless the shareholder elects to receive them in cash.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for losses
deferred due to wash sales, capital loss carryforwards, foreign currency,
and amortization and/or accretion of premiums and discounts on certain
securities.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
F. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
G. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory and administrative
services, and
19
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
general office facilities, is paid monthly at the annual rate of 0.40% of
the Fund's average daily net assets. Standish Mellon voluntarily agreed to
limit total Fund operating expenses (excluding brokerage commissions, taxes
and extraordinary expenses) to 0.10% of the Fund's average daily net assets
for the year ended December 31, 2003. Pursuant to this agreement, for the
year ended December 31, 2003, Standish Mellon voluntarily did not impose
$148,664 of its investment advisory fee and reimbursed the Fund for
$151,462 of its operating expenses. This agreement is voluntary and
temporary and may be discontinued or revised by Standish Mellon at any
time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were $46,891,637 and
$46,666,730, respectively. For the year ended December 31, 2003, the Fund
did not purchase or sell any long-term U.S. government securities.
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 1,812,094 1,619,440
Shares issued to shareholders in payment of
distributions declared 137,526 263,456
Shares redeemed (2,061,476) (2,223,499)
---------- ----------
Net decrease (111,856) (340,603)
========== ==========
At December 31, 2003, five shareholders held of record approximately 21%,
13%, 11%, 11% and 11% of the total outstanding shares of the Fund. All of
the Fund's shares are beneficially owned by fiduciary accounts over which
Standish Mellon and its affiliates have either sole or joint investment
discretion. Investment activity of these shareholders could have a material
impact on the Fund.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
Dividends paid by the Fund from net interest earned on tax-exempt municipal
bonds are not includable by shareholders as gross income for federal income
tax purposes because the Fund intends to meet certain requirements of the
Internal Revenue Code applicable to regulated investment companies which
will enable the Fund to pay exempt-interest dividends.
20
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 were as follows:
Unrealized appreciation $ 3,269,762
Unrealized depreciation (486,693)
-----------
Net unrealized appreciation/depreciation 2,783,069
Undistributed ordinary income 320,386
Accumulated losses (18,509,205)
Cost for federal income tax purposes $39,069,661
At December 31, 2003, the Fund, for federal income tax purposes had capital
loss carryovers which will reduce the Fund's taxable income arising from
net realized gain on investments, if any, to the extent permitted by the
Internal Revenue Code and thus will reduce the amount of distributions to
shareholders which would otherwise be necessary to relieve the Fund of any
liability for federal income tax. The capital loss carryovers are
$11,205,658 and $7,303,547 which expire on December 31, 2009 and 2010,
respectively.
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
AMOUNT
------------
Distributions paid from:
Ordinary income $3,206,052
(6) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face amount at value of any
open purchased options is shown in the Schedule of Investments. This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contract or
if the counterparty does not perform under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
21
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
The Fund entered into no such transactions during the year ended December
31, 2003.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Fund primarily to protect the value of the Fund's foreign securities
from adverse currency movements. Unrealized appreciation and depreciation
of forward currency exchange contracts is included in the Statement of
Assets and Liabilities.
At December 31, 2003, the Fund held the following forward foreign currency
or cross currency exchange contracts:
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
------------------------------------------------------------------------------------------------------
Euro 2,230,500 03/17/2004 $2,801,054 $2,726,159 $(74,895)
--------
SWAP AGREEMENTS
The Fund may invest in swap agreements. A swap is an agreement to exchange
the return generated by one instrument for the return generated by another
instrument. The Fund may enter into interest rate and credit default swap
agreements to manage its exposure to interest rates and credit risk.
Interest rate swap agreements involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. In a credit default swap, one party makes a
stream of payments to another party in exchange for the right to receive a
specified return in the event of a default by a third party on its
obligation. The Fund may use credit default swaps to provide a measure of
protection against defaults of issuers (i.e., to reduce risk where the Fund
owns or has exposure to the corporate or sovereign issuer) or to take an
active long or short position with respect to the likelihood of a
particular corporate or sovereign issuer's default. In connection with
these agreements, cash or securities may be set aside as collateral in
accordance with the terms of the swap agreement. The Fund earns interest on
cash set aside as collateral. Swaps are marked to market daily based upon
quotations from market makers and change in value, if any, is recorded as
unrealized gain or loss in the Statement of Operations. These financial
instruments are not actively traded on financial markets. The values
assigned to these instruments are based upon the best available information
and because of the uncertainty of the valuation, these values may differ
significantly from the values that would have been realized had a ready
market for these instruments existed, and differences could be material.
Payments received or made from credit default swaps at the end of the
measurement period are recorded as realized gain or loss in the Statement
of Operations. Net payments of interest on interest rate swap agreements
are included as part of interest income. Entering into these agreements, if
any, involves, to varying degrees, elements of credit, market, and
documentation risk in excess of the amounts recognized on the Statement of
Assets and Liabilities. Such risks involve the possibility that there will
be no liquid market for these agreements, that the counterparty to the
agreements may default on its obligation to perform or disagree as to the
meaning of contractual terms in the agreements, and that there may be
unfavorable changes in interest rates.
22
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following credit default swap
contracts:
NOTIONAL EXPIRATION NET UNREALIZED
AMOUNT DATE DESCRIPTION (DEPRECIATION)
------------------------------------------------------------------------------------------------
1,000,000 USD 6/20/08 Agreement with Goldman Sachs Capital $(11,310)
Markets, dated 04/16/03 to pay 0.46% per
year times the notional amounts The Fund
receives payment only upon a default event
by JP Morgan Chase & Co., the notional
amount times the difference between the par
value and the then-market value of JP Morgan
Chase & Co., 5.25% due 05/30/2007.
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
The Fund entered into no such transactions during the year ended December
31, 2003.
(7) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during theyear ended December 31, 2003 resulting
in security lending income. At December 31, 2003 the Fund had no securities
on loan.
23
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON OPPORTUNISTIC HIGH YIELD FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(8) DELAYED DELIVERY TRANSACTIONS:
The Fund may purchase or sell securities on a when-issued, delayed delivery
or forward commitment basis. This Fund segregates securities having a value
at least equal to the amount of the purchase commitment.
The Fund may enter into to be announced ("TBA") purchase commitments to
purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Fund holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
Fund may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition
to the risk of the decline in the value of the Fund's other assets.
Unsettled TBA purchase commitments are valued at the current market value
of the underlying securities, according to the procedures described under
"Investment security valuations" above.
The Fund may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is "marked-to-
market" daily and the change in market value is recorded by the Fund as an
unrealized gain or loss. If the TBA sale commitment is closed through the
acquisition of an offsetting purchase commitment, the Fund realizes a gain
or loss from the sale of the securities based upon the unit price
established at the date the commitment was entered into.
The Fund entered into no such transactions during the year ended December
31, 2003.
(9) CONCENTRATION OF RISK:
The Fund invests in low rated (non-investment grade) and comparable quality
unrated high yield securities. Investments in high yield securities are
accompanied by a greater degree of credit risk and the value of high yield
securities tends to be more sensitive to economic conditions than higher
rated securities. The risk of loss due to default of an issuer may be
significantly greater for holders of high yield securities, because such
securities are generally unsecured and are often subordinated to other
creditors of the issuer.
24
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Opportunistic High Yield Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon Opportunistic High
Yield Fund (fomerly, Standish Opportunistic High Yield Fund) (the "Fund")
at December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in
conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 2003 by correspondence
with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
25
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
26
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstituionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
27
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon High
Yield Bond Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON HIGH YIELD BOND FUND
Management Discussion and Analysis
December 2003
Performance
Just when it looked like the high yield market might settle down and glide
through the last month of the year, bond prices moved sharply higher during
December. December's monthly return was one of seven that exceeded 2% and high
yield finished with its best year since 1991. For the month the Standish Mellon
High Yield Fund returned 2.28% modestly topping the 2.26% return of the
benchmark Lehman High Yield Index. The Fund had a total return in 2003 of
21.76%, which underperformed the Index mark of 28.97%. The high yield asset
class was the star of the fixed income market in 2003 as it significantly
outperformed most competitors, with Emerging Markets coming the closest at
26.93%. High yield outperformed the Lehman Aggregate Index (+4.1% 2003 total
return) by almost 23%.
From a quality perspective the return pattern for December mirrored the one that
held steady throughout the year: outperformance by the most speculative
securities. In December, CCC and Ca thru D rated securities returned 3.43% and
3.58% respectively. The B sector was next at 2.34% and BB's followed along at
1.54%. The story for the year, as we have related repeatedly, was the same but
on a much bigger scale. Lehman's Ca and defaulted bond sub-index returned 86.29%
for the year while CCC's were next in line with a stunning +60.23%. The more
mainstream rating sectors had strong but much lower returns with B's gaining
26.59% and BB's rising 19.95%. Two of the outcomes from all this performance are
worth noting: the average dollar price of bonds in the Index is nearly 103
(CCC's alone are over 94) and CCC and lower rated bonds represent 18%20% of the
market value of every broad high yield index.
On an industry basis December's outperforming sectors were led by a price
recovery in steel (+9.21%) and late in the month gains from the cable sector
(+4.28%). Again, the standout under-performing sector (a small component of the
total market at 0.7%) was textile/apparel, which fell a further 2.09% during the
month largely due to further price deterioration in Levi's securities. For the
year, apparel/textile is the only sector reporting a negative total return at
- -3.85%. Interestingly, only one other market sector has a YTD total return of
less than 10%: steel at +9.91%, almost all of which came in December. Combined,
these two laggard sectors represent less than 1.5% of the high yield universe.
With lower quality bonds dominating returns in 2003, it follows that the
industry classifications containing a concentration of those lower
priced/higher-yielding securities would provide the bulk of outperformance. The
top performing industries were electric utilities (+52.29%), telecommunications
(+46.77%), cable TV (+46.03%, a large share from Charter) and technology
(+41.44%). All of these industries represent large components of the high yield
index universe, with each exceeding a 3.5% share, and in total they represent
about 28% of the asset class's market value.
3
Despite the huge returns in these four industries, fundamental credit
improvement within them was not universally observed. A return of capital market
access did solve almost all near term liquidity problems for many companies. But
notable large issuers such as Calpine, Charter Communications, Level Three
Communications, Lucent Technologies and Qwest Communications still face enormous
competitive threats and business execution issues. We have had limited or zero
exposure to these companies.
In examining the performance of the Standish Mellon High Yield Fund against the
benchmark, the major discrepancy was caused by the huge returns from credit
situations that were stressed and at low dollar prices starting the year. Our
higher-quality strategy and concentration on cash flow generating B and BB
credits was not a recipe for outperformance in 2003. Although we avoided what
few credit problems did occur, the sectors that did poorly were not material
parts of the universe. Also, positive performance opportunities from security
selection standpoint were limited to a fairly small list of industries: of the
37 industry classifications defined in the Merrill Lynch Master Index only six
had returns above the overall return of the Index. Of the four big outperforming
sectors listed above, the Fund's portfolio had a large overweight in the utility
area; particularly in the asset-value rich pipeline operating subsidiaries. Our
exposure to the other three was limited primarily due to fundamental credit
concerns and, in the case of Qwest, a lack of audited financial statements upon
which to base a credit opinion.
Market Environment
The market commentary surrounding the huge cash flows in the market remains the
same and is substantially repeated below. High yield mutual fund flows continued
to be positive as over $1 billion was allocated in December thus increasing 2003
inflows to $27 billion. As a back of the envelope demonstration of the technical
strength of the asset class, consider that in 2003 the high yield market had
approximately $121 billion in new issuance. A bit less than half of that total
was in the form of refinancings and as such does not represent net new issuance.
Against the roughly $70 billion in net new issuance, sources of cash for the
market include about $50 billion in high yield coupon income, the aforementioned
$27 billion in mutual fund flows plus all institutional, hedge fund and
insurance company commitments not flowing to reporting mutual funds.
Wall Street of course has a ready answer for this situation: more high yield
paper. As the search for potential issuers widens and portfolio managers
continue to search for any new opportunity with yield, the quality of the new
issuance has declined precipitously. The average ratings of new deals have
fallen and CCC new issues have become a regular occurrence. Other anecdotal
signs of quality decline include: the return of zero-coupon issues, new deals of
less than $100 million, paper from industries such as sub-prime finance,
shipping, European cable and CLECs all of which were effectively banished from
the high yield primary market due to horrific default rates.
4
Portfolio Strategy and Outlook
Seemingly ever-higher high yield bond prices continue to be supported by high
levels of investor liquidity and improving trends in defaults and ratings
actions. The burning questions now are: what is likely to change this situation
and when might the change occur? Our feeling is that although spreads on high
yield securities have declined, the asset class continues to offer attractive
return opportunities relative to other higher quality fixed income options,
particularly if the default experience continues to decline. High yield
investments to be avoided, therefore, are ones that may experience credit
stress. That statement sounds obvious, but the behavior of the market is just
the opposite -there is a huge thirst for risk and yield, and performance in 2003
was dominated by the price recovery of the most stressed situations. We intend
to invest based on sensible risk reward from a credit standpoint.
We believe that the credit stress associated with the risky crop of issues
priced in the past six months will occur sometime in the next 18 to 36 months.
Also, companies that were facing liquidity and capital market access
difficulties were bailed out in 2003 but many of those companies also have
significant business challenges that have not been addressed or improved. When
investors begin to fear the possibility that those business issues will not be
solved those credits will suffer. The other timing consideration that will
impact the market will occur when high yield buyers feel that, despite excess
portfolio cash, it is time to sell the new issues from weak credits that were
purchased in a hot market. That exercise will be the high yield portfolio
management guessing game in 2004 for those who are currently aggressively
invested.
/s/ Michael Tucker /s/ Jonathan Uhrig
Michael Tucker Jonathan Uhrig
5
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon High Yield Bond Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon High Yield Bond Fund and the Lehman High Yield Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
High Yield Bond Lehman High
Fund Yield Index
100,000 100,000
101,500 101,390
104,400 104,178
103,950 103,939
106,049 105,997
103,919 106,092
105,238 107,110
106,200 108,053
1998 107,546 109,998
108,271 110,642
110,189 111,681
110,346 112,121
109,978 112,510
109,770 112,915
110,782 113,557
100,285 107,291
102,526 107,776
101,877 105,567
107,831 109,948
107,115 110,069
107,566 111,703
105,876 111,045
1999 108,476 112,105
111,966 114,277
109,105 112,730
109,633 112,489
107,773 112,942
106,436 111,693
106,781 110,890
105,658 110,153
107,549 111,449
109,472 112,702
109,535 112,216
2000 111,046 112,433
111,163 110,069
108,922 110,245
106,552 109,115
110,335 111,337
111,443 112,186
112,942 112,954
112,162 111,967
110,636 108,381
107,718 104,089
112,581 106,098
119,958 114,046
2001 121,093 115,566
118,751 112,844
116,956 111,439
118,176 113,446
114,298 110,264
114,371 111,887
115,103 113,207
107,560 105,599
111,145 108,211
114,656 112,158
114,289 111,701
115,594 112,478
2002 114,750 110,909
116,287 113,577
117,228 115,348
117,306 114,752
112,874 106,292
110,642 101,649
113,512 104,547
112,772 103,174
113,259 102,275
118,127 108,609
119,659 110,128
121,662 113,794
2003 123,247 115,198
126,278 118,511
132,199 125,543
133,389 126,839
136,350 130,488
134,455 129,053
135,234 130,537
138,156 134,105
140,863 136,813
142,441 138,888
145,689 142,032
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 06/02/1997
------ ------ ------ ----------
21.76% 8.97% 6.34% 5.88%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investment in Standish Mellon High Yield Bond Portfolio
("Portfolio"), at value (Note 1A) $57,078,563
Receivable for Fund shares sold 140,375
Prepaid expenses 4,564
-----------
Total assets 57,223,502
LIABILITIES
Distributions payable $171,528
Accrued accounting, custody and transfer agent fees 2,506
Accrued trustees' fees and expenses (Note 2) 500
Accrued expenses and other liabilities 12,894
-------
Total liabilities 187,428
-----------
NET ASSETS $57,036,074
===========
NET ASSETS CONSIST OF:
Paid-in capital $65,340,774
Accumulated net realized loss (11,670,055)
Distributions in excess of net investment income (169,652)
Net unrealized appreciation 3,535,007
-----------
TOTAL NET ASSETS $57,036,074
===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 3,522,502
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 16.19
===========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B)
Interest income allocated from Portfolio $ 4,240,739
Dividend income allocated from Portfolio 89,295
Expenses allocated from Portfolio (260,941)
-----------
Net investment income allocated from Portfolio 4,069,093
EXPENSES
Accounting, custody, and transfer agent fees $ 29,638
Registration fees 19,100
Legal and audit services 17,399
Trustees' fees and expenses (Note 2) 2,000
Insurance expense 957
Miscellaneous 9,296
----------
Total expenses 78,390
Deduct:
Reimbursement of Fund operating expenses (Note 2) (78,353)
----------
Net expenses 37
-----------
Net investment income 4,069,056
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) allocated from Portfolio on:
Investment security transactions 1,967,729
Written options transactions 120
Swap contracts (25,367)
Foreign currency transactions and forward foreign
currency exchange contracts (461,569)
----------
Net realized gain 1,480,913
Change in unrealized appreciation (depreciation) allocated
from Portfolio on:
Investment securities 4,602,154
Written options (765)
Swap contracts 27,936
Foreign currency and forward foreign currency exchange
contracts (11,704)
----------
Change in net unrealized appreciation (depreciation) 4,617,621
-----------
Net realized and unrealized gain on investments 6,098,534
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $10,167,590
===========
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 4,069,056 $ 3,783,370
Net realized gain (loss) 1,480,913 (3,642,617)
Change in net unrealized appreciation (depreciation) 4,617,621 2,085,028
------------ ------------
Net increase in net assets from investment operations 10,167,590 2,225,781
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1C)
From net investment income (4,091,517) (3,605,252)
Return of capital -- (6,037)
------------ ------------
Total distributions to shareholders (4,091,517) (3,611,289)
------------ ------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 13,539,738 17,255,283
Value of shares issued to shareholders in payment of
distributions declared 3,716,831 3,132,167
Cost of shares redeemed (10,355,582) (21,244,604)
------------ ------------
Net increase (decrease) in net assets from Fund share
transactions 6,900,987 (857,154)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 12,977,060 (2,242,662)
NET ASSETS
At beginning of year 44,059,014 46,301,676
------------ ------------
At end of year (including distributions in excess of net
investment income of $169,652 and $86,199) $ 57,036,074 $ 44,059,014
============ ============
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
2003 2002 2001(A) 2000 1999
------- ------- ------- ------- -------
NET ASSET VALUE, BEGINNING OF YEAR $ 14.34 $ 14.88 $ 15.88 $ 17.39 $ 19.02
------- ------- ------- ------- -------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 1.21 1.26 1.40 1.64 1.84
Net realized and unrealized gain (loss) on investments 1.85 (0.59) (1.18) (1.19) (1.45)
------- ------- ------- ------- -------
Total from investment operations 3.06 0.67 0.22 0.45 0.39
------- ------- ------- ------- -------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1.21) (1.21) (1.21) (1.93) (2.00)
From tax return of capital -- -- (0.01) (0.03) (0.02)
------- ------- ------- ------- -------
Total distributions to shareholders (1.21) (1.21) (1.22) (1.96) (2.02)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF YEAR $ 16.19 $ 14.34 $ 14.88 $ 15.88 $ 17.39
======= ======= ======= ======= =======
TOTAL RETURN+ 21.76% 4.70% 1.52% 2.84% 2.20%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)*(2) 0.50% 0.50% 0.50% 0.37% 0.00%
Net Investment Income (to average daily net assets)* 7.79% 8.68% 8.86% 10.41% 9.87%
Net Assets, End of Year (000's omitted) $57,036 $44,059 $46,302 $31,807 $31,138
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment adisory fee payable to the
Portfolio and/or reimbursed the Fund for all or a portion of its operating
expenses. If this voluntary action had not been taken, the investment
income per share and ratios would have been:
Net investment income per share(1) $ 1.13 $ 1.21 $ 1.33 $ 1.64 $ 1.64
Ratios (to average daily net assets):
Expenses(2) 1.00% 1.01% 0.97% 1.11% 1.08%
Net investment income 7.29% 8.17% 8.39% 9.67% 8.79%
(a) Through its investment in the Portfolio, the Fund has adopted the
provisions of the revised AICPA Audit and Accounting Guide for Investment
Companies effective January 1, 2001 and began amortizing premium and
discount on all debt securities on an effective yield basis. The effect of
this change for the year ended December 31, 2001 was to decrease net
investment income per share by $0.05, increase net realized and unrealized
gains and losses per share by $0.05 and decrease the ratio of net
investment income to average net assets from 9.20% to 8.86%. Per share data
and ratios/supplemental data for periods prior to January 1, 2001 have not
been restated to reflect this change in presentation.
(1) Calculated based on average shares outstanding.
(2) Includes the Fund's share of the Standish Mellon High Yield Bond
Portfolio's allocated expenses.
+ Total return would have been lower in the absense of expense waivers.
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon High Yield Bond Fund (the "Fund") is a separate diversified
investment series of the Trust.
The objective of the Fund is to maximize total return, consisting primarily
of a high level of income. The Fund seeks to achieve its objective by
investing all of its investable assets in an interest of the Standish
Mellon High Yield Bond Portfolio (the "Portfolio"), a subtrust of the
Mellon Institutional Funds Master Portfolio ( the "Portfolio Trust"), which
is organized as a New York trust and which has the same investment
objective as the Fund. The Portfolio seeks to achieve its objective by
investing, under normal circumstances, at least 80% of net assets in fixed
income securities issued by U.S. and foreign governments, companies and
banks, as well as tax-exempt securities, preferred stocks and warrants. The
value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (approximately
100% at December 31, 2003). The performance of the Fund is directly
affected by the performance of the Portfolio. The financial statements of
the Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
On June 21, 2003, by vote of the Trustees, the name of the Standish High
Yield Bond Fund was changed to Standish Mellon High Yield Bond Fund. In
addition, the Declaration of Trust was amended to change the name of the
Trust from Standish, Ayer & Wood Investment Trust to Mellon Institutional
Funds Investment Trust. The name changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Currently, the
Fund's net investment income consists of the Fund's pro rata share of the
net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with accounting principles
generally accepted in the United States of America. All realized and
unrealized gains and losses of the Portfolio are allocated pro rata among
the investors in the Portfolio.
C. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date. The
Fund's dividends from short-term and long-term capital gains, if any, after
reduction of capital losses will be declared and distributed at least
annually, as will dividends from net investment income. In determining the
amounts of its dividends, the Fund will take into account its share of the
income, gains or losses, expenses, and any other tax items of the
Portfolio. Dividends from net investment income and distributions from
capital gains, if any, are reinvested in additional shares of the Fund
unless a shareholder elects to receive them in cash. Income and capital
gain distributions are determined in accordance with income tax regulations
which may differ from accounting principles generally accepted in the
United States of America. These differences, which may result in
distribution reclassifications, are primarily due to differing treatments
for foreign currency transactions, amortization and/or accretion of
premiums and discounts on certain securities, non-taxable dividends,
capital loss carryforwards, post-October losses, losses deferred due to
wash sales and excise tax regulations.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
D. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
E. COMMITMENT AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The Fund does not directly pay any investment advisory fees, but indirectly
bears its pro rata share of the compensation paid by the Portfolio to
Standish Mellon Asset Management Company LLC ("Standish Mellon"), a
wholly-owned subsidiary of Mellon Financial Corporation, for such services.
See Note 2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report. Standish Mellon voluntarily agreed to
limit the total operating expenses of the Fund and its pro rata share of
the Portfolio expenses (excluding commissions, taxes and extraordinary
expenses) to 0.50% of the Fund's average daily net assets. This agreement
is voluntary and temporary and may be discontinued or revised by Standish
Mellon at any time. Pursuant to this agreement, for the year ended December
31, 2003, Standish Mellon voluntarily reimbursed the Fund for $78,353 of
its operating expenses.
Effective January 28, 2003, the Fund began imposing a redemption fee of 2%
of the net asset value of the shares, with certain exceptions, which are
redeemed or exchanged less than 90 days from the day of their purchase. The
redemption fee is paid directly to the Fund, and is designed to offset
brokerage commissions, market impact, and other costs associated with
short-term trading. The fee does not apply to shares that were acquired
through reinvestment of distributions. For the period ended December 31,
2003, the Fund received $1,380 in redemption fees.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) INVESTMENT TRANSACTIONS:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 2003 aggregated $13,400,767 and $10,633,762,
respectively.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON HIGH YIELD BOND FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 883,066 1,205,169
Shares issued to shareholders in payment of
distributions declared 235,981 217,488
Shares redeemed (668,446) (1,461,971)
-------- ----------
Net increase (decrease) 450,601 (39,314)
======== ==========
At December 31, 2003, one shareholder held of record approximately 57% of
the total outstanding shares of the Fund. Investment activity of this
shareholder could have a material impact on the Fund.
A significant portion of the Fund's shares represent investments by
fiduciary accounts over which Standish Mellon and its affiliates have
either sole or joint investment discretion.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
AMOUNT
------------
Accumulated losses $(11,733,921)
At December 31, 2003, the Fund, for federal income tax purposes, has
capital loss carryovers which will reduce the Fund's taxable income arising
from net realized gain on investments, if any, to the extent permitted by
the Internal Revenue Code and thus will reduce the amount of distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal income tax. Such capital loss carryovers are as
follows:
CAPITAL LOSS
CARRY OVER EXPIRATION DATE
------------ ---------------
$1,184,433 12/31/2007
1,597,308 12/31/2008
4,484,343 12/31/2009
4,197,096 12/31/2010
The fund elected to defer to its fiscal year ending December 31, 2004
$270,741 of losses recognized during the period November 1, 2003 to
December 31, 2003.
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
Distributions paid from:
Ordinary income $4,091,517
See corresponding master portfolio for tax basis unrealized
appreciation/(depreciation) information.
13
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and
Shareholders of Standish Mellon High Yield Bond Fund:
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Mellon Institutional Funds Investment Trust: Standish
Mellon High Yield Bond Fund (formerly, Standish High Yield Bond Fund) (the
"Fund") at December 31, 2003, and the results of its operations, the
changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included correspondence with the custodian,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
14
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 96.3%
ASSET BACKED -- 0.1%
South Carolina Tobacco Settlement Authority 6.000% 05/15/2022 USD 90,000 $ 86,024
--------
Total Asset Backed (Cost $79,668) 86,024
--------
CONVERTIBLE CORPORATE BONDS -- 1.1%
CenterPoint Energy, Inc. 144A CVT 2.875% 01/15/2024 75,000 76,219
Lam Research Corp. CVT 4.000% 06/01/2006 200,000 205,000
Meristar Hospitality Corp. REIT CVT 9.500% 04/01/2010 175,000 210,875
Royal Caribbean Cruises Step Up Notes CVT(a) 0.000% 05/18/2021 50,000 29,000
Xcel Energy, Inc. 144A CVT 7.500% 11/21/2007 40,000 62,050
--------
Total Convertible Corporate Bonds (Cost $511,199) 583,144
--------
CORPORATE -- 75.8%
BANKING -- 1.4%
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 795,000 814,875
--------
BASIC INDUSTRY -- 12.1%
Berry Plastics Corp. 144A Senior Sub Notes 10.750% 07/15/2012 70,000 80,588
Boise Cascade Co. Senior Notes 6.500% 11/01/2010 110,000 114,747
Corn Products International, Inc. Senior Notes 8.250% 07/15/2007 145,000 158,775
Corrections Corp. of America Senior Notes 7.500% 05/01/2011 60,000 63,000
Crown Cork & Seal Co., Inc. 7.375% 12/15/2026 575,000 519,656
Crown Cork & Seal Co., Inc. 8.000% 04/15/2023 270,000 252,450
CSC Holdings, Inc. 8.125% 08/15/2009 450,000 483,750
Earle M. Jorgensen Co. 9.750% 06/01/2012 100,000 111,000
Equistar Chemical/Funding 10.125% 09/01/2008 140,000 153,300
Equistar Chemicals LP Senior Notes 10.625% 05/01/2011 160,000 176,800
Freeport-McMoRan Copper & Gold, Inc. 144A
Senior Notes 10.125% 02/01/2010 175,000 201,687
Georgia-Pacific Corp. 8.875% 02/01/2010 150,000 171,000
Georgia-Pacific Corp. 144A Senior Notes 8.000% 01/15/2024 230,000 234,600
Georgia-Pacific Corp. Senior Notes 7.375% 07/15/2008 440,000 473,000
Great Lakes Dredge & Dock Co. 144A Senior Sub
Notes 7.750% 12/15/2013 150,000 154,312
Kansas City Southern 7.500% 06/15/2009 250,000 256,250
Kraton Polymers LLC 144A Senior Sub Notes 8.125% 01/15/2014 20,000 20,800
Nalco Co. 144A Senior Sub Notes 8.875% 11/15/2013 500,000 530,000
National Waterworks, Inc. Series B 10.500% 12/01/2012 90,000 100,575
Norcraft Co. 144A Senior Sub Notes 9.000% 11/01/2011 50,000 54,000
Owens-Brockway Glass Container, Inc. 7.750% 05/15/2011 80,000 85,900
Owens-Illinois, Inc. 7.500% 05/15/2010 290,000 297,612
Silgan Holdings, Inc. 144A Senior Sub Notes 6.750% 11/15/2013 110,000 110,275
Steel Dynamics, Inc. 9.500% 03/15/2009 450,000 499,500
Texas Industries, Inc. Senior Notes 10.250% 06/15/2011 235,000 265,550
US Steel Corp. Senior Notes 9.750% 05/15/2010 130,000 146,250
Westlake Chemical Corp. 144A 8.750% 07/15/2011 235,000 257,325
Williams Cos., Inc. 7.125% 09/01/2011 225,000 237,937
Williams Cos., Inc. 7.625% 07/15/2019 475,000 496,969
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BASIC INDUSTRY (CONTINUED)
Williams Cos., Inc. Senior Notes 8.625% 06/01/2010 USD 75,000 $ 84,187
Williams Cos., Inc. Series A 7.500% 01/15/2031 115,000 116,437
----------
6,908,232
----------
CAPITAL GOODS -- 4.9%
Alliant Techsystems, Inc. 8.500% 05/15/2011 105,000 115,500
Allied Waste Industries, Inc. 8.875% 04/01/2008 275,000 308,000
Allied Waste Industries, Inc. 9.250% 05/01/2021 360,000 398,250
Allied Waste Industries, Inc. 10.000% 08/01/2009 150,000 162,000
Allied Waste Industries, Inc. Series B 8.500% 12/01/2008 150,000 166,875
Allied Waste North America Senior Notes 7.875% 04/15/2013 215,000 232,737
Esterline Technologies Corp. 144A Senior Sub
Notes 7.750% 06/15/2013 120,000 129,000
K&F Industries, Inc. Senior Sub Notes 9.625% 12/15/2010 65,000 72,881
Kinetic Concepts, Inc. 144A Senior Sub Notes 7.375% 05/15/2013 145,000 149,350
Sensus Metering Systems, Inc. 144A Senior Sub
Notes 8.625% 12/15/2013 180,000 184,725
Smurfit-Stone Container Corp. 8.250% 10/01/2012 100,000 108,500
SPX Corp. Senior Notes 6.250% 06/15/2011 80,000 82,200
SPX Corp. Senior Notes 7.500% 01/01/2013 250,000 271,875
Stone Container Corp. Senior Notes 8.375% 07/01/2012 360,000 390,600
----------
2,772,493
----------
COMMUNICATIONS -- 7.6%
ACC Escrow Corp. 144A Senior Notes 10.000% 08/01/2011 150,000 167,250
American Tower Corp. Senior Notes 9.375% 02/01/2009 160,000 170,400
Block Communications, Inc. 9.250% 04/15/2009 400,000 430,000
CBD Media LLC 144A Senior Sub Notes 8.625% 06/01/2011 350,000 385,000
Crown Castle International Corp.144A Senior
Notes 7.500% 12/01/2013 140,000 140,700
Dobson Communications Co. 144A Senior Notes 8.875% 10/01/2013 310,000 313,875
Fairpoint Communications, Inc. Senior Notes 11.875% 03/01/2010 90,000 104,850
Gables Wireless, Inc. 144A Senior Notes 10.750% 10/01/2011 300,000 298,500
Nextel Communications, Inc. Senior Notes 6.875% 10/31/2013 525,000 555,187
Qwest Capital Funding 6.500% 11/15/2018 685,000 578,825
Qwest Services Corp. 144A 13.000% 12/15/2007 145,000 170,375
Salem Communciations Corp. Senior Sub Notes 7.750% 12/15/2010 390,000 406,575
Worldcom, Inc.{*} 8.250% 05/15/2031 365,000 122,275
Worldcom, Inc. Senior Notes{*} 6.500% 04/15/2010 580,000 466,900
----------
4,310,712
----------
CONSUMER CYCLICAL -- 19.6%
Advanced Accessory Systems LLC Senior Notes 10.750% 06/15/2011 460,000 506,575
American Media Operations, Inc. Series B 10.250% 05/01/2009 210,000 223,912
Ameristar Casinos, Inc. 10.750% 02/15/2009 500,000 575,000
Argosy Gaming Co. 10.750% 06/01/2009 825,000 891,000
Chumash Casino & Resort 144A Senior Notes 9.000% 07/15/2010 515,000 569,075
Cinemark USA, Inc. Senior Sub Notes 9.000% 02/01/2013 135,000 151,875
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 285,000 301,387
D.R. Horton, Inc. 8.500% 04/15/2012 50,000 56,500
D.R. Horton, Inc. 10.500% 04/01/2005 175,000 189,875
Dex Media Finance, Inc. 144A Senior Notes 8.500% 08/15/2010 80,000 89,100
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (CONTINUED)
Dex Media Finance, Inc. 144A Senior Sub Notes 9.875% 08/15/2013 USD 80,000 $ 93,000
Dex Media, Inc. 144A 8.000% 11/15/2013 90,000 94,500
DirecTV Holdings LLC Senior Notes 8.375% 03/15/2013 275,000 319,000
Dominos, Inc. 144A Senior Sub Notes 8.250% 07/01/2011 155,000 166,044
Echostar DBS Corp. 144A Senior Notes 5.750% 10/01/2008 435,000 439,894
Echostar DBS Corp. Senior Notes 9.125% 01/15/2009 146,000 163,337
Entercom Communications Corp. 7.625% 03/01/2014 50,000 53,687
Entravision Communications Corp. 8.125% 03/15/2009 315,000 337,050
Gaylord Entertainment Co. 144A Senior Notes 8.000% 11/15/2013 60,000 63,300
Horseshoe Gaming Holding Corp. 8.625% 05/15/2009 200,000 211,250
Host Marriott LP REIT 8.375% 02/15/2006 115,000 122,619
Isle of Capri Casinos 8.750% 04/15/2009 260,000 273,000
John Q Hamons Hotels, Inc. Series B 8.875% 05/15/2012 350,000 385,875
Keystone Automotive Operations, Inc. 144A
Senior Sub Notes 9.750% 11/01/2013 105,000 112,875
Mohegan Tribal Gaming Authority Senior Notes 8.375% 07/01/2011 670,000 730,300
Mohegan Tribal Gaming Authority Senior Sub
Notes 8.125% 01/01/2006 350,000 377,125
Moore North America Finance, Inc. 144A Senior
Notes 7.875% 01/15/2011 225,000 254,812
Panavision, Inc. Step Up Sub Notes(a)(b) 9.625% 02/01/2006 400,000 240,000
Pinnacle Entertainment, Inc. 8.750% 10/01/2013 340,000 345,950
Radio One, Inc. Series B 8.875% 07/01/2011 60,000 66,150
Regal Cinemas, Inc. Series B 9.375% 02/01/2012 215,000 242,950
River Rock Entertainment Authority 144A Senior
Notes 9.750% 11/01/2011 160,000 172,000
Russell Corp. 9.250% 05/01/2010 187,000 193,779
Scotts Co. 144A Senior Sub Notes 6.625% 11/15/2013 85,000 87,337
Six Flags, Inc. Senior Notes 9.500% 02/01/2009 420,000 439,950
Spanish Broadcasting System, Inc. 9.625% 11/01/2009 190,000 202,825
Speedway Motorsports, Inc. Senior Sub Notes 6.750% 06/01/2013 395,000 407,837
Station Casinos, Inc. 8.375% 02/15/2008 200,000 214,250
Station Casinos, Inc. Senior Sub Notes 9.875% 07/01/2010 200,000 220,000
TRW Automotive, Inc. Senior Notes 9.375% 02/15/2013 310,000 354,175
Turning Stone Casino Resort Enterprise 9.125% 12/15/2010 250,000 271,875
-----------
11,211,045
-----------
CONSUMER NONCYCLICAL -- 8.6%
Altria Group, Inc. 7.000% 11/04/2013 135,000 144,017
Apogent Technologies, Inc. Senior Sub Notes 6.500% 05/15/2013 100,000 104,250
Ball Corp. 6.875% 12/15/2012 30,000 31,350
Chattem, Inc. 8.875% 04/01/2008 550,000 566,500
Columbia/HCA Healthcare 8.850% 01/01/2007 175,000 197,867
Constellation Brands, Inc. Series B 8.000% 02/15/2008 130,000 144,300
Del Monte Corp. Senior Sub Notes 8.625% 12/15/2012 380,000 416,100
Elizabeth Arden, Inc. 11.750% 02/01/2011 100,000 119,000
Ingles Markets, Inc. 8.875% 12/01/2011 150,000 150,750
Marsh Supermarket, Inc. Series B 8.875% 08/01/2007 150,000 141,750
Medex, Inc. 144A Senior Sub Notes 8.875% 05/15/2013 35,000 37,625
NeighborCare, Inc. 144A Senior Sub Notes 6.875% 11/15/2013 40,000 40,700
Pathmark Stores 8.750% 02/01/2012 270,000 282,150
Rite Aid Corp. 8.125% 05/01/2010 310,000 333,250
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
CONSUMER NONCYCLICAL (CONTINUED)
Rite Aid Corp. 9.500% 02/15/2011 USD 135,000 $ 152,212
Rite Aid Corp. 12.500% 09/15/2006 500,000 580,000
RJ Reynolds Tobacco Holdings, Inc. Series B 7.750% 05/15/2006 135,000 141,750
Smithfield Foods, Inc. Senior Notes 7.750% 05/15/2013 160,000 166,400
Stater Brothers Holdings Senior Notes 10.750% 08/15/2006 795,000 837,731
Tenet Healthcare Corp. Senior Notes 6.500% 06/01/2012 149,000 142,854
Tricon Global Restaurant, Inc. Senior Notes 7.650% 05/15/2008 175,000 198,625
-----------
4,929,181
-----------
ENERGY -- 11.6%
Amerigas Partners Senior Notes 8.875% 05/20/2011 200,000 220,000
ANR Pipeline Co. 7.375% 02/15/2024 225,000 227,250
ANR Pipeline Co. Senior Notes 7.000% 06/01/2025 35,000 35,613
Calpine Corp. 144A 8.500% 07/15/2010 200,000 195,000
Chesapeake Energy Corp. 8.125% 04/01/2011 275,000 305,250
Citgo Petroleum Corp. Senior Notes 11.375% 02/01/2011 185,000 214,600
CMS Energy Corp. 144A Senior Notes 7.750% 08/01/2010 150,000 157,688
CMS Energy Corp. Senior Notes 8.500% 04/15/2011 345,000 372,600
CMS Energy Corp. Senior Notes 9.875% 10/15/2007 400,000 446,000
Dynegy Holdings, Inc. 144A 9.875% 07/15/2010 485,000 545,625
El Paso Natural Gas Co. 8.375% 06/15/2032 140,000 143,080
El Paso Natural Gas Co. 8.625% 01/15/2022 425,000 442,531
El Paso Production Co. 144A Senior Notes 7.750% 06/01/2013 465,000 458,025
FirstEnergy Corp. Series B 6.450% 11/15/2011 135,000 139,920
Houston Exploration Co. 144A Senior Sub Notes 7.000% 06/15/2013 150,000 154,875
Lyondell Chemical Co. Series A 9.625% 05/01/2007 310,000 328,600
MSW Energy Holdings 144A 7.375% 09/01/2010 325,000 339,625
Newfield Exploration Co. Senior Sub Notes 8.375% 08/15/2012 225,000 252,000
NRG Energy, Inc. 144A 8.000% 12/15/2013 125,000 131,406
Peabody Energy Corp. Series B 6.875% 03/15/2013 125,000 131,875
Pogo Producing Co. 144A 8.250% 04/15/2011 55,000 61,325
Premcor Refining Group 144A Senior Notes 9.500% 02/01/2013 195,000 222,300
Reliant Resources, Inc. 144A 9.250% 07/15/2010 80,000 84,800
Teco Energy, Inc. Senior Notes 7.500% 06/15/2010 70,000 74,900
Tennessee Gas Pipeline Co. 8.375% 06/15/2032 175,000 185,719
Tesoro Petroleum Corp. 8.000% 04/15/2008 65,000 69,063
Transcontinental Gas Pipeline Corp. Senior
Notes 8.875% 07/15/2012 325,000 384,313
Westar Energy, Inc. 7.875% 05/01/2007 125,000 139,688
XTO Energy, Inc. Senior Notes 7.500% 04/15/2012 115,000 129,950
-----------
6,593,621
-----------
FINANCIAL -- 3.9%
Arch Western Finance LLC 144A Senior Notes 6.750% 07/01/2013 80,000 82,200
Couche-Tard Financing Corp. Senior Sub Notes
144A 7.500% 12/15/2013 100,000 104,750
Felcor Lodging LP REIT 10.000% 09/15/2008 100,000 108,000
FPL Energy Wind Funding LLC 144A 6.876% 06/27/2017 140,000 140,000
Leucadia National Corp. 144A Senior Notes 7.000% 08/15/2013 420,000 420,000
Meristar Hospitality Corp. REIT 10.500% 06/15/2009 190,000 206,150
Poster Financial Group 144A 8.750% 12/01/2011 500,000 528,750
The accompanying notes are an integral part of the financial statements.
18
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
FINANCIAL (CONTINUED)
RH Donnelley Finance Corp. I 144A Senior Notes 8.875% 12/15/2010 USD 220,000 $ 247,500
RH Donnelley Finance Corp. I 144A Senior Sub
Notes 10.875% 12/15/2012 320,000 379,600
-----------
2,216,950
-----------
PUBLIC UTILITY -- 4.7%
AES Corp. 144A 8.750% 05/15/2013 635,000 709,613
AES Corp. 144A 10.000% 07/15/2005 475,640 483,964
AES Corp. Senior Notes 8.875% 02/15/2011 100,000 109,000
AES Corp. Senior Sub Notes 8.500% 11/01/2007 135,000 137,026
Ipalco Enterprises, Inc. 8.375% 11/14/2008 275,000 307,313
Northwest Pipeline Corp. 6.625% 12/01/2007 525,000 551,250
Southern Natural Gas Co. 8.875% 03/15/2010 50,000 56,250
Southern Natural Gas Co. 7.350% 02/15/2031 350,000 345,625
-----------
2,700,041
-----------
TECHNOLOGY -- 0.9%
L-3 Communications Corp. 6.125% 07/15/2013 525,000 528,938
-----------
TRANSPORTATION -- 0.5%
Delta Air Lines 7.900% 12/15/2009 325,000 262,844
-----------
Total Corporate (Cost $40,439,905) 43,248,932
-----------
SOVEREIGN BONDS -- 2.7%
Dominican Republic 144A 9.500% 09/27/2006 60,000 48,600
Dominican Republic Euro Registered 9.500% 09/27/2006 65,000 52,650
Ministry Finance Russia 3.000% 05/14/2008 50,000 44,688
Nigeria Promissory Notes Series RC 5.092% 01/05/2010 150,000 57,000
Republic of Brazil 8.000% 04/15/2014 86,199 84,798
Republic of Brazil 11.000% 08/17/2040 145,000 159,500
Republic of Brazil 12.000% 04/15/2010 35,000 42,000
Republic of Colombia 9.750% 04/23/2009 65,000 71,695
Republic of Ecuador 7.000% 08/15/2030 95,000 73,625
Republic of Ecuador 144A 12.000% 11/15/2012 45,000 43,988
Republic of Peru 8.750% 11/21/2033 50,000 50,000
Republic of Peru FLIRB(c) 4.500% 03/07/2017 50,000 44,500
Republic of Peru PDI(c) 5.000% 03/07/2017 61,100 56,518
Republic of Philippines 8.375% 03/12/2009 45,000 47,419
Republic of Turkey 11.750% 06/15/2010 15,000 18,900
Republic of Turkey Senior Unsub Notes 11.875% 01/15/2030 35,000 47,425
Republic of Turkey Senior Unsub Notes 12.375% 06/15/2009 55,000 69,850
Republic of Uruguay 7.500% 03/15/2015 88,000 70,400
Republic of Venezuela 9.250% 09/15/2027 85,000 77,350
Republic of Venezuela 144A 10.750% 09/19/2013 65,000 69,388
Republic of Venezuela 144A 10.750% 09/19/2013 25,000 26,688
Russian Federation 5.000% 03/31/2030 145,000 139,563
Russian Federation 8.250% 03/31/2010 55,000 61,463
Ukraine Government Senior Notes 11.000% 03/15/2007 81,668 90,855
-----------
Total Sovereign Bonds (Cost $1,475,414) 1,548,863
-----------
The accompanying notes are an integral part of the financial statements.
19
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
YANKEE BONDS -- 8.5%
Abitibi-Consolidated, Inc. 8.550% 08/01/2010 USD 225,000 $ 250,560
Crown Euro Holdings SA 9.500% 03/01/2011 275,000 311,438
GT Group Telecom, Inc. Senior Step Up
Notes{*}(a) 0.000% 02/01/2010 925,000 93
Innova S de RL de CV 144A 9.375% 09/19/2013 175,000 179,594
Ipsco, Inc. Senior Notes 8.750% 06/01/2013 40,000 44,200
MDP Acquisitions PLC Senior Notes 9.625% 10/01/2012 150,000 168,000
Norampac, Inc. Senior Notes 6.750% 06/01/2013 80,000 83,400
Quebecor Media, Inc. Senior Notes 11.125% 07/15/2011 150,000 173,625
Rogers Cable, Inc. 6.250% 06/15/2013 315,000 317,363
Royal Caribbean Cruises 7.500% 10/15/2027 325,000 318,500
Royal Caribbean Cruises Senior Notes 8.000% 05/15/2010 150,000 163,500
Royal Caribbean Cruises Senior Notes 8.125% 07/28/2004 100,000 103,250
Royal Caribbean Cruises Senior Notes 8.750% 02/02/2011 1,000,000 1,130,000
Salomon Bros. (Sibneft) 10.750% 01/15/2009 40,000 45,200
Stena AB 144A Senior Notes 7.500% 11/01/2013 70,000 72,100
Stena AB Senior Notes 9.625% 12/01/2012 70,000 78,925
Telenet Group Holding NV 144A Senior Step Up
Notes(a) 0.000% 06/15/2014 210,000 132,300
Tyco International Group SA 6.125% 01/15/2009 500,000 535,000
Tyco International Group SA 6.375% 10/15/2011 275,000 293,906
Videotron 144A Senior Notes 6.875% 01/15/2014 120,000 123,900
Vivendi Universal 144A Senior Notes 9.250% 04/15/2010 265,000 314,025
----------
Total Yankee Bonds (Cost $4,959,681) 4,838,879
----------
NON-AGENCY -- 1.8%
PASS THRU SECURITIES -- 1.8%
Continental Airlines, Inc. 1999-1 B 6.795% 08/02/2018 87,211 73,628
Continental Airlines, Inc. 1999-2 7.566% 03/15/2020 161,605 136,237
Continental Airlines, Inc. 2000-2 8.307% 04/02/2018 372,124 330,713
GMAC Commercial Mortgage Securities, Inc.
1996-C1 F Non-ERISA 7.860% 11/15/2006 250,000 266,248
Northwest Airlines, Inc. 1999-2C 8.304% 09/01/2010 233,116 201,426
----------
Total Non-Agency (Cost $892,829) 1,008,252
----------
FOREIGN DENOMINATED -- 6.3%
EURO -- 6.2%
Colt Telecom Europe PLC CVT 2.000% 12/16/2006 EUR 125,000 170,088
Eircom Funding 8.250% 08/15/2013 255,000 353,783
Fort James Corp. 4.750% 06/29/2004 100,000 125,525
Messer Greisheim Holdings AG Senior Notes 10.375% 06/01/2011 325,000 472,372
Remy Cointreau SA 144A 6.500% 07/01/2010 60,000 78,147
Teksid Aluminum SpA 11.375% 07/15/2011 400,000 537,588
Telenet Communication NV 144A Senior Notes 9.000% 12/15/2013 960,000 1,244,306
Valentia Telecommunications Ltd. 7.250% 12/31/2049 430,000 581,695
----------
3,563,504
----------
The accompanying notes are an integral part of the financial statements.
20
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
FRANCE -- 0.1%
Ivory Coast FLIRB{*}(c) 2.000% 03/29/2018 FRF 2,000,000 $ 59,471
-----------
Total Foreign Denominated (Cost $3,101,315) 3,622,975
-----------
TOTAL BONDS AND NOTES (COST $51,460,011) 54,937,069
-----------
SHARES
---------
PREFERRED STOCKS -- 1.9%
CONVERTIBLE PREFERRED STOCKS -- 1.3%
Ford Motor Co. Capital Trust II 6.50% CVT Pfd 2,000 111,700
General Motors Corp. Series C 6.25% CVT Pfd 2,300 74,290
Kansas City Southern 4.25% 144A CVT Pfd 290 165,771
Omnicare, Inc. 4.00% CVT Pfd 1,000 63,750
Tyco International Group SA 3.125% 144A CVT
Pfd 240,000 328,200
---------
Total Convertible Preferred Stocks (Cost $577,779) 743,711
---------
NON-CONVERTIBLE PREFERRED STOCKS -- 0.6%
CSC Holdings, Inc. 11.125% Pfd 3,500 367,500
---------
Total Non-Convertible Preferred Stocks (Cost $317,750) 367,500
---------
TOTAL PREFERRED STOCKS (COST $895,529) 1,111,211
---------
SHARES VALUE
--------- -----------
WARRANTS -- 0.0%
COMMUNICATIONS -- 0.0%
GT Group Telecom, Inc., 02/01/2010* 925 9
McLeod USA, Inc., 04/16/2007* 3,379 1,386
-----
TOTAL WARRANTS (COST $60,043) 1,395
-----
SHORT-TERM INVESTMENTS -- 0.3%
REPURCHASE AGREEMENTS -- 0.3%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc.
and Investors Bank and Trust Company, due 01/02/04, with a maturity value of
$168,931 and an effective yield of 0.20%, collateralized by a U.S. Government
Obligation with a rate of 5.18%, a maturity date of 02/15/26 and an aggregate
market value of $172,477. 168,929
-------
TOTAL SHORT-TERM INVESTMENTS (COST $168,929) 168,929
-------
TOTAL INVESTMENTS -- 98.5% (COST
$52,584,512) $56,218,604
OTHER ASSETS, LESS LIABILITIES -- 1.5% 859,959
-----------
NET ASSETS -- 100.0% $57,078,563
===========
The accompanying notes are an integral part of the financial statements.
21
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
CVT - Convertible
EUR - Euro
FLIRB - Front Loaded Interest Reduction Bond
FRF - French Franc
PDI - Past Due Interest Bonds
REIT - Real Estate Investment Trust
Step Up - Coupon rate increases in increments to maturity. Rate disclosed is as
of December 31, 2003. Maturity date disclosed is the ultimate maturity. USD -
United States Dollar
(a) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date. The rate shown is the rate at
period end. The maturity date shown is the ultimate maturity.
(b) Security is valued in good faith under procedures established by the board
of trustees.
(c) Variable Rate Security; rate indicated is as of 12/31/03.
* Non-income producing security.
{*} Defaulted security.
The accompanying notes are an integral part of the financial statements.
22
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PERCENTAGE
OF NET
INDUSTRY SECTOR ASSETS
- ------------------------------------------------------------------------
Consumer Cyclical 24.8%
Basic Industry 14.7%
Energy 11.9%
Communications 10.4%
Financial 9.4%
Consumer Noncyclical 8.8%
Capital Goods 7.8%
Public Utility 4.7%
Foreign Government 2.8%
Transportation 2.0%
Technology 0.9%
Short-Term Investments 0.3%
-------
98.5%
PERCENTAGE
OF NET
TOP TEN COUNTRIES ASSETS
- ------------------------------------------------------------------------
United States 85.0%
Liberia 3.0%
Ireland 1.9%
Canada 1.5%
Bermuda 1.4%
France 1.2%
Germany 0.8%
Russia 0.5%
Brazil 0.5%
Mexico 0.3%
The accompanying notes are an integral part of the financial statements.
23
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$52,584,512) $56,218,604
Cash 41,295
Receivable for investments sold 33,228
Interest and dividends receivable 1,115,829
Receivable for open swap contracts (Note 5) 10,303
Receivable for closed forward foreign currency contracts
(Note 5) 629
Prepaid expenses 4,300
-----------
Total assets 57,424,188
LIABILITIES
Payable for investments purchased $193,678
Unrealized depreciation on forward foreign currency
exchange contracts (Note 5) 94,689
Accrued accounting and custody fees 14,871
Accrued trustees' fees and expenses (Note 2) 2,108
Accrued expenses and other liabilities 40,279
-------
Total liabilities 345,625
-----------
NET ASSETS (APPLICABLE TO INVESTORS' BENEFICIAL INTERESTS) $57,078,563
===========
The accompanying notes are an integral part of the financial statements.
24
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$15,246 (Note 6)) $ 4,240,746
Dividend income 89,295
-----------
Total income 4,330,041
EXPENSES
Investment advisory fee (Note 2) $ 261,023
Accounting and custody fees 124,705
Legal and audit services 40,223
Insurance expense 8,682
Trustees' fees and expenses (Note 2) 7,289
Miscellaneous 1,936
---------
Total expenses 443,858
Deduct:
Waiver of investment advisory fee (Note 2) (182,917)
---------
Net expenses 260,941
-----------
Net investment income 4,069,100
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 1,967,737
Written options transactions 120
Swap contracts (25,367)
Foreign currency transactions and forward foreign
currency exchange contracts (461,570)
---------
Net realized gain 1,480,920
Change in unrealized appreciation (depreciation)
Investment securities 4,602,166
Written options (765)
Swap contracts 27,936
Foreign currency and forward foreign currency exchange
contracts (11,704)
---------
Change in net unrealized appreciation (depreciation) 4,617,633
-----------
Net realized and unrealized gain 6,098,553
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $10,167,653
===========
The accompanying notes are an integral part of the financial statements.
25
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 4,069,100 $ 3,785,085
Net realized gain (loss) 1,480,920 (3,642,626)
Change in net unrealized appreciation (depreciation) 4,617,633 2,085,034
------------ ------------
Net increase in net assets from investment operations 10,167,653 2,227,493
------------ ------------
CAPITAL TRANSACTIONS
Contributions 13,400,767 17,254,281
Withdrawals (10,633,906) (22,385,787)
------------ ------------
Net increase (decrease) in net assets from capital
transactions 2,766,861 (5,131,506)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 12,934,514 (2,904,013)
NET ASSETS
At beginning of year 44,144,049 47,048,062
------------ ------------
At end of year $ 57,078,563 $ 44,144,049
============ ============
The accompanying notes are an integral part of the financial statements.
26
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001(A) 2000 1999
------- ------- -------- ------- -------
TOTAL RETURN+ 21.76% 4.71% 1.54% 2.84% 2.20%
RATIOS:
Expenses (to average daily net assets)* 0.50% 0.50% 0.50% 0.37% 0.00%
Net Investment Income (to average daily net assets)* 7.79% 8.66% 8.87% 10.37% 9.83%
Portfolio Turnover 80% 130% 117% 148% 137%
Net Assets, End of Year (000's omitted) $57,079 $44,144 $47,048 $31,818 $31,144
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment advisory fee
and/or reimbursed the Portfolio for a portion of its operating expenses. If
this voluntary action had not been taken, the ratios would have been:
Ratios (to average daily net assets):
Expenses 0.85% 0.82% 0.81% 0.89% 0.86%
Net investment income 7.44% 8.34% 8.56% 9.85% 8.97%
(a) The Portfolio has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease the ratio of net investment income to
average net assets from 9.20% to 8.87%. Ratios for the periods prior to
January 1, 2001 have not been restated to reflect this change in
presentation.
+ Total return for the Portfolio has been calculated based on the total
return for the invested Fund, assuming all distributions were reinvested,
and adjusted for the difference in expenses as set out in the notes to the
financial statements. Total return would have been lower in the absence of
expense waivers.
The accompanying notes are an integral part of the financial statements.
27
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the State of New York on
January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Mellon High Yield Bond Portfolio (the "Portfolio") is a separate
diversified investment series of the Portfolio Trust.
The objective of the Portfolio is to maximize total return, consisting
primarily of a high level of income. The Portfolio seeks to achieve its
objective by investing, under normal circumstances, at least 80% of net
assets in fixed income securities issued by U.S. and foreign governments,
companies and banks, as well as tax-exempt securities, preferred stocks and
warrants.
At December 31, 2003, there was one fund, Standish Mellon High Yield Bond
Fund (the "Fund"), invested in the Portfolio. The value of the Fund's
investment in the Portfolio reflects the Fund's proportionate interest in
the net assets of the Portfolio. The Fund's proportionate interest at
December 31, 2003 was approximately 100%.
On June 21, 2003, by vote of the Trustees, the name of the Standish High
Yield Bond Portfolio was changed to Standish Mellon High Yield Bond
Portfolio. In addition, the Declaration of Trust was amended to change the
name of the Portfolio Trust from Standish, Ayer & Wood Master Portfolio to
Mellon Institutional Funds Master Portfolio. The name changes became
effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Portfolio are valued at amortized cost, which
approximates market value. If the Portfolio acquires a short-term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and
will then be valued at amortized value based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized
value does not represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Portfolio to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Portfolio
and the counterparty. Additionally, procedures have been established by the
Portfolio to monitor on a daily basis, the market value and accrued
interest of the repurchase agreement's underlying investments to ensure the
existence of a proper level of collateral.
28
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Interest income
is determined on the basis of interest accrued, adjusted for discount or
amortization of premium using the yield-to-maturity method on long-term
debt securities. Dividend income is recorded on the ex-dividend date.
Realized gains and losses from securities sold are recorded on the
identified cost basis. The Portfolio 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. Net realized gains and losses on
foreign currency transactions represent gains and losses on disposition of
foreign currencies and forward foreign currency exchange contracts,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts usually received or paid.
D. INCOME TAXES
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since at least one of
the Portfolio's investors is a regulated investment company that invests
all or substantially all of its assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification requirements
applicable to regulated investment companies (under the Internal Revenue
Code) in order for its investors to satisfy them. The Portfolio allocates
at least annually among its investors each investor's distributive share of
the Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss deduction or credit.
E. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
F. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
G. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Portfolio may enter into contracts
and agreements that contain a variety of representations and warranties,
which provide general indemnifications. The maximum exposure to the
Portfolio under these arrangements is unknown, as this would involve future
claims that may be made against the Portfolio that have not yet occurred.
However, based on experience, the Portfolio expects the risks of loss to be
remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon") for overall investment advisory and
administrative services is paid monthly at the annual rate of 0.50% of the
Portfolio's
29
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
average daily net assets. Standish Mellon voluntarily agreed to limit the
Portfolio's total annual operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to 0.50% of the Portfolio's
average daily net assets for the year ended December 31, 2003. Pursuant to
this agreement, for the year ended December 31, 2003, Standish Mellon
voluntarily did not impose $182,917 of its investment advisory fees. This
agreement is voluntary and temporary and may be discontinued or revised by
Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were $49,862,518 and
$40,379,673, respectively. For the year ended December 31, 2003, the
Portfolio did not purchase or sell any long-term U.S. government
securities.
(4) FEDERAL TAXES:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 2003, as computed on a federal
income tax basis, were as follows:
Aggregate Cost $52,615,512
===========
Gross unrealized appreciation 4,538,365
Gross unrealized depreciation (939,668)
-----------
Net unrealized appreciation $ 3,598,697
===========
(5) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Portfolio Trust's registration statement.
The Portfolio may trade the following financial instruments with
off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Portfolio may use options to seek to hedge against
risks of market exposure and changes in security prices and foreign
currencies, as well as to seek to enhance returns. Writing puts and buying
calls tend to increase the Portfolio's exposure to the underlying
instrument. Buying puts and writing calls tend to decrease the Portfolio's
exposure to the underlying instrument, or hedge other Portfolio
investments. Options, both held and written by the Portfolio, are reflected
in the accompanying Statement of Assets and Liabilities at market value.
The underlying face amount at value of any open purchased options is shown
in the Schedule of Investments. This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments if there is an illiquid
secondary market for the contract or if the counterparty does not perform
under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and
30
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
losses on foreign currency transactions. If a put option written by the
Portfolio is exercised, the premium reduces the cost basis of the
securities purchased by the Portfolio. The Portfolio, as a writer of an
option, has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 1,845
Options expired (1) (1,845)
-- -------
Outstanding, end of period 0 $ --
== =======
At December 31, 2003, the Portfolio held no written put option contracts.
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 1,380
Options closed (1) (1,380)
-- -------
Outstanding, end of period 0 $ --
== =======
At December 31, 2003, the Portfolio held no written call option contracts.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolio may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Portfolio primarily to protect the value of the Portfolio's foreign
securities from adverse currency movements. Unrealized appreciation and
depreciation of forward currency exchange contracts is included in the
Statement of Assets and Liabilities.
At December 31, 2003, the Portfolio held the following forward foreign
currency exchange contracts:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO RECEIVE AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
--------------------------------------------------------------------------------------------------------
Euro 3,097,500 03/17/2004 $3,889,830 $3,795,424 $(94,406)
South African Rand 40,000 01/27/2004 5,961 5,678 (283)
---------- ---------- --------
TOTAL $3,895,791 $3,801,102 $(94,689)
========== ========== ========
31
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
The Portfolio may invest in swap agreements. A swap is an agreement to
exchange the return generated by one instrument for the return generated by
another instrument. The Portfolio may enter into interest rate and credit
default swap agreements to manage its exposure to interest rates and credit
risk. Interest rate swap agreements involve the exchange by the Portfolio
with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. In a credit
default swap, one party makes a stream of payments to another party in
exchange for the right to receive a specified return in the event of a
default by a third party on its obligation. The Portfolio may use credit
default swaps to provide a measure of protection against defaults of
issuers (i.e., to reduce risk where the Portfolio owns or has exposure to
the corporate or sovereign issuer) or to take an active long or short
position with respect to the likelihood of a particular corporate or
sovereign issuer's default. In connection with these agreements, cash or
securities may be set aside as collateral in accordance with the terms of
the swap agreement. The Portfolio earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and change in value, if any, is recorded as unrealized gain
or loss in the Statement of Operations. These financial instruments are not
actively traded on financial markets. The values assigned to these
instruments are based upon the best available information and because of
the uncertainty of the valuation, these values may differ significantly
from the values that would have been realized had a ready market for these
instruments existed, and differences could be material. Payments received
or made from credit default swaps at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements, if any, are included
as part of interest income. Entering into these agreements involves, to
varying degrees, elements of credit, market, and documentation risk in
excess of the amounts recognized on the Statement of Assets and
Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or disagree as to the meaning of
contractual terms in the agreements, and that there may be unfavorable
changes in interest rates.
At December 31, 2003, the Portfolio held the following open swap contracts:
NET UNREALIZED
EXPIRATION APPRECIATION
NOTIONAL AMOUNT DATE DESCRIPTION (DEPRECIATION)
-------------------------------------------------------------------------------------------------
1,000,000 USD 6/20/08 Agreement with Goldman Sachs Capital $(11,310)
Markets, dated 4/16/03 to pay 0.46% per
year times the notional amount. The
Portfolio receives payment only upon a
default event by JP Morgan Chase & Co.,
the notional amount times the difference
between the par value and the then-
market value of JP Morgan Chase & Co.,
5.25% due 5/30/07.
1,000,000 USD 9/20/08 Agreement with Goldman Sachs Capital (8,380)
Markets, dated 9/11/03 to pay 0.55% per
year times the notional amount. The
Portfolio receives payment only upon a
default event by Cox
Communications, Inc., the notional amount
times the difference between the par
value and the then-market value Cox
Communications, Inc., 7.75% due 11/01/10.
1,000,000 USD 9/20/08 Agreement with Goldman Sachs Capital 15,569
Markets, dated 9/11/03 to receive 0.88%
per year times the notional amount. The
Portfolio makes payment only upon a
default event by Comcast Cable
Communications, Inc., the notional amount
times the difference between the par
value and the then-market value of
Comcast Cable Communications, Inc., 6.75%
due 1/30/11.
32
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NET UNREALIZED
EXPIRATION APPRECIATION
NOTIONAL AMOUNT DATE DESCRIPTION (DEPRECIATION)
-------------------------------------------------------------------------------------------------
500,000 USD 12/20/13 Agreement with Goldman Sachs Capital $ 1,018
Markets, dated 12/05/03 to pay 0.46% per
year times the notional amount. The
Portfolio receives payment only upon a
default event by BellSouth Corp., the
notional amount times the difference
between the par value and the then-market
value of BellSouth Corp., 6.0% due
10/15/11.
500,000 USD 12/20/13 Agreement with Goldman Sachs Capital 5,018
Markets, dated 12/5/03 to pay 0.49% per
year times the notional amount. The
Portfolio receives payment only upon a
default event by SBC
Communications, Inc., the notional amount
times the difference between the par
value and the then-market value of event
SBC Communications, Inc., 6.25% due
3/15/11.
500,000 USD 12/20/13 Agreement with Goldman Sachs Capital 3,555
Markets, dated 12/5/03 to receive 1.05%
per year times the notional amount. The
Portfolio makes payment only upon a
default event by AT&T Wireless Services,
Inc, the notional amount times the
difference between the par value and the
then-market value of AT&T Wireless Corp.,
8.125% due 5/1/12.
500,000 USD 12/20/13 Agreement with Goldman Sachs Capital 4,366
Markets, dated 12/5/03 to receive 1.43%
per year times the notional amount. The
Portfolio makes payment only upon a
default event by Sprint Corp., the
notional amount times the difference
between the par value and the then-market
value Sprint Capital Corp., 8.375% due
3/15/12.
(6) SECURITY LENDING:
The Portfolio may lend its securities to financial institutions which the
Portfolio deems to be creditworthy. The loans are collateralized at all
times with cash or securities with a market value at least equal to the
market value of the securities on loan. The market value of securities
loaned is determined daily and any additional required collateral is
allocated to the Portfolio on the next business day. For the duration of a
loan, the Portfolio receives the equivalent of the interest or dividends
paid by the issuer on the securities loaned and also receives compensation
from the investment of the collateral. As with other extensions of credit,
the Portfolio bears the risk of delay in recovery or even loss of rights in
its securities on loan should the borrower of the securities fail
financially or default on its obligations to the Portfolio. In the event of
borrower default, the Portfolio generally has the right to use the
collateral to offset losses incurred. The Portfolio may incur a loss in the
event it was delayed or prevented from exercising its rights to dispose of
the collateral. The Portfolio also bears the risk in the event that the
interest and/or dividends received on invested collateral is not sufficient
to meet the Portfolio's obligations due on the loans.
The Portfolio loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Portfolio
had no securities on loan.
33
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(7) DELAYED DELIVERY TRANSACTIONS:
The Portfolio may purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis. Payment and delivery may take place a
month or more after the date of the transactions. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. Income on
the securities will not be earned until settlement date. The Portfolio
instructs its custodian to segregate securities having value at least equal
to the amount of the purchase commitment.
The Portfolio may enter into to be announced ("TBA") purchase commitments
to purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Portfolio holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the Portfolio may enter into offsetting contracts for the forward
sale of other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in the value of the Portfolio's other
assets. Unsettled TBA purchase commitments are valued at the current market
value of the underlying securities, according to the procedures described
under "Investment security valuations" above.
The Portfolio may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is "marked-to-
market" daily and the change in market value is recorded by the Portfolio
as an unrealized gain or loss. If the TBA sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Portfolio
realizes a gain or loss. If the Portfolio delivers securities under the
commitment, the Portfolio realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the commitment
was entered into.
At December 31, 2003, the Portfolio did not have any delayed delivery
transactions.
(8) CONCENTRATION OF RISK:
The Portfolio invests in low rated (non-investment grade) and comparable
quality unrated high yield securities. Investments in high yield securities
are accompanied by a greater degree of credit risk and the value of high
yield securities tends to be more sensitive to economic conditions than
higher rated securities. The risk of loss due to default of an issuer may
be significantly greater for holders of high yield securities, because such
securities are generally unsecured and are often subordinated to other
creditors of the issuer.
There are certain additional considerations and risks associated with
investing in foreign securities and currency transactions that are not
inherent with investments of domestic origin. The Portfolio's investment in
emerging market countries may involve greater risks than investments in
more developed markets and the price of such investments may be volatile.
These risks of investing in foreign and emerging markets may include
foreign currency exchange rate fluctuations, perceived credit risk, adverse
political and economic developments and possible adverse foreign government
intervention.
(9) LINE OF CREDIT:
The Portfolio, and other subtrusts in the Portfolio Trust and funds in the
Trust are parties to a committed line of credit facility with Investors
Bank and Trust Co., which enables each portfolio/fund to borrow, in the
aggregate, up to $35 million. Interest is charged to each participating
portfolio/fund based on its borrowings at a rate equal to the Federal Funds
effective rate plus 1/2 of 1%. In addition, a commitment fee, computed at
an annual rate of .065 of 1% on the daily unused portion of the facility,
is allocated ratably among the participating portfolios/funds at the end of
each quarter.
For the year ended December 31, 2003, the expense related to the commitment
fee was $1,558 for the Portfolio.
34
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON HIGH YIELD BOND PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Portfolio, and other subtrusts in the Portfolio Trust and funds in the
Trust are parties to a committed line of credit facility with Bank of New
York, which enables each portfolio/fund to borrow, in the aggregate, up to
$35 million. Interest is charged to each participating portfolio/fund based
on its borrowings at a rate equal to the Federal Funds effective rate plus
1/2 of 1%. In addition, a commitment fee, computed at an annual rate of
.060 of 1% on the daily unused portion of the facility, is allocated
ratably among the participating portfolios/funds at the end of each
quarter.
For the year ended December 31, 2003, the expense related to the commitment
fee was $378 for the Portfolio.
During the year ended December 31, 2003, the Portfolio had no borrowings
under the credit facilities.
35
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Master Portfolio and the
Investors of Standish Mellon High Yield Bond Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Master Portfolio: Standish Mellon High Yield Bond
Portfolio (formerly, Standish High Yield Bond Portfolio) (the "Portfolio"),
at December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 2003, by correspondence
with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
36
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
37
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstituionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
38
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon Global
Fixed Income Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON GLOBAL FIXED INCOME FUND
Management Discussion and Analysis
December 2003
Global bond markets produced modest, positive returns in 2003. The Standish
Mellon Global Fixed Income Fund returned 6.38% for the year, after all expenses,
compared to our benchmarks of 2.09% for the JP Morgan Hedged Global Government
Bond Index, and 3.11% for the Lehman Global Aggregate Hedged Index.
Global bond market returns had two distinct phases during 2003 that were driven
by a series of economic, financial and geopolitical developments. During the
first half of the year, bond markets were generally strong, led by the U.S.
market. The global economy was weak, although there were signs of recovery, and
financial market participants were concerned about the possibility of deflation,
particularly in the U.S. The Iraq war and concern about North Korea's nuclear
weapons program further weighed on confidence and the growth outlook. In
addition, financial market scandals caused some investors to abandon riskier
assets such as stocks. Bonds looked like a safe bet.
During the second half of the year, global growth accelerated and confidence
returned to financial markets. The heavy fighting was over in Iraq and progress
was being made on the Korean Peninsula. The Federal Reserve had lowered rates to
their lowest level since 1958 and the combination of low interest rates and
fiscal stimulus was taking hold. The health of global companies was improving
with increasing profits and declining credit spreads. Equities were rallying
globally as were emerging market stocks and bonds. As the fear of deflation
faded, bond yields rose dramatically from the mid-year lows.
The range of returns in hedged terms for government bond markets as measured by
the JP Morgan Government Bond Indices was modest for the year with only 514 b.p.
separating the best market Canada (+4.52%) from the worst, Australia (-0.62%).
The U.S. component of the index returned 2.44% while European markets returned
2.80% and Japan only 36 b.p. Although government bond returns were modest in
2003, corporate and emerging market bonds performed quite well. The higher
yielding segments of the bond market produced the best returns with high yield
corporate bonds and emerging market bond indices recording returns in excess of
20%. The U.S. dollar fell during the year as the mix of loose fiscal and
monetary policy and the large current account deficit made the currency
unattractive to global investors.
During this period of U.S. dollar weakness, the Fund has not been able to make
regular distributions of investment income. This is due to our policy of hedging
most of our currency exposures back to U.S. dollars. Although this policy
results in less volatility in total return over time than if the portfolio were
unhedged, currency volatility can have a significant effect on the Fund's
investment income. In periods when the dollar declines as it has over the past
two years, the losses from the currency hedging activity offset the investment
income of the portfolio. Conversely, when the dollar appreciates, our
3
currency hedging activity typically generates gains that enhance the investment
income of the Fund. Another way to view this is that much of the Fund's reported
total return -which has been very strong compared to the Index -- is classified
as capital appreciation within the portfolio.
The Fund outperformed its benchmarks during the year. Our position in investment
grade and high yield corporate bonds and emerging market securities was the
largest positive contributor relative to our benchmarks. Our country selection
was also positive as we were overweighted European markets and zero weighted in
Japan. Our currency exposure was positive for the year relative to the benchmark
as we had established positions in the euro and the Australian, New Zealand and
Canadian dollars relative to the U.S. dollar and all those positions contributed
positively in 2003.
Our outlook for 2004 is favorable for global bonds. We believe that the
performance of global economies will be mixed in the coming year with the U.S.
growing above trend, Japan on trend and Europe below. Government bond yields in
the U.S. will be biased upwards but opportunities for value-added can be found
in European bonds as the European Central Bank is likely to lag any moves by the
Fed to increase interest rates. Non-government sectors such as corporate and
emerging bonds offer value in 2004 as credit quality improves. However, the
excess returns are likely to be more modest than in 2003.
We appreciate your continued support and look forward to working on your behalf
over the next year.
/s/ W. Charles Cook
W. Charles Cook
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Global Fixed Income Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon Global Fixed Income Fund, the Lehman Brothers Hedged Global
Aggregate Index and the J.P. Morgan Hedged Global Index
[The following data was represented as a line chart in the printed material].
Standish Mellon J.P. Morgan
Global Fixed Global Hedged Lehman Global
Income Fund Index Aggregate Index
100000 100000 100000
101350 100332 100704
97950 98201 98778
95200 96831 96931
94237 96113 96237
92971 95492 95747
91805 94898 95243
93228 95936 96689
92313 95469 96395
1994 91602 95008 95557
92212 95186 95675
92822 95832 96069
92923 95954 96420
93801 97272 97965
94731 98867 99817
95661 100302 100883
97598 101745 102378
101263 105254 105946
100635 105381 106251
102014 106084 106705
103447 107086 107873
1995 104455 108482 109080
106013 109818 110399
108323 111917 112345
109774 113133 113782
111348 114273 114824
109718 112635 113113
109830 112870 112989
111026 113484 113236
111197 113905 113374
112677 114986 114674
113023 115630 115216
114465 116558 115646
1996 118271 118773 117886
120839 120898 120186
124167 123153 122400
124076 122852 121832
125682 123900 122628
126793 124454 123118
125307 123579 122043
127058 125089 123662
128434 125928 124683
130310 127783 126404
133031 130502 129152
132398 130044 128545
1997 135246 132228 130606
135887 133690 132005
136847 134547 132786
138574 136197 134218
140205 138129 136006
140137 138698 136428
141636 139602 137194
142118 140284 137848
143631 142039 139361
144159 143061 140318
145208 143971 141117
144928 147259 143533
1998 147528 151005 146797
144980 150670 146389
148307 151744 147605
148244 151738 147331
150657 153271 149150
148464 151216 147282
150222 152607 148445
151924 154034 149578
150518 153107 148716
149044 151380 147351
147171 151069 146738
146346 151234 146848
1999 147095 152009 147732
146184 152308 148123
147398 152819 148651
147299 152831 148489
146828 152948 148220
148634 154486 149630
150365 157052 151624
150286 157446 151757
150684 158379 152156
152521 159759 154048
153650 161056 155250
154939 161796 156389
2000 155426 162782 157661
156080 164191 158841
158448 167292 161514
161720 169570 163841
164426 171350 166087
165822 173029 167549
166347 174102 168653
164416 172553 167843
164767 173329 168842
165460 174300 169687
166971 176722 172197
168216 178490 173802
2001 167949 179757 175199
171683 183568 178386
170617 181677 176896
169012 180006 175705
169470 180510 176533
169379 181141 177471
168098 179149 175593
170051 181496 177957
171540 181949 178793
172935 184369 180653
173214 186858 182543
175819 189661 185161
2002 177493 192639 187646
176191 191965 187167
177772 191715 187393
180749 195109 190560
182330 196065 191437
184284 198006 193356
184377 197570 193190
186144 198163 194239
189774 202047 197590
190059 200915 196954
186980 196917 192891
186887 196253 192802
2003 190512 199387 196302
188931 197214 194452
189403 197411 194729
192282 199257 196588
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 10 Year 01/03/1994
------ ------ ------ ------- ----------
6.38% 5.94% 5.34% 6.76% 6.76%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investment in Standish Mellon Global Fixed Income
Portfolio ("Portfolio"), at value (Note 1A) $153,572,413
Prepaid expenses 4,443
------------
Total assets 153,576,856
LIABILITIES
Payable for Fund shares redeemed $7,370,000
Accrued accounting, custody and transfer agent fees 3,215
Accrued trustees' fees and expenses (Note 2) 500
Accrued expenses and other liabilities 17,223
---------
Total liabilities 7,390,938
------------
NET ASSETS $146,185,918
============
NET ASSETS CONSIST OF:
Paid-in capital $161,325,369
Accumulated net realized loss (25,474,329)
Distributions in excess of net investment income (3,586,640)
Net unrealized appreciation 13,921,518
------------
TOTAL NET ASSETS $146,185,918
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 7,072,376
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 20.67
============
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B)
Interest income allocated from Portfolio $ 6,948,478
Dividend income allocated from Portfolio 63,503
Expenses allocated from Portfolio (1,014,568)
-----------
Net investment income allocated from Portfolio 5,997,413
EXPENSES
Accounting, custody, and transfer agent fees $ 37,259
Legal and audit services 32,540
Registration fees 22,117
Insurance expense 1,785
Trustees' fees and expenses (Note 2) 1,523
Miscellaneous 14,097
-----------
Total expenses 109,321
Deduct:
Reimbursement of Fund operating expenses (Note 2) (85,583)
-----------
Net expenses 23,738
-----------
Net investment income 5,973,675
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) allocated from Portfolio on:
Investment security transactions 16,725,958
Financial futures contracts 5,797
Written options transactions 181,507
Foreign currency transactions and forward foreign
currency exchange contracts (16,914,638)
-----------
Net realized loss (1,376)
Change in unrealized appreciation (depreciation) allocated
from Portfolio on:
Investment securities 3,457,190
Financial futures contracts 323,700
Written options (162,104)
Foreign currency and forward foreign currency exchange
contracts 177,303
-----------
Change in net unrealized appreciation (depreciation) 3,796,089
-----------
Net realized and unrealized gain on investments 3,794,713
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 9,768,388
===========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 5,973,675 $ 11,853,212
Net realized loss (1,376) (16,266,885)
Change in net unrealized appreciation (depreciation) 3,796,089 20,302,604
------------ -------------
Net increase in net assets from investment operations 9,768,388 15,888,931
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1C)
From net investment income -- (5,079,763)
Return of capital -- (106,692)
------------ -------------
Total distributions to shareholders -- (5,186,455)
------------ -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 10,566,938 16,933,516
Value of shares issued to shareholders in payment of
distributions declared -- 3,839,481
Cost of shares redeemed (38,731,401) (226,251,292)
------------ -------------
Net decrease in net assets from Fund share transactions (28,164,463) (205,478,295)
------------ -------------
TOTAL DECREASE IN NET ASSETS (18,396,075) (194,775,819)
NET ASSETS
At beginning of year 164,581,993 359,357,812
------------ -------------
At end of year (including distributions in excess of net
investment income of $3,586,640 and $2,030,149) $146,185,918 $ 164,581,993
============ =============
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF YEAR $ 19.43 $ 18.45 $ 18.53 $ 18.76 $ 20.28
-------- -------- -------- -------- --------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.75 0.82 0.84 1.06 1.26
Net realized and unrealized gain (loss) on investments 0.49 0.44 (0.01)(2) 0.71 (1.38)
-------- -------- -------- -------- --------
Total from investment operations 1.24 1.26 0.83 1.77 (0.12)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.27) (0.91) (2.00) (1.40)
From tax return of capital -- (0.01) -- -- --
-------- -------- -------- -------- --------
Total distributions to shareholders -- (0.28) (0.91) (2.00) (1.40)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 20.67 $ 19.43 $ 18.45 $ 18.53 $ 18.76
======== ======== ======== ======== ========
TOTAL RETURN 6.38%+ 6.94% 4.51% 9.79% (0.64)%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.65% 0.60% 0.56% 0.56% 0.54%
Net Investment Income (to average daily net assets)* 3.74% 4.43% 4.46% 5.59% 6.31%
Net Assets, End of Year (000's omitted) $146,186 $164,582 $359,358 $373,739 $379,246
- -----------------
* For the periods indicated, the investment advisor voluntarily agreed not to
impose a portion of its investment advisory fee payable to the Portfolio
and/or reimbursed the Fund for aportion of its operating expenses. If this
voluntary action had not been taken, the investment income per share and
ratios would have been:
Net investment income per share(1) $ 0.74 N/A N/A N/A N/A
Ratios (to average daily net assets):
Expenses 0.70% N/A N/A N/A N/A
Net investment income 3.69% N/A N/A N/A N/A
(a) Through its investment in the Portfolio, the Fund has adopted the
provisions of the revised AICPA Audit and Accounting Guide for Investment
Companies effective January 1, 2001 and began amortizing premium and
discount on all debt securities on an effective yield basis. The effect of
this change for the year ended December 31, 2001 was to decrease net
investment income per share by $0.007, to increase net realized and
unrealized gains and losses per share by $0.007 and decrease the ratio of
net investment income to average net assets from 4.50% to 4.46%. Per share
data and ratios/supplemental data for periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
(1) Calculated based on average shares outstanding.
(2) The amount shown for a share outstanding does not correspond with the
aggregate net realized and unrealized gain/loss for the period due to the
timing of purchases and redemptions of Fund shares in relation to the
fluctuating market values of the Fund.
+ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Global Fixed Income Fund (the "Fund") is a separate
non-diversified investment series of the Trust.
The objective of the Fund is to maximize total return while realizing a
market level of income consistent with preserving principal and liquidity.
The Fund seeks to achieve its objective by investing all of its investable
assets in an interest of Standish Mellon Global Fixed Income Portfolio (the
"Portfolio"), a subtrust of the Mellon Institutional Funds Master Portfolio
(the "Portfolio Trust"), which is organized as a New York trust and which
has the same investment objective as the Fund. The Portfolio seeks to
achieve its investment objective by investing, under normal circumstances,
at least 80% of its net assets in U.S. and non-U.S. dollar denominated
fixed income securities of U.S. and foreign governments and companies
located in the U.S. and various countries, including emerging markets. The
value of the Fund's investment in the Portfolio reflects the Fund's
proportionate interest in the net assets of the Portfolio (approximately
100% at December 31, 2003). The performance of the Fund is directly
affected by the performance of the Portfolio. The financial statements of
the Portfolio are included elsewhere in this report and should be read in
conjunction with the Fund's financial statements.
On June 21, 2003, by vote of the Trustees, the name of the Standish Global
Fixed Income Fund was changed to Standish Mellon Global Fixed Income Fund.
In addition, the Declaration of Trust was amended to change the name of the
Trust from Standish, Ayer & Wood Investment Trust to Mellon Institutional
Funds Investment Trust. The name changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Currently, the
Fund's net investment income consists of the Fund's pro rata share of the
net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with accounting principles
generally accepted in the United States of America. All realized and
unrealized gains and losses of the Portfolio are allocated pro rata among
the investors in the Portfolio. The 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.
C. DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income will be declared and distributed
quarterly. The Fund's dividends from short-term and long-term capital
gains, if any, after reduction of capital losses will be declared and
distributed at least annually. In determining the amounts of its dividends,
the Fund will take into account its share of the income, gains or losses,
expenses, and any other tax items of the Portfolio. Distributions to
shareholders are recorded on ex-dividend date. Dividends from net
investment income and distributions from capital gains, if any, are
reinvested in additional shares of the Fund unless a shareholder elects to
receive them in cash. Income and capital gain distributions are determined
in accordance with income tax regulations which may differ from accounting
principles generally accepted in the United
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
States of America. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for foreign
currency transactions, options, futures, amortization and/or accretion of
premiums and discounts on certain securities, capital loss carryforwards
and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
D. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
E. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The Fund does not directly pay any investment advisory fees, but indirectly
bears its pro rata share of the compensation paid by the Portfolio to
Standish Mellon Asset Management Company LLC ("Standish Mellon"), a
wholly-owned subsidiary of Mellon Financial Corporation, for such services.
See Note 2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report. Standish Mellon voluntarily agreed to
limit the total operating expenses of the Fund and its pro rata share of
the Portfolio expenses (excluding commissions, taxes and extraordinary
expenses) to 0.65% of the Fund's average daily net assets for the year
ended December 31, 2003. Pursuant to this agreement, for the year ended
December 31, 2003, Standish Mellon voluntarily reimbursed the Fund for
$85,583 of its operating expenses. This agreement is voluntary and
temporary and may be discontinued or revised by Standish Mellon at any
time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) INVESTMENT TRANSACTIONS:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 2003, aggregated $10,566,938 and $31,376,444,
respectively.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- --------------------
Shares sold 523,070 931,692
Shares issued to shareholders in payment of
distributions declared -- 212,596
Shares redeemed (1,921,020) (12,149,438)
---------- -----------
Net decrease (1,397,950) (11,005,150)
========== ===========
At December 31, 2003, four shareholders held of record approximately 32%,
19%, 15% and 14% of the total outstanding shares of the Fund, respectively.
Investment activity of these shareholders could have a material impact on
the Fund.
A significant portion of the Fund's shares represent investments by
fiduciary accounts over which Standish Mellon and its affiliates have
either sole or joint investment discretion.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
AMOUNT
------------
Accumulated losses $(31,409,647)
At December 31, 2003, the Fund, for federal income tax purposes, has
capital loss carryovers which will reduce the Fund's taxable income arising
from net realized gain on investments, if any, to the extent permitted by
the Internal Revenue Code and thus will reduce the amount of distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal income tax. Such capital loss carryovers are as
follows:
CAPITAL LOSS
CARRY OVER EXPIRATION DATE
------------ ---------------
$ 6,326,146 12/31/2007
15,100,842 12/31/2008
408,689 12/31/2009
3,621,061 12/31/2010
The fund elected to defer to its fiscal year ending December 31, 2004
$5,952,909 of losses recognized during the period November 1, 2003 to
December 31, 2003.
See corresponding master portfolio for tax basis unrealized
appreciation/(depreciation) information.
12
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and
Shareholders of Standish Mellon Global Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Mellon Institutional Funds Investment Trust: Standish
Mellon Global Fixed Income Fund (formerly, Standish Global Fixed Income
Fund) (the "Fund") at December 31, 2003, and the results of its operations,
the changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included correspondence with the custodian,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
13
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 99.1%
ASSET BACKED -- 2.1%
Household Automotive Trust 2003-1A A2 1.300% 09/18/2006 USD 1,065,000 $1,064,939
MBNA Master Credit Card Trust 1999-G A 6.350% 12/15/2006 1,595,000 1,638,405
Whole Auto Loan Trust 2002-1 A2 1.880% 06/15/2005 514,417 515,495
----------
Total Asset Backed (Cost $3,236,951) 3,218,839
----------
CORPORATE -- 15.3%
BANKING -- 0.7%
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 295,000 302,375
FleetBoston Financial Corp. Sub Notes 7.375% 12/01/2009 210,000 246,559
Union Planters Bank 5.125% 06/15/2007 455,000 484,668
----------
1,033,602
----------
BASIC INDUSTRY -- 1.8%
Alcoa, Inc. 4.250% 08/15/2007 85,000 88,381
CSC Holdings, Inc. 7.875% 12/15/2007 155,000 163,525
Fort James Corp. Senior Notes 6.625% 09/15/2004 840,000 856,800
Freeport-McMoRan Copper & Gold, Inc.
144A Senior Notes 10.125% 02/01/2010 130,000 149,825
ICI Wilmington, Inc. 4.375% 12/01/2008 500,000 498,120
Nalco Co. 7.750% 11/15/2011 210,000 272,853
Pinnacle Partners 144A Senior Notes 8.830% 08/15/2004 615,000 637,294
Republic Services, Inc. Senior Notes 6.750% 08/15/2011 150,000 167,669
----------
2,834,467
----------
CAPITAL GOODS -- 1.2%
Allied Waste Industries Series B 7.375% 01/01/2004 170,000 170,000
Allied Waste Industries, Inc. 8.875% 04/01/2008 225,000 252,000
Allied Waste Industries, Inc. 10.000% 08/01/2009 95,000 102,600
American Standard, Inc. 7.375% 02/01/2008 145,000 160,225
Oakmont Asset Trust 144A 4.514% 12/22/2008 400,000 400,716
Raytheon Corp. 6.500% 07/15/2005 480,000 511,524
Smurfit-Stone Container Corp. 8.250% 10/01/2012 15,000 16,275
Stone Container Corp. Senior Notes 8.375% 07/01/2012 150,000 162,750
----------
1,776,090
----------
COMMUNICATIONS -- 2.2%
AOL Time Warner, Inc. 7.700% 05/01/2032 350,000 408,487
AT&T Wireless Services, Inc. Senior
Notes 8.750% 03/01/2031 640,000 789,651
Block Communications, Inc. 9.250% 04/15/2009 280,000 301,000
Comcast Cable Communication Senior Notes
NCL 6.750% 01/30/2011 75,000 83,470
Salem Communciations Corp. Senior Sub
Notes 7.750% 12/15/2010 90,000 93,825
Sprint Capital Corp. 6.900% 05/01/2019 435,000 444,369
Sprint Capital Corp. 8.375% 03/15/2012 420,000 490,476
Sprint Capital Corp. 8.750% 03/15/2032 685,000 809,252
----------
3,420,530
----------
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL -- 2.2%
Argosy Gaming Co. 10.750% 06/01/2009 USD 130,000 $ 140,400
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 145,000 153,337
Cox Communications, Inc. 7.125% 10/01/2012 200,000 230,683
Dex Media Finance, Inc. 144A Senior
Notes 8.500% 08/15/2010 70,000 77,962
Dex Media Finance, Inc. 144A Senior Sub
Notes 9.875% 08/15/2013 70,000 81,375
Echostar DBS Corp. Senior Notes 10.375% 10/01/2007 480,000 526,200
ERAC USA Finance Company 144A 7.350% 06/15/2008 155,000 177,089
Horseshoe Gaming Holding Corp. 8.625% 05/15/2009 135,000 142,594
Liberty Media Corp. 3.500% 09/25/2006 800,000 803,998
Mohegan Tribal Gaming Authority Senior
Notes 8.375% 07/01/2011 155,000 168,950
Mohegan Tribal Gaming Authority Senior
Sub Notes 6.375% 07/15/2009 100,000 103,250
Moore North America Finance, Inc. 144A
Senior Notes 7.875% 01/15/2011 125,000 141,562
News America Holdings Corp. 9.250% 02/01/2013 180,000 232,201
Station Casinos, Inc. Senior Sub Notes 8.875% 12/01/2008 155,000 160,425
Univision Communications, Inc. 7.850% 07/15/2011 200,000 237,768
----------
3,377,794
----------
CONSUMER NONCYCLICAL -- 1.0%
Altria Group, Inc. 5.625% 11/04/2008 600,000 615,503
Kroger Co. Senior Notes 8.000% 09/15/2029 185,000 222,056
Office Depot, Inc. 6.250% 08/15/2013 145,000 152,249
Stater Brothers Holdings Senior Notes 10.750% 08/15/2006 165,000 173,869
Tricon Global Restaurant, Inc. Senior
Notes 8.875% 04/15/2011 310,000 375,875
----------
1,539,552
----------
ELECTRIC -- 0.1%
Niagara Mohawk Power Senior Notes 7.750% 10/01/2008 175,000 203,084
----------
ENERGY -- 1.8%
ANR Pipeline Co. 7.375% 02/15/2024 95,000 95,950
Chesapeake Energy Corp. 8.125% 04/01/2011 250,000 277,500
FirstEnergy Corp. Series B 6.450% 11/15/2011 560,000 580,411
Halliburton Co. 144A 5.500% 10/15/2010 325,000 339,891
Progress Energy, Inc. 7.000% 10/30/2031 230,000 246,166
Transcontinental Gas Pipeline Corp. 6.125% 01/15/2005 325,000 330,281
TXU Energy Co. Senior Notes 7.000% 03/15/2013 270,000 298,619
Waste Management, Inc. 6.875% 05/15/2009 245,000 273,857
Waste Management, Inc. 7.375% 05/15/2029 225,000 253,234
----------
2,695,909
----------
FINANCIAL -- 3.6%
Boston Properties, Inc. REIT Senior
Notes 6.250% 01/15/2013 370,000 397,026
EOP Operating LP 7.875% 07/15/2031 155,000 181,476
Fifth Third Bank Sub Notes 4.500% 06/01/2018 565,000 524,523
Ford Motor Credit Co. Senior Notes 6.875% 02/01/2006 710,000 757,789
General Motors Acceptance Corp. 6.875% 09/15/2011 1,580,000 1,701,861
General Motors Corp. 7.250% 07/03/2013 550,000 766,081
Goldman Sachs Group, Inc. 4.750% 07/15/2013 170,000 165,677
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
FINANCIAL (CONTINUED)
Goldman Sachs Group, Inc. 5.700% 09/01/2012 USD 215,000 $ 225,955
Morgan Stanley Dean Witter 6.600% 04/01/2012 205,000 228,952
Petronas Capital Ltd. 144A 7.875% 05/22/2022 160,000 189,095
RH Donnelley Finance Corp. I 144A Senior
Notes 8.875% 12/15/2010 50,000 56,250
RH Donnelley Finance Corp. I 144A Senior
Sub Notes 10.875% 12/15/2012 90,000 106,762
Travelers Property Casualty Corp. Senior
Notes 5.000% 03/15/2013 190,000 190,125
-----------
5,491,572
-----------
PUBLIC UTILITY -- 0.7%
AES Corp. 144A 8.750% 05/15/2013 200,000 223,500
AES Corp. 144A 10.000% 07/15/2005 80,769 82,183
Northern States Power Co. 8.000% 08/28/2012 195,000 237,750
Public Service Co. of CO 7.875% 10/01/2012 355,000 430,863
Southern Natural Gas Co. 8.875% 03/15/2010 100,000 112,500
-----------
1,086,796
-----------
Total Corporate (Cost $22,702,295) 23,459,396
-----------
SOVEREIGN BONDS -- 2.0%
Republic of Brazil 10.000% 08/07/2011 200,000 221,000
Republic of Brazil 11.000% 08/17/2040 415,000 456,500
Republic of Brazil 14.500% 10/15/2009 130,000 169,975
Republic of Bulgaria IAB PDI(a) 1.938% 07/28/2011 152,000 149,340
Republic of Bulgaria Series A(a) 1.938% 07/28/2024 75,000 74,250
Republic of Colombia 10.750% 01/15/2013 150,000 170,625
Republic of El Salvador 8.500% 07/25/2011 160,000 176,400
Republic of Peru 8.750% 11/21/2033 160,000 160,000
Republic of Peru FLIRB(a) 4.500% 03/07/2017 185,000 164,650
Republic of Turkey Senior Unsub Notes 11.875% 01/15/2030 70,000 94,850
Republic of Turkey Senior Unsub Notes 12.375% 06/15/2009 135,000 171,450
Russian Federation 5.000% 03/31/2030 175,000 168,437
Russian Federation 11.000% 07/24/2018 115,000 154,962
Ukraine Government Senior Notes 11.000% 03/15/2007 316,870 352,518
United Mexican States 9.875% 02/01/2010 270,000 340,875
-----------
Total Sovereign Bonds (Cost $2,980,873) 3,025,832
-----------
YANKEE BONDS -- 6.6%
Banque Centrale de Tunisie 7.375% 04/25/2012 210,000 235,200
British Sky Broadcasting 8.200% 07/15/2009 335,000 398,821
British Sky Broadcasting 6.875% 02/23/2009 1,360,000 1,526,589
British Sky Broadcasting 7.300% 10/15/2006 410,000 456,522
Carnival Corp. 144A 3.750% 11/15/2007 100,000 100,179
Deutsche Telekom 5.250% 07/22/2013 1,000,000 1,010,219
HBOS PLC 144A Sub Notes(a) 5.375% 12/31/2049 745,000 742,719
Hutchison Whampoa Ltd. 144A 5.450% 11/24/2010 585,000 593,370
Inco Ltd. 7.750% 05/15/2012 205,000 239,145
International Telecom Satellite Ltd.
144A 6.500% 11/01/2013 175,000 182,594
Merita Bank FLIRB 144A 7.500% 12/29/2049 445,000 475,961
Ministry Finance Russia 3.000% 05/14/2008 260,000 232,375
Rogers Cable, Inc. 6.250% 06/15/2013 200,000 201,500
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
YANKEE BONDS (CONTINUED)
Royal Caribbean Cruises 8.250% 04/01/2005 USD 100,000 $ 105,250
Salomon Bros. (Sibneft) 10.750% 01/15/2009 200,000 226,000
Teck Cominico Ltd. 7.000% 09/15/2012 340,000 373,274
Telecom Italia Capital 144A 4.000% 11/15/2008 1,060,000 1,066,710
Telus Corp. 8.000% 06/01/2011 335,000 391,711
Tyco International Group SA 6.750% 02/15/2011 410,000 447,925
Tyco International Group SA 144A Senior
Notes 6.000% 11/15/2013 1,040,000 1,071,200
-----------
Total Yankee Bonds (Cost $9,796,180) 10,077,264
-----------
U.S. GOVERNMENT AGENCY -- 8.8%
PASS THRU SECURITIES -- 8.8%
FNMA 6.500% 10/01/2032 232,953 243,666
FNMA (TBA)# 5.500% 01/01/2034 1,650,000 1,671,140
FNMA (TBA)# 6.000% 01/01/2032 10,650,000 11,006,115
FNMA (TBA)# 6.500% 01/01/2032 580,000 606,462
-----------
13,527,383
-----------
Total U.S. Government Agency (Cost $13,326,838) 13,527,383
-----------
U.S. TREASURY OBLIGATIONS -- 1.7%
TREASURY BONDS -- 1.0%
U.S. Treasury Bond 6.250% 05/15/2030 1,375,000 1,586,728
-----------
TREASURY NOTES -- 0.7%
U.S. Treasury Note 3.250% 08/15/2008 105,000 105,640
U.S. Treasury Note 4.000% 11/15/2012 210,000 207,982
U.S. Treasury Note 4.625% 05/15/2006 750,000 794,883
-----------
1,108,505
-----------
Total U.S. Treasury Obligations (Cost $2,663,021) 2,695,233
-----------
FOREIGN DENOMINATED -- 62.6%
AUSTRALIA -- 2.1%
Australian Government Series 808 8.750% 08/15/2008 AUD 3,865,000 3,278,944
-----------
CANADA -- 0.3%
Canadian Pacific Railway 4.900% 06/15/2010 CAD 620,000 478,075
-----------
DENMARK -- 4.0%
Denmark Realkredit 4.000% 01/01/2006 DKK 5,140,000 887,420
Denmark Realkredit 6.000% 10/01/2032 30,562,247 5,301,346
-----------
6,188,766
-----------
EURO -- 47.6%
Allied Domecq PLC 5.875% 06/12/2009 EUR 145,000 196,577
Allied Irish Banks Ltd.(a) 7.500% 02/28/2011 135,000 196,970
Bank of Ireland Holdings(a) 7.400% 12/29/2049 135,000 197,507
Barclays Bank PLC(a) 7.500% 12/15/2010 135,000 199,054
Bertelsmann U.S. Finance 4.625% 06/03/2010 195,000 245,049
Bouni Poliennali del Tesoro 1.650% 09/15/2008 705,000 890,455
British Telecom PLC 6.125% 02/15/2006 150,000 200,595
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
EURO (CONTINUED)
Bundes Obligation Series 135 5.000% 05/20/2005 EUR 6,830,000 $8,895,263
Bundes Obligation Series 136 5.000% 08/19/2005 2,575,000 3,367,727
Bundes Obligation Series 140 4.500% 08/17/2007 3,840,000 5,036,660
Bundes Obligation Series 143 3.500% 10/10/2008 3,840,000 4,829,840
Daimlerchrysler International Finance 6.125% 03/21/2006 410,000 544,152
Deutsche Telekom International Finance
BV 8.125% 05/29/2012 225,000 347,441
Deutschland Republic 4.000% 07/04/2009 2,030,000 2,597,213
Deutschland Republic 4.125% 07/04/2008 345,000 445,892
Deutschland Republic 5.000% 07/04/2011 1,855,000 2,477,660
Deutschland Republic 5.250% 01/04/2011 1,290,000 1,749,632
Deutschland Republic 5.625% 01/04/2028 710,000 979,594
Deutschland Republic 6.250% 01/04/2030 795,000 1,190,809
Eircom Funding 8.250% 08/15/2013 135,000 187,297
European Investment Bank 3.625% 10/15/2013 360,000 426,746
FBG Treasury BV 5.750% 03/17/2005 295,000 384,195
Ford Motor Credit Co. Senior Notes 5.750% 01/12/2009 1,200,000 1,540,795
Fort James Corp. 4.750% 06/29/2004 110,000 138,078
France Telecom 7.250% 01/28/2013 875,000 1,281,130
France Telecom Senior Unsub Notes 8.125% 01/28/2033 240,000 388,030
French Government 3.150% 07/25/2032 1,644,619 2,322,285
French Treasury Note 5.000% 01/12/2006 2,720,000 3,581,494
HBOS PLC(a) 6.050% 11/23/2049 450,000 612,488
Heinz BV 5.125% 04/10/2006 100,000 131,364
Hilton Group Finance PLC 6.500% 07/17/2009 225,000 310,404
Honeywell Holding BV 5.250% 12/20/2006 135,000 176,478
Household Finance Corp. Senior Unsub
Notes 6.500% 05/05/2009 300,000 418,130
Inco, Ltd. 15.750% 07/15/2006 200,000 414,585
International Paper Co. 5.375% 08/11/2006 135,000 176,939
Italian Government 7.750% 11/01/2006 2,025,000 2,858,638
Kappa Beheer BV 10.625% 07/15/2009 135,000 180,926
Lear Corp. Senior Notes 8.125% 04/01/2008 135,000 191,119
Linde Finance BV(a) 6.000% 07/29/2049 1,410,000 1,783,925
MBNA Corp. Series 6 4.375% 08/19/2004 1,100,000 1,400,088
Messer Greisheim Holdings AG Senior
Notes 10.375% 06/01/2011 135,000 196,216
National Westminister Bank(a) 6.625% 10/29/2049 630,000 880,736
Netherland Government Notes 5.500% 07/15/2010 3,165,000 4,347,265
NGG Finance PLC 5.250% 08/23/2006 190,000 250,242
Nordbanken(a) 6.000% 12/13/2010 140,000 185,789
Parker-Hannifin Corp. 6.250% 11/21/2005 75,000 99,795
Pemex Project Funding Master Trust 144A 6.625% 04/04/2010 180,000 234,440
Republic of Bulgaria 144A 7.500% 01/15/2013 15,000 21,311
Republic of South Africa 5.250% 05/16/2013 110,000 132,195
Sara Lee Corp. 6.125% 07/27/2007 125,000 169,868
Sogerim 7.000% 04/20/2011 210,000 299,596
Spanish Government 4.250% 10/31/2007 3,130,000 4,071,521
Spanish Government 5.000% 07/30/2012 1,555,000 2,067,949
Svenska Handelsbanken(a) 5.500% 03/07/2011 100,000 131,926
Teksid Aluminum SpA 11.375% 07/15/2011 150,000 201,596
Telecom Italia SpA 6.250% 02/01/2012 555,000 760,431
Telelfonica Europe BV 5.125% 02/14/2013 195,000 252,234
Telenet Communication NV 144A Senior
Notes 9.000% 12/15/2013 625,000 810,095
ThyssenKrupp 7.000% 03/19/2009 160,000 218,962
The accompanying notes are an integral part of the financial statements.
18
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- -------------------------------------------------------------------------------------------------------------
EURO (CONTINUED)
Transco PLC Senior Unsubordinated Notes 5.250% 05/23/2006 EUR 245,000 $ 322,206
Treuhandanstalt 7.500% 09/09/2004 1,205,000 1,570,567
Tyco International Group SA 5.500% 11/19/2008 1,405,000 1,803,413
Valentia Telecommunications Ltd. 7.250% 12/31/2049 230,000 311,139
Vivendi Environnement Senior Notes 5.875% 06/27/2008 185,000 249,205
------------
73,081,921
------------
SINGAPORE -- 3.4%
Singapore Government 5.625% 07/01/2008 SGD 7,680,000 5,143,985
------------
SOUTH AFRICA -- 0.1%
Republic of South Africa 13.000% 08/31/2010 ZAR 945,000 169,143
------------
SWEDEN -- 5.1%
Swedish Government Series 1037 8.000% 08/15/2007 SEK 27,600,000 4,372,315
Swedish Government Series 1040 6.500% 05/05/2008 22,450,000 3,427,555
------------
7,799,870
------------
Total Foreign Denominated (Cost $81,106,796) 96,140,704
------------
TOTAL BONDS AND NOTES (COST $135,812,954) 152,144,651
------------
SHARES
-------------
PREFERRED STOCKS -- 0.2%
Convertible Preferred Stocks -- 0.2%
Tyco International Group SA 3.125% 144A
CVT Pfd 195,000 266,663
------------
Total Convertible Preferred Stocks (Cost $195,000) 266,663
------------
TOTAL PREFERRED STOCKS (COST $195,000) 266,663
------------
CONTRACT
SIZE
---------
PURCHASED OPTIONS -- 0.5%
JPY Put/USD Call, Strike Price 130.00,
05/13/2004 (USD) 6,985,000 22
USD Put/AUD Call, Strike Price 0.70,
04/12/2004 (USD) 3,025,000 193,600
USD Put/CAD Call, Strike Price 1.30,
05/19/2004 (USD) 3,240,000 68,040
USD Put/CAD Call, Strike Price 1.325,
01/15/2004 (USD) 3,250,000 84,565
USD Put/EUR Call, Strike Price 1.145,
03/5/2004 (USD) 1,480,000 146,712
USD Put/EUR Call, Strike Price 1.23,
03/10/2004 (USD) 3,140,000 98,596
USD Put/NZD Call, Strike Price 0.61
04/12/2004 (USD) 3,025,000 178,777
------------
TOTAL PURCHASED OPTIONS (COST $455,946) 770,312
------------
The accompanying notes are an integral part of the financial statements.
19
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
CONTRACT VALUE
SECURITY RATE MATURITY SIZE (NOTE 1A)
- ---------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 8.4%
U.S. GOVERNMENT AGENCY -- 5.6%
FNMA Discount Note=/= 1.056% 01/14/2004 USD 8,575,000 $ 8,571,570
-----------
REPURCHASE AGREEMENTS -- 2.8%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney, Inc.
and Investors Bank and Trust Company, due 01/02/04, with a maturity value of
$4,346,091 and an effective yield of 0.20%, collateralized by a U.S. Government
Obligation with a rate of 5.18%, a maturity date of 02/15/26 and an aggregate
market value of $4,437,310. 4,346,043
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $12,917,791) 12,917,613
-----------
TOTAL INVESTMENTS -- 108.2% (COST
$149,381,691) $ 166,099,239
OTHER ASSETS, LESS LIABILITIES -- (8.2%) (12,526,826)
-------------
NET ASSETS -- 100.0% $ 153,572,413
=============
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
AUD - Australian Dollar
CAD - Canadian Dollar
CVT - Convertible
DKK - Danish Krone
EUR - Euro
FLIRB - Front Loaded Interest Reduction Bond
FNMA - Federal National Mortgage Association
IAB - Interest Arrears Bonds
JPY - Japanese Yen
NZD - New Zealand Dollar
PDI - Past Due Interest Bonds
REIT - Real Estate Investment Trust
SEK - Swedish Krona
SGD - Singapore Dollar
USD - United States Dollar
ZAR - South African Rand
(a) Variable Rate Security; rate indicated is as of 12/31/03.
# Delayed delivery contract.
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
20
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PERCENTAGE
OF NET
INDUSTRY SECTOR ASSETS
- ------------------------------------------------------------------------
Foreign Government 51.7%
Financial 16.4%
U.S. Government 16.1%
Communications 8.1%
Capital Goods 3.9%
Consumer Cyclical 3.1%
Basic Industry 2.7%
Energy 1.9%
Consumer Noncyclical 1.3%
Banking 1.2%
Public Utility 1.0%
Transportation 0.4%
Technology 0.3%
Electric 0.1%
-------
108.2%
PERCENTAGE
OF NET
TOP TEN COUNTRIES ASSETS
- ------------------------------------------------------------------------
United States 39.4%
Germany 21.2%
Netherlands 6.7%
France 5.9%
Sweden 5.3%
United Kingdom 4.1%
Denmark 4.0%
Spain 4.0%
Italy 3.6%
Singapore 3.4%
The accompanying notes are an integral part of the financial statements.
21
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$149,381,691) $166,099,239
Cash 219
Receivable for investments sold 559,951
Interest receivable 3,035,990
Unrealized appreciation on forward foreign currency
exchange contracts (Note 5) 73,429
Prepaid expenses 3,753
------------
Total assets 169,772,581
LIABILITIES
Payable for investments purchased $13,139,877
Unrealized depreciation on forward foreign currency
exchange contracts (Note 5) 2,725,313
Payable for closed forward foreign currency exchange
contracts (Note 5) 51,296
Options written, at value (Note 5) (premiums received,
$69,112) 172,806
Accrued accounting and custody fees 25,729
Accrued trustees' fees and expenses (Note 2) 5,646
Accrued expenses and other liabilities 79,501
----------
Total liabilities 16,200,168
------------
NET ASSETS (APPLICABLE TO INVESTORS' BENEFICIAL INTERESTS) $153,572,413
============
The accompanying notes are an integral part of the financial statements.
22
MELLON INSTITUTIONAL MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$6,321 (Note 6)) $6,948,485
Dividend income 63,503
----------
Total income 7,011,988
EXPENSES
Investment advisory fee (Note 2) $ 639,251
Accounting and custody fees 261,099
Legal and audit services 54,954
Trustees' fees and expenses (Note 2) 23,228
Licensing fees 19,999
Insurance expense 16,038
-----------
Total expenses 1,014,569
----------
Net investment income 5,997,419
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 16,725,976
Financial futures contracts 5,797
Written options transactions 181,507
Foreign currency transactions and forward foreign
currency exchange contracts (16,914,657)
-----------
Net realized loss (1,377)
Change in unrealized appreciation (depreciation)
Investment securities 3,457,192
Financial futures contracts 323,700
Written options (162,104)
Foreign currency and forward foreign currency exchange
contracts 177,306
-----------
Change in net unrealized appreciation (depreciation) 3,796,094
----------
Net realized and unrealized gain 3,794,717
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $9,792,136
==========
The accompanying notes are an integral part of the financial statements.
23
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 5,997,419 $ 11,973,451
Net realized loss (1,377) (16,266,897)
Change in net unrealized appreciation (depreciation) 3,796,094 20,302,620
------------ -------------
Net increase in net assets from investment operations 9,792,136 16,009,174
------------ -------------
CAPITAL TRANSACTIONS
Contributions 10,566,938 21,983,740
Withdrawals (31,376,618) (237,470,874)
------------ -------------
Net decrease in net assets from capital transactions (20,809,680) (215,487,134)
------------ -------------
TOTAL DECREASE IN NET ASSETS (11,017,544) (199,477,960)
NET ASSETS
At beginning of year 164,589,957 364,067,917
------------ -------------
At end of year $153,572,413 $ 164,589,957
============ =============
The accompanying notes are an integral part of the financial statements.
24
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- -------- -------- --------
TOTAL RETURN+ 6.40% 6.98% 4.54% 9.82% (0.62)%
RATIOS:
Expenses (to average daily net assets) 0.63% 0.56% 0.53% 0.53% 0.52%
Net Investment Income (to average daily net assets) 3.75% 4.47% 4.49% 5.61% 6.33%
Portfolio Turnover 222% 205% 251% 236% 172%
Net Assets, End of Year (000's omitted) $153,572 $164,590 $364,068 $375,348 $379,604
- -----------------
(a) The Portfolio has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease the ratio of net investment income to
average net assets from 4.53% to 4.49%. Ratios for the periods prior to
January 1, 2001 have not been restated to reflect this change in
presentation.
+ Total return for the Portfolio has been calculated based on the total
return for the invested Fund, assuming all distributions were reinvested,
and adjusted for the difference in expenses as set out in the notes to the
financial statements.
The accompanying notes are an integral part of the financial statements.
25
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the state of New York on
January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Mellon Global Fixed Income Portfolio (the "Portfolio") is a separate
non-diversified investment series of the Portfolio Trust.
The objective of the Portfolio is to maximize total return while realizing
a market level of income consistent with preserving principal and
liquidity. The Portfolio seeks to achieve its objective by investing, under
normal circumstances, at least 80% of its net assets in U.S. and non-U.S.
dollar denominated fixed income securities of U.S. and foreign governments
and companies located in the U.S. and various countries, including emerging
markets.
At December 31, 2003 there was one fund, Standish Mellon Global Fixed
Income Fund (the "Fund"), invested in the Portfolio. The value of the
Fund's investment in the Portfolio reflects the Fund's proportionate
interest in the net assets of the Portfolio. The Fund's proportionate
interest at December 31, 2003 was approximately 100%.
On June 21, 2003, by vote of the Trustees, the name of the Standish Global
Fixed Income Portfolio was changed to Standish Mellon Global Fixed Income
Portfolio. In addition, the Declaration of Trust was amended to change the
name of the Portfolio Trust from Standish, Ayer & Wood Master Portfolio to
Mellon Institutional Funds Master Portfolio. The name changes became
effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Portfolio are valued at amortized cost, which
approximates market value. If the Portfolio acquires a short-term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and
will then be valued at amortized value based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized
value does not represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Portfolio to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Portfolio
and the counterparty. Additionally, procedures have been established by the
Portfolio to monitor on a daily basis, the market value and accrued
interest of the repurchase agreement's underlying investments to ensure the
existence of a proper level of collateral.
26
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of trade date. Interest income is
determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Realized gains and losses from securities sold
are recorded on the identified cost basis. The Portfolio 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. Net realized
gains and losses on foreign currency transactions represent gains and
losses on disposition of foreign currencies and forward foreign currency
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts usually required or
paid.
D. INCOME TAXES
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since at least one of
the Portfolio's investors is a regulated investment company that invests
all or substantially all of its assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification requirements
applicable to regulated investment companies (under the Internal Revenue
Code) in order for its investors to satisfy them. The Portfolio allocates
at least annually among its investors each investor's distributive share of
the Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss deduction or credit.
E. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
F. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
G. INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
27
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
H. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Portfolio may enter into contracts
and agreements that contain a variety of representations and warranties,
which provide general indemnifications. The maximum exposure to the
Portfolio under these arrangements is unknown, as this would involve future
claims that may be made against the Portfolio that have not yet occurred.
However, based on experience, the Portfolio expects the risks of loss to be
remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon") for overall investment advisory and
administrative services, and general office facilities, is paid monthly at
the annual rate of 0.40% of the Portfolio's average daily net assets.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
investments, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
------------ ------------
U.S. Government Securities $133,900,841 $139,456,947
============ ============
Investments (non-U.S.Government Securities) $199,017,909 $203,310,655
============ ============
(4) FEDERAL TAXES:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 2003, as computed on a federal
income tax basis, were as follows:
Aggregate Cost $149,381,880
============
Gross unrealized appreciation 16,546,661
Gross unrealized depreciation (276,465)
------------
Net unrealized appreciation $ 16,270,196
============
(5) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Portfolio Trust's registration statement.
The Portfolio may trade the following financial instruments with
off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Portfolio may use options to seek to hedge against
risks of market exposure and changes in security prices and foreign
currencies, as well as to seek to enhance returns. Writing puts and buying
28
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
calls tend to increase the Portfolio's exposure to the underlying
instrument. Buying puts and writing calls tend to decrease the Portfolio's
exposure to the underlying instrument, or hedge other Portfolio
investments. Options, both held and written by the Portfolio, are reflected
in the accompanying Statement of Assets and Liabilities at market value.
The underlying face amount at value of any open purchased options is shown
in the Schedule of Investments. This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments if there is an illiquid
secondary market for the contract or if the counterparty does not perform
under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Portfolio is exercised, the premium reduces
the cost basis of the securities purchased by the Portfolio. The Portfolio,
as a writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
Outstanding, beginning of period 2 $ 45,729
Options expired (2) (45,729)
-- --------
Outstanding, end of period 0 $ --
== ========
At December 31, 2003, the Fund held no written put options.
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
Outstanding, beginning of period 1 $ 2,576
Options closed (1) $(2,576)
-- -------
Outstanding, end of period 0 $ --
== =======
At December 31, 2003, the Fund held no written call options.
A summary of the written currency options for the year ended December 31,
2003 is as follows:
WRITTEN CURRENCY OPTION TRANSACTIONS
---------------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ---------------
Outstanding, beginning of period 1 $ 18,009
Options written 13 250,930
Options expired (2) (13,861)
Options closed (9) (185,966)
-- ---------
Outstanding, end of period 3 $ 69,112
== =========
29
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Portfolio held the following written currency
option contracts:
SECURITY CONTRACTS VALUE
---------------------------------------------------------------------------------------------------
USD Put/AUD Call, Strike Price 0.74, 04/12/2004 1 $ 68,365
USD Put/CAD Call, Strike Price 1.24, 05/19/2004 1 23,976
USD Put/NZD Call, Strike Price 0.64, 04/12/2004 1 80,465
--------
Total (premiums received $69,112) $172,806
========
FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolio may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Portfolio primarily to protect the value of the Portfolio's foreign
securities from adverse currency movements. Unrealized appreciation and
depreciation of forward currency exchange contracts is included in the
Statement of Assets and Liabilities.
At December 31, 2003, the Portfolio held the following forward foreign
currency exchange contracts:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
------------------------------------------------------------------------------------------------------------
Australian Dollar 4,420,000 03/17/2004 $ 3,292,037 $ 3,210,997 $ (81,040)
Canadian Dollar 620,000 03/17/2004 476,615 470,981 (5,634)
Danish Krone 41,950,000 03/17/2004 7,071,791 6,827,687 (244,104)
Euro 58,738,000 03/17/2004 73,762,996 71,639,456 (2,123,540)
Singapore Dollar 8,810,000 03/17/2004 5,193,558 5,152,047 (41,511)
South African Rand 1,170,000 01/27/2004 174,364 166,075 (8,289)
Swedish Krona 55,030,000 03/17/2004 7,624,483 7,404,667 (219,816)
----------- ------------ -----------
TOTAL $97,595,844 $94,871,910 $(2,723,934)
=========== ============ ===========
FORWARD FOREIGN CROSS CURRENCY EXCHANGE CONTRACTS
MARKET MARKET CONTRACT UNREALIZED
CONTRACTS TO DELIVER VALUE IN EXCHANGE FOR VALUE VALUE DATE GAIN/(LOSS)
------------------------------------------------------------------------------------------------------
New Zealand Dollar $5,196,853 Australian Dollar $5,270,282 03/04/2004 $73,429
Euro 1,708,568 Swedish Krona 1,707,189 03/02/2004 (1,379)
---------- ---------- -------
TOTAL $6,905,421 $6,977,471 $72,050
========== ========== =======
FUTURES CONTRACTS
The Portfolio may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices at a
fixed price on a future date. Pursuant to margin requirements the Portfolio
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Portfolio each day, depending on the daily fluctuations in the value
of the underlying security, and are
30
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
recorded for financial statement purposes as unrealized gains or losses by
the Portfolio. There are several risks in connection with the use of
futures contracts as a hedging device. The change in value of futures
contracts primarily corresponds with the value of their underlying
instruments or indices, which may not correlate with changes in the value
of hedged investments. Buying futures tends to increase the Portfolio's
exposure to the underlying instrument, while selling futures tends to
decrease the Portfolio's exposure to the underlying instrument or hedge
other investments. In addition, there is the risk that the Portfolio may
not be able to enter into a closing transaction because of an illiquid
secondary market. Losses may arise if there is an illiquid secondary market
or if the counterparty does not perform under the contract's terms. The
Portfolio enters into financial futures transactions primarily to seek to
manage its exposure to certain markets and to changes in securities prices
and foreign currencies. Gains and losses are realized upon the expiration
or closing of the futures contracts. Futures contracts are valued at the
quoted daily settlement prices established by the exchange on which they
trade.
At December 31, 2003, the Portfolio held no outstanding financial futures
contracts.
INTEREST RATE SWAP CONTRACTS
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal. Credit and market risk exist with respect
to these instruments. If forecasts of interest rates and other market
factors are incorrect, investment performance will be diminished compared
to what performance would have been if these investment techniques were not
used. Even if the forecasts are correct, there are risks that the positions
may correlate imperfectly with the asset or liability being hedged, a
liquid secondary market may not always exist, or a counterparty to a
transaction may not perform. The Portfolio expects to enter into these
transactions primarily for hedging purposes including, but not limited to,
preserving a return or spread on a particular investment or portion of its
portfolio, protecting against currency fluctuations, managing duration or
protecting against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. Interest rate swaps are marked to
market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments made or received are
included as part of interest income. Gains and losses are realized upon the
expiration or closing of the swap contracts.
The Portfolio entered into no such transactions during the year ended
December 31, 2003.
(6) SECURITY LENDING:
The Portfolio may lend its securities to financial institutions which the
Portfolio deems to be creditworthy. The loans are collateralized at all
times with cash or securities with a market value at least equal to the
market value of the securities on loan. The market value of securities
loaned is determined daily and any additional required collateral is
allocated to the Portfolio on the next business day. For the duration of a
loan, the Portfolio receives the equivalent of the interest or dividends
paid by the issuer on the securities loaned and also receives compensation
from the investment of the collateral. As with other extensions of credit,
the Portfolio bears the risk of delay in recovery or even loss of rights in
its securities on loan should the borrower of the securities fail
financially or default on its obligations to the Portfolio. In the event of
borrower default, the Portfolio generally has the right to use the
collateral to offset losses incurred. The Portfolio may incur a loss in the
event it was delayed or prevented from exercising its rights to dispose of
the collateral. The Portfolio also bears the risk in the event that the
interest and/or dividends received on invested collateral is not sufficient
to meet the Portfolio's obligations due on the loans.
The Portfolio loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Portfolio
had no securities on loan.
(7) DELAYED DELIVERY TRANSACTIONS:
The Portfolio may purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis. Payment and delivery may take place a
month or more after the date of the transactions. The price of the
underlying securities
31
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON GLOBAL FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
and the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. Income on the securities will
not be earned until settlement date. The Portfolio instructs its custodian
to segregate securities having value at least equal to the amount of the
purchase commitment.
The Portfolio may enter into to be announced ("TBA") purchase commitments
to purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Portfolio holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the Portfolio may enter into offsetting contracts for the forward
sale of other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in the value of the Portfolio's other
assets. Unsettled TBA purchase commitments are valued at the current market
value of the underlying securities, according to the procedures described
under "Investment security valuations" above.
The Portfolio may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is "marked-to-
market" daily and the change in market value is recorded by the Portfolio
as an unrealized gain or loss. If the TBA sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Portfolio
realizes a gain or loss. If the Portfolio delivers securities under the
commitment, the Portfolio realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the commitment
was entered into.
See the Schedule of Investments for outstanding delayed delivery
transactions.
32
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Master Portfolio and the
Investors of Standish Mellon Global Fixed Income Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Master Portfolio: Standish Mellon Global Fixed Income
Portfolio (formerly, Standish Global Fixed Income Portfolio) (the
"Portfolio"), at December 31, 2003, and the results of its operations, the
changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Portfolio's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 2003, by correspondence with the custodian and brokers,
provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
33
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
34
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstitutionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
35
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
International Fixed
Income Fund
(Institutional and Service Classes)
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
Management Discussion and Analysis
December 2003
International bond markets produced modest, positive returns in 2003. The
Standish Mellon International Fixed Income Fund returned 4.89% for the year,
after all expenses, compared to 1.98% for our benchmark, the JP Morgan Hedged
Non-U.S. Government Bond Index.
Global bond market returns had two distinct phases during 2003 that were driven
by a series of economic, financial and geopolitical developments. During the
first half of the year, bond markets were generally strong, led by the U.S.
market. The global economy was weak, although there were signs of recovery, and
financial market participants were concerned about the possibility of deflation,
particularly in the U.S. The Iraq war and concern about North Korea's nuclear
weapons program further weighed on confidence and the growth outlook. In
addition, financial market scandals caused some investors to abandon riskier
assets such as stocks. Bonds looked like a safe bet.
During the second half of the year, global growth accelerated and confidence
returned to financial markets. The heavy fighting was over in Iraq and progress
was being made on the Korean Peninsula. The Federal Reserve had lowered rates to
their lowest level since 1958 and the combination of low interest rates and
fiscal stimulus was taking hold. The health of global companies was improving
with increasing profits and declining credit spreads. Equities were rallying
globally as were emerging market stocks and bonds. As the fear of deflation
faded, bond yields rose dramatically from the mid-year lows.
The range of returns in hedged terms for government bond markets as measured by
the JP Morgan Government Bond Indices was modest for the year with only 514 b.p.
separating the best market Canada (+4.52%) from the worst, Australia (-0.62%).
The U.S. component of the index returned 2.44% while European markets returned
2.80% and Japan only 36 b.p. Although government bond returns were modest in
2003, corporate and emerging market bonds performed quite well. The higher
yielding segments of the bond market produced the best returns with high yield
corporate bonds and emerging market bond indices recording returns in excess of
20%. The U.S. dollar fell during the year as the mix of loose fiscal and
monetary policy and the large current account deficit made the currency
unattractive to global investors.
During this period of U.S. dollar weakness, the Fund has not been able to make
regular distributions of investment income. This is due to our policy of hedging
most of our currency exposures back to U.S. dollars. Although this policy
results in less volatility in total return over time than if the portfolio were
unhedged, currency volatility can have a significant effect on the Fund's
investment income. In periods when the dollar declines as it has over the past
two years, the losses from the currency hedging activity offset the investment
income of the portfolio. Conversely, when the dollar appreciates, our
3
currency hedging activity typically generates gains that enhance the investment
income of the Fund. Another way to view this is that much of the Fund's reported
total return -which has been very strong compared to the Index -- is classified
as capital appreciation within the portfolio.
The Fund outperformed its benchmark during the year. Our position in investment
grade and high yield corporate bonds and emerging market securities was the
largest positive contributor relative to our benchmark. Our country selection
was also positive as we were overweighted European markets and zero weighted in
Japan. Our currency exposure was positive for the year relative to the benchmark
as we had established positions in the euro and the Australian, New Zealand and
Canadian dollars relative to the U.S. dollar and all those positions contributed
positively in 2003.
Our outlook for 2004 is favorable for international bonds. We believe that the
performance of global economies will be mixed in the coming year with the U.S.
growing above trend, Japan on trend and Europe below. Government bond yields in
the U.S. will be biased upwards but opportunities for value-added can be found
in European bonds as the European Central Bank is likely to lag any moves by the
Fed to increase interest rates. Non-government sectors such as corporate and
emerging bonds offer value in 2004 as credit quality improves. However, the
excess returns are likely to be more modest than in 2003.
We appreciate your continued support and look forward to working on your behalf
over the next year.
/s/ W. Charles Cook
W. Charles Cook
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon International Fixed Income Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon International Fixed Income Fund and the J.P. Morgan Hedged
Non-U.S. Government Bond Index
[The following data was represented as a line chart in the printed material].
Standish Mellon J.P. Morgan
International Hedged Non-U.S.
Fixed Income Gov't Bond
Fund Index
1990 100,000 100,000
102,350 101,898
102,900 103,455
97,100 103,624
97,604 104,383
97,654 105,189
95,387 104,413
97,352 105,005
99,569 106,594
104,910 108,148
106,019 108,999
107,430 109,096
1991 115,083 110,899
112,787 111,943
113,622 112,316
112,293 111,506
114,468 111,980
118,130 113,006
122,906 112,849
124,687 112,486
129,920 112,504
128,194 114,052
125,658 116,363
124,336 116,194
1992 124,391 117,510
126,034 118,585
128,909 120,735
132,077 120,811
134,223 120,821
135,892 121,493
139,229 123,974
143,102 125,359
148,366 127,965
146,551 128,511
149,559 130,224
149,498 131,138
1993 153,972 133,858
155,497 133,187
149,267 130,193
145,072 129,008
143,587 128,087
140,940 126,663
138,551 125,369
140,233 126,197
138,357 124,983
137,257 125,098
138,551 125,583
140,039 127,353
1994 139,781 127,061
141,093 128,446
142,077 130,097
143,390 132,746
146,503 134,851
151,867 139,272
150,145 138,816
152,685 140,567
154,556 141,786
156,159 144,029
158,653 145,636
162,899 148,821
1995 165,123 150,212
168,040 152,037
165,408 150,245
166,332 151,490
169,274 153,316
169,848 154,352
172,141 155,626
172,874 156,788
175,732 158,876
181,375 162,262
185,069 164,944
190,240 168,247
1996 190,347 168,481
193,213 170,589
194,768 171,687
193,132 170,779
195,532 172,624
197,435 173,519
200,360 176,478
203,727 179,284
203,390 179,505
207,937 182,677
208,532 183,842
210,233 185,177
1997 212,928 187,574
215,542 190,074
215,915 191,775
218,349 193,476
219,009 194,470
221,557 197,140
222,152 197,982
224,263 199,819
224,647 203,764
228,793 208,594
225,787 208,288
231,315 210,550
1998 231,521 210,294
235,609 212,913
233,615 211,485
236,313 213,993
239,034 216,714
237,220 215,839
234,501 212,488
231,444 211,936
230,832 212,318
231,138 213,118
231,344 213,636
233,612 214,878
1999 233,353 215,524
232,587 215,541
234,995 217,139
238,282 220,302
239,721 221,484
240,607 223,244
242,608 224,307
243,840 225,765
246,080 225,810
246,869 227,640
247,436 229,415
250,948 233,476
2000 255,952 236,067
260,269 238,877
262,698 240,931
263,756 242,738
260,919 241,087
261,460 242,269
262,936 243,601
264,168 245,818
265,536 247,883
265,125 248,924
269,503 253,479
268,819 252,389
2001 266,376 250,294
266,513 250,570
265,827 250,795
265,275 249,516
266,689 251,537
268,529 251,864
271,217 255,113
271,500 257,588
275,461 260,679
277,866 263,651
276,735 263,545
278,998 264,020
2002 283,526 267,821
286,921 269,910
289,185 271,773
288,619 271,447
290,741 272,044
296,120 276,369
295,824 274,932
292,422 271,880
291,866 269,977
295,690 272,947
293,295 270,409
293,441 270,652
2003 297,403 273,185
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 10 Year 01/02/1991
------ ------ ------ ------- ----------
4.89% 5.13% 5.14% 6.80% 8.75%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon International Fixed Income Service Class Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon International Fixed Income Service Class Fund, and the J.P.
Morgan Hedged Non-U.S. Government Bond Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
International J.P. Morgan
Fixed Income Hedged Non-U.S.
Service Class Government Bond
Fund Index
100,000 100,000
99,701 98,448
98,165 98,192
97,695 98,369
97,652 98,739
97,439 98,980
98,122 99,555
97,925 99,854
97,327 99,862
98,338 100,603
99,442 102,068
100,001 102,616
2000 100,419 103,431
101,213 103,924
101,730 104,599
102,624 104,620
102,956 105,468
103,146 106,290
104,622 108,171
106,614 109,372
108,428 110,674
109,392 111,626
109,821 112,463
108,630 111,698
2001 108,857 112,245
109,363 112,863
109,881 113,890
110,455 114,846
110,225 115,329
112,007 117,439
111,720 116,934
110,678 115,964
110,678 116,091
110,448 116,196
110,099 115,603
110,693 116,540
2002 111,465 116,691
112,534 118,196
112,594 119,343
114,256 120,775
115,206 122,152
114,731 122,103
115,622 122,323
117,463 124,084
118,829 125,052
119,779 125,915
119,542 125,764
120,373 126,040
2003 122,576 128,044
122,931 127,379
121,505 125,965
121,214 125,083
122,814 126,459
121,745 125,283
121,806 125,396
2003 122,878 126,569
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 06/03/1999
------ ------ ----------
4.60 4.85% 4.60%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$321,896,590) $368,801,795
Cash 330
Receivable for investments sold 1,388,317
Receivable for Fund shares sold 377,904
Interest receivable 8,582,470
Unrealized appreciation on forward foreign currency
exchange contracts (Note 7) 180,931
Prepaid expenses 19,431
------------
Total assets 379,351,178
LIABILITIES
Payable for investments purchased $ 99,373
Payable for Fund shares redeemed 190,000
Payable for variation margin on open financial futures
contracts (Note 7) 13,875
Unrealized depreciation on forward foreign currency
exchange contracts (Note 7) 8,487,618
Payable for closed forward foreign currency exchange
contracts (Note 7) 177,359
Options written, at value (Note 7) (premiums received,
$184,869) 484,380
Accrued accounting, custody and transfer agent fees 44,837
Accrued trustees' fees and expenses (Note 2) 10,628
Accrued expenses and other liabilities 67,421
---------
Total liabilities 9,575,491
------------
NET ASSETS $369,775,687
============
NET ASSETS CONSIST OF:
Paid-in capital $403,703,064
Accumulated net realized loss (60,875,180)
Distributions in excess of net investment income (11,010,459)
Net unrealized appreciation 37,958,262
------------
TOTAL NET ASSETS $369,775,687
============
NET ASSETS ATTRIBUTABLE TO:
Institutional Class $369,705,887
============
Service Class $ 69,800
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING
Institutional Class 17,589,351
============
Service Class 3,374
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding)
Institutional Class $ 21.02
============
Service Class $ 20.69
============
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$5,070 (Note 8)) $17,198,420
Dividend income 67,482
-----------
Total investment income 17,265,902
EXPENSES
Investment advisory fee (Note 2) $ 1,669,633
Accounting and custody fees 525,299
Legal and audit services 106,970
Registration fees 65,510
Trustees' fees and expenses (Note 2) 43,928
Insurance expense 20,584
Transfer agent fees - Institutional Class 14,500
Transfer agent fees - Service Class 10,152
Service fees - Service Class (Note 3) 5,336
Miscellaneous 24,494
------------
Total expenses 2,486,406
Deduct:
Reimbursement of operating expenses - Service Class (Note
2) (11,300)
------------
Net expenses 2,475,106
-----------
Net investment income 14,790,796
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 53,066,598
Financial futures contracts (644,570)
Written options transactions 134,745
Foreign currency transactions and forward foreign
currency exchange contracts (59,767,564)
------------
Net realized loss (7,210,791)
Change in unrealized appreciation (depreciation)
Investment securities 10,429,832
Financial futures contracts 593,464
Written options (331,749)
Foreign currency and forward foreign currency exchange
contracts 1,365,827
-----------
Change in net unrealized appreciation (depreciation) 12,057,374
-----------
Net realized and unrealized gain 4,846,583
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $19,637,379
===========
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 14,790,796 $ 14,070,865
Net realized loss (7,210,791) (35,294,689)
Change in net unrealized appreciation (depreciation) 12,057,374 43,416,019
------------- -------------
Net increase in net assets from investment operations 19,637,379 22,192,195
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1F)
From net investment income
Institutional Class -- (8,973,023)
Service Class -- (50,553)
Return of capital
Institutional Class -- (2,482,598)
Service Class -- (13,987)
------------- -------------
Total distributions to shareholders -- (11,520,161)
------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 5)
Net proceeds from sale of shares
Institutional Class 244,264,085 129,553,707
Service Class 1,066,887 2,480,257
Value of shares issued to shareholders in payment of
distributions declared
Institutional Class -- 8,100,619
Service Class -- 64,540
Cost of shares redeemed
Institutional Class (258,534,627) (206,444,379)
Service Class (3,750,467) (1,840,537)
------------- -------------
Net decrease in net assets from Fund share transactions (16,954,122) (68,085,793)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 2,683,257 (57,413,759)
NET ASSETS
At beginning of year 367,092,430 424,506,189
------------- -------------
At end of year (including distributions in excess of net
investment income of $11,010,459 and $3,934,810) $ 369,775,687 $ 367,092,430
============= =============
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- -------- -------- ----------
NET ASSET VALUE, BEGINNING OF YEAR $ 20.04 $ 19.43 $ 18.97 $ 21.32 $ 23.22
-------- -------- -------- -------- ----------
FROM INVESTMENT OPERATIONS:
Net investment income(1) 0.66 0.75 0.76 1.12 1.34
Net realized and unrealized gain (loss) on
investments 0.32 0.46 0.01 0.84 (1.15)
-------- -------- -------- -------- ----------
Total from investment operations 0.98 1.21 0.77 1.96 0.19
-------- -------- -------- -------- ----------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.47) (0.31) (4.31) (2.08)
From net realized gain on investments -- -- -- -- (0.01)
From tax return of capital -- (0.13) -- -- --
-------- -------- -------- -------- ----------
Total distributions to shareholders -- (0.60) (0.31) (4.31) (2.09)
-------- -------- -------- -------- ----------
NET ASSET VALUE, END OF YEAR $ 21.02 $ 20.04 $ 19.43 $ 18.97 $ 21.32
======== ======== ======== ======== ==========
TOTAL RETURN 4.89% 6.44% 4.07% 9.68% 0.79%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets) 0.59% 0.59% 0.56% 0.53% 0.52%
Net Investment Income (to average daily net assets) 3.20% 3.89% 3.94% 5.21% 5.82%
Portfolio Turnover 185% 159% 211% 240% 162%
Net Assets, End of Year (000's omitted) $369,706 $364,460 $422,626 $454,333 $1,051,443
- -----------------
(a) The Fund has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease net investment income per share by
$0.007, increase net realized and unrealized gains and losses per share by
$0.007 and decrease the ratio of net investment income to average net
assets from 3.98% to 3.94%. Per share data and ratios/supplemental data for
the periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
(1) Calculated based on average shares outstanding.
The accompanying notes are an integral part of the financial statements.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS - SERVICE CLASS
- --------------------------------------------------------------------------------
FOR THE PERIOD
APRIL 25, 2000
YEAR ENDED DECEMBER 31, (COMMENCEMENT OF
----------------------- OPERATIONS) TO
2003 2002 2001(A) DECEMBER 31, 2000
------ ------ ------- -----------------
NET ASSET VALUE, BEGINNING OF YEAR $19.78 $19.24 $18.81 $21.48
------ ------ ------ ------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.61 0.69 0.69 0.69
Net realized and unrealized gain on investments 0.30 0.45 0.02 0.67
------ ------ ------ ------
Total from investment operations 0.91 1.14 0.71 1.36
------ ------ ------ ------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income -- (0.47) (0.28) (4.03)
From tax return of capital -- (0.13) -- --
------ ------ ------ ------
Total distributions to shareholders -- (0.60) (0.28) (4.03)
------ ------ ------ ------
NET ASSET VALUE, END OF YEAR $20.69 $19.78 $19.24 $18.81
====== ====== ====== ======
TOTAL RETURN+++ 4.60% 6.13% 3.81% 6.61%++
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.84% 0.84% 0.81% 0.78%+
Net Investment Income (to average daily net assets)* 3.02% 3.64% 3.56% 4.89%+
Portfolio Turnover 185% 159% 211% 240%
Net Assets, End of Year (000's omitted) $ 70 $2,633 $1,880 $ 213
- -----------------
* For the periods indicated, the investment advisor voluntarily agreed to
reimburse the Class for a portion of its operating expenses. If this
voluntary action had not been taken, the investment income (loss) per share
and ratios would have been:
Net investment income (loss) per share(1) $ 0.46 $ 0.59 $ 0.51 $(0.19)
Ratios (to average daily net assets):
Expenses 1.57% 1.36% 1.75% 7.02%+
Net investment income 2.29% 3.12% 2.62% (1.35)%+
(a) The Fund has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease net investment income per share by
$0.007, increase net realized and unrealized gains and losses per share by
$0.007 and decrease the ratio of net investment income to average net
assets from 3.60% to 3.56%. Per share data and ratio/supplemental data for
the periods prior to January 1, 2001 have not been restated to reflect this
change in presentation.
(1) Calculated based on average shares outstanding.
+ Computed on an annualized basis.
++ Not annualized.
+++ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 96.8%
ASSET BACKED -- 2.1%
Household Automotive Trust 2003-1A A2 1.300% 09/18/2006 USD 2,580,000 $2,579,852
MBNA Master Credit Card Trust 1999-G A 6.350% 12/15/2006 3,915,000 4,021,540
Whole Auto Loan Trust 2002-1 A2 1.880% 06/15/2005 1,266,655 1,269,310
----------
Total Asset Backed (Cost $7,915,172) 7,870,702
----------
CORPORATE -- 4.7%
BANKING -- 0.2%
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 705,000 722,625
----------
BASIC INDUSTRY -- 0.3%
CSC Holdings, Inc. 7.875% 12/15/2007 420,000 443,100
Nalco Co. 7.750% 11/15/2011 490,000 636,656
----------
1,079,756
----------
CAPITAL GOODS -- 0.4%
Allied Waste Industries, Inc. 8.875% 04/01/2008 1,115,000 1,248,800
Allied Waste Industries, Inc. 10.000% 08/01/2009 280,000 302,400
----------
1,551,200
----------
COMMUNICATIONS -- 0.9%
AT&T Wireless Services, Inc. Senior Notes 8.750% 03/01/2031 805,000 993,232
Sprint Capital Corp. 8.375% 03/15/2012 1,100,000 1,284,580
Sprint Capital Corp. 8.750% 03/15/2032 870,000 1,027,809
----------
3,305,621
----------
CONSUMER CYCLICAL -- 0.8%
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 350,000 370,125
Echostar DBS Corp. Senior Notes 10.375% 10/01/2007 1,215,000 1,331,944
Mohegan Tribal Gaming Authority Senior
Sub Notes 6.375% 07/15/2009 670,000 691,775
Station Casinos, Inc. Senior Sub Notes 8.875% 12/01/2008 395,000 408,825
----------
2,802,669
----------
CONSUMER NONCYCLICAL -- 0.7%
Aramark Services, Inc. 7.000% 07/15/2006 2,000,000 2,175,678
Tricon Global Restaurant, Inc. Senior
Notes 8.875% 04/15/2011 450,000 545,625
----------
2,721,303
----------
ENERGY -- 0.5%
ANR Pipeline Co. 7.375% 02/15/2024 250,000 252,500
Chesapeake Energy Corp. 8.125% 04/01/2011 555,000 616,050
Halliburton Co. 144A 5.500% 10/15/2010 760,000 794,821
----------
1,663,371
----------
FINANCIAL -- 0.6%
General Motors Corp. 7.250% 07/03/2013 EUR 1,375,000 1,915,203
The accompanying notes are an integral part of the financial statements.
12
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
FINANCIAL (CONTINUED)
RH Donnelley Finance Corp. I 144A Senior
Notes 8.875% 12/15/2010 USD 125,000 $ 140,625
RH Donnelley Finance Corp. I 144A Senior
Sub Notes 10.875% 12/15/2012 195,000 231,319
-----------
2,287,147
-----------
PUBLIC UTILITY -- 0.3%
AES Corp. 144A 8.750% 05/15/2013 610,000 681,675
Southern Natural Gas Co. 8.875% 03/15/2010 255,000 286,875
-----------
968,550
-----------
Total Corporate (Cost $16,309,783) 17,102,242
-----------
SOVEREIGN BONDS -- 2.2%
Republic of Brazil 8.000% 04/15/2014 430,994 423,990
Republic of Brazil 10.000% 08/07/2011 495,000 546,975
Republic of Brazil 11.000% 08/17/2040 1,010,000 1,111,000
Republic of Brazil 14.500% 10/15/2009 305,000 398,788
Republic of Bulgaria IAB PDI(a) 1.938% 07/28/2011 427,500 420,019
Republic of Bulgaria Series A(a) 1.938% 07/28/2024 220,000 217,800
Republic of Colombia 10.750% 01/15/2013 340,000 386,750
Republic of El Salvador 8.500% 07/25/2011 510,000 562,275
Republic of Peru 8.750% 11/21/2033 385,000 385,000
Republic of Peru FLIRB(a) 4.500% 03/07/2017 415,000 369,350
Republic of Turkey Senior Unsub Notes 11.875% 01/15/2030 155,000 210,025
Republic of Turkey Senior Unsub Notes 12.375% 06/15/2009 300,000 381,000
Russian Federation 5.000% 03/31/2030 405,000 389,813
Russian Federation 11.000% 07/24/2018 360,000 485,100
Ukraine Government Senior Notes 11.000% 03/15/2007 777,475 864,940
United Mexican States 9.875% 02/01/2010 730,000 921,625
-----------
Total Sovereign Bonds (Cost $7,953,398) 8,074,450
-----------
YANKEE BONDS -- 2.8%
Banque Centrale de Tunisie 7.375% 04/25/2012 580,000 649,600
British Sky Broadcasting 6.875% 02/23/2009 3,185,000 3,575,137
British Sky Broadcasting 7.300% 10/15/2006 1,035,000 1,152,440
Dominican Republic Euro Registered 9.500% 09/27/2006 115,000 93,150
HBOS PLC 144A Sub Notes(a) 5.375% 12/31/2049 565,000 563,270
Hutchison Whampoa Ltd. 144A 5.450% 11/24/2010 1,400,000 1,420,030
International Telecom Satellite Ltd. 144A 6.500% 11/01/2013 410,000 427,791
Ministry Finance Russia 3.000% 05/14/2008 745,000 665,844
Petronas Capital Ltd. 144A 7.875% 05/22/2022 430,000 508,193
Rogers Cable, Inc. 6.250% 06/15/2013 640,000 644,800
Royal Caribbean Cruises 8.250% 04/01/2005 225,000 236,813
Salomon Bros. (Sibneft) 10.750% 01/15/2009 485,000 548,050
-----------
Total Yankee Bonds (Cost $10,261,766) 10,485,118
-----------
The accompanying notes are an integral part of the financial statements.
13
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 0.1%
TREASURY NOTES -- 0.1%
U.S. Treasury Note 4.000% 11/15/2012 USD 500,000 $ 495,196
-----------
Total U.S. Treasury Obligations (Cost $498,131) 495,196
-----------
FOREIGN DENOMINATED -- 84.9%
AUSTRALIA -- 2.4%
Australian Government Series 808 8.750% 08/15/2008 AUD 10,530,000 8,933,319
-----------
CANADA -- 0.4%
Canadian Pacific Railway 4.900% 06/15/2010 CAD 2,000,000 1,542,176
-----------
DENMARK -- 6.8%
Denmark Realkredit 4.000% 01/01/2006 DKK 13,965,000 2,411,053
Denmark Realkredit 6.000% 10/01/2032 77,993,590 13,528,815
Kingdom of Denmark 4.000% 11/15/2004 53,200,000 9,110,371
-----------
25,050,239
-----------
EURO -- 61.3%
Allied Domecq PLC 5.875% 06/12/2009 EUR 370,000 501,611
Allied Irish Banks Ltd.(a) 7.500% 02/28/2011 365,000 532,548
Bank of Ireland Holdings(a) 7.400% 12/29/2049 355,000 519,371
Barclays Bank PLC(a) 7.500% 12/15/2010 350,000 516,065
Bouni Poliennali del Tesoro 1.650% 09/15/2008 1,700,000 2,147,195
British Telecom PLC 6.125% 02/15/2006 375,000 501,488
Bundes Obligation Series 135 5.000% 05/20/2005 15,115,000 19,685,490
Bundes Obligation Series 136 5.000% 08/19/2005 8,205,000 10,730,951
Bundes Obligation Series 143 3.500% 10/10/2008 5,130,000 6,452,364
Buoni del Tesoro Poliennali 4.500% 03/01/2007 10,675,000 13,986,877
Daimlerchrysler International Finance 6.125% 03/21/2006 890,000 1,181,207
DePfa ACS Bank 144A 3.875% 07/15/2013 4,350,000 5,229,991
Deutsche Telekom International Finance BV 8.125% 05/29/2012 535,000 826,138
Deutschland Republic 4.000% 07/04/2009 5,495,000 7,030,387
Deutschland Republic 4.750% 07/04/2028 6,265,000 7,686,779
Deutschland Republic 5.250% 01/04/2011 920,000 1,247,799
Deutschland Republic 5.625% 01/04/2028 940,000 1,296,927
Deutschland Republic 6.250% 01/04/2030 4,175,000 6,253,622
Dexia Municipal Agency 5.375% 04/26/2007 3,500,000 4,695,130
Eircom Funding 8.250% 08/15/2013 360,000 499,459
European Investment Bank 3.625% 10/15/2013 1,130,000 1,339,509
FBG Treasury BV 5.750% 03/17/2005 750,000 976,767
Fort James Corp. 4.750% 06/29/2004 2,000,000 2,510,508
France Telecom 7.250% 01/28/2013 2,185,000 3,199,164
France Telecom Senior Unsub Notes 8.125% 01/28/2033 605,000 978,159
French Government 3.150% 07/25/2032 3,666,024 5,176,612
French Treasury Note 5.000% 01/12/2006 12,775,000 16,821,169
HBOS PLC(a) 6.050% 11/23/2049 390,000 530,823
Heinz BV 5.125% 04/10/2006 550,000 722,504
Hilton Group Finance PLC 6.500% 07/17/2009 565,000 779,458
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
EURO (CONTINUED)
Honeywell Holding BV 5.250% 12/20/2006 EUR 405,000 $ 529,435
Household Finance Corp. Senior Unsub
Notes 6.500% 05/05/2009 335,000 466,912
Inco, Ltd. 15.750% 07/15/2006 796,000 1,650,049
International Paper Co. 5.375% 08/11/2006 405,000 530,816
Italian Government 7.750% 11/01/2006 9,410,000 13,283,844
Kappa Beheer BV 10.625% 07/15/2009 365,000 489,172
Kingdom of Belgium 5.750% 09/28/2010 11,400,000 15,862,107
Kingdom of Belgium Series 41 4.250% 09/28/2013 925,000 1,156,570
Lear Corp. Senior Notes 8.125% 04/01/2008 365,000 516,731
Linde Finance BV(a) 6.000% 07/29/2049 3,410,000 4,314,316
MBNA Corp. Series 6 4.375% 08/19/2004 3,620,000 4,607,563
Messer Greisheim Holdings AG Senior Notes 10.375% 06/01/2011 360,000 523,243
Morgan Stanley Dean Witter 5.750% 04/01/2009 585,000 796,364
National Westminister Bank(a) 6.625% 10/29/2049 740,000 1,034,516
Netherland Government Notes 5.500% 07/15/2010 8,795,000 12,080,316
Nordbanken(a) 6.000% 12/13/2010 380,000 504,285
Parker-Hannifin Corp. 6.250% 11/21/2005 200,000 266,120
Pemex Project Funding Master Trust 144A 6.625% 04/04/2010 440,000 573,075
Republic of Austria 5.500% 10/20/2007 7,500,000 10,160,007
Republic of Bulgaria 144A 7.500% 01/15/2013 110,000 156,278
Republic of South Africa 5.250% 05/16/2013 345,000 414,611
Sara Lee Corp. 6.125% 07/27/2007 545,000 740,623
Sogerim 7.000% 04/20/2011 555,000 791,790
Spanish Government 4.250% 10/31/2007 14,595,000 18,985,257
Svenska Handelsbanken(a) 5.500% 03/07/2011 400,000 527,703
Teksid Aluminum SpA 11.375% 07/15/2011 400,000 537,588
Telecom Italia SpA 6.250% 02/01/2012 1,400,000 1,918,204
Telelfonica Europe BV 5.125% 02/14/2013 545,000 704,963
Telenor ASA 5.875% 12/05/2012 1,100,000 1,497,218
ThyssenKrupp 7.000% 03/19/2009 420,000 574,774
Tyco International Group SA 5.500% 11/19/2008 3,370,000 4,325,624
Valentia Telecommunications Ltd. 7.250% 12/31/2049 600,000 811,668
Vivendi Environnement Senior Notes 5.875% 06/27/2008 525,000 707,204
------------
226,595,018
------------
GERMANY -- 5.3%
Deutschland Republic 6.000% 01/05/2006 14,700,000 19,687,932
------------
SINGAPORE -- 3.4%
Singapore Government 3.500% 07/01/2012 SGD 21,800,000 12,680,517
------------
SOUTH AFRICA -- 0.1%
Republic of South Africa 13.000% 08/31/2010 ZAR 2,270,000 406,300
------------
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
SWEDEN -- 5.2%
Swedish Government Series 1037 8.000% 08/15/2007 SEK 67,800,000 $ 10,740,687
Swedish Government Series 1040 6.500% 05/05/2008 54,665,000 8,345,981
------------
19,086,668
------------
Total Foreign Denominated (Cost $269,265,305) 313,982,169
------------
TOTAL BONDS AND NOTES (COST $312,203,555) 358,009,877
------------
CONTRACT
SIZE
-------------
PURCHASED OPTIONS -- 0.5%
JPY Put/USD Call, Strike Price 130.00, 05/13/2004 (USD) 7,320,000 23
USD Put/AUD Call, Strike Price 0.70, 04/12/2004 (USD) 8,690,000 556,160
USD Put/CAD Call, Strike Price 1.30, 05/19/2004 (USD) 7,680,000 161,280
USD Put/CAD Call, Strike Price 1.325, 01/15/2004 (USD) 7,610,000 198,012
USD Put/EUR Call, Strike Price 1.145, 03/5/2004 (USD) 3,720,000 368,764
USD Put/EUR Call, Strike Price 1.23, 03/10/2004 (USD) 7,845,000 246,333
USD Put/NZD Call, Strike Price 0.61 04/12/2004 (USD) 8,690,000 513,579
------------
TOTAL PURCHASED OPTIONS (COST $945,271) 2,044,151
------------
PAR
RATE MATURITY VALUE
------- ----------------------- -------------
SHORT-TERM INVESTMENTS -- 2.4%
U.S. TREASURY BILLS -- 0.1%
U.S. Treasury Bill=/= 0.864% 03/04/2004 USD 150,000 149,780
------------
REPURCHASE AGREEMENTS -- 2.3%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney,
Inc. and Investors Bank and Trust Company, due 01/02/04, with a maturity
value of $8,598,082 and an effective yield of 0.20%, collateralized by a
U.S. Goverment Obligation with a rate of 5.18%, a maturity date of 02/15/26
and an aggregate market value of $8,778,546. 8,597,987
------------
TOTAL SHORT-TERM INVESTMENTS (COST $8,747,764) 8,747,767
------------
TOTAL INVESTMENTS -- 99.7% (COST
$321,896,590) $368,801,795
OTHER ASSETS, LESS LIABILITIES -- 0.3% 973,892
------------
NET ASSETS -- 100.0% $369,775,687
============
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
AUD - Australian Dollar
CAD - Canadian Dollar
DKK - Danish Krone
EUR - Euro
FLIRB - Front Loaded Interest Reduction Bond
IAB - Interest Arrears Bonds
JPY - Japanese Yen
MTN - Medium Term Notes
NZD - New Zealand Dollar
PDI - Past Due Interest Bonds
SEK - Swedish Krona
SGD - Singapore Dollar
ZAR - South African Rand
(a) Variable Rate Security; rate indicated is as of 12/31/03.
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PERCENTAGE
OF NET
INDUSTRY SECTOR ASSETS
- ------------------------------------------------------------------------
Foreign Government 71.7%
Financial 14.5%
Communications 4.9%
Capital Goods 1.9%
Consumer Cyclical 1.5%
Basic Industry 1.4%
Consumer Noncyclical 1.3%
Energy 0.6%
Transportation 0.5%
Banking 0.5%
Technology 0.4%
Public Utility 0.3%
U.S. Government 0.2%
-------
99.7%
PERCENTAGE
OF NET
TOP TEN COUNTRIES ASSETS
- ------------------------------------------------------------------------
Germany 21.8%
United States 11.7%
France 8.8%
Italy 8.5%
Denmark 6.8%
Netherlands 5.8%
Sweden 5.4%
Spain 5.1%
Belgium 4.6%
Singapore 3.4%
The accompanying notes are an integral part of the financial statements.
18
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon International Fixed Income Fund (the "Fund") is a separate
non-diversified investment series of the Trust.
The Fund currently offers two classes of shares: Institutional Class and
Service Class. Expenses of the Fund are borne pro-rata by the holders of
each class of shares, except for transfer agent fees and an account service
fee of up to 0.25% of the average daily net assets of the Service Class of
shares. Each class votes separately as a class only with respect to its own
distribution plan (Service Class only) or other matters that relate only to
that class. Shares of each class would receive their pro-rata share of the
net assets of the Fund (after satisfaction of any class-specific expenses)
if the Fund were liquidated. In addition, the Trustees declare separate
dividends on each class of shares.
Shares of the Service Class may be purchased by entities ("Account
Administrators") that provide omnibus accounting services for groups of
individuals who beneficially own Service Class shares ("Omnibus Accounts").
Omnibus Accounts include pension and retirement plans (such as 401(k)
plans, 457 plans and 403(b) plans), and programs through which personal and
or account maintenance services are provided to groups of individuals
whether or not such individuals invest on a tax-deferred basis. Individual
investors may only purchase Service Class shares through their Omnibus
Account Administrators.
The objective of the Fund is to maximize total return while realizing a
market level of income consistent with preserving principal and liquidity.
The Fund seeks to achieve its objective by investing, under normal
circumstances, at least 80% of net assets in fixed income securities. The
Fund also invests, under normal circumstances, at least 65% of net assets
in non-U.S. dollar denominated fixed income securities of foreign
governments and companies located in various countries, including emerging
markets.
On June 21, 2003, by vote of the Trustees, the name of the Standish
International Fixed Income Fund was changed to Standish Mellon
International Fixed Income Fund. In addition, the Declaration of Trust was
amended to change the name of the Trust from Standish, Ayer & Wood
Investment Trust to Mellon Institutional Funds Investment Trust. The name
changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are primarily traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued at amortized cost, which approximates
market value. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market value
until the sixtieth day prior to maturity and will then be valued at
amortized value based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized value does not
represent fair value.
19
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
B. REPURCHASE AGREEMENTS
It is the policy of the Fund to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Fund and
the counterparty. Additionally, procedures have been established by the
Fund to monitor on a daily basis, the market value and accrued interest of
the repurchase agreement's underlying investments to ensure the existence
of a proper level of collateral.
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of trade date. Interest income is
determined on the basis of interest accrued, adjusted accretion of discount
or amortization of premium using the yield-to-maturity method on long-term
debt securities. Realized gains and losses from securities sold are
recorded on the identified cost basis. The 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. Net realized
gains and losses on foreign currency transactions represent gains and
losses on disposition of foreign currencies and forward foreign currency
exchange contracts, currency gains and losses realized between the trade
and settlement dates on securities transactions, and the difference between
the amount of investment income and foreign withholding taxes recorded on
the Fund's books and the U.S. dollar equivalent amounts usually received or
paid.
D. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
E. INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
F. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on ex-dividend date. Dividends
from net investment income and distributions from capital gains, if any,
are reinvested in additional shares of the Fund unless the shareholder
elects to receive them in cash. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
accounting principles generally accepted in the United States of America.
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for foreign currency transactions,
amortization and/or accretion of premiums and discounts on certain
securities, capital loss carry forwards, losses deferred due to wash sales
and excise tax regulations.
20
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications among undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
G. ALLOCATION OF OPERATING ACTIVITY
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration among other things, the nature
and type of expense and the relative size of the funds. Investment income,
common expenses and realized and unrealized gains and losses are allocated
among the share classes of the Fund based on the relative net assets of
each class. Transfer agent fees, which are directly attributable to a class
of shares, are charged to that class' operations. Service fees, which are
directly attributable to the Service Class shares, are charged to the
Service Class operations.
H. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon
Financial Corporation, for overall investment advisory and administrative
services, and general office facilities is paid monthly at the annual rate
of 0.40% of the Fund's average daily net assets. Standish Mellon
voluntarily agreed to limit the Service Class operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) for the year ended
December 31, 2003, so that the Service Class annual operating expenses do
not exceed the total operating expenses of the Institutional Class (net of
any expense limitation) for the comparable period plus 0.25% (the maximum
Service Fee). Pursuant to this agreement, for the year ended December 31,
2003, Standish Mellon reimbursed the Service Class $11,300 for class
specific operating expenses. This agreement is voluntary and temporary and
may be discontinued or revised by Standish Mellon at any time.
Effective January 28, 2003, the Institutional Class of the Fund began
imposing a redemption fee of 2% of the net asset value of the shares, with
certain exceptions, which are redeemed or exchanged less than 90 days from
the day of their purchase. The redemption fee is paid directly to the Fund,
and is designed to offset brokerage commissions, market impact, and other
costs associated with short-term trading. The fee does not apply to shares
that were acquired through reinvestment of distributions. For the period
ended December 31, 2003, the Fund received $627 in redemption fees which is
recorded in capital.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) SERVICE FEE:
Pursuant to a service plan, the Service Class pays a service fee at an
aggregate annual rate of up to 0.25% of the class' average daily net
assets. The service fee is payable for the benefit of participants in the
omnibus accounts that are
21
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
shareholders in the Service Class and is intended to be compensation to
Account Administrators for providing personal services and/or account
maintenance services to participants in omnibus accounts that are the
beneficial owners of Service Class shares.
(4) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
investments, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
----------------- -----------------
U.S. Government Securities $ 88,751,235 $109,713,919
============ ============
Investments (non-U.S.Government Securities) $618,183,200 $646,371,652
============ ============
(5) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
INSTITUTIONAL CLASS: DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------------------- ------------------ ------------------
Shares sold 11,910,779 6,633,795
Shares issued to shareholders in payment of
distributions declared -- 431,803
Shares redeemed (12,510,470) (10,629,935)
----------- -----------
Net decrease (599,691) (3,564,337)
=========== ===========
YEAR ENDED YEAR ENDED
SERVICE CLASS: DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------------------------------------- ------------------ ------------------
Shares sold 52,864 129,719
Shares issued to shareholders in payment of
distributions declared -- 3,477
Shares redeemed (182,602) (97,810)
----------- ----------
Net increase (decrease) (129,738) 35,386
=========== ==========
(6) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
The tax basis components of distributable earnings and the federal tax cost
as of December 31, 2003 was as follows:
Unrealized appreciation $ 46,455,344
Unrealized depreciation (1,223,730)
------------
Net unrealized appreciation/depreciation 45,231,614
Accumulated losses (79,158,991)
Cost basis of investments for federal income tax purposes $321,896,590
22
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund, for federal income tax purposes, has
capital loss carryovers which will reduce the Fund's taxable income arising
from net realized gain on investments, if any, to the extent permitted by
the Internal Revenue Code and thus will reduce the amount of distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal income tax. Such capital loss carryovers are as
follows:
CAPITAL LOSS
CARRY OVER EXPIRATION DATE
------------ ---------------
$27,284,240 12/31/2007
19,786,516 12/31/2008
6,955,771 12/31/2009
6,588,065 12/31/2010
The fund elected to defer to its fiscal year ending December 31, 2004
$18,544,399 of losses recognized during the period November 1, 2003 to
December 31, 2003.
(7) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Fund's Prospectus and Statement of Additional Information.
The Fund may trade the following instruments with off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Fund may use options to seek to hedge against risks of
market exposure and changes in securities prices and foreign currencies, as
well as to seek to enhance returns. Writing puts and buying calls tend to
increase the Fund's exposure to the underlying instrument. Buying puts and
writing calls tend to decrease the Fund's exposure to the underlying
instrument, or hedge other Fund investments. Options, both held and written
by the Fund, are reflected in the accompanying Statement of Assets and
Liabilities at market value. The underlying face amount at value of any
open purchased options is shown in the Schedule of Investments. This amount
reflects each contract's exposure to the underlying instrument at period
end. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contract or
if the counterparty does not perform under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
23
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of written put option transactions for the year ended December
31, 2003 is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 6,150
Options expired (1) (6,150)
-- -------
Outstanding, end of period 0 $ --
== =======
At December 31, 2003, the Fund held no open written put option contracts.
A summary of written call option transactions for the year ended December
31, 2003 is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 1 $ 4,600
Options closed (1) $(4,600)
-- -------
Outstanding, end of period 0 $ --
== =======
At December 31, 2003, the Fund held no open written call option contracts.
A summary of written currency option transactions for the year ended
December 31, 2003 is as follows:
WRITTEN CURRENCY OPTION TRANSACTIONS
---------------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- --------
Outstanding, beginning of period 2 $ 108,650
Options written 13 659,958
Options expired (4) (173,965)
Options closed (8) (409,774)
-- ---------
Outstanding, end of period 3 $ 184,869
== =========
At December 31, 2003, the Fund held the following written currency option
contracts:
SECURITY CONTRACTS VALUE
---------------------------------------------------------------------------------------------------
USD Put/NZD Call, Strike Price 0.64, 04/12/2004 1 $231,154
USD Put/AUD Call, Strike Price 0.74, 04/12/2004 1 196,394
USD Put/CAD Call, Strike Price 1.25, 05/19/2004 1 56,832
--------
Total (premiums received $184,869) $484,380
========
FORWARD CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Fund primarily to protect the value of the Fund's foreign securities
from adverse currency movements. Unrealized appreciation and depreciation
of forward currency exchange contracts is included in the Statement of
Assets and Liabilities.
24
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Fund held the following forward foreign currency
contracts:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
--------------------------------------------------------------------------------------------------------------
Australian Dollar 12,030,000 03/17/2004 $ 8,960,002 $ 8,717,540 $ (242,462)
British Pound Sterling 480,000 03/17/2004 851,999 829,930 (22,069)
Canadian Dollar 2,000,000 03/17/2004 1,537,469 1,519,295 (18,174)
Danish Krone 161,790,000 03/17/2004 27,274,018 26,332,580 (941,438)
Euro 196,949,000 03/17/2004 247,327,914 240,744,824 (6,583,090)
Singapore Dollar 23,795,000 03/17/2004 14,027,323 13,915,205 (112,118)
South African Rand 2,900,000 01/27/2004 432,186 411,639 (20,547)
Swedish Krona 136,270,000 03/17/2004 18,880,397 18,336,069 (544,328)
------------ ------------- -----------
TOTAL $319,291,308 $310,807,082 $(8,484,226)
============ ============= ===========
FORWARD FOREIGN CROSS CURRENCY EXCHANGE CONTRACTS
MARKET MARKET CONTRACT UNREALIZED
CONTRACTS TO DELIVER VALUE IN EXCHANGE FOR VALUE VALUE DATE GAIN/(LOSS)
---------------------------------------------------------------------------------------------------------
Euro $ 4,202,323 Swedish Krona $ 4,198,931 03/02/2004 $ (3,392)
New Zealand Dollar 12,810,148 Australian Dollar 12,991,079 03/04/2004 180,931
----------- ----------- --------
TOTAL $17,012,471 $17,190,010 $177,539
=========== =========== ========
FUTURES CONTRACTS
The Fund may enter into financial futures contracts for the delayed sale or
delivery of securities or contracts based on financial indices at a fixed
price on a future date. Pursuant to the margin requirements, the Fund
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Fund each day, depending on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the value
of their underlying instruments or indices, which may not correlate with
changes in the value of hedged investments. Buying futures tends to
increase the Fund's exposure to the underlying instrument, while selling
futures tends to decrease the Fund's exposure to the underlying instrument
or hedge other Fund investments. In addition, there is the risk that the
Fund may not be able to enter into a closing transaction because of an
illiquid secondary market. Losses may arise if there is an illiquid
secondary market or if the counterparties do not perform under the
contract's terms. The Fund enters into financial futures transactions
primarily to manage its exposure to certain markets and to changes in
securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
At December 31, 2003, the Fund held the following financials futures
contracts:
UNDERLYING FACE
CONTRACT POSITION EXPIRATION DATE AMOUNT AT VALUE UNREALIZED LOSS
-----------------------------------------------------------------------------------------------
U.S. 5 Year Note (111 Contracts) Short 11/26/2003 12,390,375 $(64,726)
--------
25
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON INTERNATIONAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INTEREST RATE SWAP CONTRACTS
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments with respect to a
notional amount of principal. Credit and market risk exist with respect to
these instruments. If forecasts of interest rates and other market factors
are incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Fund expects to enter into these transactions
primarily for hedging purposes including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management
technique or protecting against an increase in the price of securities the
Fund anticipates purchasing at a later date. Interest rate swaps are marked
to market daily based upon quotations from market makers and the change, if
any, is recorded as unrealized gain or loss. Payments made or received are
included as part of interest income. Gains and losses are realized upon the
expiration or closing of the swap contracts.
The Fund entered into no such transactions during the year ended December
31, 2003.
(8) SECURITY LENDING:
The Fund may lend its securities to financial institutions which the Fund
deems to be creditworthy. The loans are collateralized at all times with
cash or securities with a market value at least equal to the market value
of the securities on loan. The market value of securities loaned is
determined daily and any additional required collateral is allocated to the
Fund on the next business day. For the duration of a loan, the Fund
receives the equivalent of the interest or dividends paid by the issuer on
the securities loaned and also receives compensation from the investment of
the collateral. As with other extensions of credit, the Fund bears the risk
of delay in recovery or even loss of rights in its securities on loan
should the borrower of the securities fail financially or default on its
obligations to the Fund. In the event of borrower default, the Fund
generally has the right to use the collateral to offset losses incurred.
The Fund may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Fund also bears the
risk in the event that the interest and/or dividends received on invested
collateral is not sufficient to meet the Fund's obligations due on the
loans.
The Fund loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003 the Fund had no
securities on loan.
26
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon International Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Investment Trust: Standish Mellon International Fixed
Income Fund (formerly, Standish International Fixed Income Fund) (the
"Fund") at December 31, 2003, and the results of its operations, the
changes in its net assets and the financial highlights for each of the
periods indicated, in conformity with accounting principles generally
accepted in the United States of America. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Fund's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at
December 31, 2003 by correspondence with the custodian and brokers, provide
a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
27
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc.Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
28
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstitutionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
29
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
Fixed Income Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON FIXED INCOME FUND
Management Discussion and Analysis
December 2003
The market environment improved dramatically over the course of the year. As we
began 2003, the war with Iraq, weak job growth and deflation concerns posed
considerable risks to economic growth. However, second half GDP was boosted by
prompt military action, tax cuts and another mortgage refinancing boom. By
mid-year, a pick up in growth pushed interest rates higher. However, the Federal
Reserve has tempered the upward pressure on bond yields by emphasizing their
focus on inflation over growth. With core inflation dipping to 1.1%
year-over-year, and job growth still sluggish, the Fed has little reason to
raise interest rates in the near term.
Over the past year, investment grade and high yield corporate bonds solidly
outperformed other fixed income sectors. As the previous year's negative events
faded from the headlines and corporate profits surged, credit spreads narrowed
significantly. The relative performance of other sectors, especially mortgages
and agencies, paled in comparison to corporate bonds. The mortgage market
suffered amid sharp interest rate moves which resulted in significant hedging
costs and diminished returns. The agency sector also suffered as Freddie Mac's
accounting issues surfaced and regulatory oversight came under harsh scrutiny.
The Fund's outperformance in 2003 was largely driven by the overweight in high
yield and increased allocation to investment grade corporate bonds. Our
underweight to agencies positively contributed to returns. A sizable reduction
to the mortgage position around mid-year was well-timed as we avoided July's
massive underperformance when interest rates backed up and durations extended
sharply. Mortgage security selection was particularly positive in the beginning
of the year as we favored lower coupon issues that benefited from very strong
demand by banks.
Looking ahead, the prospects for economic growth in 2004 appear quite good.
Solid corporate profits should spur business spending and a weaker dollar should
support higher export activity. Inventory rebuilding should also boost GDP in
the first half. With strong productivity and lots of excess capacity, a low
inflation environment should persist. In this environment, the Fed will likely
hold interest rates unchanged for most of the year. The key investment themes
are building the Fund's yield advantage and a bulleted intermediate curve
position. Among the various spread sectors, we favor corporate bonds as we find
the fundamental improvement of credit quality remains solidly in place. Given a
steep yield curve, we are more heavily weighted toward intermediate bonds in the
2 to 5 year area. The Fund's overweight position in commercial mortgage and
asset backed securities emphasizes our intermediate bias. The less-thanbenchmark
weighting in mortgages also fits well with our yield curve strategy as
amortizing assets are less attractive than bullet securities. Finally, the Fund
has a
3
meaningful allocation to international bonds. As the recovery takes hold in the
U.S., we expect European growth prospects will lag, especially with the strength
of the euro. As a result, we look for the yield relationship between U.S.
Treasuries and European bonds will shift in favor of the latter.
As always, we look forward to serving you in the coming year.
/s/ Catherine A. Powers
Catherine A. Powers
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Fixed Income Fund
Comparison of Change in Value of $100,000 Investment in Standish Mellon Fixed
Income Fund and Lehman Aggregate Index
[The following data was represented as a line chart in the printed material].
Standish Mellon
Fixed Income Lehman Aggregate
Fund Index
100000 100000
98550 97258
97650 96878
98800 98211
98800 98135
98648 97610
96564 95532
98597 98935
99530 99727
100568 101086
1988 104222 104639
105758 105881
104963 104888
104639 104321
104098 103620
106208 106121
105931 105565
105986 105841
108310 108237
110120 110275
108988 108936
109158 109059
1989 110722 110628
110143 109817
110491 110298
112449 112610
115416 115569
118858 119088
121225 121620
119525 119818
120193 120431
122926 123400
123858 124576
124169 124910
1990 122898 123426
123215 123822
123533 123914
122753 122779
126133 126414
128082 128443
130407 130219
128746 128481
129211 129544
130570 131189
133423 134013
135597 136101
1991 137746 137783
139479 138960
139895 139916
141801 141431
142789 142258
142295 142186
144519 144158
147603 147277
151117 150262
153166 151935
154410 153328
159558 157881
1992 157122 155733
158872 156746
158047 155862
158900 156988
162775 159950
165876 162152
168639 165460
170534 167136
171561 169117
168022 166875
167780 166913
170546 169567
1993 174696 172819
179094 175844
180588 176576
182193 177806
182700 178032
186754 181259
188988 182284
193197 185479
193111 185989
195208 186684
193461 185095
195488 186099
1994 198708 188611
193832 185335
187668 180765
185420 179322
184858 179297
184132 178901
187467 182454
187753 182681
185371 179992
185274 179832
184887 179432
185951 180671
1995 189098 184247
193228 188627
194113 189784
197408 192436
204797 199882
205596 201348
206001 200898
208636 203323
210662 205301
213952 207971
217242 211087
220429 214050
1996 222326 215471
218533 211726
216952 210254
216204 209072
215776 208647
218770 211449
219638 212028
219746 211672
224413 215361
229478 220132
233993 223902
232499 221820
1997 233744 222500
234990 223053
232132 220581
235235 223883
237763 226000
240866 228682
247278 234849
245179 232846
249141 236280
251270 239707
252216 240811
254689 243236
1998 257505 246358
257261 246173
258978 247020
260345 248310
262581 250664
264412 252791
264791 253327
264159 257451
268471 263478
262448 262088
267702 263572
268060 264365
1999 270590 266253
266063 261604
268869 263056
271032 263890
268869 261577
267303 260742
265378 259634
264278 259502
266751 262514
265634 263482
266612 263464
266173 262193
2000 265886 261335
268757 264496
270774 267978
269170 267213
268878 267090
275471 272647
277992 275122
281402 279110
283490 280864
284092 282720
286502 287344
293361 292676
2001 301118 297460
302514 300052
302524 301557
301421 300305
303785 302120
303442 303259
310004 310039
313045 313592
312579 317244
318594 323884
315831 319418
314368 317388
2002 316859 319957
319184 323058
314541 317684
319253 323845
322451 326596
324802 329422
328042 333395
333157 339024
337766 344515
335010 342945
336043 342854
342303 349936
2003 343693 350235
348210 355083
348037 354809
351371 357737
357345 364407
356809 363683
346211 351456
347631 353789
356982 363154
354305 359769
355368 360629
360201 364299
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 10 Year 03/30/1987
------ ------ ------ ------- ----------
5.24% 7.08% 6.09% 6.30% 7.95%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investment in Standish Mellon Fixed Income Portfolio
("Portfolio"), at value (Note 1A) $611,008,440
Receivable for Fund shares sold 105,562
Miscellaneous receivable 7,482
Prepaid expenses 7,632
------------
Total assets 611,129,116
LIABILITIES
Payable for Fund shares redeemed $13,896,161
Distributions payable 1,413,934
Accrued accounting, custody and transfer agent fees 7,947
Accrued trustees' fees and expenses (Note 2) 500
Accrued expenses and other liabilities 21,237
----------
Total liabilities 15,339,779
------------
NET ASSETS $595,789,337
============
NET ASSETS CONSIST OF:
Paid-in capital $771,351,242
Accumulated net realized loss (199,024,204)
Undistributed net investment income 2,677,342
Net unrealized appreciation 20,784,957
------------
TOTAL NET ASSETS $595,789,337
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 29,672,672
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 20.08
============
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B)
Interest income allocated from Portfolio $32,729,566
Dividend income allocated from Portfolio 521,362
Expenses allocated from Portfolio (3,229,905)
-----------
Net investment income allocated from Portfolio 30,021,023
EXPENSES
Legal and audit services $ 89,294
Accounting, custody, and transfer agent fees 83,822
Registration fees 37,450
Insurance expense 2,971
Trustees' fees and expenses (Note 2) 2,000
Miscellaneous 41,865
-----------
Total expenses 257,402
Deduct:
Reimbursement of Fund operating expenses (Note 2) (121,899)
-----------
Net expenses 135,503
-----------
Net investment income 29,885,520
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) allocated from Portfolio on:
Investment security transactions 28,286,895
Financial futures contracts (2,745,137)
Written options transactions 948,501
Swap contracts 13,039
Foreign currency transactions and forward foreign
currency exchange contracts (10,929,415)
-----------
Net realized gain 15,573,883
Change in unrealized appreciation (depreciation) allocated
from Portfolio on:
Investment securities (5,590,479)
Financial futures contracts 1,796,584
Written options (792,871)
Swap contracts 98,436
Foreign currency and forward foreign currency exchange
contracts (169,828)
-----------
Change in net unrealized appreciation (depreciation) (4,658,158)
-----------
Net realized and unrealized gain on investments 10,915,725
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $40,801,245
===========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 29,885,520 $ 53,285,875
Net realized gain 15,573,883 13,179,486
Change in net unrealized appreciation (depreciation) (4,658,158) 23,791,586
------------- --------------
Net increase in net assets from investment operations 40,801,245 90,256,947
------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1C)
From net investment income (25,303,177) (48,646,406)
------------- --------------
Total distributions to shareholders (25,303,177) (48,646,406)
------------- --------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 24,407,420 94,184,646
Value of shares issued to shareholders in payment of
distributions declared 18,529,816 34,960,251
Cost of shares redeemed (403,886,019) (705,084,925)
------------- --------------
Net decrease in net assets from Fund share transactions (360,948,783) (575,940,028)
------------- --------------
TOTAL DECREASE IN NET ASSETS (345,450,715) (534,329,487)
NET ASSETS
At beginning of year 941,240,052 1,475,569,539
------------- --------------
At end of year (including undistributed net investment
income of $2,677,342 and $1,614,543) $ 595,789,337 $ 941,240,052
============= ==============
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- ---------- ---------- ----------
NET ASSET VALUE, BEGINNING OF YEAR $ 19.70 $ 18.93 $ 18.92 $ 18.55 $ 20.13
-------- -------- ---------- ---------- ----------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.75 0.93 1.22 1.35 1.34
Net realized and unrealized gain (loss) on
investments 0.28 0.71 0.10 0.47 (1.47)
-------- -------- ---------- ---------- ----------
Total from investment operations 1.03 1.64 1.32 1.82 (0.13)
-------- -------- ---------- ---------- ----------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.65) (0.87) (1.31) (1.45) (1.42)
From net realized gain on investments -- -- -- -- (0.03)
-------- -------- ---------- ---------- ----------
Total distributions to shareholders (0.65) (0.87) (1.31) (1.45) (1.45)
-------- -------- ---------- ---------- ----------
NET ASSET VALUE, END OF YEAR $ 20.08 $ 19.70 $ 18.93 $ 18.92 $ 18.55
======== ======== ========== ========== ==========
TOTAL RETURN+ 5.24% 8.89% 7.16% 10.21% (0.70)%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.42% 0.38% 0.38% 0.37% 0.36%
Net Investment Income (to average daily net assets)* 3.76% 4.86% 6.35% 7.23% 6.85%
Net Assets, End of Year (000's omitted) $595,789 $941,240 $1,475,570 $2,220,981 $2,910,545
- -----------------
* For the periods indicated, the investment advisor voluntarily agreed not to
impose a portion of its investment advisory fee payable to the Portfolio
and/or reimbursed the Fund for a portion of its operating expenses. If this
voluntary action had not been taken, the investment income per share and
ratios would have been:
Net investment income per share(1) $ 0.73 $ 0.93 N/A N/A N/A
Ratios (to average daily net assets):
Expenses 0.45% 0.42% N/A N/A N/A
Net investment income 3.73% 4.82% N/A N/A N/A
(a) Through its investment in the Portfolio, the Fund has adopted the
provisions of the revised AICPA Audit and Accounting Guide for Investment
Companies effective January 1, 2001and began amortizing premium and
discount on all debt securities on an effective yield basis. The effect of
this change for the year ended December 31, 2001 was to decrease net
investment income per share by $0.004, increase net realized and unrealized
gains and losses per share by $0.004 and decrease the ratio of net
investment income to average net assets from 6.37% to 6.35%. Per share data
and ratios/supplemental data for periods prior to January 1, 2001 have not
been restated to reflect this change in presentation.
(1) Calculated based on average shares outstanding.
+ Total return would have been lower in the absense of the expense waivers.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Fixed Income Fund (the "Fund") is a separate diversified
investment series of the Trust.
The objective of the Fund is to achieve a high level of current income,
consistent with conserving principal and liquidity, and secondarily to seek
capital appreciation when changes in interest rates and economic conditions
indicate that capital appreciation may be available without significant
risk to principal. The Fund seeks to achieve its objective by investing all
of its investable assets in an interest of the Standish Mellon Fixed Income
Portfolio (the "Portfolio"), a subtrust of Mellon Institutional Funds
Master Portfolio (the "Portfolio Trust"), which is organized as a New York
trust and which has the same investment objective as the Fund. The
Portfolio seeks to achieve its objective by investing, under normal
circumstances, at least 80% of net assets in fixed income securities issued
by U.S. and foreign governments and companies. The value of the Fund's
investment in the Portfolio reflects the Fund's proportionate interest in
the net assets of the Portfolio (approximately 100% at December 31, 2003).
The performance of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio are included elsewhere
in this report and should be read in conjunction with the Fund's financial
statements.
On June 21, 2003, by vote of the Trustees, the name of the Standish Fixed
Income Fund was changed to Standish Mellon Fixed Income Fund. In addition,
the Declaration of Trust was amended to change the name of the Trust from
Standish, Ayer & Wood Investment Trust to Mellon Institutional Funds
Investment Trust. The name changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Currently, the
Fund's net investment income consists of the Fund's pro rata share of the
net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with generally accepted
accounting principles. All realized and unrealized gains and losses of the
Portfolio are allocated pro rata among the investors in the Portfolio. The
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.
C. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income will be declared and distributed
quarterly. The Fund's dividends from short-term and long-term capital
gains, if any, after reduction of capital losses will be declared and
distributed at least annually. In determining the amounts of its dividends,
the Fund will take into account its share of the income, gains or losses,
expenses, and any other tax items of the Portfolio. Dividends from net
investment income and distributions from capital gains, if any, are
reinvested in additional shares of the Fund unless a shareholder elects to
receive them in cash. Income and capital gain distributions are determined
in accordance with income tax regulations which may differ from generally
accepted accounting principles.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
These differences, which may result in distribution reclassifications, are
primarily due to differing treatments for foreign currency transactions,
options, futures, interest rate floor, capital loss carryforwards, losses
deferred due to wash sales, paydown gains and losses, and amortization
and/or accretion of premiums and discounts on certain securities.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
D. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
E. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The Fund does not directly pay any investment advisory fees, but indirectly
bears its pro rata share of the compensation paid by the Portfolio to
Standish Mellon Asset Management Company LLC ("Standish Mellon"), a
wholly-owned subsidiary of Mellon Financial Corporation, for such services.
See Note 2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report. Standish Mellon voluntarily agreed to
limit the total operating expenses of the Fund and its pro rata share of
the Portfolio expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.38% of the Fund's average daily net assets for
the period from January 1, 2003 through June 30, 2003 and 0.50% for the
period from July 1, 2003 through December 31, 2003. Pursuant to these
agreements, for the year ended December 31, 2003, Standish Mellon
voluntarily reimbursed the Fund for $121,899 of its operating expenses.
This agreement is voluntary and temporary and may be discontinued or
revised by Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) INVESTMENT TRANSACTIONS:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 2003, aggregated $24,345,488 and $398,371,443,
respectively.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 1,222,331 4,867,816
Shares issued to shareholders in payment of
distributions declared 928,677 1,827,424
Shares redeemed (20,268,022) (36,871,959)
----------- -----------
Net decrease (18,117,014) (30,176,719)
=========== ===========
At December 31, 2003, one shareholder held of record approximately 12% of
the total outstanding shares of the Fund. Investment activity of this
shareholder could have a material impact on the Fund.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
AMOUNT
-------------
Undistributed ordinary income $ 2,751,000
Accumulated losses (198,011,405)
At December 31, 2003, the Fund, for federal income tax purposes, has
capital loss carryovers which will reduce the Fund's taxable income arising
from net realized gain on investments, if any, to the extent permitted by
the Internal Revenue Code and thus will reduce the amount of distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal income tax. Such capital loss carryovers are as
follows:
CAPITAL LOSS
CARRY OVER EXPIRATION DATE
------------ ---------------
$ 43,337,647 12/31/2007
118,614,149 12/31/2008
36,020,187 12/31/2009
The fund elected to defer to its fiscal year ending December 31, 2004
$39,422 of losses recognized during the period November 1, 2003 to December
31, 2003.
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
Distributions paid from:
Ordinary income $25,303,177
See corresponding master portfolio for tax basis unrealized
appreciation/(depreciation) information.
12
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Mellon Institutional Funds Trust: Standish Mellon
Fixed Income Fund (formerly, Standish Fixed Income Fund) (the "Fund"), at
December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included correspondence with the custodian, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
13
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 112.1%
ASSET BACKED -- 21.5%
Advanta Mortgage Loan Trust 1997-4 M1 7.040% 01/25/2029 USD 1,873,405 $1,893,841
Advanta Mortgage Loan Trust 1999-3 A4 7.750% 10/25/2026 1,460,978 1,532,543
American Express Credit Account Master
Trust 2000-2B(a) 1.470% 09/17/2007 1,250,000 1,251,156
American Express Credit Account Master
Trust 2003-4A(a) 1.690% 01/15/2009 7,875,000 7,725,788
Americredit Auto Receivables Trust 2001-1
A3 5.130% 11/06/2005 749,579 753,634
Americredit Auto Receivables Trust 2001-D
A3(a) 1.470% 09/12/2006 2,325,048 2,326,466
ARG Funding Corp. 1999-1A A3 6.020% 05/20/2005 333,334 333,334
Bear Stearns Commercial Mortage
Securities 2003-T12 A3 4.490% 08/13/2039 1,890,000 1,876,152
Capital Auto Receivables Asset Trust
2003-2 A3A 1.440% 02/15/2007 625,000 621,785
Capital One Master Trust 1999-1 A(a) 1.303% 07/16/2007 3,570,000 3,568,425
Capital One Multi-Asset Execution Trust
2003-B2 B2 3.500% 02/17/2009 725,000 728,125
Chase Credit Card Master Trust 2002-2
C(a) 2.020% 07/16/2007 2,985,000 2,998,175
Chase Funding Mortgage Loan Asset-Backed
2001-1 2A1(a) 1.381% 12/25/2030 2,989,212 2,989,515
Chase Funding Mortgage Loan Asset-Backed
2003-4 2A1(a) 1.239% 02/25/2021 9,431,416 9,426,530
Chase Manhattan Auto Owner Trust 2003-A
A3 1.520% 05/15/2007 3,500,000 3,483,802
Citibank Credit Card Issuance Trust
2000-C1 7.450% 09/15/2007 3,250,000 3,514,705
Citibank Credit Card Issuance Trust
2001-C3 6.650% 05/15/2008 1,400,000 1,512,130
Citibank Credit Card Issuance Trust
2003-A2 A2 2.700% 01/15/2008 3,000,000 3,023,062
Citibank Credit Card Master Trust 1999-7
B 6.900% 11/15/2006 3,285,000 3,435,470
Citibank Credit Card Master Trust I
1997-6 B, PO(b) 0.766% 08/15/2006 4,500,000 4,449,324
Citifinancial Mortgage Securities, Inc.
2003-2 AV1(a) 1.219% 05/25/2033 1,924,536 1,923,959
Daimler Chrysler Auto Trust 2001-C A3 4.210% 07/06/2005 7,788,849 7,818,395
Daimler Chrysler Auto Trust 2003-A A4 2.880% 10/08/2009 500,000 503,149
Daimler Chrysler Auto Trust 2003-B A4 2.860% 03/09/2009 1,675,000 1,673,953
First USA Credit Card Master Trust 1997-7
B(a) 1.666% 05/17/2007 9,430,000 9,436,955
Golden State Tobacco Securitization Corp. 5.000% 06/01/2021 2,195,000 2,182,269
Granite Mortgages PLC 2003-3 1A1(a) 1.236% 01/20/2019 7,000,000 7,000,000
Green Tree Home Equity Loan Trust 1999-A
A1B(a) 1.443% 02/15/2029 2,270,162 2,270,856
Harley-Davidson Motorcycle Trust 2001-3 B 3.720% 10/15/2009 2,322,208 2,357,734
Honda Auto Receivables Owner Trust 2003-1
A3 1.920% 11/20/2006 4,635,000 4,649,145
Honda Auto Receivables Owner Trust 2003-4
A3 2.190% 05/15/2007 1,000,000 1,001,457
Honda Auto Receivables Owner Trust 2003-5
A3 2.300% 10/18/2007 1,790,000 1,795,012
MBNA Credit Card Master Note Trust
2002-A1 A1 4.950% 06/15/2009 2,500,000 2,664,355
MBNA Master Credit Card Trust 1997-J A(a) 1.283% 02/15/2007 3,250,000 3,250,755
MBNA Master Credit Card Trust 1999-C C(a) 1.963% 05/17/2004 1,120,000 1,121,302
MBNA Master Credit Card Trust 2000-A C 7.900% 07/16/2007 2,145,000 2,268,002
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
ASSET BACKED (CONTINUED)
MBNA Master Credit Card Trust 2000-C C(a) 1.920% 07/15/2007 USD 4,400,000 $ 4,393,812
Nissan Auto Receivables Owner Trust
2003-C A4 2.700% 12/17/2007 2,525,000 2,533,285
Nissan Auto Receivables Owner Trust
2003-C A5 3.210% 03/16/2009 600,000 603,234
Residential Asset Mortgage Products, Inc.
2003-RS1 AI1(a) 1.301% 01/25/2019 890,272 890,249
Residential Asset Securities Corp.
2003-KS11 AI1(a) 1.333% 11/25/2021 3,175,000 3,175,000
SLMA Student Loan Trust 2003-6 A1(a) 1.170% 06/16/2008 2,493,957 2,493,957
Vanderbilt Mortgage Finance 1999-A 1A6 6.750% 03/07/2029 1,110,000 1,090,789
Whole Auto Loan Trust 2003-1 A2A 1.400% 04/15/2006 7,000,000 7,001,709
------------
Total Asset Backed (Cost $131,424,361) 131,543,295
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 5.7%
Bear Stearns Mortgage 1998-2 B 6.750% 04/30/2030 505,131 503,868
Calwest Industrial Trust 2002-CALW A 144A 6.127% 02/15/2017 3,620,000 3,963,176
FNMA Grantor Trust 2001-T6 B 6.088% 05/25/2011 3,983,000 4,389,321
FNMA Grantor Trust 2002-T11 A 4.769% 04/25/2012 1,538,279 1,608,385
FNMA Grantor Trust 2002-T3 A 5.139% 12/25/2011 6,492,917 6,872,201
GNMA 2003-48 AC 2.712% 02/16/2020 3,007,289 2,974,559
GNMA 2003-72 A 3.206% 04/16/2018 2,574,305 2,584,062
GNMA 2003-88 AC 2.914% 06/16/2018 1,836,105 1,822,219
GNMA 2003-96 B 3 3.607% 08/16/2018 615,000 620,024
Merrill Lynch Mortgage Investors, Inc.
1996-C2 B 6.960% 11/21/2028 1,035,000 1,129,431
Merrill Lynch Mortgage Investors, Inc.
1996-C2 D Non-ERISA 6.960% 11/21/2028 1,180,000 1,287,853
Permanent Financing PLC 2 1C Step Up(a) 2.421% 06/10/2042 3,000,000 3,001,410
Permanent Financing PLC 3 1A NCL(a) 1.080% 12/10/2004 3,400,000 3,400,000
Prudential Home Mortgage 1993-B 3B
144A(a) 7.500% 04/28/2023 222,113 222,946
Vendee Mortgage Trust 2003-1 A 5.750% 09/15/2012 286,774 288,937
------------
Total Collateralized Mortgage Obligations (Cost $34,418,291) 34,668,392
------------
CORPORATE -- 30.2%
BANKING -- 3.9%
Amsouth Bank NA 4.850% 04/01/2013 1,100,000 1,092,243
Bank of America Corp. 5.250% 12/01/2015 1,800,000 1,795,471
Bank of America Corp. 7.400% 01/15/2011 2,100,000 2,462,943
BankBoston NA 6.375% 04/15/2008 583,000 646,826
BB&T Corp. 4.750% 10/01/2012 1,000,000 994,771
Chevy Chase Bank Sub Notes 6.875% 12/01/2013 1,030,000 1,055,750
CS First Boston (USA), Inc. 5.500% 08/15/2013 1,075,000 1,107,804
First Union National Bank Sub Notes 7.800% 08/18/2010 3,125,000 3,770,222
FleetBoston Corp. 6.500% 03/15/2008 1,500,000 1,667,682
National City Bank 6.200% 12/15/2011 1,300,000 1,417,812
National City Corp. 6.875% 05/15/2019 675,000 779,173
Union Planters Corp. 4.375% 12/01/2010 525,000 522,841
Union Planters Corp. 7.750% 03/01/2011 1,965,000 2,318,101
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
BANKING (CONTINUED)
US Bank NA 2.850% 11/15/2006 USD 1,430,000 $ 1,436,918
Wells Fargo & Co. 5.000% 11/15/2014 2,935,000 2,922,371
-----------
23,990,928
-----------
BASIC INDUSTRY -- 1.7%
Cabot Corp. 5.250% 09/01/2013 900,000 892,345
General Electric Co. 5.000% 02/01/2013 2,205,000 2,229,994
ICI Wilmington, Inc. 4.375% 12/01/2008 1,700,000 1,693,610
International Paper Co. 5.300% 04/01/2015 675,000 659,867
International Paper Co. 6.750% 09/01/2011 600,000 667,064
Nalco Co. 144A Senior Notes 7.750% 11/15/2011 200,000 214,000
Occidental Petroleum Senior Notes 8.450% 02/15/2029 370,000 485,041
RPM International, Inc. 144A 6.250% 12/15/2013 450,000 456,282
Sealed Air Corp. 144A 5.625% 07/15/2013 570,000 583,276
Tosco Corp. 7.250% 01/01/2007 1,415,000 1,585,468
Tosco Corp. 7.800% 01/01/2027 201,000 243,792
Tosco Corp. 8.125% 02/15/2030 450,000 573,858
Westvaco Corp. 8.200% 01/15/2030 341,000 399,792
-----------
10,684,389
-----------
CAPITAL GOODS -- 1.7%
Allied Waste Industries 144A Notes 7.625% 01/01/2006 3,000,000 3,157,500
American Standard, Inc. 7.375% 02/01/2008 500,000 552,500
Lockheed Martin Corp. 8.200% 12/01/2009 490,000 595,033
Lockheed Martin Corp. 8.500% 12/01/2029 870,000 1,140,025
Northrop Grumman Corp. 7.125% 02/15/2011 545,000 630,340
Northrop Grumman Corp. 7.750% 02/15/2031 760,000 924,158
Raytheon Co. 5.500% 11/15/2012 755,000 765,917
Raytheon Co. 6.750% 08/15/2007 850,000 941,738
SPX Corp. Senior Notes 6.250% 06/15/2011 230,000 236,325
SPX Corp. Senior Notes 7.500% 01/01/2013 1,225,000 1,332,187
-----------
10,275,723
-----------
COMMUNICATIONS -- 1.9%
AOL Time Warner, Inc. 7.700% 05/01/2032 1,485,000 1,733,152
AT&T Wireless Services, Inc. 8.125% 05/01/2012 1,360,000 1,599,293
AT&T Wireless Services, Inc. Senior Notes 8.750% 03/01/2031 555,000 684,775
Comcast Corp. 5.500% 03/15/2011 1,635,000 1,699,455
Comcast Corp. 8.375% 11/01/2005 350,000 385,731
Sprint Capital Corp. 8.375% 03/15/2012 2,425,000 2,831,915
Verizon Global Funding Corp. 4.375% 06/01/2013 2,050,000 1,936,617
Verizon Global Funding Corp. 7.750% 06/15/2032 575,000 675,868
-----------
11,546,806
-----------
CONSUMER CYCLICAL -- 4.3%
Coast Hotels & Casino, Inc. 9.500% 04/01/2009 665,000 703,237
Cox Communications, Inc. 7.750% 11/01/2010 1,875,000 2,233,612
Daimler Chrysler NA Holding 8.500% 01/18/2031 325,000 388,305
Echostar DBS Corp. 144A Senior Notes 5.750% 10/01/2008 1,160,000 1,173,050
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
CONSUMER CYCLICAL (CONTINUED)
Echostar DBS Corp. Senior Notes 10.375% 10/01/2007 USD 1,750,000 $ 1,918,437
ERAC USA Finance Co. 144A 8.250% 05/01/2005 1,950,000 2,103,295
Horseshoe Gaming Holding Corp. 8.625% 05/15/2009 495,000 522,844
International Flavors & Fragrance 6.450% 05/15/2006 950,000 1,031,766
Lear Corp. 8.110% 05/15/2009 2,255,000 2,652,444
Liberty Media Corp. 3.500% 09/25/2006 1,800,000 1,808,995
Liberty Media Corp. 5.700% 05/15/2013 1,900,000 1,921,403
MGM Mirage, Inc. 6.950% 02/01/2005 720,000 748,800
Mohegan Tribal Gaming Authority Senior
Notes 8.375% 07/01/2011 1,035,000 1,128,150
Mohegan Tribal Gaming Authority Senior
Sub Notes 6.375% 07/15/2009 965,000 996,362
Mohegan Tribal Gaming Authority Senior
Sub Notes 8.125% 01/01/2006 1,355,000 1,460,012
Moore North America Finance, Inc. 144A
Senior Notes 7.875% 01/15/2011 350,000 396,375
News America, Inc. Deb Notes 144A 7.625% 11/30/2028 910,000 1,054,103
Park Place Entertainment 8.875% 09/15/2008 900,000 1,019,250
TCI Communications, Inc. 7.875% 02/15/2026 825,000 964,557
Univision Communications, Inc. 7.850% 07/15/2011 1,617,000 1,922,353
-----------
26,147,350
-----------
CONSUMER NONCYCLICAL -- 3.2%
Altria Group, Inc. 7.000% 11/04/2013 1,000,000 1,066,795
Apogent Technologies, Inc. Senior Sub
Notes 6.500% 05/15/2013 315,000 328,387
Aramark Services, Inc. 7.000% 07/15/2006 2,290,000 2,491,151
Aramark Services, Inc. 7.000% 05/01/2007 2,225,000 2,446,428
Archer-Daniels-Midland 5.935% 10/01/2032 1,100,000 1,105,180
Ball Corp. 6.875% 12/15/2012 740,000 773,300
Ball Corp. 7.750% 08/01/2006 200,000 215,000
HJ Heinz Finance Co. 6.750% 03/15/2032 850,000 948,586
Kroger Co. 7.250% 06/01/2009 600,000 683,529
Kroger Co. Senior Notes 8.000% 09/15/2029 955,000 1,146,288
Laboratory Corp. of America Holdings 5.500% 02/01/2013 1,495,000 1,543,410
Safeway, Inc. 6.150% 03/01/2006 1,470,000 1,572,885
Tricon Global Restaurant, Inc. Senior
Notes 7.650% 05/15/2008 275,000 312,125
Tricon Global Restaurant, Inc. Senior
Notes 8.875% 04/15/2011 2,783,000 3,374,387
Weyerhaeuser Co. 7.250% 07/01/2013 1,165,000 1,299,517
-----------
19,306,968
-----------
ELECTRIC -- 0.9%
Dominion Resources, Inc. 5.250% 08/01/2033 845,000 836,812
Dominion Resources, Inc. Senior Notes 5.700% 09/17/2012 1,025,000 1,079,972
Niagara Mohawk Power 7.625% 10/01/2005 593,536 643,905
Niagara Mohawk Power Senior Notes 7.750% 10/01/2008 1,000,000 1,160,482
Pepco Holdings, Inc. 5.500% 08/15/2007 1,400,000 1,497,598
-----------
5,218,769
-----------
ENERGY -- 1.7%
Amerada Hess Corp. 7.300% 08/15/2031 290,000 299,453
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
ENERGY (CONTINUED)
CenterPoint Energy, Inc. 7.750% 02/15/2011 USD 600,000 $ 674,940
CenterPoint Energy, Inc. 144A 7.875% 04/01/2013 1,200,000 1,358,516
Consumers Energy Co. 6.250% 09/15/2006 1,125,000 1,214,730
Consumers Energy Co. 144A 5.375% 04/15/2013 1,495,000 1,501,914
FirstEnergy Corp. Series B 6.450% 11/15/2011 1,110,000 1,150,457
Halliburton Co. 144A 5.500% 10/15/2010 705,000 737,301
Progress Energy, Inc. 7.000% 10/30/2031 600,000 642,172
Waste Management, Inc. 6.875% 05/15/2009 1,020,000 1,140,138
Waste Management, Inc. 7.375% 05/15/2029 50,000 56,274
Waste Management, Inc. Senior Notes 7.000% 07/15/2028 1,400,000 1,506,855
XTO Energy, Inc. 6.250% 04/15/2013 380,000 399,950
-----------
10,682,700
-----------
FINANCIAL -- 7.8%
Allstate Corp. Senior Notes 6.125% 12/15/2032 733,000 753,745
Archstone-Smith Trust REIT 5.000% 08/15/2007 850,000 891,864
ASIF Global Financing XVIII 144A 3.850% 11/26/2007 1,695,000 1,722,905
Bear Stearns Co., Inc. 4.500% 10/28/2010 905,000 910,307
Boeing Capital Corp. 4.750% 08/25/2008 350,000 361,066
Boston Properties, Inc. 5.625% 04/15/2015 675,000 674,561
Citigroup, Inc. Sub Notes 5.625% 08/27/2012 2,155,000 2,274,909
City National Corp. Senior Notes 144A 5.125% 02/15/2013 1,515,000 1,498,218
Devon Financing Corp. 7.875% 09/30/2031 874,000 1,044,082
Duke Realty Corp. REIT Senior Notes 7.750% 11/15/2009 915,000 1,076,807
Duke Realty Investments REIT Senior Notes 6.950% 03/15/2011 25,000 28,158
Duke Realty LP REIT 5.875% 08/15/2012 1,150,000 1,222,008
EOP Operating LP Senior Notes 7.000% 07/15/2011 1,100,000 1,241,253
Ford Motor Credit Co. 6.500% 01/25/2007 2,635,000 2,806,865
Ford Motor Credit Co. 7.200% 06/15/2007 2,290,000 2,486,239
General Electric Capital Corp. 6.000% 06/15/2012 1,755,000 1,903,215
General Motors Acceptance Corp. 6.150% 04/05/2007 3,150,000 3,376,041
General Motors Acceptance Corp. 8.000% 11/01/2031 1,235,000 1,386,864
Goldman Sachs Group, Inc. 5.700% 09/01/2012 750,000 788,214
Healthcare Realty Trust Senior Notes 8.125% 05/01/2011 1,090,000 1,248,204
Household Finance Corp. 6.375% 10/15/2011 2,078,000 2,288,260
Household Finance Corp. 6.400% 06/17/2008 335,000 371,418
Jefferies Group, Inc. Senior Notes 7.750% 03/15/2012 1,920,000 2,147,875
JP Morgan Chase & Co. Sub Notes 5.750% 01/02/2013 1,485,000 1,565,915
Leucadia National Corp. 144A Senior Notes 7.000% 08/15/2013 590,000 590,000
MassMutual Global Funding II 144A 3.800% 04/15/2009 650,000 651,929
Morgan Stanley Dean Witter 6.600% 04/01/2012 2,060,000 2,300,688
Pacific Life Corp. 6.600% 09/15/2033 1,010,000 1,066,646
Simon Property Group LP 6.375% 11/15/2007 1,400,000 1,543,930
SLM Corp. MTN 5.000% 10/01/2013 2,600,000 2,583,441
Travelers Property Casualty Corp. Senior
Notes 5.000% 03/15/2013 1,140,000 1,140,749
Washington Mutual, Inc. 7.500% 08/15/2006 1,600,000 1,787,427
Zions Bancorp 6.000% 09/15/2015 1,795,000 1,882,063
-----------
47,615,866
-----------
The accompanying notes are an integral part of the financial statements.
18
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
HEALTH CARE -- 0.3%
Schering-Plough Corp. 5.300% 12/01/2013 USD 940,000 $ 956,402
Wyeth Corp. 6.450% 02/01/2024 325,000 333,062
Wyeth Corp. 6.500% 02/01/2034 275,000 281,195
------------
1,570,659
------------
PUBLIC UTILITY -- 1.3%
AES Corp. 144A 10.000% 07/15/2005 807,691 821,825
Appalachian Power Co. 5.950% 05/15/2033 450,000 432,855
Keyspan Corp. Senior Notes 8.000% 11/15/2030 635,000 812,295
NiSource Finance Corp. 7.625% 11/15/2005 440,000 480,699
NiSource Finance Corp. 7.875% 11/15/2010 1,450,000 1,724,617
Northern States Power Co. 8.000% 08/28/2012 415,000 505,981
Public Service Co. of CO 4.375% 10/01/2008 930,000 954,213
Southern Natural Gas Co. 6.700% 10/01/2007 1,910,000 1,981,625
------------
7,714,110
------------
TECHNOLOGY -- 0.3%
L-3 Communications Corp. 144A Senior Sub
Notes 7.625% 06/15/2012 1,450,000 1,571,437
------------
TRANSPORTATION -- 1.0%
CSX Corp. 6.250% 10/15/2008 865,000 947,986
Norfolk Southern Corp. 7.050% 05/01/2037 1,500,000 1,682,727
Norfolk Southern Corp. Senior Notes 7.250% 02/15/2031 670,000 758,717
Union Pacific Corp. 3.625% 06/01/2010 1,645,000 1,575,935
Union Pacific Corp. 3.875% 02/15/2009 1,400,000 1,389,668
------------
6,355,033
------------
UTILITIES -- 0.2%
TXU Corp. Series C 6.375% 01/01/2008 1,105,000 1,163,013
------------
Total Corporate (Cost $177,487,406) 183,843,751
------------
MUNICIPAL OBLIGATIONS -- 1.0%
Illinois State 5.100% 06/01/2033 4,220,000 3,880,163
New York NY NCL 5.250% 06/01/2013 1,100,000 1,204,555
New York NY NCL 5.500% 08/01/2012 1,030,000 1,148,553
------------
Total Municipal Obligations (Cost $6,599,045) 6,233,271
------------
SOVEREIGN BONDS -- 3.0%
Province of Ontario 4.200% 06/30/2005 1,505,000 1,554,469
Republic of Brazil 11.000% 08/17/2040 1,165,000 1,281,500
Republic of Brazil 12.000% 04/15/2010 2,335,000 2,802,000
Republic of Bulgaria 144A 8.250% 01/15/2015 835,000 979,038
Republic of El Salvador 8.500% 07/25/2011 870,000 959,175
Republic of South Africa 8.500% 06/23/2017 818,000 973,420
Republic of South Africa 9.125% 05/19/2009 850,000 1,022,125
Russian Federation 8.250% 03/31/2010 955,000 1,067,213
State of Qatar 144A 9.750% 06/15/2030 565,000 791,000
Ukraine Government Senior Notes 11.000% 03/15/2007 1,666,017 1,853,444
The accompanying notes are an integral part of the financial statements.
19
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
SOVEREIGN BONDS (CONTINUED)
United Mexican States 6.375% 01/16/2013 USD 750,000 $ 778,125
United Mexican States 6.625% 03/03/2015 2,260,000 2,339,100
United Mexican States 8.300% 08/15/2031 1,370,000 1,537,825
-----------
Total Sovereign Bonds (Cost $17,371,657) 17,938,434
-----------
YANKEE BONDS -- 8.4%
Abbey National PLC 7.950% 10/26/2029 723,000 897,641
Abitibi-Consolidated, Inc. 8.850% 08/01/2030 1,410,000 1,524,247
Amvescap Senior Notes 144A 6.600% 05/15/2005 1,440,000 1,524,528
British Sky Broadcasting 8.200% 07/15/2009 4,755,000 5,660,870
British Sky Broadcasting 6.875% 02/23/2009 115,000 129,087
British Telecom PLC 8.875% 12/15/2030 457,000 597,575
Carnival Corp. 6.650% 01/15/2028 1,860,000 1,909,681
Celulosa Arauco Constitution 5.125% 07/09/2013 935,000 914,710
ChevronTexaco Capital Co. 3.500% 09/17/2007 3,120,000 3,177,645
Deutsche Telekom 8.500% 06/15/2010 1,100,000 1,330,028
Deutsche Telekom 8.750% 06/15/2030 1,215,000 1,552,075
Domtar, Inc. 5.375% 12/01/2013 375,000 371,070
Domtar, Inc. 7.875% 10/15/2011 935,000 1,102,636
Donohue Forest Products 7.625% 05/15/2007 1,560,000 1,629,886
Eircom Funding Senior Sub Notes 8.250% 08/15/2013 215,000 238,113
Financement Quebec 5.000% 10/25/2012 2,765,000 2,843,529
HBOS PLC 144A Sub Notes(a) 5.375% 12/31/2049 1,200,000 1,196,326
Hutchison Whampoa Ltd. 144A 5.450% 11/24/2010 1,160,000 1,176,596
International Telecom Satellite Ltd. 144A 6.500% 11/01/2013 475,000 495,612
Koninklijke KPN NV 8.000% 10/01/2010 950,000 1,136,454
Nordea Bank Sweden AB 144A 5.250% 11/30/2012 2,760,000 2,816,293
Rio Tinto Finance USA Ltd. 2.625% 09/30/2008 3,330,000 3,176,464
Rogers Cable, Inc. 6.250% 06/15/2013 550,000 554,125
Royal Caribbean Cruises Senior Notes 8.750% 02/02/2011 3,335,000 3,768,550
St. George Bank Ltd. 144A 5.300% 10/15/2015 890,000 890,699
Teck Cominico Ltd. 7.000% 09/15/2012 1,465,000 1,608,374
Telecom Italia Capital 144A 4.000% 11/15/2008 2,700,000 2,717,091
Telus Corp. 8.000% 06/01/2011 1,590,000 1,859,166
Tyco International Group SA 6.125% 11/01/2008 1,895,000 2,027,650
Tyco International Group SA 6.750% 02/15/2011 975,000 1,065,188
Tyco International Group SA 144A Senior
Notes 6.000% 11/15/2013 575,000 592,250
Tyco International Group SA NCL 6.375% 06/15/2005 750,000 789,375
UPM-Kymmene Corp. Senior Notes 5.625% 12/01/2014 580,000 591,909
Videotron 144A Senior Notes 6.875% 01/15/2014 180,000 185,850
-----------
Total Yankee Bonds (Cost $49,507,930) 52,051,293
-----------
NON-AGENCY -- 3.4%
PASS THRU SECURITIES -- 3.4%
DLJ Commercial Mortgage Corp. 1998-CF2
B1(a) 7.058% 11/12/2031 2,350,000 2,617,993
First Chicago/Lennar Trust 1997-CHL1-D(a) 7.987% 04/29/2039 7,610,000 7,613,567
GMAC Commercial Mortgage Securities, Inc.
1996-C1 F Non-ERISA 7.860% 11/15/2006 2,375,000 2,529,356
The accompanying notes are an integral part of the financial statements.
20
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
PASS THRU SECURITIES (CONTINUED)
JP Morgan Commercial Mortgage Finance
Corp. 1997-C5 A3 7.088% 09/15/2029 USD 1,385,000 $ 1,529,179
Morgan Stanley Capital 1998-HF1 E(a) 7.377% 03/15/2030 5,800,000 6,539,480
------------
20,829,575
------------
Total Non-Agency (Cost $19,655,935) 20,829,575
------------
U.S. GOVERNMENT AGENCY -- 27.0%
PASS THRU SECURITIES -- 27.0%
FHLMC 7.000% 11/01/2031 - 11/01/2031 637,725 674,742
FNMA 3.530% 07/01/2010 4,200,453 4,042,468
FNMA 3.640% 06/01/2010 2,600,000 2,512,286
FNMA 5.000% 07/01/2018 1,368,074 1,397,096
FNMA+ 5.703% 05/25/2011 1,556,291 1,675,262
FNMA 6.500% 09/01/2032 5,362,863 5,609,496
FNMA 7.000% 05/01/2031 - 07/01/2032 140,738 149,028
FNMA 7.500% 11/01/2029 2,164 2,314
FNMA 8.500% 06/01/2012 79,747 86,283
FNMA (TBA)# 5.000% 01/01/2019 21,375,000 21,795,831
FNMA (TBA)# 5.500% 01/01/2019 - 01/01/2034 56,450,000 57,427,623
FNMA (TBA)# 6.000% 01/01/2032 33,600,000 34,723,517
FNMA (TBA)# 6.500% 01/01/2032 32,975,000 34,479,484
GNMA 6.500% 08/15/2032 569,819 600,756
GNMA 9.000% 02/15/2021 21,949 24,558
------------
165,200,744
------------
Total U.S. Government Agency (Cost $163,242,518) 165,200,744
------------
U.S. TREASURY OBLIGATIONS -- 2.7%
TREASURY BONDS -- 1.2%
U.S. Treasury Bond 6.250% 05/15/2030 6,452,000 7,445,505
------------
TREASURY NOTES -- 1.5%
U.S. Treasury Inflation-Indexed Note
(TIPS) 4.250% 01/15/2010 7,697,340 8,948,758
------------
Total U.S. Treasury Obligations (Cost $16,343,736) 16,394,263
------------
FOREIGN DENOMINATED -- 9.2%
AUSTRALIA -- 0.1%
TXU Australia Holdings Ltd. 6.150% 11/15/2013 500,000 509,617
------------
CANADA -- 0.3%
Alcan, Inc. 6.125% 12/15/2033 1,800,000 1,810,966
------------
DENMARK -- 0.3%
Denmark Realkredit 6.000% 10/01/2032 DKK 10,850,109 1,882,066
------------
EURO -- 8.5%
Deutschland Republic 4.125% 07/04/2008 EUR 16,015,000 20,698,422
Deutschland Republic 4.500% 01/04/2013 7,055,000 9,063,562
The accompanying notes are an integral part of the financial statements.
21
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
EURO (CONTINUED)
Deutschland Republic 5.000% 07/04/2011 EUR 1,340,000 $ 1,789,792
Deutschland Republic 5.250% 01/04/2011 7,650,000 10,375,722
Deutschland Republic 5.625% 01/04/2028 3,632,205 5,011,389
Kingdom of Belgium Series 38 5.000% 09/28/2012 2,870,000 3,811,330
Sappi Pappier Holding AG 144A 6.750% 06/15/2012 1,076,000 1,176,216
------------
51,926,433
------------
Total Foreign Denominated (Cost $46,067,271) 56,129,082
------------
TOTAL BONDS AND NOTES (COST $662,118,150) 684,832,100
------------
SHARES
-------------
PREFERRED STOCKS -- 0.4%
CONVERTIBLE PREFERRED STOCKS -- 0.4%
Equity Office Properties Trust 144A CVT
Pfd REIT 50,600 2,530,506
------------
Total Convertible Preferred Stocks (Cost $2,513,200) 2,530,506
------------
TOTAL PREFERRED STOCKS (COST $2,513,200) 2,530,506
------------
CONTRACT
SIZE
-------------
PURCHASED OPTIONS -- 0.0%
JPY Put/USD Call, Strike Price 150.00,
02/02/2004 (USD) 38,880,000 0
------------
TOTAL PURCHASED OPTIONS (COST $583,200) 0
------------
PAR
VALUE
-------------
PAR
VALUE
-------------
SHORT-TERM INVESTMENTS -- 8.3%
U.S. GOVERNMENT AGENCY -- 7.9%
FNMA Discount Note=/= 1.000% 01/14/2004 USD 3,850,000 3,848,610
FNMA Discount Note=/= 1.030% 01/14/2004 14,680,000 14,674,179
FNMA Discount Note=/= 1.066% 01/20/2004 29,685,000 29,670,158
------------
48,192,947
------------
The accompanying notes are an integral part of the financial statements.
22
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
PAR VALUE
SECURITY RATE MATURITY VALUE (NOTE 1A)
- --------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS -- 0.0%
U.S. Treasury Bill+ 0.864% 03/04/2004 USD 450,000 $ 449,341
-----------
REPURCHASE AGREEMENTS -- 0.4%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith Barney,
Inc. and Investors Bank and Trust Company, due 01/02/04, with a maturity
value of $2,320,043 and an effective yield of 0.20%, collateralized by a
U.S. Government Obligation with a rate of 5.18%, a maturity date of
02/15/26 and an aggregate market value of $2,368,737. 2,320,017
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $50,957,910) 50,962,305
-----------
TOTAL INVESTMENTS -- 120.8% (COST
$716,172,460) $ 738,324,911
OTHER ASSETS, LESS LIABILITIES --
(20.8%) (127,316,471)
-------------
NET ASSETS -- 100.0% $ 611,008,440
=============
NOTES TO SCHEDULE OF INVESTMENTS:
144A - Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from registration
to qualified buyers.
CVT - Convertible
DKK - Danish Krone
EUR - Euro
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GNMA - Government National Mortgage Association
JPY - Japanese Yen
MTN - Medium Term Notes
NCL - Non-callable
PO - Principal Only
REIT - Real Estate Investment Trust
Step Up - Coupon rate increases in increments to
maturity. Rate disclosed is as of December 31, 2003.
Maturity date disclosed is the ultimate maturity.
TIPS - Treasury Inflation Protected Securities
USD - United States Dollar
(a) Variable Rate Security; rate indicated is as of 12/31/03.
(b) Zero coupon security.
+ Denotes all or part of security pledged as collateral.
# Delayed delivery contract.
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
23
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$716,172,460) $738,324,911
Cash 2,275
Receivable for investments sold 22,694,190
Interest and dividends receivable 6,848,121
Receivable for open swap contracts (Note 5) 98,436
Miscellaneous 5,240
Tax reclaim receivable 2,784
Prepaid expenses 5,132
------------
Total assets 767,981,089
LIABILITIES
Payable for investments purchased $154,848,388
Payable for variation margin on open financial futures
contracts (Note 5) 29,531
Unrealized depreciation on forward foreign currency
exchange contracts (Note 5) 1,522,972
Payable for closed forward foreign currency exchange
contracts (Note 5) 6,173
Interest payable on open swap contracts (Note 5) 4,804
Options written, at value (Note 5) (premiums received,
$508,105) 393,236
Accrued accounting and custody fees 35,552
Accrued trustees' fees and expenses (Note 2) 18,922
Accrued expenses and other liabilities 113,071
-----------
Total liabilities 156,972,649
------------
NET ASSETS (APPLICABLE TO INVESTORS' BENEFICIAL INTERESTS) $611,008,440
============
The accompanying notes are an integral part of the financial statements.
24
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$120,580 (Note 7)) $32,729,572
Dividend income 521,363
-----------
Total income 33,250,935
EXPENSES
Investment advisory fee (Note 2) $ 2,761,889
Accounting and custody fees 368,986
Legal and audit services 87,102
Trustees' fees and expenses (Note 2) 80,681
Insurance expense 26,765
Licensing fees 19,999
Interest on swap contracts 8,890
------------
Total expenses 3,354,312
Deduct:
Waiver of investment advisory fee (Note 2) (124,405)
------------
Net expenses 3,229,907
-----------
Net investment income 30,021,028
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss)
Investment security transactions 28,286,900
Financial futures contracts (2,745,137)
Written options transactions 948,500
Swap contracts 13,039
Foreign currency transactions and forward foreign
currency exchange contracts (10,929,416)
------------
Net realized gain 15,573,886
Change in unrealized appreciation (depreciation)
Investment securities (5,590,479)
Financial futures contracts 1,796,585
Written options (792,871)
Swap contracts 98,436
Foreign currency and forward foreign currency exchange
contracts (169,827)
-----------
Change in net unrealized appreciation (depreciation) (4,658,156)
-----------
Net realized and unrealized gain 10,915,730
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $40,936,758
===========
The accompanying notes are an integral part of the financial statements.
25
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 30,021,028 $ 53,285,882
Net realized gain 15,573,886 13,179,491
Change in net unrealized appreciation (depreciation) (4,658,156) 23,791,589
------------- --------------
Net increase in net assets from investment operations 40,936,758 90,256,962
------------- --------------
CAPITAL TRANSACTIONS
Contributions 24,345,488 94,362,926
Withdrawals (398,371,613) (735,911,427)
------------- --------------
Net decrease in net assets from capital transactions (374,026,125) (641,548,501)
------------- --------------
TOTAL DECREASE IN NET ASSETS (333,089,367) (551,291,539)
NET ASSETS
At beginning of year 944,097,807 1,495,389,346
------------- --------------
At end of year $ 611,008,440 $ 944,097,807
============= ==============
The accompanying notes are an integral part of the financial statements.
26
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- ---------- ---------- ----------
TOTAL RETURN+ 5.25% 8.89% 7.18% 10.23% (0.69)%
RATIOS:
Expenses (to average daily net assets)* 0.41% 0.38% 0.36% 0.35% 0.35%
Net Investment Income (to average daily net
assets)* 3.78% 4.86% 6.37% 7.24% 6.86%
Portfolio Turnover 398% 384% 329% 233% 159%
Net Assets, End of Year (000's omitted) $611,008 $944,098 $1,495,389 $2,226,002 $2,911,705
- -----------------
* For the period indicated, the investment advisor voluntarily agreed not to
impose a portion of its investment advisory fee. If this voluntary action
had not been taken, the ratios would have been:
Ratios (to average daily net assets):
Expenses 0.42% 0.39% N/A N/A N/A
Net investment income 3.77% 4.85% N/A N/A N/A
(a) The Portfolio has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
began amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to decrease the ratio of net investment income to
average net assets from 6.39% to 6.37%. Ratios for the periods prior to
January 1, 2001 have not been restated to reflect this change in
presentation.
+ Total return for the Portfolio has been calculated based on the total
return for the invested Fund, assuming all distributions were reinvested,
and adjusted for the difference in expenses as set out in the notes to the
financial statements. Total return would have been lower in the absence of
expense waivers.
The accompanying notes are an integral part of the financial statements.
27
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the state of New York on
January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Mellon Fixed Income Portfolio (the "Portfolio") is a separate diversified
investment series of the Portfolio Trust.
At December 31, 2003, there was one fund, Standish Mellon Fixed Income Fund
(the "Fund"), invested in the Portfolio. The value of the Fund's investment
in the Portfolio reflects the Fund's proportionate interest in the net
assets of the Portfolio. The Fund's proportionate interest at December 31,
2003 was approximately 100%.
The objective of the Portfolio is to achieve a high level of current
income, consistent with conserving principal and liquidity, and secondarily
to seek capital appreciation when changes in interest rates and economic
conditions indicate that capital appreciation may be available without
significant risk to principal by investing, under normal circumstances, at
least 80% of net assets in fixed income securities issued by U.S. and
foreign governments and companies.
On June 21, 2003, by vote of the Trustees, the name of the Standish Fixed
Income Portfolio was changed to Standish Mellon Fixed Income Portfolio. In
addition, the Declaration of Trust was amended to change the name of the
Portfolio Trust from Standish, Ayer & Wood Master Portfolio to Mellon
Institutional Funds Master Portfolio. The name changes became effective
July 1, 2003.
The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Portfolio are valued at amortized cost, which
approximates market value. If the Portfolio acquires a short-term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and
will then be valued at amortized value based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized
value does not represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Portfolio to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Portfolio
and the counterparty. Additionally, procedures have been established by the
Portfolio to monitor on a daily basis, the market value and accrued
interest of the repurchase agreement's underlying investments to ensure the
existence of a proper level of collateral.
28
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of trade date. Interest income is
determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Dividend income is recorded on the ex-dividend
date. Realized gains and losses from securities sold are recorded on the
identified cost basis. The Portfolio 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. Net realized gains and losses on
foreign currency transactions represent gains and losses on disposition of
foreign currencies and forward foreign currency exchange contracts,
currency gains and losses realized between the trade and settlement dates
on securities transactions, and the difference between the amount of
investment income and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts usually received or paid.
D. INCOME TAXES
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since at least one of
the Portfolio's investors is a regulated investment company that invests
all or substantially all of its assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification requirements
applicable to regulated investment companies (under the Internal Revenue
Code) in order for its investors to satisfy them. The Portfolio allocates
at least annually among its investors each investor's distributive share of
the Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss deduction or credit.
E. FOREIGN CURRENCY TRANSACTIONS
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based upon
current currency exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars based
upon currency exchange rates prevailing on the respective dates of such
transactions.
Section 988 of the Internal Revenue Code provides that gains or losses on
certain transactions attributable to fluctuations in foreign currency
exchange rates must be treated as ordinary income or loss. For financial
statement purposes, such amounts are included in net realized gains or
losses.
F. INVESTMENT RISK
There are certain additional risks involved in investing in foreign
securities that are not inherent in investments in domestic securities.
These risks may involve adverse political and economic developments,
including the possible imposition of capital controls or other foreign
governmental laws or restrictions. In addition, the securities of some
foreign companies and securities markets are less liquid and at times may
be more volatile than securities of comparable U.S. companies and U.S.
securities markets. The risks described above apply to an even greater
extent to investments in emerging markets. The securities markets of
emerging countries are generally smaller, less developed, less liquid, and
more volatile than the securities markets of the U.S. and developed foreign
markets.
G. COMMITMENT AND CONTINGENCIES
In the normal course of business, the Portfolio may enter into contracts
and agreements that contain a variety of representations and warranties,
which provide general indemnifications. The maximum exposure to the
Portfolio under these arrangements is unknown, as this would involve future
claims that may be made against the Portfolio that have not yet occurred.
However, based on experience, the Portfolio expects the risks of loss to be
remote.
29
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon") for overall investment advisory and
administrative services is paid monthly at the annual rate of 0.40% of the
Portfolio's first $250,000,000 of average daily net assets, 0.35% of the
next $250,000,000 of average daily net assets, and 0.30% of the average
daily net assets in excess of $500,000,000. Standish Mellon voluntarily
agreed to limit the Portfolio's total annual operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.38% of the
Portfolio's average daily net assets for the period from January 1, 2003
through June 30, 2003 and 0.50% for the period from July 1, 2003 through
December 31, 2003. Pursuant to these agreements, for the year ended
December 31, 2003, Standish Mellon voluntarily waived $124,405 of its
investment advisory fee. This agreement is voluntary and temporary and may
be discontinued or revised by Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Portfolio for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Portfolio Trust pays the legal
fees for the independent counsel of the Trustees.
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
-------------- --------------
U.S. Government Securities $3,035,796,660 $3,500,577,662
============== ==============
Investments (non-U.S.Government Securities) $ 503,937,299 $ 368,953,139
============== ==============
(4) FEDERAL TAXES:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 2003, as computed on a federal
tax basis, were as follows:
Aggregate Cost $717,371,612
============
Gross unrealized appreciation 23,549,680
Gross unrealized depreciation (2,437,246)
------------
Net unrealized appreciation $ 21,112,434
============
(5) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Portfolio Trust's registration statement.
The Portfolio may trade the following financial instruments with
off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Portfolio may use options to seek to hedge against
risks of market exposure and changes in security prices and foreign
currencies, as well as to seek to enhance returns. Writing puts and buying
30
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
calls tend to increase the Portfolio's exposure to the underlying
instrument. Buying puts and writing calls tend to decrease the Portfolio's
exposure to the underlying instrument, or hedge other Portfolio
investments. Options, both held and written by the Portfolio, are reflected
in the accompanying Statement of Assets and Liabilities at market value.
The underlying face amount at value of any open purchased options is shown
in the Schedule of Investments. This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments if there is an illiquid
secondary market for the contract or if the counterparty does not perform
under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Portfolio is exercised, the premium reduces
the cost basis of the securities purchased by the Portfolio. The Portfolio,
as a writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option.
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
A summary of the written put options for the year ended December 31, 2003
is as follows:
WRITTEN PUT OPTION TRANSACTIONS
----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ------------------
Outstanding, beginning of period 4 $ 855,084
Options written 11 826,910
Options expired (11) (1,394,022)
--- -----------
Outstanding, end of period 4 $ 287,972
=== ===========
At December 31, 2003, the Portfolio held the following written put option
contracts:
SECURITY CONTRACTS VALUE
---------------------------------------------------------------------------------------------------
UST 4.25% Put, Strike Price 100.91, 01/20/2004 1 $ 97,840
UST 4.25% Put, Strike Price 100.22, 01/27/2004 1 76,697
UST 4.25% Put, Strike Price 99.91, 01/15/2004 1 52,164
UST 4.25% Put, Strike Price 99.81, 01/05/2004 1 23,096
--------
Total (premium received $287,972) $249,797
========
A summary of the written call options for the year ended December 31, 2003
is as follows:
WRITTEN CALL OPTION TRANSACTIONS
-----------------------------------
NUMBER OF CONTRACTS PREMIUMS
------------------- ----------------
Outstanding, beginning of period 3 $ 105,383
Options written 11 667,153
Options expired (3) (139,923)
Options closed (7) (412,480)
-- ---------
Outstanding, end of period 4 $ 220,133
== =========
31
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Portfolio held the following written call option
contracts:
SECURITY CONTRACTS VALUE
--------------------------------------------------------------------------------------------------
UST 4.25% Call, Strike Price 100.94, 01/20/2004 1 $ 21,033
UST 4.25% Call, Strike Price 100.22, 01/27/2004 1 46,634
UST 4.25% Call, Strike Price 99.91, 01/15/2004 1 47,422
UST 4.25% Call, Strike Price 99.81, 01/05/2004 1 28,350
--------
Total (premiums received $220,133) $143,439
========
INTEREST RATE FLOORS
Interest rate floors purchased by the Portfolio entitle the Portfolio to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate amount. Credit and market risk exist with respect to these
instruments. If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Portfolio expects to enter these transactions
primarily for hedging purposes including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management
technique or protecting against an increase in the price of securities the
Portfolio anticipates purchasing at a later date. Interest rate floors are
"marked-to-market" daily based on quotations from market makers and the
change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations. Periodic payments of interest, if any, are
reported as additions to interest income in the Statement of Operations.
Realized gains or losses from these agreements are disclosed in the
Statement of Operations.
At December 31, 2003, the Portfolio did not hold any open interest rate
floor agreements.
FORWARD CURRENCY EXCHANGE CONTRACTS
The Portfolio may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign currency
at a fixed price on a future date. Risks may arise upon entering these
contracts from the potential inability of counterparties to meet the terms
of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar and other foreign currencies.
The forward foreign currency and cross currency exchange contracts are
marked to market using the forward foreign currency rate of the underlying
currency and any gains or losses are recorded for financial statement
purposes as unrealized until the contract settlement date or upon the
closing of the contract. Forward currency exchange contracts are used by
the Portfolio primarily to protect the value of the Portfolio's foreign
securities from adverse currency movements. Unrealized appreciation and
depreciation of forward currency exchange contracts is included in the
Statement of Assets and Liabilities.
At December 31, 2003, the Portfolio held the following forward foreign
currency exchange contracts:
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
LOCAL PRINCIPAL CONTRACT MARKET AGGREGATE UNREALIZED
CONTRACTS TO DELIVER AMOUNT VALUE DATE VALUE FACE AMOUNT LOSS
-------------------------------------------------------------------------------------------------------
Danish Krone 16,670,000 03/17/2004 $ 2,810,173 $ 2,713,172 $ (97,001)
Euro 40,400,000 03/17/2004 50,734,188 49,308,217 (1,425,971)
----------- ----------- -----------
TOTAL $53,544,361 $52,021,389 $(1,522,972)
=========== =========== ===========
32
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FUTURES CONTRACTS
The Portfolio may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices at a
fixed price on a future date. Pursuant to margin requirements the Portfolio
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Portfolio each day, depending on the daily fluctuations in the value
of the underlying security, and are recorded for financial statement
purposes as unrealized gains or losses by the Portfolio. There are several
risks in connection with the use of futures contracts as a hedging device.
The change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not correlate
with changes in the value of hedged investments. Buying futures tends to
increase the Portfolio's exposure to the underlying instrument, while
selling futures tends to decrease the Portfolio's exposure to the
underlying instrument or hedge other investments. In addition, there is the
risk that the Portfolio may not be able to enter into a closing transaction
because of an illiquid secondary market. Losses may arise if there is an
illiquid secondary market or if the counterparty does not perform under the
contract's terms. The Portfolio enters into financial futures transactions
primarily to seek to manage its exposure to certain markets and to changes
in securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
At December 31, 2003, the Portfolio held the following financials futures
contracts:
UNDERLYING FACE
CONTRACT POSITION EXPIRATION DATE AMOUNT AT VALUE UNREALIZED LOSS
-----------------------------------------------------------------------------------------------
U.S. 10 Year Note (189 Contracts) Short 3/31/2004 $21,218,204 $(60,007)
--------
At December 31, 2003, the Portfolio had segregated sufficient cash and/or
securites to cover margin requirements on open futures contracts.
SWAP AGREEMENTS
The Portfolio may invest in swap agreements. A swap is an agreement to
exchange the return generated by one instrument for the return generated by
another instrument. The Portfolio may enter into interest rate and credit
default swap agreements to manage its exposure to interest rates and credit
risk. Interest rate swap agreements involve the exchange by the Portfolio
with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. In a credit
default swap, one party makes a stream of payments to another party in
exchange for the right to receive a specified return in the event of a
default by a third party on its obligation. The Portfolio may use credit
default swaps to provide a measure of protection against defaults of
issuers (i.e., to reduce risk where the Portfolio owns or has exposure to
the corporate or sovereign issuer) or to take an active long or short
position with respect to the likelihood of a particular corporate or
sovereign issuer's default. In connection with these agreements, cash or
securities may be set aside as collateral in accordance with the terms of
the swap agreement. The Portfolio earns interest on cash set aside as
collateral. Swaps are marked to market daily based upon quotations from
market makers and change in value, if any, is recorded as unrealized gain
or loss in the Statement of Operations. These financial instruments are not
actively traded on financial markets. The values assigned to these
instruments are based upon the best available information and because of
the uncertainty of the valuation, these values may differ significantly
from the values that would have been realized had a ready market for these
instruments existed, and differences could be material. Payments received
or made from credit default swaps at the end of the measurement period are
recorded as realized gain or loss in the Statement of Operations. Net
payments of interest on interest rate swap agreements, if any, are included
as part of interest income. Entering into these agreements involves, to
varying degrees, elements of credit, market, and documentation risk in
excess of the amounts recognized on the Statement of Assets and
Liabilities. Such risks involve the possibility that there will be no
liquid market for these agreements, that the counterparty to the agreements
may default on its obligation to perform or disagree as to the meaning of
contractual terms in the agreements, and that there may be unfavorable
changes in interest rates.
33
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At December 31, 2003, the Portfolio held the following open swap contracts:
NET UNREALIZED
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION APPRECIATION
------------------------------------------------------------------------------------------------------------
9,215,000 USD 4/30/04 Agreement with Citigroup Global Markets, Inc., $98,436
dated 10/30/03 to pay the notional amount
multiplied by 0.57% and to receive the notional
amount multiplied by the 1 month LIBOR adjusted by
a specified spread.
(6) DELAYED DELIVERY TRANSACTIONS:
The Portfolio may purchase or sell securities on a when-issued, delayed
delivery or forward commitment basis. Payment and delivery may take place a
month or more after the date of the transactions. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. Income on
the securities will not be earned until settlement date. The Portfolio
instructs its custodian to segregate securities having value at least equal
to the amount of the purchase commitment.
The Portfolio may enter into to be announced ("TBA") purchase commitments
to purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Portfolio holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the Portfolio may enter into offsetting contracts for the forward
sale of other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of decline in the value of the Portfolio's other
assets. Unsettled TBA purchase commitments are valued at the current market
value of the underlying securities, according to the procedures described
under "Investment security valuations" above.
The Portfolio may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is "marked-to-
market" daily and the change in market value is recorded by the Portfolio
as an unrealized gain or loss. If the TBA sale commitment is closed through
the acquisition of an offsetting purchase commitment, the Portfolio
realizes a gain or loss. If the Portfolio delivers securities under the
commitment, the Portfolio realizes a gain or a loss from the sale of the
securities based upon the unit price established at the date the commitment
was entered into.
See the Schedule of Investments for outstanding delayed delivery
transactions.
(7) SECURITIES LENDING:
The Portfolio may lend its securities to financial institutions which the
Portfolio deems to be creditworthy. The loans are collateralized at all
times with cash or securities with a market value at least equal to the
market value of the securities on loan. The market value of securities
loaned is determined daily and any additional required collateral is
allocated to the Portfolio on the next business day. For the duration of a
loan, the Portfolio receives the equivalent of the interest or dividends
paid by the issuer on the securities loaned and also receives compensation
from the investment of the collateral. As with other extensions of credit,
the Portfolio bears the risk of delay in recovery or even loss of rights in
its securities on loan should the borrower of the securities fail
financially or default on its obligations to the Portfolio. In the event of
borrower default, the Portfolio generally has the right to use the
collateral to offset losses incurred. The
34
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON FIXED INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Portfolio may incur a loss in the event it was delayed or prevented from
exercising its rights to dispose of the collateral. The Portfolio also
bears the risk in the event that the interest and/or dividends received on
invested collateral is not sufficient to meet the Portfolio's obligations
due on the loans.
The Portfolio loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Portfolio
had no securities on loan.
35
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Master Portfolio and the
Investors of Standish Mellon Fixed Income Portfolio:
In our opinion, the accompanying statement of asset and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Master Portfolio: Standish Mellon Fixed Income
Portfolio (formerly Standish Fixed Income Portfolio) (the "Portfolio"), at
December 31, 2003, and the results of its operations, the changes in its
net assets and the financial highlights for each of the periods indicated,
in conformity with accounting principles generally accepted in the United
States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 2003, by correspondence
with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
36
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc.Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
37
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Vice Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset President Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstitutionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
38
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Standish Mellon
Short-Term
Asset Reserve Fund
Financial Statements for the
Year Ended
December 31, 2003
[Logo] Mellon
--------------------------
Mellon Institutional Funds
[Logo] Mellon
--------------------------
Mellon Institutional Funds
February 28, 2004
Dear Mellon Institutional Fund Shareholder:
Enclosed you will find your Fund's annual report for the fiscal year ended
December 31, 2003.
In 2003 we experienced a return to risk-taking in the financial markets. It's
worth recalling that for most of 2002, market sentiment was notably bearish,
characterized by a flight to quality. Indeed, the first half of 2002 produced
the worst six-month performance for the S&P 500 Index in more than 30 years,
with a loss of almost 14%.
In contrast, during 2003, the greatest gains were made by the stock market and
the lowest-rated corporate debt. The S&P 500 gained 22%, while the Merrill Lynch
C-Rated High Yield Index advanced 42%. In keeping with the risk-taking trend,
small cap stocks, as measured by the Russell 2000 Index, advanced 45%.
International stocks also have enjoyed a healthy rebound, advancing 17%, as
measured by the MSCI EAFE Index. In comparison, intermediate U.S. Treasuries had
a total return of just 2%, after providing a total return of 12% in 2002, as
measured by the Lehman Treasury Index.
The financial markets were reacting to the increasing strength of the economy.
After several sluggish quarters, economic activity in the U.S. accelerated in
the summer months and remains strong. The sources of strength include a)
continuing monetary ease that has induced substantial mortgage refinancing and
housing activity, b) Federal fiscal stimulus from large new tax cuts and sharp
increases in defense spending, and c) a gradual improvement in business capital
spending after many quarters of stagnation. Sluggish spots to date include
inventory investment, state and local spending, net exports and employment,
although some of these sectors show signs of much-awaited improvement.
The renewal of economic strength has created a schizophrenic year for the bond
markets. Until late June, the market's tone had been set by an expectation of
continued sluggish growth. In June, the Fed made explicit its intent to keep
short-term interest rates low for a "considerable period." But the Fed
announcement was perceived as a disappointment by the market, which promptly
caused a sharp summer selloff in bonds. In September, bonds recouped some of
their losses, as market participants felt the selloff had been overdone. At its
most recent meeting, the Fed edged closer to a less accommodative stance in
dropping the "considerable period" language. Instead, the Fed said it "can be
patient" in not raising rates until signs of inflation become evident. The yield
curve remains very steep, influenced by the Fed at the short end, but with the
intermediate maturities under pressure from the large volume of Treasury
financing in that sector. With the recent bump in yields and inflation still
relatively quiescent, real interest rates have increased to the lower end of
what have been the historic norms.
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
1
Looking ahead, it is clear that there are some serious distortions and
imbalances in world economies including structural problems in Japan and core
Europe, the U.S. current account deficit, and the leverage in the consumer
balance sheet. It is impossible to predict when these restraints might undermine
economic activity, but the latter part of 2004 or the year 2005 could be a
period of vulnerability when there will be a loss of incremental fiscal stimulus
as well as the lagged effect of higher interest rates.
Nevertheless, the near term economic outlook has brightened, business activity
has some significant momentum which should carry over into 2004. The result
should be favorable growth, especially in business investment. We expect
inflation to remain modest and corporate profit growth to be reasonably strong.
We wish to thank you for your business and confidence in Mellon Institutional
Funds. Please feel free to contact us with questions or comments.
Sincerely,
/s/ Patrick J. Sheppard
Patrick J. Sheppard
Mellon Funds Distributor, L.P.
P.O. Box 51407 o Boston, MA 02205-1407
(800) 221-4795 Toll Free o (617) 350-0042 Fax
A Mellon Financial Company. (SM)
2
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
Management Discussion and Analysis
December 2003
The year 2003 can be broken into two distinctly different environments for the
financial markets. The first half of the year was characterized by the war in
Iraq and a generally weak economy. The second half saw a renewed optimism in the
economy and was highlighted by a moderate rise in interest rates and a strong
equity market. The fixed income market had mixed results during the year, strong
during the first half, weaker during the second. In this mixed environment
Standish Mellon's disciplined approach to investing provided excellent relative
returns. The Standish Mellon Short-Term Asset Reserve Fund returned 1.48% for
the year, surpassing the iMoneyNet All Taxable Fund which returned 0.53%. On an
absolute basis, both the return of the Fund and its benchmark are low due to the
historically low levels of short-term interest rates.
The year started on a cautious note. Early in the first quarter, the war in Iraq
seemed more likely every day and it appeared that the entire economy was waiting
on some resolution to this uncertainty. Consumer spending continued to be
strong, but there were few other bright spots. As the war commenced and was
successfully resolved, some of the uncertainty was eliminated and the stock
market improved. However, through April and May, the lack of any bounce in the
economy led people to speculate that a declining economic, deflationary
environment was possible and that drastic measures might need to be taken to
spark the economy. During this time, interest rates declined to historically low
levels. It was speculated that the Federal Reserve might drop its overnight
funds target to well below 1% and even buy long-term Treasury securities to
reduce long-term interest rates. In June, the rates on two-year Treasury notes
reached a historical low of 1.08%, down nearly 50 basis points from the
beginning of the year. Longer-term interest rates declined even more
dramatically.
The Fed did eventually lower its overnight target rate to 1.00% in late June.
Although this action moved short-term rates to their lowest level yet, the move
was not as dramatic as originally expected. At the same time, economic news
began to indicate stronger growth, particularly in the capital goods sector.
This news led to a rapid increase in long-term interest rates during the summer.
While very-short term rates were held stable by the 1.00% overnight Fed Funds
target, longer-term rates began to anticipate an eventual tightening by the
Federal Reserve. The yield of the two-year note rose to over 2.10% by early
September. Since that time, the economy has continued to strengthen and the
stock market has risen in step. The bond market has also improved somewhat as
the inflationary pressures have not yet reappeared and the Fed has expressed
reluctance to raising rates. Ironically, the two-year Treasury note ended the
year at roughly 1.60%, the same level as it began the year.
In this back and forth interest rate environment, the spread sectors in the
fixed-income market continued to outperform. The deleveraging of corporations
from the prior few years and the gradually improving economy helped narrow
credit spreads to levels not
3
seen since 1997. This spread narrowing was particularly noteworthy in lesser
quality names such as those rated BBB and below.
The performance of the Fund was helped during the year by its use of high
quality spread paper and its ability to extend beyond the technical limits of
money-market funds. High quality spread paper, such as corporate notes and
asset-backed securities, will continue to represent a major portion of the Fund
in the coming year.
By strategy, the duration of the Fund is relatively long compared to its
benchmark. This longer duration combined with a steep yield curve did enable the
fund to benefit from higher long-term yields.
We would also like to note that as of March 31, 2003, portfolio management of
STAR changed from David Hertan to Laurie Carroll and Johnson Moore. As you may
recall, as of July 1, Standish Mellon in Boston combined with two affiliates
within Mellon: Mellon Bond Associates and Certus Asset Advisors. STAR had been
managed by Mr. Hertan from the Boston office. In conjunction with the
combination, all short term asset management was relocated in the Pittsburgh
office, under Ms. Carroll and Mr. Moore.
We remain committed to our disciplined approach with high quality fundamental
research to generate the strong relative returns we have achieved in the past.
We appreciate the continued support of our shareholders.
Sincerely,
/s/ Laurie A. Carroll /s/ Johnson S. Moore
Laurie A. Carroll Johnson S. Moore
4
- --------------------------------------------------------------------------------
Mellon Institutional Funds Investment Trust
Standish Mellon Short-Term Asset Reserve (STAR) Fund
Comparison of Change in Value of $100,000 Investment in
Standish Mellon STAR Fund and iMoneyNet Fund Average
[The following data was represented as a line chart in the printed material].
Standish Mellon iMoney Net
STAR Fund Fund Average
1989 100,000 100,000
100,560 100,710
101,009 101,365
101,575 102,135
102,728 102,901
103,757 103,704
105,161 104,461
106,391 105,223
106,278 105,970
106,956 106,691
108,206 107,438
108,913 108,147
109,501 108,871
1990 109,761 109,590
110,428 110,237
110,970 110,953
111,337 111,652
112,731 112,378
113,817 113,086
114,949 113,821
115,465 114,549
116,300 115,248
116,937 115,974
118,165 116,670
119,335 117,382
1991 120,206 118,074
120,963 118,653
121,844 119,270
122,886 119,842
123,546 120,406
124,239 120,947
125,292 121,504
126,537 122,063
127,503 122,588
128,682 123,115
129,663 123,595
130,565 124,077
1992 130,399 124,511
131,009 124,885
131,662 125,284
132,429 125,660
133,401 126,012
134,413 126,365
134,473 126,719
135,204 127,048
136,021 127,353
135,327 127,659
135,244 127,952
136,240 128,259
1993 137,415 128,567
138,294 128,837
138,831 129,133
139,604 129,418
139,687 129,702
140,364 129,988
140,805 130,274
141,601 130,560
142,054 130,847
142,478 131,148
142,710 131,437
143,169 131,739
1994 143,964 132,042
143,724 132,319
143,251 132,637
143,012 132,969
143,092 133,354
143,337 133,754
144,276 134,182
144,892 134,612
145,206 135,069
145,671 135,569
145,802 136,084
146,413 136,642
1995 147,434 137,243
148,614 137,820
149,439 138,468
150,389 139,105
151,765 139,758
152,612 140,387
153,377 141,047
154,147 141,682
154,978 142,291
155,978 142,917
156,901 143,532
157,907 144,163
1996 159,007 144,783
159,186 145,333
159,620 145,915
160,210 146,484
160,810 147,011
161,712 147,584
162,403 148,190
163,107 148,797
164,148 149,392
165,370 150,005
166,243 150,605
166,779 151,222
1997 167,583 151,842
168,015 152,404
168,416 153,029
169,462 153,656
170,552 154,302
171,452 154,934
172,559 155,601
173,241 156,270
174,352 156,910
175,312 157,585
175,826 158,247
176,678 158,927
1998 177,954 159,611
178,451 160,233
179,379 160,922
180,149 161,582
181,018 162,261
181,880 162,926
182,756 163,627
184,161 164,330
185,172 165,004
185,806 165,664
185,905 166,293
186,840 166,942
1999 187,936 167,576
188,058 168,129
189,309 168,751
190,143 169,359
190,527 169,969
191,110 170,564
191,676 171,212
192,170 171,879
193,069 172,550
193,891 173,240
194,704 173,933
195,457 174,681
2000 196,228 175,432
197,602 176,151
198,569 176,944
199,453 177,740
200,362 178,593
201,902 179,451
203,016 180,366
204,266 181,286
205,634 182,174
205,420 183,103
207,526 184,000
208,992 184,939
2001 211,567 185,826
212,710 186,570
214,072 187,335
212,830 188,028
213,987 188,667
214,658 189,233
216,567 189,782
217,853 190,313
219,907 190,751
221,242 191,151
221,523 191,476
221,827 191,744
2002 222,168 191,994
222,350 192,205
221,668 192,436
222,983 192,666
223,608 192,878
224,519 193,071
225,441 193,284
226,219 193,496
227,324 193,690
227,627 193,883
227,901 194,058
228,801 194,213
2003 229,105 194,349
229,612 194,466
229,990 194,582
230,338 194,699
230,799 194,835
231,122 194,952
230,475 194,855
230,544 194,933
231,558 195,011
231,280 195,089
231,442 195,167
232,206 195,245
-----------------------------
Average Annual Total Return
(for period ended 12/31/2003)
-----------------------------
Since
Inception
1 Year 3 Year 5 Year 10 Year 01/03/1989
------ ------ ------ ------- ----------
1.48% 3.57% 4.44% 4.95% 5.78%
-----------------------------
Must be preceded or accompanied by a prospectus which contains more complete
information and should be read carefully before investing. Copyright 2003,
Mellon Funds Distributor, L.P. Member, NASD. The investment return and principal
value of an investment will fluctuate, and an investor's shares, when redeemed,
may be worth more or less than their original cost.
Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------
5
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investment in Standish Mellon Short-Term Asset Reserve
Portfolio ("Portfolio"), at value (Note 1A) $141,855,980
Receivable for Fund shares sold 41,200
Prepaid expenses 10,007
------------
Total assets 141,907,187
LIABILITIES
Payable for Fund shares redeemed $ 131
Distributions payable 51,288
Accrued accounting, custody and transfer agent fees 3,767
Accrued trustees' fees and expenses (Note 2) 500
Accrued expenses and other liabilities 14,907
-------
Total liabilities 70,593
------------
NET ASSETS $141,836,594
============
NET ASSETS CONSIST OF:
Paid-in capital $144,080,754
Accumulated net realized loss (2,449,299)
Distributions in excess of net investment income (33,067)
Net unrealized appreciation 238,206
------------
TOTAL NET ASSETS $141,836,594
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING 7,280,850
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER
SHARE
(Net Assets/Shares outstanding) $ 19.48
============
The accompanying notes are an integral part of the financial statements.
6
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1B)
Interest income allocated from Portfolio $3,483,663
Expenses allocated from Portfolio (638,470)
----------
Net investment income allocated from Portfolio 2,845,193
EXPENSES
Accounting, custody, and transfer agent fees $ 41,725
Legal and audit services 29,036
Registration fees 17,810
Trustees' fees and expenses (Note 2) 2,000
Insurance expense 1,435
Miscellaneous 12,167
---------
Total expenses 104,173
Deduct:
Reimbursement of Fund operating expenses (Note 2) (101,180)
---------
Net expenses 2,993
----------
Net investment income 2,842,200
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain allocated from Portfolio on:
Investment security transactions 345,564
Financial futures contracts 163,705
---------
Net realized gain 509,269
Change in unrealized appreciation (depreciation) allocated
from Portfolio on:
Investment securities (654,182)
Financial futures contracts (100,342)
---------
Change in net unrealized appreciation (depreciation) (754,524)
----------
Net realized and unrealized loss on investments (245,255)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $2,596,945
==========
The accompanying notes are an integral part of the financial statements.
7
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 2,842,200 $ 4,382,028
Net realized gain 509,269 729,932
Change in net unrealized appreciation (depreciation) (754,524) (433,362)
------------- -------------
Net increase in net assets from investment operations 2,596,945 4,678,598
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS (NOTE 1C)
From net investment income (3,213,940) (4,545,684)
------------- -------------
Total distributions to shareholders (3,213,940) (4,545,684)
------------- -------------
FUND SHARE (PRINCIPAL) TRANSACTIONS (NOTE 4)
Net proceeds from sale of shares 153,359,955 147,542,518
Value of shares issued to shareholders in payment of
distributions declared 2,836,562 3,926,750
Cost of shares redeemed (160,362,595) (138,921,633)
------------- -------------
Net increase (decrease) in net assets from Fund share
transactions (4,166,078) 12,547,635
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,783,073) 12,680,549
NET ASSETS
At beginning of year 146,619,667 133,939,118
------------- -------------
At end of year (including distributions in excess of net
investment income of $33,067 and undistributed net
investment income of $101,604, respectively) $ 141,836,594 $ 146,619,667
============= =============
The accompanying notes are an integral part of the financial statements.
8
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- -------- -------- --------
NET ASSET VALUE, BEGINNING OF YEAR $ 19.55 $ 19.55 $ 19.36 $ 19.23 $ 19.44
-------- -------- -------- -------- --------
FROM INVESTMENT OPERATIONS:
Net investment income*(1) 0.31 0.58 0.95 1.15 1.08
Net realized and unrealized gain (loss) on
investments (0.04) 0.03 0.21 0.13 (0.21)
-------- -------- -------- -------- --------
Total from investment operations 0.27 0.61 1.16 1.28 0.87
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (0.34) (0.61) (0.97) (1.15) (1.08)
-------- -------- -------- -------- --------
Total distributions to shareholders (0.34) (0.61) (0.97) (1.15) (1.08)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF YEAR $ 19.48 $ 19.55 $ 19.55 $ 19.36 $ 19.23
======== ======== ======== ======== ========
TOTAL RETURN+ 1.48% 3.14% 6.14% 6.94% 4.61%
RATIOS/SUPPLEMENTAL DATA:
Expenses (to average daily net assets)* 0.36% 0.36% 0.36% 0.36% 0.35%
Net Investment Income (to average daily net assets)* 1.60% 2.99% 4.89% 6.07% 5.60%
Net Assets, End of Year (000's omitted) $141,837 $146,620 $133,939 $183,858 $301,965
- -----------------
* For the periods indicated, the investment adviser voluntarily agreed to
reimburse the Fund for a portion of its operating expenses. If this
voluntary action had not been taken, the investment income per share and
ratios would have been:
Net investment income per share(1) $ 0.30 $ 0.56 $ 0.94 $ 1.15 N/A
Ratios (to average daily net assets):
Expenses 0.43% 0.46% 0.41% 0.38% N/A
Net investment income 1.53% 2.89% 4.84% 6.05% N/A
(a) Through its investment in the Portfolio, the Fund has adopted the
provisions of the revised AICPA Audit and Accounting Guide for Investment
Companies effective January 1, 2001 and began amortizing premium and
discount on all debt securities on an effective yield basis. The effect of
this change for the year ended December 31, 2001 was to increase net
investment income per share by $0.001, decrease net realized and unrealized
gains and losses per share by $0.001 and increase the ratio of net
investment income to average net assets by less than 0.01%. Per share data
and ratios/supplemental data for the periods prior to January 1, 2001 have
not been restated to reflect this change in presentation.
(1) Calculated based on average shares outstanding.
+ Total return would have been lower in the absence of expense waivers.
The accompanying notes are an integral part of the financial statements.
9
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Mellon Short-Term Asset Reserve Fund (the "Fund") is a separate
diversified investment series of the Trust.
The objective of the Fund is to achieve a high level of current income
consistent with preserving principal and liquidity. The Fund seeks to
achieve its objective by investing all of its investable assets in an
interest of the Standish Mellon Short-Term Asset Reserve Portfolio (the
"Portfolio"), a subtrust of Mellon Institutional Funds Master Portfolio
(the "Portfolio Trust"), which is organized as a New York trust and which
has the same investment objective as the Fund. The Portfolio seeks to
achieve its objective by investing, under normal circumstances, at least
80% of net assets in dollar-denominated money market instruments,
short-term fixed income securities and asset-backed securities of U.S. and
foreign governments, banks and companies. The value of the Fund's
investment in the Portfolio reflects the Fund's proportionate interest in
the net assets of the Portfolio (approximately 100% at December 31, 2003).
The performance of the Fund is directly affected by the performance of the
Portfolio. The financial statements of the Portfolio are included elsewhere
in this report and should be read in conjunction with the Fund's financial
statements.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Short-Term Asset Reserve Fund was changed to Standish Mellon Short-Term
Asset Reserve Fund. In addition, the Declaration of Trust was amended to
change the name of the Trust from Standish, Ayer & Wood Investment Trust to
Mellon Institutional Funds Investment Trust. The name changes became
effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those
estimates.
A. INVESTMENT SECURITY VALUATIONS
The Fund records its investment in the Portfolio at value. The method by
which the Portfolio values its securities is discussed in Note 1A of the
Portfolio's Notes to Financial Statements, which are included elsewhere in
this report.
B. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of the trade date. Currently, the
Fund's net investment income consists of the Fund's pro rata share of the
net investment income of the Portfolio, less all actual and accrued
expenses of the Fund determined in accordance with accounting principles
generally accepted in the United States of America. All realized and
unrealized gains and losses of the Portfolio are allocated pro rata among
the investors in the Portfolio.
C. DISTRIBUTIONS TO SHAREHOLDERS
Distributions to shareholders are recorded on the ex-dividend date.
Dividends from net investment income will be declared daily and distributed
monthly. The Fund's dividends from short-term and long-term capital gains,
if any, after reduction of capital losses will be declared and distributed
at least annually. In determining the amounts of its dividends, the Fund
will take into account its share of the income, gains or losses, expenses,
and any other tax items of the Portfolio. Dividends from net investment
income and distributions from capital gains, if any, are reinvested in
additional shares of the Fund unless a shareholder elects to receive them
in cash. Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from accounting principles
generally accepted in the United States of America. These differences,
which may result in distribution reclassifications, are primarily due to
differing treatments for capital loss carryforwards and amortization and/or
accretion of premiums and discounts on certain securities.
10
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to undistributed net
investment income, accumulated net realized gain (loss) and paid in
capital. Undistributed net investment income and accumulated net realized
gain (loss) on investments and foreign currency transactions may include
temporary book and tax basis differences which will reverse in a subsequent
period. Any taxable income or gain remaining at fiscal year end is
distributed in the following year.
D. EXPENSES
The majority of expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific
fund are allocated taking into consideration, among other things, the
nature and type of expense and the relative size of the funds.
E. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Fund may enter into contracts and
agreements that contain a variety of representations and warranties, which
provide general indemnifications. The maximum exposure to the Fund under
these arrangements is unknown, as this would involve future claims that may
be made against the Fund that have not yet occurred. However, based on
experience, the Fund expects the risks of loss to be remote.
(2) INVESTMENT ADVISORY FEE:
The Fund does not directly pay any investment advisory fees, but indirectly
bears its pro rata share of the compensation paid by the Portfolio to
Standish Mellon Asset Management Company LLC ("Standish Mellon"), a
wholly-owned subsidiary of Mellon Financial Corporation, for such services.
See Note 2 of the Portfolio's Notes to Financial Statements which are
included elsewhere in this report. Standish Mellon voluntarily agreed to
limit the total operating expenses of the Fund and its pro rata share of
the Portfolio expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.36% of the Fund's average daily net assets for
the year ended December 31, 2003. Pursuant to this agreement, for the year
ended December 31, 2003, Standish Mellon voluntarily reimbursed the Fund
for $101,180 of its operating expenses. This agreement is voluntary and
temporary and may be discontinued or revised by Standish Mellon at any
time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Fund for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Trust pays the legal fees for the
independent counsel of the Trustees.
(3) INVESTMENT TRANSACTIONS:
Increases and decreases in the Fund's investment in the Portfolio for the
year ended December 31, 2003, aggregated $153,343,305 and $160,857,552,
respectively.
11
MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST
STANDISH MELLON SHORT-TERM ASSET RESERVE FUND
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) SHARES OF BENEFICIAL INTEREST:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
-------------------- --------------------
Shares sold 7,856,671 7,582,039
Shares issued to shareholders in payment of
distributions declared 145,331 201,591
Shares redeemed (8,221,254) (7,133,587)
---------- ----------
Net increase (decrease) (219,252) 650,043
========== ==========
At December 31, 2003, two shareholders held of record approximately 25% and
15% of the total outstanding shares of the Fund. Investment activity of
these shareholders could have a material impact on the Fund.
A significant portion of the Fund's shares represent investments by
fiduciary accounts over which Standish Mellon and its affiliates have
either sole or joint investment discretion.
(5) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows:
AMOUNT
-----------
Undistributed ordinary income $ 170,610
Accumulated losses (2,449,299)
At December 31, 2003, the Fund, for federal income tax purposes, had
capital loss carryovers which will reduce the Fund's taxable income arising
from net realized gain on investments, if any, to the extent permitted by
the Internal Revenue Code and thus will reduce the amount of distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal income tax. Such capital loss carryovers are as
follows:
CAPITAL LOSS
CARRY OVER EXPIRATION DATE
------------ ---------------
$277,757 12/31/2004
381,998 12/31/2005
80,787 12/31/2006
848,377 12/31/2007
816,280 12/31/2008
The tax character of distributions paid during the fiscal year ended
December 31, 2003, was as follows:
Distributions paid from:
Ordinary income $3,213,940
See corresponding master portfolio for tax basis unrealized
appreciation/(depreciation) information.
12
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Investment Trust and the
Shareholders of Standish Mellon Short-Term Asset Reserve Fund:
In our opinion, the accompanying statement of assets and liabilities and
the related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of Mellon Institutional Funds Investment Trust: Standish
Mellon Short-Term Asset Reserve Fund (formerly, Standish Short-Term Asset
Reserve Fund) (the "Fund"), at December 31, 2003, and the results of its
operations, the changes in its net assets and the financial highlights for
each of the periods indicated, in conformity with accounting principles
generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with auditing standards generally accepted in the United States
of America, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
correspondence with the custodian, provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
13
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
EXPECTED
MATURITY PAR VALUE
SECURITY RATE (UNAUDITED) MATURITY VALUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------
BONDS AND NOTES -- 94.8%
ASSET BACKED -- 38.3%
American Express Master Trust 2001-1 A(a) 1.253% 10/23/2004 09/15/2005 $ 680,000 $ 680,012
American Express Master Trust 2002-1 A(a) 1.233% 01/23/2005 12/15/2005 2,735,000 2,736,207
BMW Vehicle Owner Trust 2002-A A3 3.800% 11/25/2004 05/25/2006 2,331,385 2,355,016
Capital Auto Receivables Asset Trust 2002-2 A3 3.820% 12/15/2004 07/15/2005 3,035,530 3,064,251
Capital One Master Trust 2002-3A A(a) 1.190% 04/21/2005 02/15/2008 3,980,000 3,965,124
Chase Credit Card Master Trust 2002-2 A(a) 1.213% 03/23/2005 07/16/2007 3,510,000 3,510,061
Chase Funding Mortgage Loan Asset Backed
2003-3 2A2(a) 1.389% 10/30/2006 04/25/2033 1,900,000 1,902,343
Chase Manhattan Auto Owner Trust 2001-A A3 4.550% 04/15/2004 08/15/2005 369,287 371,000
Chase Manhattan Auto Owner Trust 2002-A A3 3.490% 09/15/2004 03/15/2006 447,578 451,364
Chase Manhattan Auto Owner Trust 2002-B A3 3.580% 12/15/2004 05/15/2006 1,269,315 1,282,166
Citibank Credit Card Issuance Trust 2002-A5
A5(a) 1.210% 09/21/2005 09/17/2007 4,080,000 4,080,341
Daimler Chrysler Master Owner Trust 2002-A
A(a) 1.223% 05/24/2005 05/15/2007 3,950,000 3,950,069
Discover Card Master Trust I 1995-1 A(a) 1.443% 08/29/2004 02/16/2007 3,000,000 3,003,092
Discover Card Master Trust I 2000-5 A(a) 1.343% 05/24/2005 11/15/2007 725,000 726,215
First USA Credit Card Master Trust 1997-2 A(a) 1.250% 05/23/2004 01/17/2007 2,440,000 2,439,993
Fleet Credit Card Master Trust II 2001-C A 3.860% 09/15/2004 03/15/2007 2,725,000 2,770,952
Ford Credit Auto Owner Trust 2002-A A3B(a) 1.283% 06/06/2004 01/15/2006 1,376,762 1,376,898
Gracechurch Card Funding PLC 4 A(a) 1.213% 06/21/2006 06/15/2008 2,000,000 2,000,312
Honda Auto Receivables Owner Trust 2002-1 A3 3.500% 09/15/2004 10/17/2005 1,781,515 1,795,949
MBNA Credit Card Master Trust 2001-A4 A(a) 1.293% 09/20/2004 02/15/2007 2,440,000 2,440,741
MBNA Master Credit Card Trust 1999-H A(a) 1.360% 04/20/2004 09/15/2006 1,500,000 1,500,493
Nissan Auto Receivable Owner Trust 2002-A A3 3.580% 08/15/2004 09/15/2005 2,027,816 2,042,451
Residential Asset Securities Corp. 1998-KS3
AI6(a) 1.641% 03/08/2005 10/25/2029 564,972 566,788
Residential Asset Securities Corp. 2001-KS2
AI3 5.751% 02/25/2004 03/25/2027 318,507 318,715
SLMA Student Loan Trust 2002-4 A2(a) 1.200% 12/13/2004 12/15/2009 2,222,533 2,222,871
The Money Store Home Equity Trust 1998-B AF6 6.315% 05/15/2004 07/15/2026 169,697 170,921
Toyota Auto Receivables Owner Trust 2001-C
A3(a) 1.233% 03/07/2004 12/15/2005 133,424 133,422
Toyota Auto Receivables Owner Trust 2002-A
A3(a) 1.180% 10/15/2004 01/16/2006 461,171 461,115
Toyota Auto Receivables Owner Trust 2003-B
A3(a) 1.150% 10/29/2005 08/15/2007 2,000,000 1,999,691
------------
Total Asset Backed (Cost $54,479,311) 54,318,573
------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 2.9%
Mound Financing PLC 3A A1-1(a) 1.310% 02/13/2006 02/08/2008 2,500,000 2,501,563
Permanent Financing PLC 1 3A(a) 1.295% 12/14/2005 06/10/2007 1,490,000 1,490,745
------------
Total Collateralized Mortgage Obligations (Cost $3,990,000) 3,992,308
------------
CORPORATE -- 44.0%
BANKING -- 8.8%
CS First Boston (USA), Inc. Notes MTN(a) 1.420% 06/19/2006 06/19/2006 2,000,000 2,003,306
First Union Corp.(a) 1.520% 03/31/2005 1,550,000 1,555,937
National City Bank(a) 1.210% 01/03/2005 2,000,000 2,000,578
National City Bank of Indiana(a) 1.248% 09/16/2005 440,000 440,300
US Bancorp Notes MTN 2.625% 03/15/2006 500,000 504,631
US Bank NA Senior Notes(a) 1.340% 06/14/2005 570,000 571,553
Wachovia Corp. Senior Notes(a) 1.526% 08/19/2004 1,680,000 1,684,506
The accompanying notes are an integral part of the financial statements.
14
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
EXPECTED
MATURITY PAR VALUE
SECURITY RATE (UNAUDITED) MATURITY VALUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------
BANKING (CONTINUED)
Wells Fargo Financial Senior Notes(a) 1.240% 09/12/2005 $2,700,000 $ 2,703,718
Zions Bancorp Senior Notes 2.700% 05/01/2006 1,000,000 1,004,887
------------
12,469,416
------------
CONSUMER CYCLICAL -- 2.1%
Diageo Capital PLC 6.125% 08/15/2005 2,000,000 2,128,538
Diageo PLC 7.125% 09/15/2004 830,000 862,685
------------
2,991,223
------------
CONSUMER NONCYCLICAL -- 2.9%
Coca-Cola Enterprises 2.500% 08/01/2004 09/15/2006 1,559,000 1,554,764
Coca-Cola Enterprises 6.625% 08/01/2004 565,000 580,952
General Mills, Inc. 2.625% 10/24/2006 2,000,000 1,989,026
------------
4,124,742
------------
FINANCIAL -- 28.6%
Allstate Corp. Senior Notes 7.875% 05/01/2005 1,500,000 1,618,232
Associates Corp. NA Senior Notes 6.200% 05/16/2005 2,350,000 2,496,891
Associates Corp. Senior Notes 6.000% 07/15/2005 2,700,000 2,875,551
Bear Stearns Co., Inc. MTN(a) 1.350% 09/15/2006 2,000,000 1,998,586
CIT Group, Inc. Senior Notes(a) 1.540% 09/22/2006 1,550,000 1,556,118
Caterpillar Financial Service Corp. 6.875% 08/01/2004 820,000 845,691
Caterpillar Financial Service Corp.(a) 1.420% 11/04/2004 3,110,000 3,114,995
Citigroup Global Markets, Inc. MTN(a) 1.320% 06/06/2006 2,000,000 2,003,752
Credit Agricole Indosuez(a) 1.038% 02/28/2005 2,000,000 1,984,000
General Electric Capital Corp. 7.500% 05/15/2005 3,000,000 3,233,181
General Electric Capital Corp. MTN(a) 1.185% 12/15/2004 900,000 900,770
General Electric Capital Corp. MTN(a) 1.295% 12/15/2004 03/15/2005 625,000 626,088
Goldman Sachs Group, Inc. 7.625% 08/17/2005 2,420,000 2,644,954
John Deere Capital Corp. MTN(a) 1.340% 07/11/2005 2,000,000 2,000,922
Merrill Lynch & Co. Notes MTN(a) 1.290% 04/28/2005 2,700,000 2,704,136
Morgan Stanley 6.100% 04/15/2006 1,400,000 1,514,968
Morgan Stanley Dean Witter 7.750% 06/15/2005 2,000,000 2,170,810
Morgan Stanley Dean Witter Senior Notes(a) 1.540% 01/31/2006 620,000 623,977
SLM Corp. Notes MTN(a) 1.310% 01/13/2006 700,000 701,904
SLM Corp. Notes MTN(a) 1.310% 01/13/2006 01/25/2006 2,500,000 2,506,243
Textron Financial Corp. MTN 2.690% 10/03/2006 500,000 496,633
Washington Mutual, Inc.(a) 1.433% 11/03/2005 2,000,000 2,001,230
------------
40,619,632
------------
PUBLIC UTILITY -- 1.6%
Alabama Power Co. Senior Notes 4.875% 09/01/2004 560,000 572,954
Carolina Power & Light 5.875% 01/15/2004 1,750,000 1,752,044
------------
2,324,998
------------
Total Corporate (Cost $62,155,156) 62,530,011
------------
The accompanying notes are an integral part of the financial statements.
15
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
SCHEDULE OF INVESTMENTS - DECEMBER 31, 2003
- --------------------------------------------------------------------------------
EXPECTED
MATURITY PAR VALUE
SECURITY RATE (UNAUDITED) MATURITY VALUE (NOTE 1A)
- ----------------------------------------------------------------------------------------------------------
YANKEE BONDS -- 3.5%
HBOS Treasury Services PLC MTN(a) 1.220% 03/14/2005 $2,000,000 $ 2,000,800
Nationwide Building Society 144A Senior
Notes(a) 1.235% 07/21/2006 2,000,000 1,999,822
Quebec Province MTN(a) 1.223% 07/02/2004 1,000,000 999,963
------------
Total Yankee Bonds (Cost $5,000,269) 5,000,585
------------
U.S. GOVERNMENT AGENCY -- 3.1%
PASS THRU SECURITIES -- 3.1%
FHLB 2.250% 05/15/2006 2,000,000 2,000,450
FNMA+ 2.125% 04/15/2006 2,250,000 2,249,111
FNMA Discount Note=/= 1.014% 04/02/2004 200,000 199,489
------------
4,449,050
------------
Total U.S. Government Agency (Cost $4,472,302) 4,449,050
------------
U.S. TREASURY OBLIGATIONS -- 3.0%
TREASURY NOTES -- 3.0%
U.S. Treasury Note=/= 1.625% 04/30/2004 04/30/2005 3,645,000 3,655,964
U.S. Treasury Note=/= 3.375% 04/30/2004 500,000 503,946
------------
4,159,910
------------
Total U.S. Treasury Obligations (Cost $4,157,872) 4,159,910
------------
TOTAL BONDS AND NOTES (COST $134,254,910) 134,450,437
------------
SHORT-TERM INVESTMENTS -- 4.8%
COMMERCIAL PAPER -- 4.8%
Market Street Funding Corp.=/= 0.990% 01/02/2004 6,883,000 6,882,811
------------
REPURCHASE AGREEMENTS -- 0.0%
Tri-party repurchase agreement dated 12/31/03 with Salomon Smith
Barney, Inc. and Investors Bank and Trust Company, due 01/02/04,
with a maturity value of $664 and an effective yield of 0.20%,
collateralized by a U.S. Government Obligation with a rate of 5.18%,
a maturity date of 02/15/26 and an aggregate market value of $678. 664
TOTAL SHORT-TERM INVESTMENTS (COST $6,883,475) 6,883,475
------------
TOTAL INVESTMENTS -- 99.6% (COST
$141,138,385) $ 141,333,912
OTHER ASSETS, LESS LIABILITIES -- 0.4% 522,576
-------------
NET ASSETS -- 100.0% $ 141,856,488
=============
NOTES TO SCHEDULE OF INVESTMENTS:
FHLB - Federal Home Loan Bank
FNMA - Federal National Mortgage Association
MTN - Medium Term Notes
SLMA - Student Loan Marketing Association
(a) Variable Rate Security; rate indicated is as of 12/31/03.
+ Denotes all or part of security segregated as collateral (Note 5).
=/= Rate noted is yield to maturity.
The accompanying notes are an integral part of the financial statements.
16
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (Note 1A) (identified cost,
$141,138,385) $141,333,912
Cash 604
Interest receivable 570,038
Prepaid expenses 3,362
------------
Total assets 141,907,916
LIABILITIES
Accrued accounting and custody fees $13,941
Accrued trustees' fees and expenses (Note 2) 6,149
Accrued expenses and other liabilities 31,338
------
Total liabilities 51,428
------------
NET ASSETS (APPLICABLE TO INVESTORS' BENEFICIAL INTERESTS) $141,856,488
============
The accompanying notes are an integral part of the financial statements.
17
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME (NOTE 1C)
Interest income (including securities lending income of
$22,920 (Note 6)) $3,483,674
EXPENSES
Investment advisory fee (Note 2) $ 445,824
Accounting and custody fees 138,386
Legal and audit services 33,535
Trustees' fees and expenses (Note 2) 24,605
Insurance expense 13,023
Amortization of organizational expenses (Note 1E) 10
---------
Total expenses 655,383
Deduct:
Waiver of investment advisory fee (Note 2) (16,912)
---------
Net expenses 638,471
----------
Net investment income 2,845,203
----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain
Investment security transactions 345,564
Financial futures contracts 163,706
---------
Net realized gain 509,270
Change in unrealized appreciation (depreciation)
Investment securities (654,184)
Financial futures contracts (100,342)
---------
Change in net unrealized appreciation (depreciation) (754,526)
----------
Net realized and unrealized loss (245,256)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS $2,599,947
==========
The accompanying notes are an integral part of the financial statements.
18
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS
FROM INVESTMENT OPERATIONS
Net investment income $ 2,845,203 $ 4,382,044
Net realized gain 509,270 729,933
Change in net unrealized appreciation (depreciation) (754,526) (433,364)
------------ ------------
Net increase in net assets from investment operations 2,599,947 4,678,613
------------ ------------
CAPITAL TRANSACTIONS
Contributions 153,343,305 147,731,049
Withdrawals (160,857,552) (139,693,946)
------------ ------------
Net increase (decrease) in net assets from capital
transactions (7,514,247) 8,037,103
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (4,914,300) 12,715,716
NET ASSETS
At beginning of year 146,770,788 134,055,072
------------ ------------
At end of year $141,856,488 $146,770,788
============ ============
The accompanying notes are an integral part of the financial statements.
19
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001(A) 2000 1999
-------- -------- -------- -------- --------
TOTAL RETURN+ 1.48% 3.14% 6.15% 6.96% 4.64%
RATIOS:
Expenses (to average daily net assets)* 0.36% 0.36% 0.35% 0.34% 0.32%
Net Investment Income (to average daily net assets)* 1.60% 2.99% 4.89% 6.07% 5.62%
Portfolio Turnover 113% 160% 174% 70% 86%
Net Assets, End of Year (000's omitted) $141,856 $146,771 $134,055 $180,548 $302,244
- -----------------
* For the period indicated, the investment adviser voluntarily agreed not to
impose all or a portion of its investment advisory fee and/ or reimbursed
the Portfolio for a portion of its operating expenses. If this voluntary
action had not been taken, the ratios would have been:
Ratios (to average daily net assets):
Expenses 0.37% 0.38% N/A N/A N/A
Net investment income 1.59% 2.97% N/A N/A N/A
(a) The Portfolio has adopted the provisions of the revised AICPA Audit and
Accounting Guide for Investment Companies effective January 1, 2001 and
begun amortizing premium and discount on all debt securities on an
effective yield basis. The effect of this change for the year ended
December 31, 2001 was to increase the ratio of the net investment income to
average net assets by less than 0.01%. Ratios for the periods prior to
January 1, 2001 have not been restated to reflect this change in
presentation.
+ Total return for the Portfolio has been calculated based on the total
return for the invested Fund, assuming all distributions were reinvested,
and adjusted for the difference in expenses as set out in the notes to the
financial statements. Total return would have been lower in the absence of
expense waivers.
The accompanying notes are an integral part of the financial statements.
20
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) SIGNIFICANT ACCOUNTING POLICIES:
Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was
organized as a master trust fund under the laws of the State of New York on
January 18, 1996 and is registered under the Investment Company Act of
1940, as amended, as an open-end, management investment company. Standish
Mellon Short-Term Asset Reserve Portfolio (the "Portfolio") is a separate
diversified investment series of the Portfolio Trust.
At December 31, 2003 there was one fund, Standish Mellon Short-Term Asset
Reserve Fund (the "Fund") invested in the Portfolio. The value of the
Fund's investment in the Portfolio reflects the Fund's proportionate
interest in the net assets of the Portfolio. The Fund's proportionate
interest at December 31, 2003 was approximately 100%.
The objective of the Portfolio is to achieve a high level of current income
consistent with preserving principal and liquidity. The Portfolio seeks to
achieve its objective by investing, under normal circumstances, at least
80% of net assets in dollar-denominated money market instruments,
short-term fixed income securities and asset-backed securities of U.S. and
foreign governments, banks and companies.
On June 21, 2003, by vote of the Trustees, the name of the Standish
Short-Term Asset Reserve Portfolio was changed to Standish Mellon
Short-Term Asset Reserve Portfolio. In addition, the Declaration of Trust
was amended to change the name of the Trust from Standish, Ayer & Wood
Master Portfolio to Mellon Institutional Funds Master Portfolio. The name
changes became effective July 1, 2003.
The following is a summary of significant accounting policies followed by
the Portfolio in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could
differ from those estimates.
A. INVESTMENT SECURITY VALUATIONS
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded. Market
quotations are not considered to be readily available for certain debt
obligations; such investments are stated at fair value on the basis of
valuations furnished by a pricing service or dealers, approved by the
Trustees, which determine valuations for normal institutional-size trading
units of such securities using methods based on market transactions for
comparable securities and variable relationships between securities that
are generally recognized by institutional traders. Securities (including
illiquid securities) for which quotations are not readily available are
valued at their fair value as determined in good faith under consistently
applied procedures under the general supervision of the Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Portfolio are valued at amortized cost, which
approximates market value. If the Portfolio acquires a short-term
instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and
will then be valued at amortized value based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized
value does not represent fair value.
B. REPURCHASE AGREEMENTS
It is the policy of the Portfolio to require the custodian bank to take
possession of, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Collateral for certain tri-party repurchase agreements is held
at the custodian in a segregated account for the benefit of the Portfolio
and the counterparty. Additionally, procedures have been established by the
Portfolio to monitor on a daily basis, the market value and accrued
interest of the repurchase agreement's underlying investments to ensure the
existence of a proper level of collateral.
21
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
C. SECURITIES TRANSACTIONS AND INCOME
Securities transactions are recorded as of trade date. Interest income is
determined on the basis of interest accrued, adjusted for accretion of
discount or amortization of premium using the yield-to-maturity method on
long-term debt securities. Realized gains and losses from securities sold
are recorded on the identified cost basis.
D. INCOME TAXES
The Portfolio is treated as a partnership for federal tax purposes. No
provision is made by the Portfolio for federal or state taxes on any
taxable income of the Portfolio because each investor in the Portfolio is
ultimately responsible for the payment of any taxes. Since at least one of
the Portfolio's investors is a regulated investment company that invests
all or substantially all of its assets in the Portfolio, the Portfolio
normally must satisfy the source of income and diversification requirements
applicable to regulated investment companies (under the Internal Revenue
Code) in order for its investors to satisfy them. The Portfolio allocates
at least annually among its investors each investor's distributive share of
the Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss deduction or credit.
E. DEFERRED ORGANIZATIONAL EXPENSES
Costs incurred by the Portfolio in connection with its organization and
initial registration were amortized on a straight-line basis over the five
year period since the Portfolio's inception on January 2, 1998.
F. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Portfolio may enter into contracts
and agreements that contain a variety of representations and warranties,
which provide general indemnifications. The maximum exposure to the
Portfolio under these arrangements is unknown, as this would involve future
claims that may be made against the Portfolio that have not yet occurred.
However, based on experience, the Portfolio expects the risks of loss to be
remote.
(2) INVESTMENT ADVISORY FEE:
The investment advisory fee paid to Standish Mellon Asset Management
Company LLC ("Standish Mellon") for overall investment advisory and
administrative services is paid monthly at the annual rate of 0.25% of the
Portfolio's average daily net assets. Standish Mellon voluntarily agreed to
limit the Portfolio's total annual operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to 0.36% of the Portfolio's
average daily net assets for the year ended December 31, 2003. Pursuant to
this agreement, for the year ended December 31, 2003, Standish Mellon
voluntarily did not impose $16,912 of its investment advisory fees. This
agreement is voluntary and temporary and may be discontinued or revised by
Standish Mellon at any time.
No director, officer or employee of Standish Mellon or its affiliates
receives any compensation from the Trust or the Portfolio for serving as an
officer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Standish Mellon or its affiliates an
annual fee and a per meeting fee as well as reimbursement for travel and
out of pocket expenses. In addition, the Portfolio Trust pays the legal
fees for the independent counsel of the Trustees.
22
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(3) PURCHASES AND SALES OF INVESTMENTS:
Purchases and proceeds from sales of investments, other than short-term
obligations, for the year ended December 31, 2003 were as follows:
PURCHASES SALES
------------ ------------
U.S. Government Securities $ 91,568,137 $113,005,543
============ ============
Investments (non-U.S.Government Securities) $618,183,200 $ 63,067,000
============ ============
(4) FEDERAL TAXES:
As a regulated investment company qualified under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for its
fiscal year.
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 2003, as computed on a federal
income tax basis, were as follows:
Aggregate Cost $141,138,385
============
Gross unrealized appreciation 459,919
Gross unrealized depreciation (221,713)
------------
Net unrealized appreciation $ 238,206
============
(5) FINANCIAL INSTRUMENTS:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to seek to
enhance potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more fully
in the Portfolio Trust's registration statement.
The Portfolio may trade the following financial instruments with
off-balance sheet risk:
OPTIONS
Call and put options give the holder the right to purchase or sell a
security or currency or enter into a swap arrangement on a future date at a
specified price. The Portfolio may use options to seek to hedge against
risks of market exposure and changes in security prices and foreign
currencies, as well as to seek to enhance returns. Writing puts and buying
calls tend to increase the Portfolio's exposure to the underlying
instrument. Buying puts and writing calls tend to decrease the Portfolio's
exposure to the underlying instrument, or hedge other Portfolio
investments. Options, both held and written by the Portfolio, are reflected
in the accompanying Statement of Assets and Liabilities at market value.
The underlying face amount at value of any open purchased options is shown
in the Schedule of Investments. This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments if there is an illiquid
secondary market for the contract or if the counterparty does not perform
under the contract's terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option written by the Portfolio is exercised, the premium reduces
the cost basis of the securities purchased by the Portfolio. The Portfolio,
as a writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears the
market risk of an unfavorable change in the price of the security
underlying the written option.
23
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Exchange traded options are valued at the last sale price, or if no sales
are reported, the last bid price for purchased options and the last ask
price for written options. Options traded over-the-counter are valued using
prices supplied by the dealers.
The Portfolio entered into no such transactions during the year ended
December 31, 2003.
INTEREST RATE FLOORS
Interest rate floors purchased by the Portfolio entitle the Portfolio to
receive payments on a notional principal amount from the party selling such
floor to the extent that a specified index falls below a predetermined
interest rate amount. Credit and market risk exist with respect to these
instruments. If forecasts of interest rates and other market factors are
incorrect, investment performance will diminish compared to what
performance would have been if these investment techniques were not used.
Even if the forecasts are correct, there are risks that the positions may
correlate imperfectly with the asset or liability being hedged, a liquid
secondary market may not always exist, or a counterparty to a transaction
may not perform. The Portfolio expects to enter these transactions
primarily for hedging purposes including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management
technique or protecting against an increase in the price of securities the
Portfolio anticipates purchasing at a later date. Interest rate floors are
"marked-to-market" daily based on quotations from market makers and the
change, if any, is recorded as unrealized appreciation or depreciation in
the Statement of Operations. Periodic payments of interest, if any, are
reported as additions to interest income in the Statement of Operations.
Realized gains or losses from these agreements are disclosed in the
Statement of Operations.
At December 31, 2003, the Portfolio did not hold any open interest rate
floor agreements.
FUTURES CONTRACTS
The Portfolio may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices at a
fixed price on a future date. Pursuant to margin requirements the Portfolio
deposits either cash or securities in an amount equal to a certain
percentage of the contract amount. Subsequent payments are made or received
by the Portfolio each day, depending on the daily fluctuations in the value
of the underlying security, and are recorded for financial statement
purposes as unrealized gains or losses by the Portfolio. There are several
risks in connection with the use of futures contracts as a hedging device.
The change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not correlate
with changes in the value of hedged investments. Buying futures tends to
increase the Portfolio's exposure to the underlying instrument, while
selling futures tends to decrease the Portfolio's exposure to the
underlying instrument or hedge other investments. In addition, there is the
risk that the Portfolio may not be able to enter into a closing transaction
because of an illiquid secondary market. Losses may arise if there is an
illiquid secondary market or if the counterparty does not perform under the
contract's terms. The Portfolio enters into financial futures transactions
primarily to seek to manage its exposure to certain markets and to changes
in securities prices and foreign currencies. Gains and losses are realized
upon the expiration or closing of the futures contracts. Futures contracts
are valued at the quoted daily settlement prices established by the
exchange on which they trade.
At December 31, 2003, the Portfolio held the following financials futures
contracts:
UNDERLYING FACE
CONTRACT POSITION EXPIRATION DATE AMOUNT AT VALUE UNREALIZED GAIN
-----------------------------------------------------------------------------------------------
Euro Bond (60 Contracts) Long 3/15/2004 $14,816,250 $ 1,450
Euro Bond (62 Contracts) Long 6/14/2004 15,278,350 16,190
Euro Bond (63 Contracts) Long 9/13/2004 15,473,587 26,460
-------
$44,100
=======
At December 31, 2003, the Portfolio had segregated sufficient cash and/or
securities to cover margin requirements on open futures contracts.
24
MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO
STANDISH MELLON SHORT-TERM ASSET RESERVE PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(6) SECURITY LENDING:
The Portfolio may lend its securities to financial institutions which the
Portfolio deems to be creditworthy. The loans are collateralized at all
times with cash or securities with a market value at least equal to the
market value of the securities on loan. The market value of securities
loaned is determined daily and any additional required collateral is
allocated to the Portfolio on the next business day. For the duration of a
loan, the Portfolio receives the equivalent of the interest or dividends
paid by the issuer on the securities loaned and also receives compensation
from the investment of the collateral. As with other extensions of credit,
the Portfolio bears the risk of delay in recovery or even loss of rights in
its securities on loan should the borrower of the securities fail
financially or default on its obligations to the Portfolio. In the event of
borrower default, the Portfolio generally has the right to use the
collateral to offset losses incurred. The Portfolio may incur a loss in the
event it was delayed or prevented from exercising its rights to dispose of
the collateral. The Portfolio also bears the risk in the event that the
interest and/or dividends received on invested collateral is not sufficient
to meet the Portfolio's obligations due on the loans.
The Portfolio loaned securities during the year ended December 31, 2003
resulting in security lending income. At December 31, 2003, the Portfolio
had no securities on loan.
(7) DELAYED DELIVERY TRANSACTIONS:
The Portfolio may purchase securities on a when-issued, delayed delivery or
forward commitment basis. Payment and delivery may take place a month or
more after the date of the transactions. The price of the underlying
securities and the date when the securities will be delivered and paid for
are fixed at the time the transaction is negotiated. Income on the
securities will not be earned until settlement date. The Portfolio
instructs its custodian to segregate securities having value at least equal
to the amount of the purchase commitment.
The Portfolio may enter into to be announced ("TBA") purchase commitments
to purchase securities for a fixed unit price at a future date beyond
customary settlement time. Although the unit price has been established,
the principal value has not been finalized. However, the amount of the
commitments will not fluctuate more than 0.01% from the principal amount.
The Portfolio holds, and maintains until settlement date, cash or
high-grade debt obligations in an amount sufficient to meet the purchase
price, or the Portfolio may enter into offsetting contracts for the forward
sale of other securities it owns. Income on the securities will not be
earned until settlement date. TBA purchase commitments may be considered
securities in themselves, and involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk
is in addition to the risk of the decline in the value of the Portfolio's
other assets. Unsettled TBA purchase commitments are valued at the current
market value of the underlying securities, according to the procedures
described under "Investment security valuations" above.
The Portfolio may enter into TBA sale commitments to hedge its portfolio
positions. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, an offsetting TBA purchase commitment deliverable is held as
"cover" for the transaction.
Unsettled TBA sale commitments are valued at the current market value of
the underlying securities, generally according to the procedures described
under "Investment security valuations" above. The contract is
'marked-to-market' daily and the change in market value is recorded by the
Portfolio as an unrealized gain or loss. If the TBA sale commitment is
closed through the acquisition of an offsetting purchase commitment, the
Portfolio realizes a gain or loss from the sale of the securities based
upon the unit price established at the date the commitment was entered
into.
At December 31, 2003, the Portfolio did not have any delayed delivery
transactions.
25
REPORT OF INDEPENDENT AUDITORS
To the Trustees of Mellon Institutional Funds Master Portfolio and the
Investors of Standish Mellon Short-Term Asset Reserve Portfolio:
In our opinion, the accompanying statement of asset and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Mellon
Institutional Funds Master Portfolio: Standish Mellon Short-Term Asset
Reserve Portfolio (the "Portfolio"), at December 31, 2003, and the results
of its operations, the changes in its net assets and the financial
highlights for each of the periods indicated, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Portfolio's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 2003, by correspondence with the
custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 20, 2004
26
TRUSTEES AND OFFICERS
The following table lists the Trust's trustees and officers; their address and
date of birth; their position with the Trust; the length of time holding that
position with the Trust; their principal occupation(s) during the past five
years; the number of portfolios in the fund complex they oversee; and other
directorships they hold in companies subject to registration or reporting
requirements of the Securities Exchange Act of 1934 (generally called "public
companies") or in registered investment companies as of December 31, 2003. The
Trust's Statement of Additional Information includes additional information
about the Trust's trustees and is available, without charge, upon request by
writing Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or
calling toll free 1-800-221-4795. The same persons serve as trustees and
officers of the Portfolio Trust in the same capacities.
INDEPENDENT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS TRUSTEE TRUSTEE
- ------------------------------------------------------------------------------------------------------------------------------
Samuel C. Fleming Trustee Trustee since Chairman of the 28 None
c/o Decision 11/3/1986 Board and Chief
Resources, Inc. Executive Officer,
260 Charles Street Decision Resources,
Waltham, MA 02453 Inc.
9/30/40
Caleb Loring III Trustee Trustee since Trustee, Essex 28 None
c/o Essex Street 11/3/1986 Street Associates
Associates (family investment
400 Essex Street trust office)
Beverly, MA 01915
11/14/43
Benjamin M. Friedman Trustee Trustee since William Joseph 28 None
c/o Harvard University 9/13/1989 Maier, Professor of
Cambridge, MA 02138 Political Economy,
8/5/44 Harvard University
John H. Hewitt Trustee Trustee since Trustee, Mertens 28 None
P.O. Box 233 11/3/1986 House, Inc. Trustee
New London, NH 03257 and Chairman of the
4/11/35 Board, Visiting
Nurse Alliance of
Vermont & New
Hampshire.
INTERESTED TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Patrick J. Sheppard Trustee, President Since 2003 Senior Vice 28 None
c/o Standish Mellon Asset and Chief President and Chief
Management Company LLC, Executive Officer Operating Officer,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management;
7/24/65 formerly Vice
President and Chief
Financial Officer,
Mellon Institutional
Asset Management
27
PRINCIPAL OFFICERS WHO ARE NOT TRUSTEES
NUMBER OF
PRINCIPAL PORTFOLIOS IN OTHER
NAME, TERM OF OFFICE OCCUPATION(S) FUND COMPLEX DIRECTORSHIPS
ADDRESS, AND POSITION(S) AND LENGTH OF DURING PAST OVERSEEN BY HELD BY
DATE OF BIRTH HELD WITH TRUST TIME SERVED 5 YEARS OFFICER OFFICER
- ------------------------------------------------------------------------------------------------------------------------------
Barbara A. McCann Secretary Secretary since 2003 Senior Vice 28 None
c/o Standish Mellon Asset President and Head
Management, of Operations,
One Boston Place Mellon Institutional
Boston, MA 02108 Asset Management,
2/20/61 formerly First Vice
President, Mellon
Institutional Asset
Management and
Mellon Global
Investments
Steven M. Anderson Vice President and Vice President since Vice President and 28 None
c/o Standish Mellon Asset Treasurer 1999; Treasurer Mutual Funds
Management, since 2002 Controller, Standish
One Boston Place Mellon Asset
Boston, MA 02108 Management; formerly
7/14/65 Assistant Vice
President and Mutual
Funds Controller,
Standish Mellon
Asset Management
Denise B. Kneeland Assistant Vice Since 1996 Vice President and 28 None
c/o Standish Mellon Asset President Manager, Mutual
Management, Funds Operations,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
8/19/51
Lisa Kane Assistant Vice Since 1999 Vice President and 28 None
c/o Standish Mellon Asset President Client Service
Management, Professional,
One Boston Place Standish Mellon
Boston, MA 02108 Asset Management
6/25/70
Cara E. Hultgren, Assistant Vice Since 2001 Assistant Manager, 28 None
c/o Standish Mellon Asset President Mutual Fund
Management, Operations since
One Boston Place 1999; Shareholder
Boston, MA 02108 Representative,
1/19/71 Standish Mellon
Asset Management
Scott Simonds, Assistant Since 2002 Compliance Analyst, 28 None
c/o Standish Mellon Asset VicePresident Boston Partners;
Management, Fund Accountant,
One Boston Place Mellon Financial
Boston, MA 02108 Corp.
8/17/60
A description of the policies and procedures that the fund uses to determine how
to vote proxies relating to portfolio securities is available (i) without
charge, upon request, by calling toll free 1-800-221-4795, (ii) on the fund's
website at http://www.melloninstitutionalfunds.com, and (iii) on the Securities
and Exchange Commission's website at http://www.sec.gov.
28
[Logo] Mellon
--------------------------
Mellon Institutional Funds
One Boston Place
Boston, MA 02108-4408
800.221.4795
www.melloninstitutionalfunds.com
Item 2. Code of Ethics.
As of November 25, 2003, the Registrant has adopted a Code of Ethics
that applies to the Principal Executive Officer and Principal
Financial Officer pursuant to the Sarbanes-Oxley Act of 2002. For the
year ended December 31, 2003, there were no amendments to a provision
of the Code of Ethics nor were there any waivers granted from a
provision of the Code of Ethics. A copy of the Registrant's Code of
Ethics is filed with this Form N-CSR under item 10 (a).
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that the Registrant
has more than one audit committee financial expert serving on its
audit committee. The audit committee financial experts serving on the
Registrant's audit committee are John Hewitt and Caleb Loring III,
both of whom are independent.
Item 4. Principal Accountant Fees and Services.
(a) AUDIT FEES: The aggregate fees paid and accrued by the Registrant
for professional services rendered by its independent auditors,
PricewaterhouseCoopers LLP, for the audit of the Registrant's
annual financial statements for 2003 and 2002 were $127,776 and
$122,495, respectively.
(b) AUDIT RELATED FEES: The aggregate fees paid or accrued by the
Registrant for audit-related professional services rendered by
PricewaterhouseCoopers LLP for 2003 and 2002 were $39,290 and
$37,310, respectively. Such services and related fees for 2003
and 2002 included: the preparation of fiscal year end tax
provisions and distribution requirements necessary to prepare
annual financial statements.
(c) TAX FEES: The aggregate fees paid or accrued by the Registrant
for professional services rendered by PricewaterhouseCoopers LLP
for the review of distributions, asset diversification testing
and preparation of tax returns and extensions for 2003 and 2002
were $92,214 and $88,628, respectively.
(d) ALL OTHER FEES: No such fees were billed to the Registrant by
PricewaterhouseCoopers LLP for 2003 or 2002.
(e) (1) AUDIT COMMITTEE PRE-APPROVAL POLICY: The Registrant's audit
committee pre-approves all audit and non-audit services to be
performed by the Registrant's accountant before the accountant is
engaged by the Registrant to perform such services.
(e) (2) 100% of the services described in each of paragraphs (b)
through (d) of this Item 4 were pre-approved by the Registrant's
audit committee before the accountant was engaged by the
Registrant to perform such services.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Registrant's
accountant for services rendered to the Registrant's investment
adviser by PricewaterhouseCoopers LLP for 2003 and 2002 were
$50,925 and $0, respectively. Services provided in 2003 included
consultation and discussions regarding the tax implications
resulting from the Registrant's change of custodian and fund
administrator, including change in partnership allocation
methodology for funds in a master feeder structure and state tax
issues concerning domicile of master portfolios.
(h) Because all of the non-audit services rendered to the
Registrant's investment adviser or any entity controlling,
controlled by, or under common control with the investment
adviser that provides ongoing services to the registrant were
pre-approved by the Registrant's Audit Committee of the Board of
Directors and no such non-audit services were not pre-approved,
the Audit Committee was not asked to consider whether the
provision of non-audit services rendered to the Registrant's
investment adviser or any entity controlling, controlled by, or
under common control with the investment adviser that provides
ongoing services to the registrant which were not pre-approved by
the Registrant's Audit Committee is compatible with maintaining
the principal accountant's independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable to this filing.
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable to this filing.
Item 8. [Reserved]
Item 9. Controls and Procedures.
(a) The Registrant's Principal Executive Officer and Principal
Financial Officer concluded that the Registrant's disclosure controls
and procedures are effective based on their evaluation of the
Registrant's disclosure controls and procedures as of a date within 90
days prior to the filing date of this report (the "Evaluation Date").
(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 10. Exhibits.
(a)(1) Code of Ethics Described in Item 2 is attached.
(a)(2) Certifications of the Principal Executive Officer and Principal
Financial Officer of the Registrant as required by Rule 30a-2(a) under
the Investment Company Act of 1940 (17 CFR 270.30a-2(a) are attached
hereto as Exhibit 99CERT.302
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 are attached hereto as Exhibit 99CERT.906.
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.
(Registrant) Mellon Institutional Funds Investment Trust
By (Signature and Title):
--------------------------------------------
Barbara A. McCann, Vice President and Secretary
Date
-------------------------------
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 (Signature and Title):
--------------------------------------------
Patrick J. Sheppard, President and Chief
Executive Officer
Date
-------------------------------
By (Signature and Title):
--------------------------------------------
Steven M. Anderson, Vice President and Treasurer
Date
-------------------------------