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 811-5344
William Blair Funds
(Exact name of registrant as specified in charter)
222 West Adams Street, Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
Marco Hanig, President
William Blair Funds
222 West Adams Street, Chicago, IL 60606
(Name and address of agent for service)
Registrant's telephone number, including area code: 312-236-1600
Date of fiscal year end: December 31
Date of reporting period: June 30, 2004
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A Registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimates and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. (ss) 3507.
Item 1. June 30, 2004 Semi-Annual Reports transmitted to shareholders.
[LOGO APPEARS HERE] WILLIAM BLAIR FUNDS
SEMI-ANNUAL REPORT
---------------------------------------------
JUNE 30, 2004
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Table of Contents
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A Letter from the President............. 2
Growth Fund
An Overview from the Portfolio Manager.. 4
Portfolio of Investments................ 7
Tax-Managed Growth Fund
An Overview from the Portfolio Managers. 8
Portfolio of Investments................ 12
Large Cap Growth Fund
An Overview from the Portfolio Managers. 13
Portfolio of Investments................ 16
Small Cap Growth Fund
An Overview from the Portfolio Managers. 17
Portfolio of Investments................ 20
Small-Mid Cap Growth Fund
An Overview from the Portfolio Managers. 21
Portfolio of Investments................ 24
International Growth Fund
An Overview from the Portfolio Manager.. 25
Portfolio of Investments................ 28
International Equity Fund
An Overview from the Portfolio Manager.. 32
Portfolio of Investments................ 33
Value Discovery Fund
An Overview from the Portfolio Managers. 35
Portfolio of Investments................ 39
Income Fund
An Overview from the Portfolio Managers. 40
Portfolio of Investments................ 43
Ready Reserves Fund
An Overview from the Portfolio Managers. 46
Portfolio of Investments................ 48
Financial Statements...................... 49
Notes to Financial Statements............. 55
Board of Trustees......................... 74
Officers.................................. 74
This report is submitted for the general information of the shareholders of the
William Blair Funds. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a prospectus of the William Blair
Funds. Please carefully consider the Funds' investment objectives, risks,
charges, and expenses before investing. This and other information is contained
in the Funds' prospectus, which you may obtain by calling 1-800-742-7272. Read
it carefully before you invest or send money.
June 30, 2004 William Blair Funds 1
[PHOTO OF MARCO HANIG]
Marco Hanig
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A LETTER FROM THE PRESIDENT
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Dear Shareholders:
In the first half of this year, the stock market advanced modestly. The
Standard & Poor's 500 Index of large cap stocks was up 3.44%, the Russell 2000
Index of small cap stocks increased 6.76%, and the MSCI World ex-US Index of
foreign stocks gained 4.10%.
Last year's tax cut and low interest rates were supposed to provide a powerful
stimulus to the economy--which indeed responded with strong growth in GDP and
corporate earnings. As a result, the market bounced back from its March low
point and ended last year 25-45% higher.
This year two opposing forces are at work. On the one hand, the economy is
fundamentally healthy with continued GDP and corporate earnings growth, albeit
at a more normal pace. On the other hand, the Fed raised interest rates to slow
down growth, as it wants to prevent the economy from overheating and make sure
that inflation remains in check--particularly in light of the recent rise in
energy prices. So far, it appears that the Fed is "tapping on the breaks" in
just the right measure, succeeding in slowing down the growth without choking
it off. The result is a stock market that has been rising at a moderate,
sustainable pace.
The market dislikes uncertainty, and there are several areas of concern, such
as the outcome of the upcoming election, the impact of rising interest rates,
the possibility of another major terrorist act, and anxiety over the future
direction of our Middle East policy. Hence, most observers expect the market to
continue to move mostly sideways in the next few quarters. Should some of this
uncertainty be resolved, the underlying strength of the economy would suggest
that we might expect single-digit, or even low teen returns over the coming
years.
Looking across different asset classes, in the first half of the year small cap
stocks did slightly better than large caps, and value stocks a bit better than
growth stocks, but these differences were not very pronounced. This reinforces
the picture of a market essentially in equilibrium, without strong currents
favoring any one sector or capitalization range. Our belief is that this should
favor our bottom-up fundamental research approach that focuses on individual
stock selection.
Total Returns by Fund Category*
January 1 through June 30, 2004
Value Blend Growth
----- ----- ------
Large Cap......................................... 3.46% 2.78% 2.42%
Mid Cap........................................... 6.21% 5.50% 4.57%
Small Cap......................................... 7.86% 7.11% 4.09%
So far this year, the relative returns for most of the William Blair Funds were
somewhat disappointing, with all but two funds underperforming their respective
benchmarks--albeit by fairly modest amounts. The two notable exceptions were
the Small Cap Growth Fund (Class N Shares), which posted an 11.54% return vs.
5.68% for the Russell 2000(R) Growth benchmark, and the recently launched
Small-Mid Cap Growth Fund (Class N Shares), which had a 7.04% return vs. 5.65%
for the Russell 2500(TM) Growth index. The reasons for the over- or
under-performance vary from fund to fund, and are discussed in detail in the
portfolio manager letters included in this report. While we want to be candid
when our results do not shine, we frankly do not attach much significance to
relative performance (either good or bad) over such a short time period.
As always, we thank you for investing with us!
/s/ Marco Hanig
Marco Hanig
- ----------
* Morningstar category returns represent the (non-weighted) average annual
composite performance of all mutual funds listed in a particular category
(such as Large Cap Growth) by Morningstar.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Investment returns and principal will
fluctuate and you may have a gain or loss when you sell shares. For the most
current month-end performance information, please call 1-800-742-7272, or visit
our Web site at www.williamblairfunds.com.
2 Semi-Annual Report June 30, 2004
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PERFORMANCE AS OF JUNE 30, 2004--CLASS N SHARES
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10 Yr Overall
Year to (or since Inception Morningstar
Date 1 Yr 3 Yr 5 Yr inception) Date Rating
------- ----- ----- ----- ---------- --------- ------------------------------
Growth Fund -0.10 12.93 -4.03 -3.85 8.40 3/20/46 ***
Morningstar Large Cap Growth 2.42 16.58 -4.58 -4.89 9.06 Among 985
Russell 3000(R) Growth 2.96 18.82 -3.48 -6.05 9.78 large cap growth funds
Standard & Poor's 500 3.44 19.11 -0.69 -2.20 11.83
Tax-Managed Growth Fund ****
Return before Taxes 1.07 14.40 -2.53 -3.54 12/27/99 Among 985
After Taxes on Distributions 1.07 14.40 -2.53 -3.54 large cap growth funds
After Taxes on Distributions and Sale
of Fund Shares 0.70 9.36 -2.14 2.98
Morningstar Large Cap Growth 2.42 16.58 -4.58 --
Russell 3000(R) Growth 2.96 18.82 -3.48 -10.38
Large Cap Growth Fund -0.84 12.21 -6.05 -11.10 12/27/99 ***
Morningstar Large Cap Growth 2.42 16.58 -4.58 -- Among 985
Russell 1000(R) Growth 2.74 17.88 -3.74 -10.83 large cap growth funds
Small Cap Growth Fund 11.54 44.36 16.30 23.21 12/27/99 *****
Morningstar Small Cap Growth 4.09 28.31 -0.04 -- Among 537
Russell 2000(R) Growth 5.68 31.55 -0.22 -4.53 small cap growth funds
The Small Cap Growth Fund's performance during 2000 was primarily attributable to investments in initial public
offerings (IPOs) during a rising market. Since then, IPOs have had an insignificant effect on the Fund's performance.
Small-Mid Cap Growth Fund 7.04 -- -- -- 6.40 12/29/03 Not rated.
Morningstar Mid-Cap Growth 4.57 -- -- -- --
Russell 2500/TM/ Growth 5.65 -- -- -- 5.00
International Growth Fund 2.95 31.75 5.37 8.88 10.32 10/1/92 *****
Morningstar Foreign Large Growth 2.46 25.99 -0.12 -1.96 3.48 Among 176
MSCI World Free Ex-US 4.10 32.50 5.25 0.96 4.40 foreign large cap growth funds
International Equity Fund 5.60 -- -- -- 5.60 5/24/04 Not rated.
MSCI World Free Ex. US. 5.18 -- -- -- 5.18
Value Discovery Fund 5.25 31.73 9.69 13.11 13.57 12/23/96 ***
Morningstar Small Cap Value 7.86 33.95 11.80 12.65 -- Among 194
Russell 2000(R) 6.76 33.37 6.24 6.63 8.39 small cap value funds
Russell 2000(R) Value 7.83 35.17 12.15 12.82 12.43
Income Fund -0.44 0.23 4.88 5.75 6.18 10/1/90 *****
Morningstar Short-Term Bond -0.06 0.27 3.72 4.90 5.43 Among 206
Lehman Intermediate Govt./Credit Bond short-term bond funds
Index -0.11 -0.06 6.21 6.75 6.89
Past performance does not guarantee future results and current performance
may be lower or higher that the data quoted. Returns shown are average annual
total returns, which assume reinvestment of dividends and capital gains.
Investment returns and principal will fluctuate and you may have a gain or a
loss when you sell shares. For the most current month-end performance
information, please call 1-800-742-7272, or visit our Web site at
www.williamblairfunds.com. Investing in smaller companies involves special
risks, including higher volatility and lower liquidity. International and
emerging markets investing involves special risk considerations, including
currency fluctuations, lower liquidity, economic and political risk. From time
to time, the investment advisor may waive fees or reimburse expenses for
certain Funds. Without these waivers, performance would be lower. Class N
shares are available to the general public without a sales load.
Tax-Managed Growth Fund's after-tax returns are calculated using the highest
historical individual federal marginal income tax rates, and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on the
investor's tax situation and may differ from those shown. After-tax returns
shown are not relevant to investors who hold their fund shares through
tax-deferred arrangements such as 401(k) plans or individual retirement
accounts. After-tax returns are shown only for Class N and the after-tax
returns for other classes will vary.
Morningstar Ratings/TM /are as of 6/30/04 and are subject to change every
month. The ratings are based on a risk-adjusted return measure that accounts
for variation in a fund's monthly performance, placing more emphasis on
downward variations and rewarding consistent performance. The top 10% of funds
in each Category receive 5 stars, the next 22.5% receive 4 stars, the middle
35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive
1 star. The Overall Morningstar Rating for a fund is derived from a
weighted-average of the performance figures associated with its three-, five-
and ten-year (if applicable) Morningstar Rating metrics. The 3/5/10 year
Morningstar ratings were as follows: Growth Fund ***/***/***, Tax-Managed
Growth Fund ****/NA/NA, and Large Cap Growth Fund ***/NA/NA, out of 985/666/233
large growth funds; Small Cap Growth Fund *****/NA/NA out of 537 small growth
funds; Value Discovery Fund **/***/NA out of 194/148 small value funds;
International Growth Fund *****/*****/***** out of 176/132/36 foreign large
growth funds; Income Fund *****/*****/***** out of 206/162/90 short-term bond
funds.
Please carefully consider the Funds' investment objectives, risks, charges,
and expenses before investing. This and other information is contained in the
Funds prospectus, which you may obtain by calling 1-800-742-7272. Read it
carefully before you invest or send money. (C)William Blair & Company, L.L.C.,
distributor. 6/04
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 3
[PHOTO]
JOSTRAND
John F. Jostrand
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GROWTH FUND
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The Growth Fund invests primarily in a diversified portfolio of common stocks
of domestic growth companies with sustainable, above-average growth from one
business cycle to the next.
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AN OVERVIEW FROM THE PORTFOLIO MANAGER
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How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Growth Fund posted a 0.10% decrease on a total return basis (Class N
Shares) for the six months ended June 30, 2004. By comparison, the Fund's
benchmarks, the Russell 3000(R) Growth Index increased 2.96%, while the
Standard & Poor's 500 Index increased 3.44%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The first six months of the year the market continued some of the trend seen in
late 2003, when companies with lower earnings quality outperformed. With
regards to the Fund's first half of the year, one major element of the Growth
Fund's underperformance to the Russell 3000(R) Growth Index came in the
technology sector. As is frequently true, the technology sector proved a
challenging place to invest, with various sub-categories turning in widely
disparate returns. Internet services stocks continued to enjoy strong
appreciation, while computer hardware companies were up modestly and
semiconductors were in negative territory.
As we mentioned before, low quality, low price stocks ruled the performance
derby in 2003. Most of these stocks outperformed based on expectations that
these companies would stand to benefit the most from an economic recovery.
Consistent with our philosophy, these low quality growth stocks, however, do
not meet our Fund's investment criteria. Late in the first quarter, with the
tempo of the economy slowing, higher quality stocks did begin to show signs of
strength. Companies with interest rate sensitivity, particularly financial and
consumer discretionary stocks were also laggards as concerns loomed with the
Federal Reserve set to raise interest rates. Although the Fund underperformed
early in the first quarter as the winners of 2003 had one last run, the Fund
outperformed when the market weakened. By the end of the first quarter, the
Fund worked back to almost even with its benchmark.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Health Care sector was the largest contributor to our performance. Within
the sector, Alcon and Zimmer Holdings continue to be strong outperformers with
first half returns of 30% and 25% respectively. Alcon, the global medical
company that specializes in eye care related products, continues to execute
their business strategy. Their most recent quarter saw earning's gains of 35%
spread throughout each of their divisions. We are confident that Alcon will
continue to gain market share and increase sales per account with new products
continuing to come to market. Zimmer's orthopedic sales remain robust. We
expect strong double-digit earnings growth through 2006. Pricing remains
favorable, and the demographic backdrop (aging baby-boomers) should extend
revenue growth.
4 Semi-Annual Report June 30, 2004
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
The consumer discretionary sector weighed on the Fund's first six months'
performance. CarMax, a leading retailer of used cars and trucks had a difficult
first half of the year. Consumers have been substituting new cars in place of
used because of automobile manufacturers increasing usage of incentives.
Although the industry has been under stress, CarMax continues to take market
share.
Switching from autos to airplanes, another holding that underperformed in the
first half was Ryanair based out of Ireland. From a profitability standpoint
they remain the leader, but a combination of unfavorable government regulations
and stepped up competition has impacted their margins.
What is your current strategy? How is the Fund positioned?
The next boost to the economy is more likely to come from corporate spending,
as many companies now maintain record levels of cash. We expect as consumer
spending slows, the corporate sector will take the baton and increase capital
expenditures. As business executives' optimism increases, they will begin to
increase their profit reinvestment or raise their dividends to shareholders. To
facilitate the reinvestment, businesses will have to increase hiring, which
should modestly revitalize consumer spending.
Our recent increase in Danaher this quarter illustrates our positioning given
our outlook of higher interest rates and increased capital spending. Danaher's
diversified industrial customer base has much stronger balance sheets than
year's past. To maintain its growth, Danaher's customers will need to reinvest
in its businesses.
Earnings strength remained positive into the end of the first half. However, we
are now entering the point of the earnings cycle where relatively easy
comparisons are over and companies' earnings acceleration slows. In our
opinion, earnings will remain solid; however, they will likely slow to
approximate historical trend line growth. As this transition occurs, quality
growth tends to outperform the leveraged, lower-quality companies as higher
interest rates make financing more challenging.
June 30, 2004 William Blair Funds 5
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Growth Fund
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Performance Highlights
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Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999
------------ ----- ------ ------ ------ -----
Growth Fund Class N......... (0.10)% 23.70% (25.85)% (13.53)% (7.47)% 19.98%
Growth Fund Class I......... 0.00 24.14 (25.71) (13.33) (7.27) 19.91(a)(b)
Russell 3000(R) Growth Index 2.96 30.97 (28.03) (19.63) (22.42) 33.82
S&P 500 Index............... 3.44 28.68 (22.10) (11.88) (9.11) 21.04
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year 5 Year 10 Year Inception
------ ------ ------ ------- ---------
Growth Fund Class N 12.93% (4.03)% (3.85)% 8.40% --%
Growth Fund Class I 13.26 (3.79) -- -- (2.45)(c)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 1, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from October 1, 1999 to June 30,
2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
Growth Fund - Russell 3000/R/ S&P 500
Class N Growth Index Index
1993 $10,000 $10,000 $10,000
1994 10,600 10,200 10,100
1995 13,700 14,000 13,900
1996 16,200 17,000 17,100
1997 19,500 21,900 22,900
1998 24,800 29,600 29,400
1999 29,700 39,600 35,600
2000 27,500 30,700 32,300
2001 23,800 24,700 28,500
2002 17,600 17,800 22,200
2003 21,800 23,300 28,600
6/04 21,800 23,900 29,500
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. Class N shares are available
to the general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 3000(R) Growth Index consists of large, medium, and
small-capitalization companies with above average price-to-book ratios and
forecasted growth rates. The index is weighted by market capitalization and
large/medium/small companies make up approximately 80%/15%/5% of the index.
The S&P 500 Index indicates broad larger capitalization equity market
performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
6 Semi-Annual Report June 30, 2004
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Growth Fund
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Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- --------------------------------------------------- --------
Shares Value
- --------- ----------------------------------------- --------
Common Stocks
Information Technology--32.3%
288,200 *BEA Systems, Inc........................ $ 2,369
89,900 CDW Corporation.......................... 5,732
94,700 *Cognos, Inc.+........................... 3,424
224,900 *Dell, Inc............................... 8,056
49,000 *Digital Insight, Inc.................... 1,016
398,100 *EMC Corporation......................... 4,538
243,200 First Data Corporation................... 10,827
136,400 *Intuit, Inc............................. 5,262
138,525 *Iron Mountain, Inc...................... 6,685
179,525 *Jabil Circuit, Inc...................... 4,520
124,700 Linear Technology Corporation............ 4,922
157,800 Paychex, Inc............................. 5,346
201,900 SAP AG-ADR............................... 8,442
172,700 *Skillsoft Plc-ADR....................... 1,313
37,500 StarTek, Inc............................. 1,343
308,600 *SunGard Data Systems, Inc............... 8,024
838,651 Taiwan Semiconductor Mfg. Co. Ltd.--ADR.. 6,969
--------
88,788
--------
Health Care--26.2%
100,200 Alcon, Inc.+............................. 7,881
110,000 *Amgen, Inc.............................. 6,003
182,700 *Axcan Pharma, Inc.+..................... 3,855
102,175 Eli Lilly & Company...................... 7,143
78,400 *Express Scripts, Inc., Class "A"........ 6,212
73,900 *Integra LifeSciences Holding Corporation 2,606
171,800 Medtronic, Inc........................... 8,370
242,275 Pfizer, Inc.............................. 8,305
81,200 *ResMed, Inc............................. 4,138
117,900 UnitedHealth Group, Inc.................. 7,339
113,500 *Zimmer Holdings, Inc.................... 10,011
--------
71,863
--------
Industrials and Services--12.0%
101,500 C.H. Robinson Worldwide, Inc............. 4,653
213,196 Danaher Corporation...................... 11,054
140,000 *Education Management Corporation........ 4,600
171,000 *Knight Transportation, Inc.............. 4,913
159,500 *Labor Ready, Inc........................ 2,472
103,300 *Ryanair Holdings plc--ADR............... 3,386
15,900 Strayer Education, Inc................... 1,774
--------
32,852
--------
- ----------
*Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
- ---------------------------------------------- --------
Shares Value
- --------- ------------------------------------ --------
Common Stocks--(continued)
Consumer Discretionary--11.8%
185,350 *Bed, Bath & Beyond, Inc............ $ 7,127
141,700 *CarMax, Inc........................ 3,099
98,075 *Cox Communications, Inc., Class "A" 2,725
108,900 *Entercom Communications Corporation 4,062
161,550 Family Dollar Stores, Inc........... 4,914
106,550 Harley-Davidson, Inc................ 6,600
89,900 *Kohl's Corporation................. 3,801
--------
32,328
--------
Financials--8.0%
165,205 SEI Investments Company............. 4,798
174,050 SLM Corporation..................... 7,040
138,650 State Street Corporation............ 6,799
43,500 XL Capital Ltd., Class "A"+......... 3,283
--------
21,920
--------
Consumer Staples--3.4%
175,200 PepsiCo, Inc........................ 9,440
--------
Energy--2.7%
66,700 Apache Corporation.................. 2,905
178,300 Suncor Energy, Inc.+................ 4,566
--------
7,471
--------
Materials--2.3%
200,600 Ecolab, Inc......................... 6,359
--------
Total Common Stock--98.7%
(cost $217,557).............................. 271,021
--------
Investment in Affiliate
3,273,228 William Blair Ready Reserves Fund... 3,273
--------
Total Investment in Affiliate--1.2%
(cost $3,273)................................ 3,273
--------
Total Investments--99.9%
(cost $220,830).............................. 274,294
Cash and other assets, less liabilities--0.1%. 319
--------
Net assets--100.0%............................ $274,613
========
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 7
[PHOTO]
FULLER
Mark A. Fuller III
[PHOTO]
PUSINELLI
Gregory J. Pusinelli
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TAX-MANAGED GROWTH FUND
- --------------------------------------------------------------------------------
The Tax-Managed Growth Fund invests primarily in a diversified portfolio of
common stocks of domestic growth companies with sustainable, above-average
growth from one business cycle to the next.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
For the six-month period ended June 30, 2004, the Tax-Managed Growth Fund
posted a 1.07% gain on a total return basis (Class N Shares). By comparison,
the Fund's benchmark, the Russell 3000(R) Growth Index increased 2.96% and the
Standard & Poor's 500 Stock Index gained 3.44%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
Weakness in two sectors--Consumer Discretionary and Information Technology were
largely responsible for the Fund's underperformance versus its benchmark at
mid-year.
The speculative, lower quality stock rally that dominated the equity markets in
2003 spilled over into early 2004. As we have stated, most of last year's
top-performing stocks were lower-quality and more speculative companies with no
demonstrated history of earnings growth. Investors believed these companies
would be the greatest beneficiaries of an economic and stock market recovery.
The majority of these types of companies, however, do not fit our high quality
growth criteria.
In the latter half of the first quarter, higher quality issues such as those
the Fund invests in began to close the performance gap with their lower quality
counterparts. We believe investors began to move towards more predictable
businesses with solid, demonstrated track records of earnings growth. These
companies will be the best equipped to effectively manage their businesses in a
more temperate economic climate.
The equity markets moved sideways during the second quarter, as the major stock
market indexes moved in a trading range for weeks ahead of the Federal
Reserve's policy-making Open Market Committee meeting on June 30. The mood was
a subdued one as investors mulled over the prospects for rising interest rates,
inflation and the tenuous situation in Iraq.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Industrials and Healthcare sectors were where the Fund had its best
performers, with Industrial stocks, in particular, benefiting from signs of
strength in the economy. Three of the second quarter's top six performing
issues were Industrials, including Expeditors International, a transportation
and logistics company focused on imports from the Far East; Knight
Transportation, a trucking company; and Choicepoint, a company which conducts
background security checks for firms hiring new employees. As employment
numbers have grown, Choicepoint has seen greater demand for its services.
8 Semi-Annual Report June 30, 2004
Within the Healthcare sector, Alcon, Stryker and Zimmer Holdings also were
strong performers. Alcon is a global leader in developing, manufacturing, and
selling ophthalmology drugs, supplies, and surgical devices, and also sells
consumer eye-care products such as contact lens-cleaning solution. Stryker and
Zimmer Holdings are both firms involved in the design and manufacture of
orthopedic products and devices.
The Fund's best performing investment--for both the second quarter as well as
the year-to-date period--was Whole Foods, in the Consumer Staples sector. The
company has benefited from the heightened focus by consumers on eating
healthier foods, and to a lesser extent as consumers and investors avoided
supermarket retailers involved in recent labor disputes. Whole Foods also
dominates a market segment in which there is no strong "number two" competitor.
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
As previously mentioned, the Consumer Discretionary and Information Technology
sectors accounted for most of the weakness in the Fund's portfolio.
The worst-performing issue for the quarter as well as the year-to-date period
was Vistacare, in the Health Care sector. Vistacare is a hospice-care provider
which has grown rapidly since the company first went public in 2003. The
company has seen a slowdown in admissions growth, partly due to a
reorganization of its sales force and sales process. As a result, the company
has lowered its earnings "guidance" (forecasts) going forward. We believe this
company is facing a challenging and more competitive market environment in the
near-term, as the business attracts new entrants and is subjected to downward
pricing pressure. We will be closely monitoring the company to see if Vistacare
has hit a "pothole" in the road, or if its business is undergoing a fundamental
change.
CarMax was the second worst-performing stock. CarMax was hurt by continued
dealer incentives for new cars, as well as rising used car prices. The price
increase in used cars is attributed to the low cost of financing new cars,
which results in a decrease in leased cars. Fewer leased cars means that fewer
used cars are returned to dealer fleets when the leases expire. Finally, a
number of current car owners have negative "equity" in their cars as the value
of their car loans exceeds the trade-in value of their vehicles. We nonetheless
remain convinced that the rationale for originally investing in CarMax is
intact: the company has an excellent management team, it has a superior
business proposition for consumers, no dominant competitors, and the company is
still in the very early stage of significant long-term growth.
Other poor performers included Weight Watchers, which reflected migrating
consumer preferences to try out other dieting alternatives, such as the current
"low-carb" diet fad, and Family Dollar Stores, whose customers have been hurt
by the recent rise in energy prices. Family Dollar customers' disposable income
is disproportionately impacted by higher gasoline prices, so an increase at the
pump means that its customers will have less to spend in their stores.
Lastly, Technology was a volatile sector during the first quarter, and many of
the chip manufacturers came under pressure, with some profit-taking occurring
amid impressions that demand might be moderating along with growth in the
economy.
What is your current strategy? How is the Fund positioned?
Unlike the speculative market environment of 2003, the stock market has shifted
this year towards profitable companies with good balance sheets and higher
returns on invested capital. It is an environment in which we expect our high
quality growth emphasis to have a greater impact on performance.
June 30, 2004 William Blair Funds 9
With the economic recovery on solid footing, we are evaluating our industry
focus and companies that will stand to benefit from the expansion in the
economy. As we search for promising candidates for the Fund's portfolio of
investments, we intend to maintain reasonable weightings in different sectors,
and are not inclined to change our over- or under-weighting in any particular
area.
We remain committed to our Consumer Discretionary holding in spite of the
weakness in that sector. One sector we will be closely monitoring is Media,
where two of our holdings, Univision and Clear Channel, are not experiencing
the increase in ad spending we would expect at this point in the economic
recovery compared to historic trends, especially in advance of the upcoming
presidential election.
As always, we will continue to focus on and emphasize high-quality names that
we believe will serve our investors well.
10 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ------ ------ ----------
Tax-Managed Growth Fund Class N 1.07% 22.59% (24.37)% (10.02)% (0.98)% 1.80%
Tax-Managed Growth Fund Class I 1.29 22.83 (24.12) (9.79) (0.69) 1.80
Russell 3000(R) Growth Index... 2.96 30.97 (28.03) (19.63) (22.42) 0.79
S&P 500 Index.................. 3.44 28.68 (22.10) (11.88) (9.11) 0.85
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year Inception(c)
------ ------ ------------
Tax-Managed Growth Fund Class N 14.40% (2.53)% (3.54)%
Tax-Managed Growth Fund Class I 14.80 (2.26) (3.26)
----------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
12/27/99 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04
Tax-Managed
Growth Fund
Class N $10,000 10,400 10,100 9,200 9,100 7,600 6,900 7,400 8,400 8,500
Russell 3000(R)
Growth Index $10,000 10,500 7,800 6,800 6,300 5,000 4,500 5,100 5,900 6,100
S&P 500 Index $10,000 10,000 9,200 8,600 8,100 7,000 6,300 7,000 8,100 8,400
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. From time to time, the
investment adviser may waive fees or reimburse expenses for the Fund. Without
these waivers, performance would be lower. Class N shares are available to the
general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 3000(R) Growth Index consists of large, medium, and
small-capitalization companies with above average price-to-book ratios and
forecasted growth rates. The index is weighted by market capitalization and
large/medium/small companies make up approximately 80%/15%/5% of the index.
The S&P 500 Index indicates broad larger capitalization equity market
performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 11
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- --------------------------------------------- ------
Shares Value
- ------ -------------------------------------- ------
Common Stocks
Health Care--21.3%
2,115 Alcon, Inc.+.......................... $ 166
805 Allegran, Inc......................... 72
1,855 *Amgen, Inc........................... 101
2,265 *Express Scripts, Inc., Class "A"..... 179
1,425 Guidant Corporation................... 80
3,675 Pfizer, Inc........................... 126
3,190 *ResMed, Inc.......................... 163
1,400 Stryker Corporation................... 77
2,260 *Vistacare, Inc., Class "A"........... 42
2,390 *Zimmer Holdings, Inc................. 211
------
1,217
------
Information Technology--21.2%
5,775 *BISYS Group.......................... 81
1,380 *Caci International, Inc., Class "A".. 56
1,640 CDW Corporation....................... 105
3,240 First Data Corporation................ 144
2,955 *Fiserv, Inc.......................... 115
3,165 *Intuit, Inc.......................... 122
3,595 *Jabil Circuit, Inc................... 90
2,610 Microchip Technology, Inc............. 82
3,930 Microsoft Corporation................. 112
1,740 Paychex, Inc.......................... 59
4,495 *SunGard Data Systems, Inc............ 117
8,539 Taiwan Semiconductor Mfg. Co. Ltd--ADR 71
1,790 Xilinx, Inc........................... 60
------
1,214
------
Consumer Discretionary--17.7%
2,100 *Bed, Bath & Beyond, Inc.............. 80
2,750 *CarMax, Inc.......................... 60
2,200 Clear Channel Communications.......... 81
4,200 *Comcast Corporation, Class "A"....... 116
3,355 Family Dollar Stores, Inc............. 102
3,280 *InterActiveCorp...................... 99
990 *Kohl's Corporation................... 42
2,925 Lowe's Companies, Inc................. 154
2,135 Regis Corporation..................... 95
1,840 *Univision Communications, Inc........ 59
3,695 *Williams-Sonoma, Inc................. 122
------
1,010
------
Industrials and Services--16.8%
2,485 C.H. Robinson Worldwide, Inc.......... 114
1,400 *ChoicePoint, Inc..................... 64
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = US. listed foreign security
- ----------------------------------------------- ------
Shares Value
- ------ ---------------------------------------- ------
Common Stocks--(continued)
Industrials and Services--(continued)
4,030 Danaher Corporation..................... $ 209
2,475 Expeditors International of Washington.. 122
3,170 Fastenal Company........................ 180
3,605 General Electric Company................ 117
2,370 *Knight Transportation, Inc............. 68
2,725 *Ryanair Holdings plc--ADR.............. 90
------
964
------
Financials--9.7%
2,240 American International Group............ 160
2,270 Investors Financial Services Corporation 99
2,145 Moody's Corporation..................... 138
1,665 State Street Corporation................ 82
1,010 XL Capital Ltd., Class "A"+............. 76
------
555
------
Consumer Staples--7.3%
1,110 Colgate-Palmolive Company............... 65
3,115 PepsiCo, Inc............................ 168
2,395 Walgreen Co............................. 87
1,040 Whole Foods Market, Inc................. 99
------
419
------
Materials--5.0%
5,930 Airgas, Inc............................. 142
2,320 Ecolab, Inc............................. 74
1,810 Praxair, Inc............................ 72
------
288
------
Energy--2.7%
6,060 Suncor Energy, Inc.+.................... 155
------
Total Common Stock--101.7%
(Cost $4,545)................................. 5,822
------
Investment in Affiliate
1,598 William Blair Ready Reserves Fund....... 2
------
Total Investment in Affiliate--0.1%
(Cost $2)..................................... 2
------
Total Investments--101.8%
(Cost $4,547)................................. 5,824
Liabilities plus cash and other assets--(1.8)%. (104)
------
Net assets--100.0%............................. $5,720
======
See accompanying Notes to Financial Statements.
12 Semi-Annual Report June 30, 2004
[PHOTO]
BARBER
Rocky Barber
[PHOTO]
JOSTRAND
John F. Jostrand
[PHOTO]
Norbert W. Truderung
Norbert W. Truderung
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Large Cap Growth Fund invests primarily in common stocks of large domestic
growth companies of high quality that have demonstrated sustained growth over a
long period of time.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Large Cap Growth Fund posted a 0.84% decrease on a total return basis
(Class N Shares) for the six months ended June 30, 2004. By comparison, the
Fund's benchmark, the Russell 1000 Growth(R) Index, increased 2.74%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
During the first few months of 2004 the market seemed to be digesting the gains
achieved in 2003. With respect to the Fund's first half, one major element of
the Large Cap Growth Fund's underperformance to the Russell 1000(R) Growth
Index came in the technology sector. As is frequently true, the technology
sector proved a challenging place to invest, with various sub-categories
turning in widely disparate returns. Internet services stocks continued to
enjoy strong appreciation, while computer hardware companies were up modestly
and semiconductors were in negative territory.
As we mentioned before, low quality, low price stocks ruled the performance
derby in 2003. Most of these stocks outperformed based on expectations that
these companies would stand to benefit the most from an economic recovery.
Consistent with our philosophy, these low quality growth stocks, however, do
not meet our Fund's investment criteria.
Late in the first quarter, with the tempo of the economy slowing, higher
quality stocks did begin to show signs of strength. Companies with interest
rate sensitivity, particularly financial and consumer discretionary stocks were
also laggards as concerns loomed with the Federal Reserve set to raise interest
rates. Although the Fund underperformed early in the first quarter as the
low-quality winners of 2003 had one last run, the Fund outperformed when the
market weakened. By the end of the first quarter, the Fund worked back to
almost even with its benchmark.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Health Care sector was the largest contributor to our performance. Within
the Health Care sector, Alcon and Zimmer Holdings continue to be strong
outperformers with second quarter returns of 24% and 20% respectively. Alcon,
the global medical company that specializes in eye care related products,
continues to execute its business strategy. Alcon's most recent quarter saw
earnings gains of 35% spread throughout each of its divisions. We are confident
that Alcon will continue to gain market share and increase sales per account
with new products continuing to come to market. Zimmer's orthopedic sales
remain robust. We expect strong double-digit earnings growth through 2006.
Pricing remains favorable, and the demographic backdrop (aging baby-boomers)
should extend revenue growth.
June 30, 2004 William Blair Funds 13
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
BEA Systems, a software company, proved a significant detractor from
performance. Our initial rationale for the purchase was BEA's dominant software
offering. Although we still believe its products have relative strengths,
customers are currently indicating a stronger interest in purchasing
lower-priced (and in our opinion, lower quality) bundled software offerings.
The Fund's consumer discretionary holdings did not keep pace with the overall
market. Cox Communication was the largest detractor during the first half of
the year. With the majority of the costs associated with the deployment of the
next generation of cable behind them, the cable companies' balance sheets are
in much better shape. However the market is now concerned with satellite's
growing subscriber companies becoming more of a competitor.
What is your current strategy? How is the Fund positioned?
The next boost to the economy is more likely to come from corporate spending,
as many companies now have record levels of cash. We expect as consumer
spending slows, the corporate sector will take the baton and increase capital
expenditures. As business executives' optimism increases, we believe they will
begin to increase their profit reinvestment or raise their dividends to
shareholders. To facilitate the reinvestment, businesses will have to increase
hiring, which should modestly revitalize consumer spending.
Our recent increase in Danaher illustrates our positioning given our outlook
for increased capital spending. Danaher's diversified industrial customer base
has a much stronger balance sheet than in years past. To maintain their growth,
Danaher's customers will need to reinvest in its businesses.
Earnings strength remained positive into the end of the first half. However, we
are now entering the point of the earnings cycle where relatively easy
comparisons are over and companies' earnings acceleration slows. In our
opinion, earnings will remain solid; however, they will likely slow to the
approximate historical trend line growth. As this transition occurs, quality
growth tends to outperform the leveraged, lower quality companies as higher
interest rates make financing more challenging.
14 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Large Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ------ ------ ----------
Large Cap Growth Fund Class N (0.84)% 23.54% (28.57)% (20.47)% (16.67)% 1.40%
Large Cap Growth Fund Class I (0.83) 24.27 (28.49) (20.43) (16.47) 1.40
Russell 1000(R) Growth Index. 2.74 29.75 (27.88) (20.42) (22.42) 0.46
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year Inception(c)
------ ------ ------------
Large Cap Growth Fund Class N 12.21% (6.05)% (11.10)%
Large Cap Growth Fund Class I 12.50 (5.86) (10.90)
----------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
Large Cap
Growth Fund Russell 1000/R/
Class N Growth Index
12/27/99 $10,000 $10,000
6/00 10,100 10,500
12/00 8,500 7,800
6/01 7,100 6,700
12/01 6,700 6,200
6/02 5,400 4,900
12/02 4,800 4,500
6/03 5,200 5,100
12/03 5,900 5,800
6/04 5,900 6,000
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. From time to time, the
investment adviser may waive fees or reimburse expenses for the Fund. Without
these waivers, performance would be lower. Class N shares are available to the
general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 1000(R) Growth Index consists of large-capitalization companies
with above average-to-book ratios and forecasted growth rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 15
- --------------------------------------------------------------------------------
Large Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------------------------------------------- ------
Shares Value
- ------- --------------------------------------- ------
Common Stocks
Information Technology--28.1%
10,050 *BEA Systems, Inc...................... $ 83
7,450 *Dell, Inc............................. 267
9,600 *EMC Corporation....................... 110
6,500 First Data Corporation................. 289
3,450 *Intuit, Inc........................... 133
3,935 Linear Technology Corporation.......... 155
3,400 Paychex, Inc........................... 115
5,475 SAP AG--ADR............................ 229
8,635 *SunGard Data Systems, Inc............. 225
19,052 Taiwan Semiconductor Mfg. Co. Ltd.--ADR 158
------
1,764
------
Health Care--24.7%
2,500 Alcon, Inc.+........................... 197
3,285 *Amgen, Inc............................ 179
2,255 Eli Lilly & Company.................... 158
4,790 Medtronic, Inc......................... 233
9,465 Pfizer, Inc............................ 324
3,740 UnitedHealth Group, Inc................ 233
2,550 *Zimmer Holdings, Inc.................. 225
------
1,549
------
Consumer Discretionary--12.8%
5,200 *Bed, Bath & Beyond, Inc............... 200
3,685 Clear Channel Communications, Inc...... 136
7,000 *Cox Communications, Inc., Class "A"... 195
2,300 Harley-Davidson, Inc................... 142
3,000 *Kohl's Corporation.................... 127
------
800
------
Financials--10.6%
2,250 Federal National Mortgage Association.. 160
6,000 SLM Corporation........................ 243
3,770 State Street Corporation............... 185
975 XL Capital Ltd., Class "A" +........... 74
------
662
------
- ----------
* Non-income producing securities
+ U.S. listed foreign security
ADR = American Depository Receipt
- -------------------------------------------- ------
Shares Value
- --------- ---------------------------------- ------
Common Stocks--(continued)
Consumer Staples--10.5%
2,900 Avon Products, Inc................ $ 134
3,150 PepsiCo, Inc...................... 170
2,600 Wal-Mart Stores, Inc.............. 137
6,025 Walgreen Co....................... 218
------
659
------
Industrials and Services--7.0%
5,212 Danaher Corporation............... 270
5,150 General Electric Company.......... 167
------
437
------
Energy--2.3%
1,450 Apache Corporation................ 63
3,250 Suncor Energy, Inc.+.............. 83
------
146
------
Materials--2.3%
4,550 Ecolab, Inc....................... 144
------
Total Common Stock--98.3%
(cost $5,382)............................... 6,161
------
Investment in Affiliate
106,899 William Blair Ready Reserves Fund. 107
------
Total Investment in Affiliate--1.7%
(cost $107)................................. 107
------
Total Investments--100.0%
(cost $5,489)............................... 6,268
Cash and other assets, less liabilities--0.0% --
------
Net assets--100.0%........................... $6,268
======
See accompanying Notes to Financial Statements.
16 Semi-Annual Report June 30, 2004
[PHOTO]
Michael P. Balkin
Michael P. Balkin
[PHOTO]
BREWER
Karl W. Brewer
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Small Cap Growth Fund invests primarily in common stocks of small domestic
growth companies and are expected to experience solid growth in earnings.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Small Cap Growth Fund posted a 11.54% gain on a total return basis (Class N
Shares) for the six months ended June 30, 2004, significantly ahead of its
primary benchmark, the Russell 2000(R) Growth Index, which increased 5.68%
during the period, and the Russell 2000(R) Index, which rose 6.76%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's outperformance versus the benchmark?
When compared to its benchmark, the Small Cap Growth Fund had outperformance in
every significant sector (i.e., sectors with over a 5% weight in the Russell
2000(R) Growth Index) in the first half of the year.
Small cap stocks were again the best performing asset class in the first
quarter as the Russell 2000(R) Index closed at an all time high versus the S&P
500 on a trailing 52-week relative return basis. In the second quarter, the
Russell 2000(R) achieved its fifth consecutive up quarter in a row, which had
not happened since 1995-96, when the Russell 2000(R) posted six consecutive
positive quarters. A change in leadership occurred in the second quarter, as
the larger capitalization stocks, as measured by the S&P 500 and Russell 1000
Indices, modestly outpaced the small cap stocks. In contrast to 2003, the most
significant impact on the Russell 2000(R) Growth's performance in the first
half of the year came from the larger market cap companies in the index as
investors shifted their focus away from the more speculative, low-priced micro
cap stocks. In the Fund, stock selection in the middle of the small
capitalization range was a large benefit to relative performance.
While the small cap markets were relatively strong in the first quarter, the
second quarter witnessed a more turbulent period. Following a negative start in
April and early May, the equity markets turned in the middle of the second
quarter and ended in positive territory. Mixed signals on the economic and
political fronts created increased volatility and uncertainty during the
period. With continued instability in the Middle East contributing to higher
oil prices, energy stocks performed well in the second quarter both for the
benchmark and the Fund. With the virtually "pre-announced" 0.25% increase in
rates by the Federal Reserve, and some remaining concerns about future rate
increases, Financial Services, Consumer and Technology stocks in the Russell
2000(R) Growth Index were hit the hardest in the quarter.
Which sectors enhanced the Fund's return? What were among the best performing
investments for the Fund?
The Fund outperformed the benchmark in most sectors, including all of the four
major sectors (Consumer Discretionary, Healthcare, Technology and Financial
Services) during the first half of the year. The Fund's most significant
contributors to absolute performance for the first half of the year were in the
Consumer Discretionary and Health Care Sectors, while Technology was the
largest contributor to relative performance. The Fund was slightly
June 30, 2004 William Blair Funds 17
overweight the Energy sector and our holdings outperformed those in the
benchmark. Quicksilver Resources, Inc., a natural gas producer focused
primarily on the western United States and Canada, was one of our top
contributors to performance. The stock was up significantly in the second
quarter due to a combination of successful drilling on several key properties
along with an overall strong energy market.
The Health Care sector was our biggest contributor to performance in the second
quarter and the second largest contributor for the first half of 2004. Although
we had a slight underweight in the group relative to the benchmark, our strong
stock selection allowed us to significantly outperform the index. Performance
was led by three medical device companies (Cyberonics, Kensey Nash Corporation
and Integra LifeSciences).
Were there any investment strategies or themes that did not measure up to your
expectations?
While there were no major themes or sectors that disappointed us in the first
half, there were individual stocks that performed poorly. Examples of weaker
performing stocks include: Vistacare, Inc., a hospice care provider; Alliance
Gaming, a casino operator; Asyst Technologies, a manufacturer of ultra-clean
semi-conductor systems. In each case, the company gave disappointing earnings
guidance, causing the stocks' price to decline.
What is your current strategy? How is the Fund positioned?
While we were pleased with our performance at mid-year, we believe that the
second half of the year could be a more difficult environment. Concerns over
higher interest rates, continued instability in the Middle East, increasing
energy prices and a slowdown in consumer spending could create some headwinds.
Also, uncertainty regarding the outcome of the upcoming Presidential election
is likely to create increased volatility in the market. Given these issues, we
anticipate that the market could remain in a trading range over the next
several quarters. Regardless of overall market trends, we will continue to seek
smaller capitalization companies that generally offer interesting opportunities
for growth. We believe that the Fund is well positioned for what we think is a
"stock pickers" type of market.
18 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Small Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ----- ------ ----------
Small Cap Growth Fund Class N 11.54% 61.88% (17.25)% 25.99% 33.68% 1.90%
Small Cap Growth Fund Class I 11.67 62.15 (17.00) 26.33 33.87 1.90
Russell 2000(R) Growth Index. 5.68 48.54 (30.26) (9.23) (22.43) 5.22
Russell 2000(R) Index........ 6.76 47.25 (20.48) 2.49 (3.02) 4.26
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year Inception(c)
------ ------ ------------
Small Cap Growth Fund Class N 44.36% 16.30% 23.21%
Small Cap Growth Fund Class I 44.64 16.59 23.48
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distribution
[CHART]
Russell
Small Cap 2000(R) Russell
Growth Fund Growth 2000(R)
Class N Index Index
12/99 $10,000 $10,000 $10,000
6/00 14,900 10,700 10,700
12/00 13,600 8,200 10,100
6/01 16,300 8,200 10,800
12/01 17,200 7,400 10,400
6/02 16,400 6,100 9,900
12/02 14,200 5,200 8,200
6/03 17,800 6,200 9,700
12/03 23,000 7,700 12,100
6/04 25,600 8,100 13,000
IPOs made significant contributions to the performance of the Fund in the year
2000. There can be no assurance that such contributions will continue. Recent
market volatility has significantly impacted performance and the Fund's current
performance may be more or less than that shown.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. Investing in smaller companies
involves special risks, including higher volatility and lower liquidity. From
time to time, the investment advisor may waive fees or reimburse expenses for
the Fund. Without these waivers, performance would be lower. Class N shares are
available to the general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2000(R) Growth Index consists of small-capitalization companies
with above average price-to-book ratios and forecasted growth rates.
The Russell 2000(R) Index is an unmanaged composite of the smallest 2000 stocks
of the Russell 3000(R) Index.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 19
- --------------------------------------------------------------------------------
Small Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------------------------------------------------- --------
Shares Value
- --------- ------------------------------------------- --------
Common Stocks
Consumer Discretionary--38.6%
416,065 *4 Kids Entertainment, Inc................. $ 9,952
380,575 *Alliance Gaming Corporation............... 6,531
1,138,630 *Casual Male Retail Group, Inc............. 8,312
358,100 *Century Casinos, Inc...................... 1,952
191,047 *Charles River Associates.................. 5,913
1,079,355 *chinadotcom corporation +................. 7,966
326,195 *Corrections Corporation of America........ 12,881
343,830 *Cross Country Healthcare, Inc............. 6,241
395,710 *Cumulus Media, Inc., Class "A"............ 6,652
203,700 *Elizabeth Arden, Inc...................... 4,286
313,580 *Emmis Communications Corporation,
Class "A"................................. 6,579
1,266,025 *eUniverse, Inc............................ 2,811
220,560 *FirstService Corporation +................ 5,514
358,650 Fred's, Inc................................ 7,923
114,235 *Getty Images, Inc......................... 6,854
203,925 *Guitar Center, Inc........................ 9,068
670,515 *Kforce, Inc............................... 6,330
678,630 *Labor Ready, Inc.......................... 10,519
493,020 *Laureate Education, Inc................... 18,853
1,878,430 *Lions Gate Entertainment Corporation+..... 13,111
283,935 *Multimedia Games, Inc..................... 7,615
375,520 Ruby Tuesday, Inc.......................... 10,308
429,870 *Scientific Games Corporation, Class "A"... 8,228
308,661 *Shuffle Master, Inc....................... 11,207
724,720 *SkillSoft plc--ADR........................ 5,508
287,920 Speedway Motorsports, Inc.................. 9,628
225,680 StarTek, Inc............................... 8,079
74,570 Strayer Education, Inc..................... 8,320
363,100 *TiVo, Inc................................. 2,574
640,380 *ValueClick, Inc........................... 7,671
463,005 *ValueVision Media, Inc., Class "A"........ 6,028
623,600 World Wrestling Entertainment, Inc......... 7,951
--------
251,365
--------
Health Care--19.8%
193,588 *Accredo Health, Inc....................... 7,540
385,900 *American Healthways, Inc.................. 10,273
757,770 *Axcan Pharma, Inc.+....................... 15,989
916,940 *Cell Therapeutics, Inc.................... 6,758
393,280 *Connectics Corporation.................... 7,944
1,228,019 *Discovery Partners International, Inc..... 6,263
144,010 *Icon PLC--ADR............................. 6,335
371,775 *Intergra Lifesciences Holdings Corporation 13,113
240,755 *Kensey Nash Corporation................... 8,306
297,340 *Lifepoint Hospitals, Inc.................. 11,067
331,325 *Matria Healthcare, Inc.................... 8,306
357,720 *Sangamo Biosciences, Inc.................. 2,153
144,770 *Taro Pharmaceutical Industries, Inc. +.... 6,297
345,795 *Telik, Inc................................ 8,254
3,051,885 *VitalWorks, Inc........................... 10,560
--------
129,158
--------
Technology--18.2%
485,990 *AMIS Holdings, Inc........................ 8,223
629,590 *Answerthink, Inc.......................... 3,607
- ----------
*Non-income producing securities
**Security Fair Valued pursuant to Valuation Procedures adopted by Board of
Trustees.
ADR = American Depository Receipt
+ = U.S. listed foreign security
++ = Restricted security. The Fund purchased 507,788 restricted shares on May
18, 2003 at a cost of $6,136 (in thousands). The value of the Fund's holding
was 0.75% of net assets at June 30, 2004.
- --------------------------------------------------- --------
Shares Value
- ---------- ---------------------------------------- --------
Common Stocks--(continued)
Technology--(continued)
469,140 *Artisan Components, Inc................ $ 12,104
776,280 *Aspen Technology, Inc.................. 5,636
198,655 Harris Corporation...................... 10,082
936,300 *LCC International, Inc., Class "A"..... 4,588
2,463,900 *Loudeye Corporation.................... 3,890
502,450 *Mercury Computer Systems, Inc.......... 12,461
19,540 *Nuance Communications, Inc............. 89
316,530 *Open Solutions, Inc.................... 7,907
338,775 *Open Text Corporation+................. 10,807
723,710 *OPNET Technologies, Inc................ 9,480
1,583,985 *Scansoft, Inc.......................... 7,841
297,030 *Semtech Corporation.................... 6,992
807,788 *Ultimate Software Group, Inc.**++...... 7,763
314,785 *WebEx Communications, Inc.............. 6,850
--------
118,320
--------
Financial Services--10.1%
197,195 *Affiliated Managers Group, Inc......... 9,933
400,285 *Commercial Capital Bancorp, Inc........ 6,953
449,890 *Credit Acceptance Corp................. 6,780
491,657 *Electronic Clearing House.............. 4,573
279,840 *Euronet Worldwide, Inc................. 6,473
128,840 Global Payments, Inc.................... 5,800
226,350 Investors Financial Services Corporation 9,864
341,095 National Financial Partners Corporation. 12,030
361,130 *Rewards Network, Inc................... 3,250
--------
65,656
--------
Other Energy--4.4%
330,335 *Comstock Resources, Inc................ 6,428
1,698,955 *Gasco Energy, Inc...................... 3,313
1,342,360 *Grey Wolf, Inc......................... 5,692
99,530 *Quicksilver Resources, Inc............. 6,676
185,245 *Ultra Petroleum Corporation............ 6,915
--------
29,024
--------
Producer Durables--3.0%
607,180 *Crown Castle International Corporation. 8,956
242,450 *Providence Service Corporation......... 4,556
377,480 *Ultratech, Inc......................... 6,145
--------
19,657
--------
Materials and Processing--2.6%
437,795 Airgas, Inc............................. 10,468
1,039,610 *Comfort Systems USA, Inc............... 6,643
--------
17,111
--------
Utilities--0.4%
143,800 Intrado, Inc............................ 2,314
--------
Total Common Stock--97.1%
(Cost $528,779)................................... 632,605
--------
Investment in Affiliate
14,796,841 William Blair Ready Reserves Fund....... 14,797
--------
Total Investment in Affiliate--2.3%
(Cost $14,797).................................... 14,797
--------
Total Investments--99.4%
(Cost $543,576)................................... 647,402
Cash and other assets, less liabilities--0.6%...... 4,101
--------
Net assets--100.0%................................. $651,503
========
See accompanying Notes to Financial Statements.
20 Semi-Annual Report June 30, 2004
[PHOTO]
Karl W. Brewer
Karl W. Brewer
[PHOTO]
Harvey H. Bundy, III
Harvey H. Bundy, III
[PHOTO]
Robert Lanphier, IV
Robert C. Lanphier, IV
- --------------------------------------------------------------------------------
SMALL-MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Small-Mid Cap Growth Fund primarily invests in a diversified portfolio of
common stocks of small and medium-sized domestic growth companies that are
expected to experience solid growth in earnings.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Small-Mid Cap Growth Fund gained 7.04% (Class N shares) on a total return
basis for the six months ended June 30, 2004, compared with a 5.65% increase
for the Fund's benchmark, the Russell 2500/TM/ Growth Index.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's out-performance versus the benchmark?
The year opened with a continuation of the speculative frenzy of 2003, as the
lower quality names retained their market leadership. However, as the first
quarter progressed, we observed a gradual rotation toward quality growth
companies.
Following a negative start in April and early May, the equity markets ended the
second quarter in positive territory. Mixed signals on the economic and
political fronts caused the markets to seek a clear direction during the
period. Geopolitical issues also caused oil prices to rise during the quarter.
In the first half of the year, the strongest performing sectors in the Russell
2500/TM/ Growth Index were Healthcare and Energy while Technology was the only
major sector to report a negative return. The Small-Mid Cap Fund's stock
selection was the primary contributor to performance in the first half of the
year. Healthcare and Transportation were two of the strongest performing
sectors in the portfolio. While we were underweight Technology, which
contributed to relative performance, we also had strong stock selection in this
industry.
One of the Small-Mid Cap Fund's strongest performing holdings was Corporate
Executive Board. This company provides subscription-based research and
information services to senior executives in major corporations in order to
enhance management practices. With relatively low capital expenditures, the
company is able to significantly leverage its services and achieve high margin
growth. During the softer economy, we believed that many new clients put their
intentions to subscribe on hold, and would sign up for services once the
economy strengthened. This thesis came to fruition as subscriptions increased
significantly and the market recognized the outstanding potential for solid
earnings growth.
Within the Transportation sector, three stocks that fared very well were
Expeditors International, C.H. Robinson, and Knight Transportation. Along with
strong managements and good business infrastructures, these companies are
poised to benefit from the economic recovery as product deployment is on the
rise. Due to our fundamental process and conviction in these names, we are
carrying an overweight position in Transportation stocks versus the Russell
2500/TM/ Growth Index.
June 30, 2004 William Blair Funds 21
Which strategies did not measure up to your expectations?
Two industries in which our companies did not meet our expectations were
Retailing and Technology Software. In Retailing, 99 Cents Only stores
experienced a significant stock price decrease. The company had fared well in
their home state of California, but ran into significant difficulty executing
their strategy in their newly opened Texas sites. Another Retailing company
that had some difficulty during the first half of the year was CarMax. CarMax
is a company that has strong management and is well-positioned within the used
car sales business, but suffered from significant competition from incentives
in the new car market which severely hampered sales. The company continues to
be a dominant player in this market and has an ability to be relatively
flexible with its product offering, which we believe will bring their earnings
back slowly over time.
Software companies Intuit and BEA Systems were also disappointments. BEA
Systems disappointed investors with their earnings report. Our analysis
concluded that BEA would not be able to achieve our expectations on subsequent
earnings growth and we exited the position. Slowing revenue growth at Intuit
disappointed investors. However, we believe that the current valuation more
than discounts this trend. We are still positive on Intuit's ability to
generate strong annual growth in earnings and we maintain our position in
Intuit.
What is your current strategy? How is the Fund Positioned?
Our focus continues to be on selecting quality growth companies that should
perform well in a moderate economic growth environment. Of the four largest
sectors in the Russell 2500/TM/ Growth Index, we are currently overweight
Consumer Discretionary, and underweight Technology. Healthcare and Financial
Services sectors in the portfolio are relatively close to their respective
benchmark weights.
22 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003(a)(b)
------------ ----------
Small-Mid Cap Growth Fund Class N 7.04% (0.60)%
Small-Mid Cap Growth Fund Class I 7.14 (0.60)
Russell 2500(TM) Growth Index.... 5.65 (0.61)
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
Inception(c)
------------
Small Cap Growth Fund Class N 6.40%
Small Cap Growth Fund Class I 6.50
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 29, 2003
(Commencement of Operations) to December 31,
2003.
(c)For the period from December 29, 2003 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
Small-Mid Cap Russell 2500
Fund Class N Growth Index
------------- ------------
12/03 $10,000 $10,000
1/04 10,100 10,400
2/04 10,300 10,400
3/04 10,300 10,500
4/04 10,300 10,000
5/04 10,300 10,300
6/04 10,600 10,500
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. Investing in smaller companies
involves special risks, including higher volatility and lower liquidity. From
time to time, the investment advisor may waive fees or reimburse expenses for
the Fund. Without these waivers, performance would be lower. Class N shares are
available to the general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2500(TM) Growth Index measures the performance of those Russell
2500 companies with above average price-to-book ratios and forcasted growth
rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 23
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------- ------
Shares Value
- ------ ------------------------------------------ ------
Common Stocks
Consumer Discretionary--32.1%
5,400 *99 Cents Only Stores..................... $ 82
4,200 *Bed, Bath and Beyond, Inc................ 161
12,800 *CarMax, Inc.............................. 280
6,300 CDW Corporation........................... 402
4,200 Cintas Corporation........................ 200
6,300 Corporate Executive Board Co.............. 364
4,700 *Corrections Corporation of America....... 186
9,800 *Cross Country Healthcare, Inc............ 178
4,100 *Entercom Communications Corporation...... 153
6,700 Fastenal Company.......................... 381
2,600 *Getty Images, Inc........................ 156
4,400 *Guitar Center, Inc....................... 196
4,800 *Hewitt Associates, Inc., Class "A"....... 132
6,300 *Iron Mountain, Inc....................... 304
5,100 *Lamar Advertising Company................ 221
11,400 *Laureate Education, Inc.................. 436
8,700 *O'Reilly Automotive, Inc................. 393
4,000 *Shuffle Master, Inc...................... 145
13,000 *Skillsoft PLC--ADR....................... 99
1,500 Strayer Education, Inc.................... 167
------
4,636
------
Health Care--19.2%
1,700 *Atrix Labs, Inc.......................... 58
14,600 *Axcan Pharma, Inc.+...................... 308
10,700 *Connectics Corporation................... 216
6,100 *Express Scripts, Inc..................... 483
2,700 *IDEXX Laboratories, Inc.................. 170
8,300 *Integra LifeSciences Holdings Corporation 293
5,800 *IVAX Corporation......................... 139
4,200 *Kensey Nash Corporation.................. 145
4,700 *Medicines Company........................ 144
2,800 *Patterson Companies, Inc................. 214
5,000 *ResMed, Inc.............................. 255
3,900 *Stericycle, Inc.......................... 202
6,400 *Telik, Inc............................... 153
------
2,780
------
Technology--14.9%
5,100 Adobe Systems, Inc........................ 237
8,600 *Artisan Components, Inc.................. 222
8,300 *Cognos, Inc.+............................ 300
8,000 *Intuit, Inc.............................. 309
11,200 *Jabil Circuit, Inc....................... 282
12,400 Microchip Technology, Inc................. 391
11,800 *OPNET Technologies, Inc.................. 155
3,600 Xilinx, Inc............................... 120
1,500 *Zebra Technologies Corp., Class "A"...... 130
------
2,146
------
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
- ------------------------------------------------ -------
Shares Value
- ------------------------------------------------ -------
Common Stocks--(continued)
Financial Services--10.2%
4,500 *Affiliated Managers Group.............. $ 227
5,000 East West Bancorp, Inc.................. 153
7,500 *Fiserv, Inc............................ 292
8,500 Investors Financial Services Corporation 370
11,200 *SunGard Data Systems, Inc.............. 291
1,800 XL Capital Ltd., Class "A"+............. 136
-------
1,469
-------
Autos and Transportation--8.1%
4,800 C.H. Robinson Worldwide, Inc............ 220
8,600 Expeditors International of Washington.. 425
4,600 Gentex Corporation...................... 183
11,700 *Knight Transportation, Inc............. 336
-------
1,164
-------
Other Energy--4.1%
6,500 Apache Corporation...................... 283
5,600 *Smith International, Inc............... 312
-------
595
-------
Producer Durables--3.1%
18,200 *Crown Castle International Corporation. 268
5,200 Pentair, Inc............................ 175
-------
443
-------
Materials and Processing--2.3%
14,000 Airgas, Inc............................. 335
-------
Total Common Stock--94.0%
(Cost $12,895)................................. 13,568
-------
Investment in Affiliate
760,777 William Blair Ready Reserves Fund....... 761
-------
Total Investment in Affiliate--5.3%
(Cost $761).................................... 761
-------
Total Investments--99.3%
(Cost $13,656)................................. 14,329
Cash and other assets, less liabilities--0.7%... 107
-------
Net assets--100.0%.............................. $14,436
=======
See accompanying Notes to Financial Statements.
24 Semi-Annual Report June 30, 2004
[PHOTO]
GREIG
W. George Greig
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
The International Growth Fund invests primarily in common stocks of foreign
growth companies of all sizes.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The International Growth Fund posted a 2.95% gain (Class N Shares) for the six
months ended June 30, 2004. By comparison, the Fund's benchmark, the MSCI All
Country World (Free) except US Index, rose 4.10%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The overall MSCI All Country World (Free) except US index fell modestly (0.69)%
during the second quarter, but a more severe correction in Asian markets and in
cyclical sectors globally impacted our relative performance.
On a regional basis, our relative emphasis on Asia (particularly emerging Asia)
at the expense of Europe accounted for all of the portfolio's performance
shortfall at mid-year. Asian markets continue to be viewed as extremely
sensitive to global liquidity and cyclical growth, but it is worth noting that
there has been no evidence of any significant slowdown in either economic
growth or corporate earnings up to this point.
The year started with international markets extending the strong rally that
began in 2003 into the first quarter. Broadly speaking, Asian markets and
emerging markets more generally outperformed, and small companies continued to
outpace large blue chip companies. Within that framework, however, shifting
returns reflected new data about the changing dynamic of the global growth
cycle.
The major new trend to emerge in the first quarter was the increasing strength
of Japan, both in economic and market terms. After lagging the rest of the
world early in the year, Japan came to life as more and more indicators pointed
to continued strong earnings growth and increasing confidence in the economy.
Our portfolio benefited from being overweight the benchmark in Japan, but
relative returns were impacted by our emphasis on export-oriented sectors.
The global equity market climate shifted during the second quarter, as
heightened concern about monetary tightening in the US and a state-directed
slowdown in China focused attention on potential risks to economic and profit
growth, particularly in cyclical sectors and regions.
What sectors had the biggest impact on portfolio performance?
Technology was the major laggard on a global basis during the second quarter,
reversing some of 2003's strong gains as cyclical concerns arose regarding
potential oversupply of components and the sustainability of corporate and
consumer spending growth in a variety of hardware categories. Conversely, the
best performing sector in the global market was Energy, and portfolio
positioning in these sectors also detracted from performance.
June 30, 2004 William Blair Funds 25
The portfolio continues to carry relatively low exposure to Europe, a position
that helped returns during the first quarter, as growth indicators remain
inconsistent and relatively weak in most European economies.
What is your outlook for the international markets?
In both of the recent broad global economic cycles (1981-1990 and 1991-2000)
there was a sharp recovery, followed by a moderation of growth accompanied by
some monetary tightening. In each case the initial tightening occurred in the
'4' year (1984, 1994), and so the analogy is drawn that after the
liquidity-driven upturn of 2003, we should anticipate upward pressure on
interest rates, and that China and the US--the engines of global growth--could
slow significantly.
Leading economic indicators, many of them monetary, have indeed slowed on a
global basis, and some measures of investment spending and credit growth have
decelerated in China. While it is still too early to tell definitively how mild
or severe the coming slowdown will be, markets have readily anticipated a
relatively bearish scenario. Ironically, until there is clearer evidence of the
extent and effects of the slowdown, markets may overreact on the basis of fear
of the unknown.
Our view of the mid-cycle plateau is that it may well be milder and briefer
than the tightening cycle of 1994-95. There are few excesses in the global
economic picture and a diminished likelihood of instability in emerging
markets. As Asia cools down and Europe begins to reaccelerate, global growth
should move into better balance for the remainder of the economic expansion.
26 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
----------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999
------------ ----- ------ ------ ------ -----
International Growth Fund Class N.... 2.95% 42.21% (15.18)% (13.66)% (8.10)% 96.25%
International Growth Fund Class I.... 3.13 42.42 (14.94) (13.43) (7.87) 41.71(a)(b)
Morgan Stanley Capital--International
(MSCI) All Country World Free
Ex-U.S. Index....................... 4.10 41.41 (14.67) (19.50) (15.09) 30.91
Lipper International Index........... 3.86 36.00 (13.84) (19.34) (14.72) 37.83
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year 5 Year 10 Year Inception
------ ------ ------ ------- ---------
International Growth Fund Class N 31.75% 5.37% 8.88% 10.32% --
International Growth Fund Class I 32.14 5.65 -- -- 7.54%(c)
------------------------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 1, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from October 1, 1999 to June 30,
2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions
and income dividends
[CHART]
International
Growth Fund MSCI AC WLD Lipper Int'l
Class N Ex-US Index Index
1993 $10,000 $10,000 $10,000
1994 10,000 10,700 9,900
1995 10,700 11,700 10,900
1996 11,800 12,500 12,500
1997 12,800 12,800 13,400
1998 14,300 14,600 15,100
1999 28,000 19,100 20,800
2000 25,700 16,200 17,700
2001 22,200 13,100 14,300
2002 18,800 11,200 12,300
2003 26,800 15,800 16,800
6/04 27,600 16,400 17,400
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. International investing
involves special risk considerations, including currency fluctuations, lower
liquidity, economic and political risk. Class N shares are available to the
general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Morgan Stanley Capital International (MSCI) All Country World Free ex-U.S.
Index is an unmanaged index that includes developed and emerging markets and
reduced Japanese portion, making it more comparable to the International Growth
Fund in terms of investment approach.
The Lipper International Index is a composite of international growth mutual
funds.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 27
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------- --------
Shares Value
- ---------- -------------------------------------------- --------
Common Stocks--Europe--24.5%
Austria--1.3%
211,500 Erste Bank Der Oester (Banking)............. $ 33,350
--------
Estonia--0.2%
731,560 Hansabank (Banking)......................... 6,178
--------
Finland--0.5%
136,300 Nokian Renkaat Oyj (Automotive)............. 13,324
--------
France--4.6%
376,204 Christian Dior (Apparel and luxury goods)... 24,472
119,500 Hermes International SCA (Apparel and luxury
goods)..................................... 24,016
1,139,100 *JC Decaux (Media).......................... 24,518
185,200 Klepierre (Real estate)..................... 12,709
183,397 Mr. Bricolage SA (Home
improvement--retail)....................... 6,052
407,368 *Opera (Hospital and nursing management).... 10,525
81,982 Rodriquez Group (Retail trade).............. 4,307
152,900 Sanofi-Synthelabo SA (Pharmaceuticals)...... 9,712
--------
116,311
--------
Germany--4.7%
575,000 Bayer Motoren Werke (Motor vehicles)........ 25,648
223,561 Did Deutscher Industrie Svc (Commercial
services).................................. 6,583
211,000 GFK AG (Commercial services)................ 7,424
66,800 Puma AG (Consumer non-durables)............. 17,116
367,200 SAP AG (Software)........................... 61,319
--------
118,090
--------
Greece--2.3%
1,031,700 Coca-Cola Hellenic Bottling S.A.
(Beverages)................................ 24,215
548,800 EFG Eurobank (Banking)...................... 12,013
364,100 Folli Follie S.A. (Apparel and footwear
retailer).................................. 11,659
530,920 National Bank of Greece (Banking)........... 11,607
--------
59,494
--------
Ireland--1.0%
1,020,200 Anglo Irish Bank plc (Finance).............. 16,029
1,123,600 *Grafton Group (Wholesale distributors)..... 8,987
--------
25,016
--------
Italy--2.4%
1,797,700 Banco Popolare Di Verona E N (Banking)...... 31,019
1,260,800 Credito Emiliano SpA (Banking).............. 10,402
559,584 Merloni Elettrodemestici SpA
(Electronics and appliances)............... 9,994
249,852 Pirelli & C Real Estate (Real estate
development)............................... 9,390
--------
60,805
--------
Spain--1.2%
267,700 Banco Popular Espanol (Banking)............. 15,148
358,400 Grupo Ferrovial S.A. (Industrial services).. 14,963
--------
30,111
--------
Sweden--2.1%
13,200,000 *Ericsson LM-B Shares (Communications
equipment)................................. 39,490
- -------------------------------------------------------- --------
Shares Value
- ---------- --------------------------------------------- --------
Common Stocks--Europe--24.5%--(continued)
616,800 Gunnebo AB (Producer manufacturing).......... $ 6,997
190,500 *Oriflame Cosmetics S.A. SDR (Household
products)................................... 6,806
--------
53,293
--------
Switzerland--4.2%
96,900 *Actelion (Biotechnology).................... 11,172
244,300 *Logitech International S.A. (Electronic
technology)................................. 11,183
156,850 *Micronas Semiconductor (Electronic
technology)................................. 7,168
39,100 Serono S.A., Class "B" (Biotechnology)....... 24,717
741,800 UBS AG (Banking)............................. 52,591
--------
106,831
--------
United Kingdom--19.7%
1,280,700 *Acambis (Biotechnology)..................... 8,103
477,800 Astrazeneca plc (Pharmaceuticals)............ 21,583
7,132,300 BG Group plc (Industrial services)........... 44,185
4,023,300 *British Sky Broadcasting Group (Media)...... 45,607
4,336,900 Capita Group plc (Commercial services)....... 25,216
844,600 Carnival plc (Hotels, restaurants and leisure
activities)................................. 41,257
1,571,800 Cattle's Holdings plc (Finance and leasing).. 9,096
486,300 Cobham plc (Aerospace and defense)........... 12,395
3,496,200 Compass Group plc (Hotels, restaurants and
leisure activities)......................... 21,501
961,000 French Connection (Apparel and footwear
retail)..................................... 7,279
1,983,100 HBOS plc (Finance)........................... 24,736
652,700 MAN Group plc (Finance)...................... 17,012
695,300 McCarthy & Stone plc (Real estate)........... 7,370
5,209,700 *Michael Page International (Personnel
Services)................................... 17,024
655,400 Next plc (Multiline retail).................. 17,022
2,762,600 Premier Farnell (Electronics distributors)... 12,399
1,372,200 Reckitt Benckiser plc (Household products)... 39,113
2,770,000 Smith & Nephew plc (Health care equipment
and supplies)............................... 30,038
2,193,600 Standard Chartered plc (Banking)............. 35,945
10,709,500 Tesco plc (Food retailer).................... 52,051
804,500 Warner Chilcott plc (Pharmaceuticals)........ 10,163
--------
499,095
--------
Canada--5.8%
632,900 *Alimentation Couche-Tard--Class "B"
(Food retail)............................... 11,073
447,700 *Cognos Inc. (Software)...................... 16,152
180,800 *MacDonald Dettwiler & Associates
(IT consulting)............................. 3,519
1,281,600 Manulife Financial Corp. (Life and
health insurance)........................... 51,861
294,000 *Precision Drilling Corp. (Drilling)......... 14,028
234,800 *Research in Motion Ltd. (Wireless
telecommunication).......................... 16,081
477,300 *Shoppers Drug Mart Corp. (Retail trade)..... 11,935
883,300 Suncor Energy, Inc. (Energy minerals)........ 22,491
--------
147,140
--------
Japan--24.5%
230,500 Aeon Credit Service Co., Ltd.
(Consumer finance).......................... 15,463
199,300 Aeon Mall Co., Ltd. (Real estate)............ 11,902
See accompanying Notes to Financial Statements.
28 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ---------- ----------------------------------------------- --------
Shares Value
- ---------- ----------------------------------------------- --------
Common Stocks--Japan--24.3%--(continued)
194,000 Arnest One Corp. (Real estate)................. $ 5,894
168,300 Askul Corporation (Retail trade)............... 10,624
944,400 Canon, Inc. (Office electronics)............... 50,437
1,848,000 *Chiyoda Corp. (Construction).................. 13,251
60,200 Don Quijote Co., Ltd. (Multiline retail)....... 3,840
336,800 Fast Retailing (Specialty retail).............. 27,513
3,408,500 Hino Motors Ltd. (Trucks, construction and farm
machinery).................................... 24,834
294,000 Hoya Corporation (Electronic technology)....... 31,005
145,900 Kappa Create Co., Ltd. (Consumer
non-durables)................................. 10,126
137,560 Keyence Corporation (Electronic technology).... 31,593
54,200 Koha Co., Ltd. (Electronic equipment and
instruments).................................. 2,048
304,400 Matsui Securities Co., Ltd. (Financial
services)..................................... 10,509
372,250 Misumi Corp. (Trading companies and
distributors)................................. 12,247
5,424 Mitsubishi Tokyo Financial (Banking)........... 50,775
112,000 Nakanishi Inc. (Medical specialties)........... 8,032
217,000 Neomax Co., Ltd. (Electronic equipment and
instruments).................................. 3,537
243,600 Nidec Corporation (Electronic equipment and
instruments).................................. 25,151
202,060 Nitori Company Ltd. (Specialty stores)......... 12,701
509,600 Nitto Denko Corporation (Electronic technology) 26,331
321,000 Orix Corporation (Consumer finance)............ 37,046
274,600 Park 24 Co., Ltd. (Commercial services)........ 10,506
3,105 Pasona Inc. (Personnel services)............... 11,157
299,700 Point Inc. (Apparel and footwear retail)....... 8,140
189,100 Sawai Pharmaceutical Co., Ltd.
(Pharmaceuticals)............................. 8,002
2,417,200 Sharp Corp. (Electronics)...................... 38,960
2,943,000 *Shinsei Bank, Ltd. (Banking).................. 18,816
214,200 SMC Corporation (Trucks, construction and
farm machinery)............................... 23,373
224,500 Sugi Pharmacy (Food and staple retailing)...... 9,229
5,695,000 Sumitomo Trust & Banking Co. (Finance)......... 41,092
1,714,000 Toto Ltd. (Building products).................. 18,142
118,400 USS Co., Ltd. (Commercial services)............ 10,246
--------
622,522
--------
Emerging Asia--7.6%
China--0.4%
14,030,000 Zhejiang Expressway Holding Co.
(Transportation infrastructure)............... 10,003
--------
India--3.0%
392,601 Bharat Forge Ltd. (Machinery).................. 5,239
925,600 *Biocon Ltd. (Biotechnology)................... 10,103
1,240,400 HDFC Bank (Banking)............................ 10,012
908,600 Housing Development Finance Corp. (Financial
services)..................................... 10,225
171,206 Infosys Technologies, Ltd. (Consulting and
software services)............................ 20,758
322,500 ING Vysya Bank, Ltd. (Banking)................. 2,598
1,447,300 *Maruti Udyog Ltd. (Automobiles)............... 12,709
854,728 Mphasis BFL, Ltd. (Information technology)..... 4,871
--------
76,515
--------
- ---------- ------------------------------------------------ --------
Shares Value
- ---------- ------------------------------------------------ --------
Emerging Asia--7.6%--(continued)
Indonesia--0.8%
60,744,500 *Bank Rakyat Indonesia (Banking)................ $ 10,820
24,963,500 Unilever Indonesia Tbk (Household and
personal care)................................. 10,461
--------
21,281
--------
South Korea--2.2%
377,400 Hyundai Motor Co., Ltd. (Automobiles)........... 14,600
97,800 Samsung Electronics Co. (Semiconductors)........ 40,661
--------
55,261
--------
Taiwan--0.9%
19,646,794 EVA Airways Corp. (Airlines).................... 8,255
4,136,800 Hon Hai Precision Industry (Computers).......... 15,480
--------
23,735
--------
Thailand--0.3%
9,708,300 *Tisco Finance (Finance, rental and leasing).... 6,468
--------
Asia--6.0%
Australia--2.6%
1,080,890 Bendigo Bank Ltd. (Banking)..................... 7,131
1,312,200 Billabong International Ltd. (Apparel and luxury
goods)......................................... 7,594
663,100 Macquarie Bank, Ltd. (Financial services)....... 15,774
235,800 Perpetual Trustees Australia (Investment
managers)...................................... 7,763
1,578,831 Sigma Company, Ltd. (Medical distributors)...... 9,060
2,308,900 Toll Holdings, Ltd. (Trucking).................. 17,338
--------
64,660
--------
Hong Kong--3.0%
16,510,000 China Insurance International (Insurance)....... 7,352
71,262,000 Cnooc Ltd. (Oil and gas)........................ 30,209
2,887,500 Esprit Holdings Ltd. (Apparel, footwear and
retail)........................................ 12,960
7,775,000 Global Bio-Chem Technol (Food products)......... 4,431
5,949,000 Li & Fung (Distribution services)............... 8,736
7,858,200 Techtronic Industries Co. (Consumer
durables)...................................... 12,579
--------
76,267
--------
Singapore--0.4%
8,482,800 Osim International Ltd. (Consumer sundries)..... 5,260
6,582,000 Unisteel Technology, Ltd. (Electronic
components).................................... 5,114
--------
10,374
--------
Latin America--3.8%
Brazil--0.3%
404,400 *Natura Cosmeticos S.A. (Cosmetics)............. 6,502
--------
Chile--1.2%
412,900 *Cencosud S.A.--ADR 144A (Retail stores)........ 7,642
675,400 Lan Chile S.A.--ADR (Airlines).................. 13,035
4,567,464 S.A.C.I. Falabella (Department stores).......... 8,988
--------
29,665
--------
Mexico--2.3%
15,184,400 America Movil S.A. (Communications)............. 27,636
2,024,800 *Consorcio Ara S.A (Homebuilding)............... 5,840
1,648,000 *Urbi Desarrollos Urbanos S.A. (Household
durables)...................................... 5,311
6,139,000 Walmart de Mexico (Retail trade)................ 18,239
--------
57,026
--------
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 29
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------- ---------------------------------------- ----------
Shares Value
- ----------- ---------------------------------------- ----------
Emerging Europe, Mid-East, Africa--3.7%
Egypt--0.7%
744,000 Orascom Construction Industry
(Construction)......................... $ 11,044
851,000 *Orascom Telecommunication Holding GDR
(Telecommunications)................... 7,880
----------
18,924
----------
Israel--0.9%
360,100 Teva Pharmaceutical Inds.--ADR
(Pharmaceuticals)...................... 24,231
----------
Poland--0.4%
292,744 Bank Pekao S.A. (Banking)............... 9,829
----------
South Africa--1.3%
414,963 Edgars Consolidated Stores (Apparel,
footwear and retail)................... 9,972
3,120,700 *MTN Group Ltd. (Telecommunication
services).............................. 14,441
11,312,500 Network Healthcare Holdings (Health
services).............................. 8,174
----------
32,587
----------
Turkey--0.4%
463,403,928 * Enka Insaat (Industrial conglomerates) 9,523
----------
Total Common Stock--95.6%
(cost $2,006,237).................................. 2,424,411
----------
- ----------
* Non-income producing securities
ADR = American Depository Receipt
GDR = Global Depository Receipt
All securities excluding those traded on exchanges in this hemisphere, are fair
valued pursuant to Valuation Procedures adopted by the Board of Trustees.
- ----------- --------------------------------- ----------
Shares or Principal Amount Value
- --------------------------------------------- ----------
Preferred Stock
Brazil--1.4%
243,070,000 Banco Itau Holding (Banking)..... $ 22,408
979,620 Geradau S.A. (Steel)............. 11,738
----------
Total Preferred Stock--1.4%
(cost $27,753).............................. 34,146
----------
Investment in Affiliate
23,482,852 William Blair Ready Reserves Fund 23,483
----------
Total Investments in Affiliate--0.9%
(cost $23,483) 23,483
----------
Short-Term Investments
27,746,000 American Express Demand Note, VRN
1.17% due 7/1/04................ 27,746
----------
Total Short-term Investments--1.1%
(cost $27,746).............................. 27,746
----------
Total Investments--99.0%
(cost $2,085,219)........................... 2,509,786
Cash and other assets, less liabilities--1.0% 26,532
----------
Net assets--100.0%........................... $2,536,318
==========
See accompanying Notes to Financial Statements.
30 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
At June 30, 2004 the Fund's Portfolio of Investments includes the following
industry categories:
Financials................ 26.8%
Consumer Discretionary.... 21.4%
Information Technology.... 15.4%
Industrials and Services.. 12.0%
Healthcare................ 7.9%
Consumer Staples.......... 7.8%
Energy.................... 4.5%
Telecommunication Services 2.7%
Materials................. 1.5%
------
100.0%
======
At June 30, 2004 the Fund's Portfolio of Investments includes the following
currency categories:
Japanese Yen.......... 25.3%
British Pound Sterling 20.3%
Euro.................. 18.8%
Canadian Dollar....... 6.0%
Swiss Franc........... 4.4%
Hong Kong Dollar...... 3.5%
Indian Rupee.......... 3.1%
Australian Dollar..... 2.6%
Mexico Nuevo Peso..... 2.3%
South Korean Won...... 2.3%
Swedish Krona......... 2.2%
United States Dollar.. 2.1%
Brazilian Real........ 1.7%
South African Rand.... 1.3%
All other currencies.. 4.1%
------
100.0%
======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 31
[PHOTO]
GREIG
W. George Greig
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
The International Equity Fund invests primarily in common stocks of large and
medium-sized companies included in the Morgan Stanley Capital International All
Country World ex-U.S. Index.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
We are pleased to have the International Equity Fund become the newest addition
to the William Blair Fund Family and would like to thank our shareholders for
investing with us.
The International Equity Fund commenced operations on May 24, 2004. Through the
period ended June 30, 2004, the Fund posted a gain of 5.60%, just ahead of the
5.18% increase in the Fund's benchmark, the MSCI All Country World (Free)
except US Index, for this brief period.
I am very enthusiastic about the investment opportunities available to the
International Equity Fund. As you may already know, the Fund will primarily
invest in large and medium-sized companies in developed market economies and to
a limited extent in small-sized companies and Emerging Markets countries.
Our investment process seeks to find high quality growth companies for the
International Equity Fund's portfolio of investments. These are companies that
historically have had superior growth, profitability and quality relative to
local markets and relative to companies within the same industry worldwide, and
that are expected to continue such performance. In terms of growth, we aim to
find companies that have the capability of growing in real terms at least twice
the economic growth rate of the markets in which they participate. In terms of
quality, we seek to invest in companies with strong management, proprietary
market positions, strong asset bases and solid financial characteristics.
International Outlook: Moving Toward Mid-Cycle
In both of the recent broad global economic cycles (1981-1990 and 1991-2000)
there was a sharp recovery, followed by a moderation of growth accompanied by
some monetary tightening. In each case the initial tightening occurred in the
'4' year (1984, 1994), and so the analogy is drawn that after the
liquidity-driven upturn of 2003, we should anticipate upward pressure on
interest rates, and that China and the US--the engines of global growth--could
slow significantly.
Leading economic indicators, many of them monetary, have indeed slowed on a
global basis, and some measures of investment spending and credit growth have
decelerated in China. While it is still too early to tell definitively how mild
or severe the coming slowdown will be, markets have readily anticipated a
relatively bearish scenario. Ironically, until there is clearer evidence of the
extent and effects of the slowdown, markets may overreact on the basis of fear
of the unknown.
Our view of the mid-cycle plateau is that it may well be milder and briefer
than the tightening cycle of 1994-95. There are few excesses in the global
economic picture and a diminished likelihood of instability in emerging
markets. As Asia cools down and Europe begins to reaccelerate, global growth
should move into better balance for the remainder of the economic expansion.
32 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Equity Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------ -----
Shares Value
- ------ ----------------------------------------------- -----
Common Stocks--Europe--31.2%
Austria--2.7%
600 Erste Bank Der Oester (Banking)................ $ 95
----
France--2.3%
400 Hermes International (Apparel and luxury goods) 80
----
Germany--11.5%
2,100 Bayer Motoren Werke (Motor vehicles)........... 94
300 Puma AG (Consumer non-durables)................ 77
800 SAP AG (Software and programming).............. 134
8,200 *T-Online International AG (Information
technology)................................... 94
----
399
----
Greece--1.8%
2,900 EFG Eurobank Egrasias (Banking)................ 63
----
Ireland--1.7%
3,800 Anglo Irish Bank plc (Finance)................. 60
----
Italy--2.8%
5,700 Banco Popolare di Verona E N (Banking)......... 98
----
Spain--1.8%
1,500 Grupo Ferrovial S.A. (Industrial services)..... 63
----
Sweden--3.8%
44,000 *Ericsson (Communications equipment)........... 132
----
Switzerland--2.8%
150 Serono S.A (Biotechnology)..................... 95
----
United Kingdom--21.9%
15,200 BG Group plc (Industrial services)............. 94
8,100 *British Sky Broadcasting Group (Media)........ 92
3,300 *Cairn Energy plc (Energy)..................... 85
10,900 Capita Group plc (Commercial services)......... 63
3,500 Next (Multiline retail)........................ 91
2,700 Premier Farnell (Electronics distributors)..... 12
3,400 Reckitt Benckiser plc (Household products)..... 97
8,700 Smith & Nephew (Healthcare equipment and
supplies)..................................... 94
26,900 Tesco plc (Food retailer)...................... 131
----
759
----
Canada--5.7%
2,400 Manulife Financial Corp. (Life and health
insurance).................................... 97
1,000 *Research in Motion Ltd. (Wireless
telecommunication)............................ 69
1,300 Suncor Energy, Inc. (Energy minerals).......... 33
----
199
----
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
All securities excluding those traded on exchanges in this hemisphere, are fair
valued pursuant to Valuation Procedures adopted by the Board of Trustees.
- ------------------------------------------------------- --------
Shares or Principal Amount Value
- ------------------------------------------------------- --------
Common Stocks--(continued)
Japan--18.2%
1,800 Canon, Inc. (Office electronics)............... $ 96
800 Fast Retailing Co. Ltd. (Specialty retail)..... 65
10,000 Hino Motors Ltd. (Trucks, construction and farm
machinery).................................... 73
800 Hoya Corporation (Electronic technology)....... 84
300 Keyence Corporation (Electronic technology).... 69
1,100 Nitto Denko Corporation (Electronic
technology)................................... 57
5,000 Sharp Corp. (Electronics)...................... 81
15,000 Sumitomo Trust & Banking Co. (Finance)......... 108
--------
633
--------
Asia--3.7%
Australia--1.8%
2,600 Macquarie Bank, Ltd. (Financial services)...... 62
--------
Hong Kong--1.9%
14,500 Esprit Holdings (Apparel, footwear and retail). 65
--------
Latin America--1.8%
Mexico--1.8%
34,800 America Movil S.A. (Communications)............ 63
--------
Emerging Europe, Mid-East, Africa--3.8%
Israel--1.7%
900 Teva Pharmaceutical Inds.--ADR
(Pharmaceuticals)............................. 60
--------
South Africa--2.1%
10,300 Standard Bank Group Ltd. (Banking)............. 72
--------
Total Common Stock--86.3%
(cost $2,816)......................................... 2,998
--------
Investment in Affiliate
336,121 William Blair Ready Reserves Fund.............. 336
--------
Total Investment in Affiliate--9.7%
(Cost $336) 336
--------
Short-Term Investments
141,000 American Express Demand Note, VRN
1.17% due 7/1/04.............................. 141
--------
Total Short-term Investments--4.0%
(cost $141)........................................... 141
--------
Total Investments--100.0%
(cost $3,293)......................................... 3,475
Liabilities, plus cash and other assets--0.0%.......... (1)
--------
Net assets--100.0%..................................... $ 3,474
========
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 33
- --------------------------------------------------------------------------------
International Equity Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
At June 30, 2004, the Fund's Portfolio of Investments includes the following
industry categories:
Financials................ 21.9%
Consumer Discretionary.... 21.5%
Information Technology.... 20.7%
Healthcare................ 8.3%
Consumer Staples.......... 7.6%
Energy.................... 7.1%
Industrials............... 6.6%
Telecommunication Services 4.4%
Materials................. 1.9%
------
100.0%
======
At June 30, 2004 the Fund's Portfolio of Investments includes the following
currency categories:
Euro.................. 28.6%
British Pound Sterling 25.3%
Japanese Yen.......... 21.1%
Canadian Dollar....... 6.6%
Swedish Krona......... 4.4%
Swiss Franc........... 3.2%
South African Rand.... 2.4%
Hong Kong Dollar...... 2.2%
Mexico Nuevo Peso..... 2.1%
Australian Dollar..... 2.1%
United States Dollar.. 2.0%
------
100.0%
======
See accompanying Notes to Financial Statements.
34 Semi-Annual Report June 30, 2004
[PHOTO]
MITCHEL
David S. Mitchell
[PHOTO]
PRICE
Capucine "Cappy" Price
- --------------------------------------------------------------------------------
VALUE DISCOVERY FUND
- --------------------------------------------------------------------------------
The Value Discovery Fund invests in small companies that we believe offer a
long-term investment value. We do this by seeking to identify undervalued
companies with sound business fundamentals--"broken stocks not broken
companies."
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Value Discovery Fund posted a 5.25% gain on a total return basis (Class N
shares) during the six months ended June 30, 2004. By comparison, the Fund's
primary benchmark, the Russell 2000(R) Index, rose 6.76%, while the Russell
2000(R) Value Index, increased 7.83%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
At mid-year, our results lagged the benchmark. Underperformance resulted
primarily from earnings' disappointments either in actual reported or lower
than expected guidance. As the economy has improved and valuations have become
richer, the market is much less forgiving of companies that are not delivering
results here and now. That being said, earnings misses due to near term
inability to recapture spikes in raw material prices (as evidenced in steel,
copper, gas, and numerous food commodities) are much more likely to be overcome
than those driven by weaker-than-expected demand or an increasingly difficult
competitive environment.
Which investment strategies enhanced the Fund's return? What were among the
best performing sectors for the Fund?
Within the portfolio, three sectors stood out from a positive relative
contribution perspective during the first half of the year: Other Energy,
Producer Durables and Autos and Transportation.
Other Energy was the best-performing sector in both absolute and contribution
terms during the first half of the year. Veritas, a provider of geophysical
studies and exploration services to the petroleum industry, was the top
performer. Veritas posted strong year-to-date figures, reflecting an upsurge in
demand for their services. Consol Energy, a multi-fuel (coal and gas) energy
producer, also posted strong results, reflecting solid performance by its core
businesses.
Producer Durables was the second-best-performing sector in absolute terms.
Performance was driven primarily by Pentair. Historically, Pentair has operated
in three business segments: Tools, Water and Enclosures. The marketplace
responded favorably to Pentair's announcement to divest itself from its
lower-margin tool business to Black & Decker. Additionally, Pentair made an
advantageous acquisition of a water technology company.
Stock selection was the primary driver of out-performance for our holdings in
the Autos and Transportation sector. Landstar System, a transportation services
company that provides truckload carrier services, inter-modal transportation
services, and expedited air and truck services to shippers, reflected strong
revenue growth driven by increasing demand for shipping services. (We have
since exited the stock entirely due to valuation.) SCS
June 30, 2004 William Blair Funds 35
Transportation, a provider of regional and interregional less-than-truckload
and selected truckload service, reported an 89% first quarter year-over-year
earnings increase citing an increase in operational efficiency, an enhancement
in revenues, as well as an improving economy.
What were among the weakest performing sectors for the Fund?
During the first half of the year, three sectors stood out as detractors from
performance: Health Care, Consumer Staples, and Technology.
Within the Healthcare sector, First Health Group, a provider of PPO services,
clinical cost management, and fee schedule/cost management services, missed
analysts' earnings expectations, citing increased competition among health
plans trying to gain market share.
The lion's share of the shortfall in the Consumer Staples sector came from
Interstate Bakeries. Interstate Bakeries is the largest wholesale baker and
distributor of fresh baked bread and sweet goods in the U.S. Year to date,
Interstate Bakeries has suffered amid the popularity of the current
low-carbohydrate diet fads, coupled with rising prices in food commodities such
as eggs.
Within the Technology sector, Overland Storage, a designer and manufacturer of
magnetic tape data storage systems cut its revenue guidance during the first
half of the year, pointing to lower-than-expected original equipment
manufacturer revenue. This appears to be a function of supply chain management
changes at its largest customer, Hewlett Packard, as opposed to weakening end
market demand.
Are there any specific investments you would like to highlight?
Examples of some of the positions that were added to the Fund's portfolio of
investments in recent months include the following:
.. Nautilus Group is a marketer, developer and manufacturer of branded health
and fitness products sold under such names as Nautilus, Bowflex,
TreadClimber, Schwinn, StairMaster and Trimline. We are enthusiastic with
this "turnaround" story, as Nautilus introduces new products and redirects
their marketing focus to the retail channel.
.. Spatialight develops, designs, manufactures and markets miniature
high-resolution active matrix liquid crystal displays for computer, video
and other applications. We expect Spatialight to greatly benefit from the
migration to high-definition video equipment.
.. Restoration Hardware is a retailer of home furnishings, functional and
decorative hardware and related merchandise. We are impressed with the
vision new senior management brings to this company to increase sales and
margins.
.. General Cable is engaged in the development, design, manufacturing,
marketing and distribution of copper, aluminum and fiber-optic wire and
cable products. This company is well poised to lead the way as the wire and
cable industry recovers and construction and infrastructure spending and
demand increases.
The following positions were eliminated during the second quarter as they
achieved our price targets and we took profits re-deploying proceeds to more
attractive opportunities:
.. Yellow Roadway, a provider of transportation services to the
less-then-truckload market throughout North America.
.. Bank of Hawaii, a provider of a range of financial products and services in
Hawaii and the Pacific Islands.
36 Semi-Annual Report June 30, 2004
.. NCI Building Systems, a manufacturer and marketer of building and framing
systems, self-storage buildings, overhead doors and other components for the
residential, commercial, industrial and agricultural markets.
.. Landstar System, a transportation services company that provides truckload
carrier services, inter-modal transportation services, and expedited air and
truck services to shippers.
What is your current strategy? How is the Fund positioned?
Despite lagging the benchmark near-term, early returns from the earnings season
subsequent to quarter end are running positive and we have taken multiple
opportunities to re-deploy profits into more attractive expected returns both
within and previously outside the portfolio.
A combination of inflationary pressure, uncertainty regarding the upcoming
election, and a slow-down in mutual funds cash inflows continues to contribute
to excessive market volatility. Market turmoil creates opportunity and we
diligently work to uncover companies benefiting from short-term neglect or
undervaluation.
We continue to emphasize companies with strong managements, solid financials,
and competitive positions that should experience earnings growth in even modest
economic expansion.
June 30, 2004 William Blair Funds 37
- --------------------------------------------------------------------------------
Value Discovery Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999
------------ ----- ------ ----- ----- -----
Value Discovery Fund Class N 5.25% 39.31% (10.70)% 17.39% 18.85% 6.10%
Value Discovery Fund Class I 5.36 39.55 (10.34) 17.72 19.16 11.81(a)(b)
Russell 2000(R) Index....... 6.76 47.25 (20.48) 2.49 (3.02) 21.26
Russell 2000(R) Value Index. 7.83 46.03 (11.43) 14.03 22.83 (1.49)
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year 5 Year Inception
------ ------ ------ ---------
Value Discovery Fund Class N 31.73% 9.69% 13.11% 13.57%(c)
Value Discovery Fund Class I 31.98 9.97 -- 16.40(b)
------------------------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 1, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from December 23, 1996
(Commencement of the Class) to June 30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions
and income dividends
[CHART]
Value Russell Russell
Discovery 2000(R) 2000(R)
Fund Class N Index Value
12/96 $10,000 $10,000 $10,000
12/97 13,300 12,200 13,200
12/98 13,400 11,900 12,300
12/99 14,300 14,500 12,100
12/00 16,900 14,000 14,900
12/01 19,900 14,400 17,000
12/02 17,800 11,400 15,100
12/03 24,800 16,800 22,000
6/04 26,000 18,000 23,700
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. Investing in smaller companies
involves special risks, including higher volatility and lower liquidity. From
time to time, the investment adviser may waive fees or reimburse expenses for
the Fund. Without these waivers, performance would be lower. Class N shares are
available to the general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2000(R) Index is the Fund's primary benchmark. The Russell 2000(R)
Index is unmanaged composite of the smallest 2000 stocks of the Russell 3000
Index.
The Russell 2000(R) Value Index consists of small-capitalization companies with
below average price-to-book ratios and forecasted growth rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
38 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Value Discovery Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------------------------------------------- --------
Shares Value
- ------- --------------------------------------- --------
Common Stocks
Financial Services--21.7%
114,100 Agree Realty Corporation............... $ 2,887
234,905 American Financial Realty Trust........ 3,357
132,790 AmerUs Group, Class "A"................ 5,498
65,810 Astoria Financial Corporation.......... 2,407
103,585 Brandywine Realty Trust................ 2,816
49,436 City Bank (Lynnwood, WA)............... 1,583
130,655 Donegal Group, Inc., Class "A"......... 2,618
86,085 First Financial Holdings, Inc.......... 2,480
225,985 *Franklin Bank Corporation............. 3,575
583,750 *Meadowbrook Insurance Group, Inc...... 3,094
232,610 National Financial Partners Corporation 8,204
130,020 Ryder System, Inc...................... 5,210
329,220 *U.S.I. Holdings Corporation........... 5,202
309,080 *United Rentals, Inc................... 5,529
260,390 Winston Hotels, Inc.................... 2,695
--------
57,155
--------
Consumer Discretionary--21.6%
208,910 *BJ's Wholesale Club, Inc.............. 5,223
198,621 Cadmus Communications Corporation...... 2,930
142,280 Christopher & Banks Corporation........ 2,520
391,590 *Elizabeth Arden, Inc.................. 8,239
77,140 Ethan Allen Interiors Inc.............. 2,770
126,340 *Heidrick & Struggles International.... 3,750
343,335 *K2, Inc............................... 5,390
50,855 Michaels Stores, Inc................... 2,797
144,195 Nautilus Group, Inc.................... 2,813
211,100 *Navigant Consulting, Inc.............. 4,526
310,515 *Prime Hospitality Corporation......... 3,298
404,605 *Restoration Hardware, Inc............. 2,958
86,345 *Sharper Image Corporation............. 2,710
142,450 *Tech Data Corporation................. 5,574
178,800 *Whitehall Jewellers, Inc.............. 1,337
--------
56,835
--------
Materials and Processing--14.0%
91,865 Boise Cascade Corporation.............. 3,458
196,645 Ferro Corporation...................... 5,246
632,505 *GrafTech International Ltd............ 6,616
138,475 *Jones Lang LaSalle, Inc............... 3,753
342,976 LSI Industries, Inc.................... 3,944
557,280 Polyone Corporation.................... 4,146
140,830 Spartech Corporation................... 3,653
214,430 Watsco, Inc............................ 6,019
--------
36,835
--------
Technology--9.0%
193,902 Avnet, Inc............................. 4,402
553,490 *Borland Software Corporation.......... 4,699
197,975 *Checkpoint Systems, Inc............... 3,550
258,200 *Overland Storage, Inc................. 3,431
167,410 *SPSS, Inc............................. 3,008
471,022 *Tier Technologies, Inc., Class "B".... 4,588
--------
23,678
--------
Other Energy--7.7%
167,156 Consol Energy, Inc..................... 6,018
192,250 *Forest Oil Corporation................ 5,334
- ----------
* Non-income producing
** = Fair Valued pursuant to Valuation Procedures adopted by the Board of
Trustees.
ADR= American Depository Receipt
- ----------------------------------------------- --------
Shares or Principal Amount Value
- ----------------------------------------------- --------
Common Stocks--(continued)
Other Energy--(continued)
468,530 *Newpark Resources, Inc................ $ 2,905
258,075 *Veritas DGC, Inc...................... 5,974
--------
20,231
--------
Health Care--7.2%
206,275 *Albany Molecular Research............. 2,667
184,210 Alpharma, Inc., Class "A".............. 3,773
480,965 *Discovery Partners International, Inc. 2,453
525,435 *Encore Medical Corporation............ 3,310
160,395 *First Health Group Corporation........ 2,504
240,570 *SOLA International, Inc............... 4,145
--------
18,852
--------
Producer Durables--7.1%
198,400 *Agco Corporation...................... 4,042
301,220 *Artesyn Technologies, Inc............. 2,711
131,315 Belden, Inc............................ 2,814
488,700 General Cable Corporation.............. 4,178
92,885 Pentair, Inc........................... 3,125
77,290 Robbins & Myers, Inc................... 1,735
--------
18,605
--------
Consumer Staples--4.3%
492,810 *Del Monte Foods Company............... 5,007
316,725 *Interstate Bakeries Corporation....... 3,436
75,815 *Robert Mondavi Corporation, Class "A". 2,807
--------
11,250
--------
Utilities--3.0%
194,620 Atmos Energy Corporation............... 4,980
171,090 *IDT Corporation....................... 3,085
--------
8,065
--------
Autos and Transportation--3.0%
105,810 BorgWarner, Inc........................ 4,631
128,675 *SCS Transportation, Inc............... 3,396
--------
8,027
--------
Consumer Cyclical--0.6%
255,655 *Spatialight, Inc...................... 1,547
--------
Total Common Stock--99.2%
(cost $203,695)............................... 261,080
--------
Convertible Bonds
2,157 Midwest Express Holdings,
6.750%, due 10/1/08**................. 1,799
--------
Total Convertible Bonds--0.7%
(Cost $2,157)................................. 1,799
--------
Investment in Affiliate
2,172 William Blair Ready Reserves Fund...... 2,172
--------
Total Investment in Affiliate--0.8%
(cost $2,172)................................. 2,172
--------
Total Investments--100.7%
(cost $208,024)............................... 265,051
Liabilities, plus cash and other assets--(0.7)% (1,837)
--------
Net assets--100.0%............................. $263,214
========
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 39
[PHOTO]
KAPLAN
James S. Kaplan
[PHOTO]
Chris Vincent
Christopher T. Vincent
- --------------------------------------------------------------------------------
INCOME FUND
- --------------------------------------------------------------------------------
The Income Fund invests in intermediate-term income-producing debt securities.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Income Fund posted a 0.44% decrease on a total return basis (Class N
Shares) for the six months ended June 30, 2004. By comparison, the Fund's
benchmark, the Lehman Intermediate Government/Credit Bond Index, declined
0.11%, while the Fund's peer group, the Morningstar Short-term Bond Category,
decreased 0.06%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The Fund's slight underperformance versus its benchmark largely reflected the
performance of its mortgage-backed and asset-backed securities. Mortgage-backed
and asset-backed securities performed relatively well during the first quarter,
although prices of the mortgage-backed sector lagged equivalent duration
Treasury prices in March, based on expectations prepayments would increase
during the months ahead. One asset-backed security was unexpectedly downgraded
by a rating agency during the first quarter, which acted as a slight drag on
portfolio performance, and helped contribute to modest underperformance versus
our benchmark during that period. The Fund gained ground during the second
quarter, reflecting the yield advantage of corporate, mortgage and asset-backed
securities versus U.S. Treasury securities.
The first quarter was marked by a significant drop in interest rates, which was
sparked by the February U.S. employment report. The Labor Department reported
in early March that the economy added 83,000 jobs in February, which was down
sharply from January's gain and well below the type of growth experienced in
the 1980's and 1990's. The meager gain in jobs coupled with the overall
unemployment rate holding steady at 5.6% caused interest rates to decline
sharply and bond prices rallied. For example, prices on 10-year U.S. Treasury
notes gained by 4.6% during the first quarter.
Corporate bond spreads were relatively stable during the first quarter, after
experiencing a major bull market in 2003. Corporate bonds considerably
outperformed Treasury securities during most of last year, as the prices of
these bonds rallied in response to signs that an economic rebound would improve
the credit outlook for companies issuing bonds.
Interest rates were the biggest driver of Fund performance during the second
quarter. Interest rates made a significant move higher during the quarter, only
to recede slightly at the end of June. For example, the yield on 10-year U.S.
Treasury Notes stood at 3.84% on March 31, rose to 4.87% by June 14, and eased
back to 4.58% on June 30.
The rise in rates mirrored the signs of improved business confidence in the
economy and its prospects. The Labor Department reported that employers added
208,000 jobs to non-farm payrolls in May, and that hiring in March and April
was more robust than had previously been reported.
As mentioned, the positive yield advantage across all of the "spread" sectors
contributed to the Fund's performance. This positive differential was
especially noticeable in the mortgage- and asset-backed sectors of the
fixed-income markets, which benefited from a decline in prepayments.
40 Semi-Annual Report June 30, 2004
Late in the second quarter geopolitical events had a positive impact on the
markets, as the U.S. transfer of sovereignty to an interim Iraqi government
ahead of the June 30/th/ deadline calmed those investors who were anxious about
the potential for problems.
Which investment strategies enhanced the Fund's return?
Were there any investment strategies that produced the best results?
Our investment strategy through the first half of the year has been to exploit
the yield advantage of corporate, mortgage and asset-backed securities versus
U.S. Treasury securities. These securities have generated higher yields and
exhibited relatively stable returns for the quarter.
Corporate bond spreads have been underpinned by a lack of supply and a dearth
of new issuance. In addition, as corporations have benefited from productivity
gains, credit quality has improved. As a result of the improved credit quality,
there have been fewer downgrades of corporate issues and an increased number of
upgrades, when compared to the environment a several years ago.
The market has gone from a period where corporate bonds were too
cheap--reflecting a lack of demand in the aftermath of a period of corporate
scandals--to a period during the first quarter of this year marked by fair
value and renewed investor confidence, and finally to an environment in the
second quarter which there has been less discrimination in terms of bond
valuations.
What were among the weakest performing sectors for the Fund?
There really was not any sector that stood out in terms of weaker-than expected
performance during the first half of the year. As we mentioned, one
asset-backed security was unexpectedly downgraded by a rating agency during the
first quarter, which acted as a slight drag on portfolio performance. That
security was subsequently sold out of the Fund's portfolio of investments.
What is your current strategy? How is the Fund positioned?
We remain on the "defensive side" with respect to interest rates. The
fixed-income markets are currently "discounting,"--that is, expecting--the
possibility that the Federal Reserve Board will nudge interest rates higher, in
a series of three-to-four 0.25% rate hikes over the balance of 2004.
We believe corporate bond spreads should remain supported by improving credit
fundamental considerations and by the favorable supply/demand characteristics
we mentioned earlier. It is worth noting that the fixed income markets--and the
corporate bond market in particular--have yet to experience any "crowding out"
from any increased borrowing demands on the part of the U.S. Government to
finance the budget deficit.
We expect rates to move higher in an orderly manner, and have confidence owning
"callable" mortgage-backed and asset-backed securities. We believe a great deal
of "call risk' has left the market. The refinancing boom is largely over, and
the outlook for prepayments has significantly improved from earlier this year
as well as one year ago.
We intend to maintain our commitment to our current strategy within the
Corporate, Asset-backed and Mortgage-backed markets, deploying new money as it
becomes available within each sector. Consequently, the Fund will remain
overweight in favor of corporate bonds as well as mortgage-backed and
asset-backed issues, and underweight in Treasury and Agency securities. We
still see value in a variety of sectors and asset classes, and believe we can
add significant value as managers in our ability to reinvest principal and
interest in sectors, such as asset-backed securities, that will provide the
Fund's portfolio with meaningful differentiation in yield when compared to U.S.
Treasury securities.
June 30, 2004 William Blair Funds 41
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999
------------ ---- ---- ---- ----- ----
Income Fund Class N.......... (0.44)% 3.68% 7.91% 7.18% 9.99% 0.34%
Income Fund Class I.......... (0.33) 3.76 8.04 7.32 10.28 0.30(a)(b)
Lehman Intermediate
Government/Credit Bond Index (0.11) 4.31 9.84 8.96 10.12 0.39
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year 3 Year 5 Year 10 Year Inception
------ ------ ------ ------- ---------
Income Fund Class N 0.23% 4.88% 5.75% 6.18% --%
Income Fund Class I 0.36 5.03 -- -- 6.11(c)
------------------------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 1, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from October 1, 1999 to June 30,
2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
Income Fund Lehman Intermediate
Class N Gov/Credit Index
1993 $10,000 $10,000
1994 9,900 9,800
1995 11,400 11,300
1996 11,700 11,800
1997 12,600 12,700
1998 13,500 13,800
1999 13,600 13,800
2000 14,900 15,200
2001 16,000 16,600
2002 17,300 18,200
2003 17,900 19,000
6/04 17,800 19,000
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds.com. Class N shares are available
to the general public without a sales load.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Lehman Intermediate Government/Credit Bond Index indicates broad
intermediate government/corporate bond market performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all investments in the Fund performed the same, nor
is there any guarantee that these investments will perform as well in the
future. Market forecasts provided in this report may not necessarily come to
pass.
42 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all amounts in thousands) (unaudited)
- ------- ----------------------------------------------- -------
Principal Amount Value
- ------------------------------------------------------- -------
U.S. Government and U.S. Government
Agency--7.4%
U.S. Treasury--5.1%
$ 3,000 U.S. Treasury Note, 6.000%, due 8/15/09........ $3,297
8,000 U.S. Treasury Note, 6.500%, due 2/15/10........ 9,014
1,500 1,434
- ------- U.S. Treasury Note, 3.875%, due 2/15/13........ -------
12,500 13,745
- ------- Total U.S. Treasury Obligations................ -------
Government National Mortgage Association
(GNMA)--2.2%
$3,543 #616250, 6.000%, due 2/15/24................... 3,654
2,250 2,331
- ------- #2002-48, Tranche 0B, 6.000%, due 5/16/30...... -------
5,793 5,985
- ------- Total Government National Mortgage Association. -------
Small Business Administration--0.1%
-- Receipt for Multiple Originator Fees, #3,
0.814%, due 11/01/08 (Interest Only) WAC...... 64
149 157
- ------- Loan #100023, 9.375%, due 11/25/14............. -------
149 221
- ------- Total Small Business Administration Obligations -------
Federal Home Loan Mortgage Corp. (FHLMC)--18.9%
$1,084 #G10067, 7.000%, due 1/1/08.................... 1,131
354 #G10147, 8.500%, due 2/1/08.................... 371
2,200 #1601, Tranche PJ, 6.000%, due 10/15/08, VRN... 2,275
1,561 #1612, Tranche SE, 8.100%, due 11/15/08, VRN... 1,639
1,444 #E80050, 6.000%, due 10/1/09................... 1,513
1,011 #G90028, 7.000%, due 5/15/09................... 1,072
1,185 #G90019, 7.500%, due 12/17/09.................. 1,260
5,500 7.000%, due 3/15/10............................ 6,196
901 #E65418, 7.000%, due 8/1/10.................... 940
1,003 #G10457, 7.000%, due 2/1/11.................... 1,065
924 #E00436, 7.000%, due 6/1/11.................... 981
2,396 #E90630, 6.000%, due 7/1/12.................... 2,507
587 #G10708, 6.500%, due 8/1/12.................... 622
1,539 #E91999, 5.000%, due 10/1/12................... 1,568
372 #G11218, 7.000%, due 10/1/12................... 395
2,537 #E96147, 5.000%, due 5/1/13.................... 2,581
1,915 #E95846, 4.500%, due 5/1/13.................... 1,917
2,287 #G10839, 5.500%, due 10/1/13................... 2,352
2,310 #E72924, 7.000%, due 10/1/13................... 2,451
2,795 #E00639, 5.000%, due 3/1/14.................... 2,824
438 #E81908, 8.500%, due 12/1/15................... 469
1,707 #G90022, 8.000%, due 9/17/16................... 1,791
2,379 #G11486, 7.500%, due 4/1/17.................... 2,535
2,649 #E90398, 7.000%, due 5/1/17.................... 2,811
914 #M30028, 5.500%, due 5/1/17.................... 947
1,912 #G11549, 7.000%, due 7/1/17.................... 2,029
2,821 #G90027, 6.000%, due 11/15/17.................. 2,938
531 #C67537, 9.500%, due 8/1/21.................... 594
870 878
- ------- #G21, Tranche J, 6.250%, due 8/25/22........... -------
48,126 50,652
- ------- Total FHLMC Mortgage Obligations............... -------
- -------- --------------------------------------------- ------
Principal Amount Value
- ------------------------------------------------------ ------
Federal National Mortgage Association (FNMA)--19.3%
$ 1,347 #545560, 8.000%, due 5/1/07.................. $1,416
1,163 #93-196, Tranche SA, 18.723%, due 10/25/08,
VRN......................................... 1,363
520 #1993-221, Tranche SG, 12.992%, due 12/25/08,
VRN......................................... 556
818 #765396, 5.500%, due 1/1/09.................. 845
1,633 #731691, 7.000%, due 9/1/09.................. 1,731
1,142 #695512, 8.000%, due 9/1/10.................. 1,217
2,273 #725479, 8.500%, due 10/1/10................. 2,443
3,393 #255056, 5.000%, due 11/1/10................. 3,440
6,600 6.250%, due 2/1/11........................... 7,086
1,181 #313816, 6.000%, due 4/1/11.................. 1,235
553 #577393, 10.000%, due 6/1/11................. 610
1,499 #577395, 10.000%, due 8/1/11................. 1,661
3,102 # 254705, 5.500%, due 3/1/13................. 3,218
1,260 #254788, 6.500%, due 4/1/13.................. 1,334
1,724 #725315, 8.000%, due 5/1/13.................. 1,843
692 #593561, 9.500%, due 8/1/14.................. 776
3,052 #567027, 7.000%, due 9/1/14.................. 3,243
3,529 #567026, 6.500%, due 10/1/14................. 3,736
1,144 #458124, 7.000%, due 12/15/14................ 1,199
1,443 #598453, 7.000%, due 6/1/15.................. 1,532
1,225 #555747, 8.000%, due 5/1/16.................. 1,310
698 #643217 , 6.500%, due 6/1/17................. 737
1,773 #682075, 5.500%, due 11/1/17................. 1,819
3,943 #662925, 6.000%, due 12/1/17................. 4,130
371 #1996-14, Tranche B, 3.801%, due 4/25/23..... 371
11 #1993-19, Tranche SH, 11.233%, due 4/25/23,
VRN......................................... 14
1,711 #254797, 5.000%, due 6/1/23.................. 1,691
1,050 1,100
- -------- #733897, 6.500%, due 12/1/32................. ------
48,850 51,656
- -------- Total FNMA Mortgage Obligations.............. ------
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 43
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ------------------------------- ----------- --------
Collateralized Mortgage Obligations--22.2%
$ 2,500 Security National Mortgage Loan
Trust, 2002-2, Tranche M2,
6.460%, due 8/25/08........... A+ $ 2,511
614 GRP 2004-1 3.960%, due
3/25/09....................... A 613
5,125 Condor Auto, 2003-A, Tranche B,
7.000%, due 12/15/09.......... A3 5,228
2,040 Countrywide Alternative Loan
Trust, 2003-11T1, Tranche M,
4.750% due 7/25/18............ AA 1,968
1,818 Cityscape Home Equity Loan
Trust, 1997-4, Tranche M2,
7.710%, due 10/25/18.......... A 1,816
1,900 ABFS, 2002-2, Tranche A6,
5.850%, due 3/15/19........... AAA 1,976
2,960 Security National Mortgage Loan
Trust, 2001-2A, Tranche B,
8.100%, due 10/25/20.......... BBB 2,978
3,172 Countrywide, 2001-HLV1,
Tranche B1, 9.385%,
due 5/10/22................... BBB 3,275
244 First Plus, 1998-3, Tranche A7,
6.950%, due 10/10/22.......... AAA 244
1,216 First Plus, 1997-4, Tranche M2,
7.330%, due 9/11/23........... A 1,215
973 First Plus, 1997-4, Tranche A8,
7.310%, due 9/11/23........... AAA 972
712 First Plus, 1998-2, Tranche M2,
7.510%, due 5/10/24........... A2 711
208 First Plus, 1998-3, Tranche M2,
7.420%, due 5/10/24........... A2 209
2,144 Security National Mortgage Loan
Trust, 2000-2, Tranche B,
9.510%, due 9/25/24........... A2 2,238
630 Security National Mortgage Loan
Trust, 2001-2A, Tranche M,
8.100%, due 11/25/24.......... A 643
1,577 CIT Group Home Equity Loan
Trust, 98-1 M2, 6.720%, due
9/15/27....................... A2 1,616
3,035 GMAC Mortgage Corporation
Loan Trust, 2000-CL1, Tranche
M, 8.720%, due 6/25/26........ AA+ 3,109
4,425 Green Tree Home Improvement
Loan Trust, 1998-E, Tranche
HEM2, 7.270%, due 6/15/28..... A+ 4,499
2,313 Delta Funding Home Equity Loan
Trust, 2000-2, Tranche A6F,
7.970%, due 8/15/30........... AAA 2,264
2,700 Bear Stearns ABS, 2001-A,
Tranche M1 7.540%, due
2/15/31....................... A 2,860
2,000 Countrywide, 2000-2, Tranche
MF2, 9.000%, due 6/25/31...... A 2,054
590 Countrywide, 2001-1, Tranche
MF2, 7.511%, due 7/25/31...... AA- 608
2,222 IMSA, 2001-5, Tranche M1
7.250%, due 8/25/31........... AA 2,297
4,635 Origin, 2001-A, Tranche A5,
7.080%, due 3/15/32........... Aaa 4,738
1,600 Security National Mortgage Loan
Trust, 2004-1A, Tranche M2,
6.750%, due 06/25/32.......... A 1,590
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- --------------------------------- ----------- -------
Collateralized Mortgage Obligations--(continued)
$ 1,164 Structured Assets Security
Corporation, 2002-17, Tranche
B3, 6.077%, due 9/25/32......... BBB $1,135
943 GRP Real Estate Asset Trust,
2003-1, Tranche A, 5.970%, due
11/25/32........................ A 942
2,934 LSSCO, 2004-2, Tranche M1,
5.177%, due 2/28/33............. AA 2,964
324 ABFS, 2002-2, Tranche A-7,
5.125%, 6/15/33................. AAA 332
1,500 ABFS, 2002-3, Tranche MI, 1,530
------- 5.402%, 9/15/33................. AA -------
58,218 Total Collateralized Mortgage 59,135
------- Obligations..................... -------
Corporate Obligations--30.3%
3,499 Block Financial Corporation,
8.500%, due 4/15/07............. A 3,927
2,000 Mellon Bank NA, 7.375%, due
5/15/07......................... A+ 2,195
1,336 Ford Motor Credit, 7.200%, due
6/15/07......................... BBB 1,421
2,775 Applied Materials, Inc., 6.750%,
due 10/15/07.................... A- 3,039
1,000 Amgen Inc., 6.500%, due
12/01/07........................ A+ 1,090
2,550 DaimlerChrysler, NA Holdings,
4.750%, due 1/15/08............. A3 2,571
2,200 Lehman Brothers Holdings
4.000%, due 1/22/08............. A+ 2,196
1,650 Target Corporation,
3.375%, due 3/1/08.............. A+ 1,623
2,350 Wells Fargo Company,
3.500%, due 4/4/08.............. AA 2,316
2,225 Cardinal Health, Inc.,
6.250%, due 7/15/08............. A 2,384
2,425 CIT Group Inc.,
3.375%, due 4/1/09.............. A 2,303
3,475 ConocoPhillips, Inc.,
8.750%, due 5/25/10............. A- 4,200
2,300 Household Finance Corporation,
8.000%, due 7/15/10............. A 2,669
2,399 Boeing Capital Corporation,
7.375%, due 9/27/10............. A+ 2,713
2,500 Citigroup, Inc.,
7.250%, due 10/1/10............. A+ 2,816
2,125 Comcast Cable Communications
Corp., 6.750%, due 1/30/11...... BBB 2,293
2,600 Sprint Capital Corp., 7.625%, due
1/30/11......................... BBB 2,874
2,600 Countrywide Financial Corp.,
4.000%, due 3/22/11............. A 2,425
1,900 Time Warner, 6.750%, due
4/15/11......................... BBB+ 2,046
3,200 Morgan Stanley, 6.750%, due
4/15/11......................... A+ 3,507
3,000 General Motors Acceptance
Corporation, 6.875%, due
9/15/11......................... BBB+ 3,076
1,500 Ford Motor Credit Co., Inc.
7.250%, due 10/25/11............ BBB+ 1,566
See accompanying Notes to Financial Statements.
44 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ----------------------------------- ----------- --------
Corporate Obligations--30.3%--(continued)
$ 2,850 National Rural Utility Cooperative,
7.250%, due 3/1/12................ A $3,236
2,500 Weyerhaeuser Company, 6.750%,
due 3/15/12....................... BBB 2,707
2,500 GE Capital Corporation, 6.000%,
due 6/15/12....................... AAA 2,638
2,000 SLM Corporation, 5.125%, due
8/27/12........................... A+ 1,976
2,550 Verizon Global Funding
Corporation, 7.375%, due
9/1/12............................ A+ 2,868
2,360 Cox Communications Inc.,
7.125%, due 10/1/12............... BBB 2,586
3,200 IBM Corporation, 4.750%, due
11/29/12.......................... A+ 3,131
2,400 Kroger Company, 5.500%, due
2/1/13............................ BBB 2,393
1,900 Ohio Power Company, 5.500%,
due 2/15/13....................... A3 1,914
2,000 TXU Energy Company, 7.00%, 2,178
- -------- due 3/15/13....................... BBB --------
75,869 80,877
- -------- Total Corporate Obligations........ --------
249,505 Total Long Term Investments--98.1% $262,271
- -------- (Cost $261,797)............................. --------
- ----------
WAC = Weighted Average Coupon
VRN = Variable Rate Note
NRSRO = Nationally Recognized Statistical Rating Organization, such as S&P,
Moody's or Fitch
The obligations of certain U.S. Government-sponsored entities are neither
issued nor guaranteed by the United States Treasury.
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ----------------------------- ----------- --------
Short-Term Investments--0.9%
$2,345 American Express Corporation, $2,345
VRN 1.170%, due 7/1/04...... A+ --------
2,345 Total Short-Term Investments 2,345
- -------- (Cost $2,345)............. --------
$251,850 Total Investments--99.0% 264,616
======== (Cost $264,142)........... --------
Cash and other assets,
less liabilities--1.0%...... 2,682
--------
Net Assets--100.0%........... $267,298
========
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 45
[PHOTO]
KAPLAN
James S. Kaplan
[PHOTO]
Chris Vincent
Christopher T. Vincent
- --------------------------------------------------------------------------------
READY RESERVES FUND
- --------------------------------------------------------------------------------
The Ready Reserves Fund invests primarily in short-term U.S. dollar-denominated
money market instruments, and exclusively in high quality securities that are
rated in the top two categories of credit quality.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
The return for the six months ended June 30, 2003 of the Fund's Class N Shares
was 0.25%, versus the 0.20% return of the Fund's benchmark, the AAA-Rated Money
Market Funds Average. Total assets were $1.05 billion at June 30, 2004,
compared to $1.20 billion at December 31, 2003.
Federal Reserve Monetary policy was the focus of the money markets during the
first half of the year, with investors monitoring the strength of the economic
recovery and its resultant implications for interest rates.
The Fed voted at its March 16/th/ meeting to keep short-term interest rates at
a 45-year low, saying in its statement that risks to economic growth were
roughly equal and repeated its view that chances of a drop in prices were about
the same as a pickup of inflation. This was a position that the Federal Reserve
had adopted in December of 2003.
Nonetheless, during the first quarter there began to be threads of
communication from the Federal Reserve Board that interest rates could not
remain as low as they were for an indefinite period of time.
In January, for example, the Fed abandoned a promise to keep interest rates low
for "a considerable period," in favor of a promise to be "patient" with any
move to raise short-term interest rates. And in February, Federal Reserve
Chairman Alan Greenspan cautioned that low interest rates "will not be
compatible indefinitely" with the Fed's primary job of fighting inflation.
As expected, the Federal Reserve decided at its June 30/th/ meeting to raise
the federal funds rate--the interest rate that banks charge each other to lend
money overnight--0.25% to 1.25%. It was the first time in four years that the
Fed had raised the federal funds rate, which for the past year had been at a
46-year low.
The Federal Reserve's rate increase was viewed as a response to an economic
recovery that is on solid footing and an employment picture that has shown
steady signs of improvement.
Most money market observers are currently "discounting,"--that is,
expecting--the possibility that the Federal Reserve Board will nudge interest
rates higher, in a series of three-to-four 0.25% rate hikes over the balance of
2004.
Speaking to the International Monetary Conference in London in early June,
Federal Reserve Board Chairman Alan Greenspan said that the central bank is,
"of the view that monetary policy accommodation can be removed at a pace that
is likely to be measured." However, he stated the Fed stood ready to tighten
monetary policy more rapidly than the financial markets now expect, should
inflationary pressures become more intense.
For the money markets, continued strength in the economy should result in
increased issuance of commercial paper by corporations, an affirmation of a
healthy economy.
We will continue to maintain our strategy of using commercial paper in the
short end of the market, barbelled with fixed-rate obligations with slightly
longer maturities, and also intend to emphasize floating-rate obligations,
which price off of LIBOR. (LIBOR is the London Interbank Offered Rate, which is
the rate the creditworthiest international banks dealing in Eurodollars--U.S.
currency held in banks outside of the U.S.--charge each other for large loans.)
At June 30, 2004, the Fund's average maturity was 59.9 days, compared to 59.5
days at the end of the first quarter and 54 days at the end of 2003.
46 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Ready Reserves Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
The Fund's 7 day yield on June 30, 2004 was 0.61%.
Average Annual Total Returns--Class N Shares period
ending June 30, 2004.
1 Year 5 Year 10 Year
------ ------ -------
Ready Reserves Fund 0.51% 2.82% 3.87%
AAA Rated Money Market Funds 0.20% 2.72% 3.88%
Past Performance does not guarantee future results and current performance may
be lower or higher than the data quoted. For the most current month-end
performance information, please call 1-800-742-7272, or visit our Web site at
www.williamblairfunds.com. Total return includes reinvestment of income. Yields
fluctuate and are not guaranteed. An investment in the Fund is neither insured
nor guaranteed by the Federal Deposit Insurance Corp. (FDIC) or any government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
The AAA Rated Money Market Funds Average represents the average annual
composite performance of all AAA rated First Tier Retail Money Market Funds
listed by IBC Financial data.
This report identifies the Fund's investment's on June 30, 2004. These holdings
are subject to change. Not all fixed-income securities in the Fund performed
the same, nor is there any guarantee that these fixed-income securities will
perform as well in the future. Market forecasts provided in this report may not
necessarily come to pass.
June 30, 2004 William Blair Funds 47
- --------------------------------------------------------------------------------
Ready Reserves Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all amounts in thousands) (unaudited)
- ------------------------------------------------------ ----------
Principal Amortized
Amount Cost
- --------- -------------------------------------------- ----------
Mortgage Backed Securities--1.0%
$ 9,000 Federal Home Loan Mortgage Corp.
(FHLMC), 1.219%, 7/21/04................... $ 9,000
1,999 Federal National Mortgage Assoc. (FNMA), 1,999
- -------- 1.070%, 7/28/04............................ ----------
10,999 10,999
- -------- Total Mortgage Backed Securities............ ----------
Fixed Rate Notes--35.0%
38,371 Abbott Laboratories, 5.125%, 7/1/04......... 37,585
34,035 American General Finance Corporation,
1.64%-7.450%, 8/13/04-5/15/05.............. 33,548
10,039 Associates Corporation, 6.100%-8.625%,
10/15/04-2/15/05........................... 9,774
17,674 B.P. plc, 4.000%-6.20%, 10/15/04-5/27/05.... 17,406
20,810 Caterpillar Financial Services,
4.69%-6.875%, 8/1/04-4/25/05............... 20,506
6,076 ChevronTexaco Corporation,
6.000%-8.110%, 10/1/04-6/15/05............. 5,971
38,268 Coca-Cola Enterprises, 4.000%-8.000%,
8/1/04-6/1/05.............................. 37,615
15,122 Colgate-Palmolive Corporation,
1.375%-3.98%, 8/16/04-4/29/05.............. 15,091
5,521 E.I. DuPont de Nemours & Company,
6.750%, 10/15/04........................... 5,359
20,408 GE Capital Corporation, 1.670%-8.850%,
9/15/04-5/15/05............................ 20,065
17,641 IBM Credit Corporation, 1.235%-4.125%,
9/10/04-6/30/05............................ 17,629
3,811 Kimberly Clark, 10.000%, 3/15/05............ 3,711
33,707 National Rural Utility Cooperative Finance
Corporation, 3.875%-6.375%,
7/15/04-1/15/05............................ 32,805
16,687 Procter & Gamble Corporation,
4.000%-6.660%, 12/15/04-4/30/05............ 16,289
23,951 SBC Communications, Inc., 6.300%-7.050%,
7/15/04-10/15/04........................... 23,055
5,611 U.S. Bancorp, 6.875%, 12/1/04............... 5,499
10,665 USAA Capital Corporation, 5.640%-7.540%,
3/30/05-4/18/05............................ 10,619
7,890 Verizon GTE North, 6.400%, 2/15/05.......... 7,752
1,152 Verizon West Virginia, 7.000%, 8/15/04...... 1,108
15,337 Wal-Mart Stores Inc., 4.150%-6.550%,
8/10/04-6/15/05............................ 14,991
30,536 Wells Fargo Financial, 1.619%-7.600%, 30,108
- -------- 7/15/04-5/3/05............................. ----------
373,312 366,486
- -------- Total Fixed Rate Notes...................... ----------
Variable Rate Notes--12.7%
$ 8,134 American General Finance Corporation,
1.909%, 9/20/04............................ 8,115
21,901 Caterpillar Financial Services,
1.240%-1.610%, 7/14/04-9/7/04.............. 21,888
3,251 Colgate-Palmolive, 1.251%, 7/13/04.......... 3,250
10,023 General Electric Capital Corporation, 1.43%,
7/2/04..................................... 10,019
6,018 National Rural Utility Cooperative Finance
Corporation, 1.460%-1.580%,
8/7/04-9/10/04............................. 6,016
- ----------
VRN = Variable Rate Note
- --------------------------------------------------- ----------
Principal Amortized
Amount Cost
- ---------- ---------------------------------------- ----------
$ 18,506 Paccar Financial Corporation,
1.080%-1.320%, 7/6/04-8/20/04.......... $ 18,503
40,174 US Bancorp, 1.450%-1.669%,
7/2/04-9/14/04......................... 40,149
1,003 USA Education Corporation, 1.450%,
7/26/04................................ 1,002
16,503 Wal Mart Stores Inc., 1.238%, 8/22/04... 16,502
7,757 7,756
- ---------- Wells Fargo Financial, 1.599%, 9/24/04.. ----------
133,270 133,200
- ---------- Total Variable Rate Notes............... ----------
Asset Backed Commercial Paper--46.2%
45,000 Amsterdam Funding Corporation,
1.120%-1.250%, 7/12/04-7/22/04......... 44,976
40,000 Blue Ridge Asset Funding, 1.050%-1.090%,
7/2/04-7/9/04.......................... 39,993
9,000 CAFCO, L.L.C. 1.100%, 7/13/04........... 8,997
10,000 CRC Funding, L.L.C., 1.070%, 7/6/04..... 9,999
40,000 Daimler Chrysler Revolving Auto,
1.110%-1.280%, 7/9/04-7/27/04.......... 39,971
10,000 Delaware Funding Corporation, 1.090%,
7/8/04................................. 9,998
35,000 FCAR Owner Trust, 1.080%-1.120%,
7/7/04-7/16/04......................... 34,988
15,000 Govco, Inc. 1.250%, 7/29/04............. 14,985
40,000 Jupiter Securitization Corporation,
1.250%-1.300%, 7/23/04-7/30/04......... 39,963
15,000 Mortgage Interest Networking Trust,
1.290%, 7/29/04........................ 14,985
30,000 New Center Asset Trust, 1.120%,
7/13/04-7/14/04........................ 29,988
40,000 Old Line Funding, 1.090%-1.200%,
7/7/04-7/19/04......................... 39,986
35,000 Park Avenue Receivables, 1.240%-1.300%,
7/22/04-7/28/04........................ 34,971
27,983 Preferred Receivables Funding,
1.230%-1.250%, 7/19/04-7/26/04......... 27,962
40,000 Sheffield Receivables, 1.070%-1.240%,
7/2/04-7/21/04......................... 39,984
28,565 Thunder Bay Funding, 1.120%-1.250%,
7/12/04-7/23/04........................ 28,548
23,275 Windmill Funding Corporation, 23,262
- ---------- 1.080%-1.250%, 7/14/04-7/21/04......... ----------
483,823 483,556
- ---------- Total Asset Backed Commercial Paper..... ----------
Commercial Paper--1.4%
Insurance--1.4%
15,000 14,989
- ---------- Marsh & McClennan 1.200%, 7/20/04....... ----------
15,000 14,989
- ---------- Total Commercial Paper.................. ----------
Demand Note--3.7%
38,401 American Express Corporation, VRN, 38,401
- ---------- 1.170%, 7/2/04......................... ----------
$1,054,805 Total Investments--100.0% 1,047,631
========== (Cost $ 1,047,631)..................... ----------
Liabilities, plus cash and other
assets--0.0%........................... (376)
----------
Net assets--100.0%...................... $1,047,255
==========
Portfolio Weighted Average Maturity..... 60 Days
See accompanying Notes to Financial Statements.
48 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 2004 (all dollar amounts in thousands) (unaudited)
Tax- Small-
Managed LargeCap Small Cap Mid Cap
Growth Growth Growth Growth
Growth Fund Fund Fund Fund Fund
- - ----------- -------- -------- ----------- --------
Assets
Investments in securities, at cost...................................... $ 217,557 $ 4,545 $ 5,382 $ 528,779 $ 12,895
Investments in Affiliated Fund, at cost................................. 3,273 2 107 14,797 761
----------- -------- -------- ----------- --------
Investments in securities, at value..................................... $ 271,021 $ 5,822 $ 6,161 $ 632,605 $ 13,568
Investments in Affiliated Fund, at value................................ 3,273 2 107 14,797 761
Cash.................................................................... -- -- -- 86 --
Receivable for fund shares sold......................................... 459 -- -- 327 148
Receivable for investment securities sold............................... -- -- -- 7,096 --
Receivable from Advisor................................................. -- 2 8 -- 33
Dividend and interest receivable........................................ 248 4 6 91 5
----------- -------- -------- ----------- --------
Total assets..................................................... 275,001 5,830 6,282 655,002 14,515
Liabilities
Payable for investment securities purchased............................. -- 94 -- 1,998 37
Payable for fund shares redeemed........................................ 94 -- -- 673 --
Management fee payable.................................................. 184 4 4 530 11
Distribution and shareholder services fee payable....................... 9 -- -- 177 1
Other accrued expenses.................................................. 101 12 10 121 30
----------- -------- -------- ----------- --------
Total liabilities................................................ 388 110 14 3,499 79
----------- -------- -------- ----------- --------
Net Assets...................................................... $ 274,613 $ 5,720 $ 6,268 $ 651,503 $ 14,436
=========== ======== ======== =========== ========
Capital
Composition of Net Assets
Par value of shares of beneficial interest............................ $ 27 $ 1 $ 1 $ 27 $ 1
Capital paid in excess of par value................................... 244,507 6,557 11,007 509,436 13,770
Accumulated net investment income (loss).............................. (454) (25) (11) (3,676) (50)
Accumulated realized gain (loss)...................................... (22,931) (2,090) (5,508) 41,890 42
Net unrealized appreciation (depreciation) of investments and foreign
currencies........................................................... 53,464 1,277 779 103,826 673
----------- -------- -------- ----------- --------
Net Assets...................................................... $ 274,613 $ 5,720 $ 6,268 $ 651,503 $ 14,436
=========== ======== ======== =========== ========
..Class N Shares
Net Assets............................................................ $ 46,520 $ 162 $ 363 $ 404,172 $ 4,549
Shares Outstanding.................................................... 4,671,413 19,048 61,746 16,604,030 427,528
Net Asset Value Per Share............................................. $ 9.96 $ 8.50 $ 5.88 $ 24.35 $ 10.64
Class I Shares
Net Assets............................................................ $ 228,087 $ 5,552 $ 5,902 $ 247,316 $ 9,881
Shares Outstanding.................................................... 22,634,097 645,358 993,352 10,054,867 927,941
Net Asset Value Per Share............................................. $ 10.08 $ 8.61 $ 5.94 $ 24.60 $ 10.65
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 49
Statements of Operations
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 (all dollar amounts in thousands) (unaudited)
Small-Mid
Cap
Tax-Managed Large Cap Small Cap Growth
Growth Fund Growth Fund Growth Fund Growth Fund Fund
- - ----------- ----------- ----------- ----------- ---------
Investment income
Dividends.................................................... $ 905 $ 17 $ 24 $ 594 $ 14
Less foreign tax withheld.................................... (31) -- -- -- --
Interest..................................................... 6 -- -- -- --
------- ----- ----- ------- ----
Total income............................................... 880 17 24 594 14
Expenses
Investment advisory fees..................................... 1,025 25 24 3,182 45
Distribution fees............................................ 52 -- -- 462 4
Shareholder services fees.................................... -- -- -- -- --
Custodian fees............................................... 31 8 7 68 16
Transfer agent fees.......................................... 110 4 5 172 15
Professional fees............................................ 18 8 7 22 15
Registration fees............................................ 16 15 15 58 11
Other expenses............................................... 82 2 4 142 26
------- ----- ----- ------- ----
Total expenses before waiver............................... 1,334 62 62 4,106 132
Plus expenses recovered by the advisor..................... -- -- -- 164
Less expenses waived or absorbed by the Advisor............ -- (20) (27) -- (68)
------- ----- ----- ------- ----
Net expenses............................................... 1,334 42 35 4,270 64
------- ----- ----- ------- ----
Net investment income (loss)............................... (454) (25) (11) (3,676) (50)
Net realized and unrealized gain (loss) on investments, foreign
currency transactions and other assets and liabilities
Net realized gain (loss) on investments.................... 8,810 256 137 39,748 42
------- ----- ----- ------- ----
Change in net unrealized appreciation (depreciation) on
investments and other assets and liabilities.................. (8,134) (171) (181) 26,349 694
------- ----- ----- ------- ----
Net increase (decrease) in net assets resulting from operations $ 222 $ 60 $ (55) $62,421 $686
======= ===== ===== ======= ====
See accompanying Notes to Financial Statements.
50 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 and the Year Ended December 31, 2003 (all
amounts in thousands) (unaudited)
Tax-
Managed Large Cap
Growth Growth Growth
Fund Fund Fund
- - ------------------ --------------- ---------------
2004 2003 2004 2003 2004 2003
- - -------- -------- ------- ------ ------ -------
Operations
Net investment income (loss)................................. $ (454) $ (1,214) $ (25) $ (40) $ (11) $ (26)
Net realized gain (loss) on investments, foreign currency
transactions and other assets and liabilities............... 8,810 758 256 (483) 137 (553)
Change in net unrealized appreciation (depreciation) on
investments, foreign currency transactions and other assets
and liabilities............................................. (8,134) 58,056 (171) 1,777 (181) 1,644
-------- -------- ------- ------ ------ -------
Net increase (decrease) in net assets resulting from
operations.................................................. 222 57,600 60 1,254 (55) 1,065
Distributions to shareholders from
Net investment income........................................ -- -- -- -- -- --
Net realized gain............................................ -- -- -- -- -- --
-------- -------- ------- ------ ------ -------
-- -- -- -- -- --
Capital stock transactions
Net proceeds from sale of shares............................. 18,236 29,113 131 1,159 1,268 1,147
Shares issued in reinvestment of income......................
dividends and capital gain distributions..................... -- -- -- -- -- --
Less cost of shares redeemed................................. (25,499) (60,684) (1,342) (845) (464) (2,162)
-------- -------- ------- ------ ------ -------
Net increase (decrease) in net assets resulting from capital
share transactions.......................................... (7,263) (31,571) (1,211) 314 804 (1,015)
-------- -------- ------- ------ ------ -------
Increase (decrease) in net assets............................ (7,041) 26,029 (1,151) 1,568 749 50
Net assets
Beginning of period.......................................... 281,654 255,625 6,871 5,303 5,519 5,469
-------- -------- ------- ------ ------ -------
End of period................................................ $274,613 $281,654 $ 5,720 $6,871 $6,268 $ 5,519
======== ======== ======= ====== ====== =======
Undistributed net investment income (loss) at the end of the
period........................................................ $ (454) $ -- $ (25) $ -- $ (11) $ --
======== ======== ======= ====== ====== =======
Small Cap Small-Mid Cap
Growth Growth
Fund Fund
- - ------------------ ---------------
2004 2003 2004 2003(a)
- - -------- -------- ------- -------
Operations
Net investment income (loss)................................. $ (3,676) $ (2,137) $ (50) $ --
Net realized gain (loss) on investments, foreign currency
transactions and other assets and liabilities............... 39,748 20,759 42 --
Change in net unrealized appreciation (depreciation) on
investments, foreign currency transactions and other assets
and liabilities............................................. 26,349 75,261 694 (21)
-------- -------- ------- ------
Net increase (decrease) in net assets resulting from
operations.................................................. 62,421 93,883 686 (21)
Distributions to shareholders from
Net investment income........................................ -- -- -- --
Net realized gain............................................ -- (7,443) -- --
-------- -------- ------- ------
-- (7,443) -- --
Capital stock transactions
Net proceeds from sale of shares............................. 140,340 400,134 10,165 3,694
Shares issued in reinvestment of income......................
dividends and capital gain distributions..................... -- 7,200 -- --
Less cost of shares redeemed................................. (70,082) (53,530) (88) --
-------- -------- ------- ------
Net increase (decrease) in net assets resulting from capital
share transactions.......................................... 70,258 353,804 10,077 3,694
-------- -------- ------- ------
Increase (decrease) in net assets............................ 132,679 440,243 10,763 3,673
Net assets
Beginning of period.......................................... 518,824 78,581 3,673 --
-------- -------- ------- ------
End of period................................................ $651,503 $518,824 $14,436 $3,673
======== ======== ======= ======
Undistributed net investment income (loss) at the end of the
period........................................................ $ (3,676) $ -- $ (50) $ --
======== ======== ======= ======
- ----------
(a)For the period from December 29, 2003 (Commencement of Operations) to
December 31, 2003.
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 51
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 2004 (all dollar amounts in thousands) (unaudited)
International International Value Ready
Growth Equity Discovery Income Reserves
Fund Fund Fund Fund Fund
- - ------------- ------------- ---------- ----------- --------------
Assets
Investments in securities, at cost.......................... $ 2,061,736 $ 2,957 $ 205,852 $ 264,142 $ 1,047,631
Investments in Affiliated Fund, at cost..................... 23,483 336 2,172 -- --
----------- -------- ---------- ----------- --------------
Investments in securities, at value......................... $ 2,486,303 $ 3,139 $ 262,879 $ 264,616 $ 1,047,631
Investments in Affiliated Fund, at value.................... 23,483 336 2,172 -- --
Cash........................................................ -- -- -- 81 --
Foreign currency, at value (cost $714 )..................... 697 -- -- -- --
Receivable for fund shares sold............................. 14,034 -- 20 203 --
Receivable for investment securities sold................... 40,933 -- 2,773 -- --
Receivable from Advisor..................................... -- 11 23 -- --
Dividend and interest receivable............................ 2,388 1 194 2,630 6,547
----------- -------- ---------- ----------- --------------
Total assets......................................... 2,567,838 3,487 268,061 267,530 1,054,178
Liabilities
Payable for investment securities purchased................. 27,349 -- 4,403 -- 6,260
Payable for fund shares redeemed............................ 1,309 -- 67 66 --
Management fee payable...................................... 2,054 3 234 112 194
Distribution and shareholder services fee payable........... 357 -- 34 7 292
Dividend payable............................................ -- -- -- -- 36
Other accrued expenses...................................... 451 10 109 47 141
----------- -------- ---------- ----------- --------------
Total liabilities.................................... 31,520 13 4,847 232 6,923
----------- -------- ---------- ----------- --------------
Net Assets.......................................... $ 2,536,318 $ 3,474 $ 263,214 $ 267,298 $ 1,047,255
=========== ======== ========== =========== ==============
Capital
Composition of Net Assets
Par value of shares of beneficial interest................ $ 132 $ -- $ 11 $ 27 $ 1,048
Capital paid in excess of par value....................... 2,170,553 3,299 185,109 280,237 1,047,274
Accumulated net investment income (loss).................. (244) (1) 149 (538) 81
Accumulated realized gain (loss).......................... (58,675) (6) 20,918 (12,902) (1,148)
Net unrealized appreciation (depreciation) of investments
and foreign currencies................................... 424,552 182 57,027 474 --
----------- -------- ---------- ----------- --------------
Net Assets.......................................... $ 2,536,318 $ 3,474 $ 263,214 $ 267,298 $ 1,047,255
=========== ======== ========== =========== ==============
Class N Shares
Net Assets................................................ $ 1,784,875 $ 39 $ 36,313 $ 56,542 $ 1,047,255
Shares Outstanding........................................ 92,947,496 3,721 1,521,184 5,570,553 1,048,321,944
Net Asset Value Per Share................................. $ 19.20 $ 10.56 $ 23.87 $ 10.15 $ 1.00
Class I Shares
Net Assets................................................ $ 751,433 $ 3,429 $ 226,886 $ 210,751
Shares Outstanding........................................ 38,657,621 324,809 9,462,691 20,816,835
Net Asset Value Per Share................................. $ 19.44 $ 10.56 $ 23.98 $ 10.12
See accompanying Notes to Financial Statements.
52 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 (all dollar amounts in thousands) (unaudited)
International International Value
Growth Equity Discovery Income
Fund Fund Fund Fund
- - ------------- ------------- --------- -------
Investment income
Dividends............................................................... $ 20,796 $ 2 $ 1,643 $ --
Less foreign tax withheld............................................... (2,204) -- -- --
Interest................................................................ 192 1 73 6,618
-------- ---- ------- -------
Total income.......................................................... 18,784 3 1,716 6,618
Expenses
Investment advisory fees................................................ 11,347 3 1,410 658
Distribution fees....................................................... 2,054 -- 37 40
Shareholder services fees............................................... -- -- -- --
Custodian fees.......................................................... 1,045 4 42 37
Transfer agent fees..................................................... 865 1 66 49
Professional fees....................................................... 65 2 16 15
Registration fees....................................................... 87 4 10 24
Other expenses.......................................................... 519 1 9 36
-------- ---- ------- -------
Total expenses before waiver.......................................... 15,982 15 1,590 859
Less expenses repaid to (waived and absorbed by) the Advisor.......... -- (11) (23) --
-------- ---- ------- -------
Net expenses.......................................................... 15,982 4 1,567 859
-------- ---- ------- -------
Net investment income (loss).......................................... 2,802 (1) 149 5,759
Net realized and unrealized gain (loss) on investments, foreign currency
transactions and other assets and liabilities
Net realized gain (loss) on investments............................... 76,358 (2) 16,473 (2,404)
Net realized gain (loss) on foreign currency transactions and other
assets and liabilities............................................... (7,519) (4) -- --
-------- ---- ------- -------
Total net realized gain (loss)........................................ 68,839 (6) 16,473 (2,404)
Change in net unrealized appreciation (depreciation) on investments and
other assets and liabilities............................................. (13,963) 182 (4,102) (4,409)
-------- ---- ------- -------
Net increase (decrease) in net assets resulting from operations........... $ 57,678 $175 $12,520 $(1,054)
======== ==== ======= =======
Ready
Reserves
Fund
- - --------
Investment income
Dividends............................................................... $ --
Less foreign tax withheld............................................... --
Interest................................................................ 6,383
------
Total income.......................................................... 6,383
Expenses
Investment advisory fees................................................ 1,334
Distribution fees....................................................... --
Shareholder services fees............................................... 1,929
Custodian fees.......................................................... 97
Transfer agent fees..................................................... 59
Professional fees....................................................... 30
Registration fees....................................................... 14
Other expenses.......................................................... 176
------
Total expenses before waiver.......................................... 3,639
Less expenses repaid to (waived and absorbed by) the Advisor.......... --
------
Net expenses.......................................................... 3,639
------
Net investment income (loss).......................................... 2,744
Net realized and unrealized gain (loss) on investments, foreign currency
transactions and other assets and liabilities
Net realized gain (loss) on investments............................... --
Net realized gain (loss) on foreign currency transactions and other
assets and liabilities............................................... --
------
Total net realized gain (loss)........................................ --
Change in net unrealized appreciation (depreciation) on investments and
other assets and liabilities............................................. --
------
Net increase (decrease) in net assets resulting from operations........... $2,744
======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 53
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 and the Year Ended December 31, 2003 (all
amounts in thousands) (unaudited)
International International Value
Growth Equity Discovery
Fund Fund Fund
- - ---------------------- ------------- ------------------
2004 2003 2004(a) 2004 2003
- - ---------- ---------- ------------- -------- --------
Operations
Net investment income (loss)............................. $ 2,802 $ 1,037 $ (1) $ 149 $ (310)
Net realized gain (loss) on investments, foreign
currency transactions and other assets and
liabilities............................................. 68,839 (14,894) (6) 16,473 6,425
Change in net unrealized appreciation (depreciation) on
investments, foreign currency transactions and other
assets and liabilities.................................. (13,963) 459,102 182 (4,102) 60,586
---------- ---------- ------ -------- --------
Net increase (decrease) in net assets resulting from
operations............................................ 57,678 445,245 175 12,520 66,701
Distributions to shareholders from
Net investment income.................................... -- (2,775) -- -- --
Net realized gain........................................ -- -- -- -- --
---------- ---------- ------ -------- --------
-- (2,775) -- -- --
Capital stock transactions
Net proceeds from sale of shares......................... 775,248 1,012,995 3,299 43,068 53,181
Shares issued in reinvestment of income dividends and
capital gain distributions.............................. -- 2,457 -- -- --
Less cost of shares redeemed............................. (196,307) (337,011) -- (29,485) (73,573)
---------- ---------- ------ -------- --------
Net increase (decrease) in net assets resulting from
capital stock transactions............................ 578,941 678,441 3,299 13,583 (20,392)
---------- ---------- ------ -------- --------
Increase (decrease) in net assets...................... 636,619 1,120,911 3,474 26,103 46,309
Net assets
Beginning of period...................................... 1,899,699 778,788 -- 237,111 190,802
---------- ---------- ------ -------- --------
End of period............................................ $2,536,318 $1,899,699 $3,474 $263,214 $237,111
========== ========== ====== ======== ========
Undistributed net investment income (loss) at the end of
the period................................................ $ (244) $ (3,046) $ (1) $ 149 $ --
========== ========== ====== ======== ========
Ready
Income Reserves
Fund Fund
- - ------------------ -----------------------
2004 2003 2004 2003
- - -------- -------- ---------- -----------
Operations
Net investment income (loss)............................. $ 5,759 $ 10,144 $ 2,744 $ 8,301
Net realized gain (loss) on investments, foreign
currency transactions and other assets and
liabilities............................................. (2,404) 865 -- (33)
Change in net unrealized appreciation (depreciation) on
investments, foreign currency transactions and other
assets and liabilities.................................. (4,409) (2,342) -- --
-------- -------- ---------- -----------
Net increase (decrease) in net assets resulting from
operations............................................ (1,054) 8,667 2,744 8,268
Distributions to shareholders from
Net investment income.................................... (6,425) (13,802) (2,744) (8,301)
Net realized gain........................................ -- -- -- --
-------- -------- ---------- -----------
(6,425) (13,802) (2,744) (8,301)
Capital stock transactions
Net proceeds from sale of shares......................... 38,997 139,094 811,071 1,648,639
Shares issued in reinvestment of income dividends and
capital gain distributions.............................. 4,561 10,207 2,739 8,334
Less cost of shares redeemed............................. (33,843) (75,240) (920,487) (1,827,009)
-------- -------- ---------- -----------
Net increase (decrease) in net assets resulting from
capital stock transactions............................ 9,715 74,061 (106,677) (170,036)
-------- -------- ---------- -----------
Increase (decrease) in net assets...................... 2,236 68,926 (106,677) (170,069)
Net assets
Beginning of period...................................... 265,062 196,136 1,153,932 1,324,001
-------- -------- ---------- -----------
End of period............................................ $267,298 $265,062 $1,047,255 $ 1,153,932
======== ======== ========== ===========
Undistributed net investment income (loss) at the end of
the period................................................ $ (538) $ 128 $ 81 $ 81
======== ======== ========== ===========
- ----------
(a)For the period from May 24, 2004 (Commencement of Operations) to June 30,
2004.
See accompanying Notes to Financial Statements.
54 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
(a) Description of the Fund
William Blair Funds (the "Fund") is a diversified mutual fund registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. For each portfolio, the number of shares authorized is
unlimited. The Fund currently consists of the following twelve portfolios (the
"Portfolios"), each with its own investment objectives and policies.
Equity Portfolios International Portfolios
----------------- ------------------------
Growth International Growth
Tax-Managed Growth International Equity
Large Cap Growth Institutional International Growth
Small Cap Growth Institutional International Equity
Small-Mid Cap Growth Fixed Income Portfolio
----------------------
Value Discovery Income
Money Market Portfolio
----------------------
Ready Reserves
The investment objectives of the Portfolios are as follows:
Equity....... Long-term capital appreciation.
International Long-term capital appreciation.
Fixed Income. High level of current income with relative stability of principal.
Money Market. Current income, a stable share price and daily liquidity.
The Institutional International Growth Fund issues a separate report.
The Institutional International Equity Fund has not commenced operations as of
the date of this report.
(b) Share Classes
Five different classes of shares currently exist: A,B,C, N and I. This report
includes financial highlight information for Classes N and I. The table below
describes the Class N shares and the Class I shares covered by this report:
Class Description
- ----- -----------
N Class N shares are sold to the general public, either directly through the Fund's distributor or through a select number
of financial intermediaries. Class N shares are sold without any sales load, and carry an annual 12b-1 distribution fee
(0.25% for the Equity and International Portfolios and 0.15% for the Fixed Income Portfolio) or a service fee (0.35%
for the Money Market Portfolio).
I Class I shares are sold to a limited group of investors. They do not carry any sales load or distribution fees and
generally have lower ongoing expenses than the other classes.
Investment income, realized and unrealized gains and losses, and certain
portfolio level expenses and expense reductions, if any, are allocated based on
the relative net assets of each class, except for certain class specific
expenses which are charged directly to the appropriate class. Differences in
class expenses may result in the payment of different per share dividends by
class. All share classes of the Portfolios have equal rights with respect to
voting subject to class specific arrangements.
(c) Investment Valuation
The market value of domestic equity securities and options is determined by
valuing securities traded on national securities exchanges or markets or in the
over-the-counter markets at the last sales price or, if applicable, the
official closing price or, in the absence of a sale on the date of valuation,
at the latest bid price.
From January 1, 2003 until November 24, 2003, the value of foreign securities
was determined based upon the last sale price on the foreign exchange or market
on which it is primarily traded or, if there had been no sale on the date of
valuation, at the latest bid price. The Board of Trustees approved amendments
to the Fund's valuation procedures in October 2003 relating to the manner in
which the Funds' foreign securities are valued. This change was implemented
November 24, 2003. To reflect
June 30, 2004 William Blair Funds 55
this change, if the foreign exchange or market on which a security is primarily
traded closes before the close of regular trading on the New York Stock
Exchange (4:00 p.m. Eastern time), the Funds use an independent pricing service
on a daily basis to estimate the fair value price as of the close of regular
trading on the New York Stock Exchange. Otherwise, the value of foreign equity
securities is determined based on the last sale price on the foreign exchange
or market on which it is primarily traded or, if there have been no sales
during that day, at the latest bid price. Foreign currency forward contracts
and foreign currencies are valued at the forward and current exchange rates,
respectively, prevailing on the date of valuation.
Long-term, fixed income securities are valued based on market quotations, or by
independent pricing services that use prices provided by market makers or by
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics.
Investments in other funds are valued at the underlying fund's net asset value
on the date of valuation. Other securities, and all other assets, including
securities for which a market price is not available, or the value of which is
affected by a significant valuation event, are valued at fair value as
determined in good faith by, or under the direction of the Board of Trustees
and in accordance with the Fund's valuation procedures. As of June 30, 2004,
there were securities held in Small Cap Growth, Value Discovery and
International Growth and International Equity Portfolios requiring fair
valuation pursuant to the Fund's valuation procedures. Short-term securities
held in the Ready Reserves Fund are valued at amortized cost, which
approximates market value.
(d) Investment income and investment transactions
Dividend income is recorded on the ex-dividend date, except for those dividends
from certain foreign securities which are recorded as soon as the information
is available.
Premiums and discounts are accreted and amortized on a straight-line basis for
short-term investments and on an effective interest method for long-term
investments.
Interest income is determined on the basis of the interest accrued, adjusted
for amortization of premium or discount. Variable rate bonds and floating rate
notes earn interest at coupon rates that fluctuate at specific time intervals.
The interest rates shown in the Portfolio of Investments for the Income
Portfolio and the Ready Reserves Portfolio were the rates in effect on June 30,
2004. Put bonds may be redeemed at the discretion of the holder on specified
dates prior to maturity. The Portfolios utilize the straight-line method of
amortization of premiums and discounts for short-term securities (maturities
less than one year) and the effective interest method for long-term securities
(maturities greater than one year).
Paydown gains and losses on mortgage and asset-backed securities are treated as
an adjustment to interest income. For the period ended June 30, 2004, the
Income Portfolio recognized a reduction of interest income and a reduction of
net realized loss of $1,290 (in thousands). For the years ended December 31,
2003 and 2002, the Income Portfolio recognized a reduction in interest income
and a reduction in net realized loss of $2,691 and $948 (in thousands),
respectively. This reclassification has no effect on the net asset value of the
Portfolio.
Securities transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on an identified high basis.
(e) Share Valuation and Dividends to Shareholders
Shares are sold and redeemed on a continuous basis at net asset value. The net
asset value per share is determined separately for each class by dividing the
Portfolio's net assets attributable to that class by the number of shares of
the class outstanding as of the close of regular trading on the New York Stock
Exchange, which is generally 3:00 p.m. Central time (4:00 p.m. Eastern time),
on each day the Exchange is open. Redemption fees may be applicable to
redemptions within 60 days of purchase. The redemption fees collected by the
Fund are netted against the amount of Redemptions for presentation on the
Statement of Changes in Net Assets.
Dividends from net investment income, if any, of the Growth, Tax-Managed
Growth, Large Cap Growth, Small Cap Growth, Small-Mid Cap Growth, International
Growth, International Equity, and Value Discovery Portfolios are declared at
least annually. Dividends from the Income and the Ready Reserves Portfolios are
declared monthly and daily, respectively. Capital gain distributions, if any,
are declared at least annually in December. Dividends payable to shareholders
are recorded on the ex-dividend date.
56 Semi-Annual Report June 30, 2004
The timing and characterization of certain income and capital gain
distributions are determined annually in accordance with Federal income tax
regulations that may differ from accounting principles generally accepted in
the United States. As a result, net investment income or loss and net realized
gain or loss for a reporting period may differ from the amount distributed
during such period. In addition, the Portfolios may periodically record
reclassifications among certain capital accounts to reflect differences between
financial reporting and income tax basis distributions. The reclassifications
were reported in order to reflect the tax treatment for certain permanent
differences that exist between income tax regulations and accounting principles
generally accepted in the United States. The reclassifications relate to net
operating losses, Section 988 currency gains and losses, mortgage paydown
securities gains and losses associated with securities issued before June 8,
1997 and recharacterization of dividends received from investments in REITs.
These reclassifications have no impact on the net asset values of the
Portfolios. Accordingly, at December 31, 2003, the following reclassifications
were recorded (in thousands):
Accumulated
Undistributed Capital
Undistributed Net Net Realized Paid In Excess
Portfolio Investment Income/(Loss) Gain/ (Loss) of Par Value
--------- ------------------------ ------------- ------------
Growth.............. $1,214 $ (54) $(1,160)
Tax-Managed Growth.. 40 -- (40)
Large Cap Growth.... 26 -- (26)
Small Cap Growth.... 2,137 (2,137) --
Small-Mid Cap Growth -- -- --
International Growth (860) 860 --
Value Discovery..... 310 170 (480)
Income.............. 2,683 (2,686) 3
Ready Reserves...... -- -- --
Distributions from net realized gains for book purposes may include short-term
capital gains, which are included as ordinary income for tax purposes. The tax
character of distribution in 2004, will be determined at the close of the
fiscal year in December. The tax character of distributions paid during 2003
and 2002 was as follows (in thousands):
Distributions Paid In 2003 Distributions Paid In 2002
- -------------------------- --------------------------
Ordinary Long-Term Ordinary Long-Term
Portfolio Income Capital Gains Income Capital Gains
--------- ------ ------------- ------ -------------
Growth.............. $ -- $ -- $ -- $--
Tax-Managed Growth.. -- -- -- --
Large Cap Growth.... -- -- -- --
Small Cap Growth.... 1,139 6,304 -- --
Small-Mid Cap Growth -- -- -- --
International Growth 2,775 -- -- --
Value Discovery..... -- -- -- --
Income.............. 13,802 -- 9,411 --
Ready Reserves...... 8,301 -- 17,472 --
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows (in thousands):
Accumulated Net
Undistributed Capital and Undistributed Unrealized
Ordinary Other Long-Term Appreciation /
Portfolio Income Losses Gain (Depreciation)
--------- ------ ------ ---- --------------
Growth.............. $ -- $ 29,466 $ -- $ 59,304
Tax-Managed Growth.. -- 2,331 -- 1,433
Large Cap Growth.... -- 5,592 -- 907
Small Cap Growth.... 2,198 -- 985 76,436
Small-Mid Cap Growth -- -- -- (21)
International Growth 2,615 126,136 -- 431,476
Value Discovery..... -- -- 5,515 60,059
Income.............. 133 10,401 -- 4,780
Ready Reserves...... 81 1,148 -- --
(f) Options
The Portfolios may engage in options transactions on security indices and other
financial indices and in doing so achieve similar objectives to what they would
achieve through the sale or purchase of options on individual securities or
other instruments.
June 30, 2004 William Blair Funds 57
Option writing. When the Portfolio writes an option, an amount equal to the
premium received by the Portfolio is recorded as a liability and is
subsequently adjusted to the current fair value of the option written. Premiums
received from writing options that expire unexercised are treated by the
Portfolio on the expiration date as realized gains from investments. The
difference between the premium and the amount paid on effecting a closing
purchase transaction, including brokerage commissions, is also treated as a
realized gain, or, if the premium is less than the amount paid for the closing
purchase transaction, as a realized loss. If a call option is exercised, the
premium is added to the proceeds from the sale of the underlying security or
currency in determining whether the Portfolio has realized a gain or loss. If a
put option is exercised, the premium reduces the cost basis of the securities
purchased by the Portfolio. The Portfolio as writer of an option bears the
market risk of an unfavorable change in the price of the security underlying
the written option. There were no open options at June 30, 2004.
(g) Foreign Currency Translation and Foreign Currency Forward Contracts
The International Growth and International Equity Portfolios may invest in
securities denominated in foreign currencies. As such, assets and liabilities
denominated in foreign currencies are translated into U.S. dollar amounts at
the current exchange rate on the date of valuation. The Portfolios may enter
into foreign currency forward contracts (1) as a means of managing the risks
associated with changes in the exchange rates for the purchase or sale of a
specific amount of a particular foreign currency, and (2) to hedge the value,
in U.S. dollars, of portfolio securities. Gains and losses from foreign
currency transactions associated with purchases and sales of investments and
foreign currency forward contracts are included with the net realized and
unrealized gain or loss on investments.
(h) Income Taxes
Each Portfolio intends to comply with the special provisions of the Internal
Revenue Code available to regulated investment companies and, therefore, no
provision for Federal income taxes has been made in the accompanying financial
statements since each Portfolio intends to distribute substantially all of its
taxable income to its shareholders and be relieved of all Federal income taxes.
The cost of investments for Federal income tax purposes and related gross
unrealized appreciation/(depreciation) and net unrealized
appreciation/(depreciation) at June 30, 2004, were as follows (in thousands):
Net
Gross Gross Unrealized
Cost of Unrealized Unrealized Appreciation /
Portfolio Investments Appreciation Depreciation (Depreciation)
--------- ----------- ------------ ------------ --------------
Growth.............. $ 223,124 $ 65,321 $14,151 $ 51,170
Tax-Managed Growth.. 4,562 1,422 160 1,262
Large Cap Growth.... 5,514 985 231 754
Small Cap Growth.... 544,008 123,085 19,691 103,394
Small-Mid Cap Growth 13,655 1,162 488 674
International Growth 2,089,257 465,076 44,546 420,530
International Equity 3,293 190 8 182
Value Discovery..... 209,045 62,598 6,592 56,006
Income.............. 264,245 4,137 3,766 371
Ready Reserves...... 1,047,631 -- -- --
At December 31, 2003, the following Portfolios have unused capital loss
carryforwards available for Federal income tax purposes to be applied against
future capital gains, if any. If not applied, the carryforwards will expire as
follows (in thousands):
Portfolio 2004 2005 2006 2007 2008 2009 2010 2011 Total
- --------- ------ ------ ------ ------ ------ ------- ------- ------- --------
Growth.............. $ -- $ -- $ -- $ -- $ -- $ 4,332 $23,082 $ 2,032 $ 29,446
Tax-Managed Growth.. -- -- -- -- 94 732 1,037 468 2,331
Large Cap Growth.... -- -- -- -- 493 2,714 1,582 769 5,558
Small Cap Growth.... -- -- -- -- -- -- -- -- --
Small-Mid Cap Growth -- -- -- -- -- -- -- -- --
International Growth -- -- -- -- -- 31,564 59,888 34,482 125,934
Value Discovery..... -- -- -- -- -- -- -- -- --
Income.............. 2,156 -- -- 1,249 3,292 -- 1,692 1,582 9,971
Ready Reserves...... 108 1 1 51 24 -- 930 -- 1,115
The International Growth Portfolio has elected to mark-to-market its
investments in Passive Foreign Investment Companies ("PFICs") for Federal
income tax purposes. In accordance with this election, the Portfolio recognized
net unrealized
58 Semi-Annual Report June 30, 2004
appreciation (depreciation) of $4,938 (in thousands) in 2003, all of which has
been reclassified from unrealized gain (loss) on investments to undistributed
net investment income.
For the period November 1, 2003 through December 31, 2003, the following
Portfolios incurred net realized capital or foreign currency losses. Each
Portfolio intends to treat this loss as having occurred in fiscal year 2004 for
Federal income tax purposes (in thousands):
Portfolio Amount
--------- ------
Growth.............. $ --
Tax-Managed Growth.. --
Large Cap Growth.... 34
Small Cap Growth.... --
Small-Mid Cap Growth --
International Growth 202
Value Discovery..... --
Income.............. 430
Ready Reserves...... 33
(i) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from those estimates.
(2) Transactions with Affiliates
(a) Management and Expense Limitation Agreements
Each Portfolio has a management agreement with William Blair & Company L.L.C.
(the "Company") for investment advisory, administrative, and other accounting
services. Each Portfolio pays the Company an annual fee, payable monthly, based
on a specified percentage of its average daily net assets. A summary of the
annual rates expressed as a percentage of average daily net assets is as
follows:
Equity Portfolios International Portfolios
- ----------------- - ------------------------ -
Growth......................................... 0.75% International Growth and International Equity
Tax-Managed Growth............................. 0.80% First $250 million......................... 1.10%
Large Cap Growth............................... 0.80% In excess of $250 million.................. 1.00%
Small Cap Growth............................... 1.10%
Small-Mid Cap Growth........................... 1.00%
Value Discovery................................ 1.15%
Fixed Income Portfolio Money Market Portfolio
- ---------------------- ----------------------
Income* Ready Reserves
First $250 million............................ 0.25% First $250 million......................... 0.275%
In excess of $250 million..................... 0.20% Next $250 million.......................... 0.250%
- ---------- Next $2 billion............................ 0.225%
*Management fee also includes a charge of 5% of In excess of $2.5 billion.................. 0.200%
gross income.
Some of the Portfolios have also entered into Expense Limitation Agreements
with the Company. Under the terms of these Agreements, the Company has agreed
to waive its advisory fees and absorb other operating expenses through April
30, 2005, if total expenses for each class of the following Portfolios exceed
the following rates (as a percentage of average daily net assets):
Class N Shares Class I Shares
------------------------- -------------------------
Through Effective Through Effective
April 30, 2004 May 1, 2004 April 30, 2004 May 1, 2004
-------------- ----------- -------------- -----------
Tax-Managed Growth.. 1.55% 1.54% 1.30% 1.29%
Large Cap Growth.... 1.45% 1.34% 1.20% 1.09%
Small Cap Growth.... 1.55% 1.53% 1.38% 1.40%
Small-Mid Cap Growth 1.54% 1.54% 1.29% 1.29%
International Equity N/A 1.50% N/A 1.25%
Value Discovery..... 1.49% 1.34% 1.33% 1.25%
June 30, 2004 William Blair Funds 59
For a period of five years subsequent to the Commencement of Operations of each
Fund, the Company is entitled to reimbursement from the Tax-Managed Growth,
Large Cap Growth, and Small Cap Growth Portfolios for previously waived fees
and expenses to the extent the overall expense ratio remains below the
percentages indicated. As a result, the total expense ratio for the Portfolios
during the period the agreement is in effect, will not fall below the
percentages indicated. The total amount available for recapture at June 30,
2004 is $433 (in thousands) for Tax-Managed Growth, $415 for Large Cap Growth,
and $0 for Small Cap Growth. The Small Cap Growth Portfolio reimbursed the
Advisor $164,000, for the period ended June 30, 2004 and $186,000 for the year
ended December 31, 2003.
For a period of three years subsequent to the Commencement of Operations of the
Small-Mid Cap Growth and the International Equity Portfolios, the Company is
entitled to reimbursement for previously waived fees and expenses to the extent
the overall expense ratio remains below the percentages indicated. The total
amount available for recapture at June 30, 2004 is $68 (in thousands) for the
Small-Mid Cap Growth Portfolio and $11 for the International Equity Portfolio.
For the period ended June 30, 2004, the investment advisory fees incurred by
the Portfolios and related fee waivers were as follows (in thousands) :
Expenses
(Recovered) or
Gross Fee Net Absorbed
Portfolio Advisory Fee Waiver Advisory Fee by Advisor
--------- ------------ ------ ------------ ----------
Growth.............. $ 1,025 $-- $ 1,025 $ --
Tax-Managed Growth.. 25 20 5 --
Large Cap Growth.... 24 24 -- 3
Small Cap Growth.... 3,182 -- 3,182 (164)
Small-Mid Cap Growth 45 45 -- 23
International Growth 11,347 -- 11,347 --
International Equity 3 3 -- 8
Value Discovery..... 1,410 -- 1,410 --
Income.............. 658 -- 658 --
Ready Reserves...... 1,334 -- 1,334 --
(b) Underwriting, Distribution Services and Service Agreement
Each Portfolio except Ready Reserves Portfolio has a Distribution Agreement
with the Company for distribution services. Each Portfolio pays the Company an
annual fee, payable monthly, based on a specified percentage of its average
daily net assets of specified share classes. The annual rates expressed as a
percentage of average daily net assets for Class N is 0.25% for all Portfolios
except the Income Portfolio, which is 0.15%. Pursuant to the Distribution
Agreement, the Company enters into related selling group agreements with
various firms at various rates for sales of the Portfolios' Class N shares.
Distribution fees incurred by the Portfolios to the Company, for the period
ended June 30, 2004, were as follows (in thousands):
Gross Net
Distribution Fee Distribution
Portfolio Fees Waiver Fee
--------- ------------ ------ ------------
Growth.............. $ 52 $-- $ 52
Tax-Managed Growth.. -- -- --
Large Cap Growth.... -- -- --
Small Cap Growth.... 462 -- 462
Small-Mid Cap Growth 4 -- 4
International Growth 2,054 -- 2,054
International Equity -- -- --
Value Discovery..... 37 23 14
Income.............. 40 -- 40
The Ready Reserves Portfolio has a Service Agreement with the Company to
provide shareholder services and automatic sweep services. The Portfolio pays
the Company an annual fee, payable monthly, based upon 0.35% of its average
daily net assets. For the period ended June 30, 2004, the following fees were
incurred (in thousands):
Ready Reserves $1,929
60 Semi-Annual Report June 30, 2004
(c) Trustees Fees
The Portfolios incurred fees of $129 (in thousands) to non-interested trustees
of the Fund for the period ended June 30, 2004. Interested trustees are not
compensated.
(d) Investments in Affiliated Portfolio
Pursuant to an Exemptive Order granted by the Securities and Exchange
Commission in January, 2001, each of the Portfolios of the Fund may invest in
the William Blair Ready Reserves Portfolio ("Ready Reserves"), an open-end
money market portfolio managed by the Advisor. Ready Reserves Portfolio is used
as a cash management option to the other Portfolios in the Fund. The Advisor
waives management fees and shareholder service fees earned from the other
Portfolios investment in the Ready Reserves Fund. The fees waived with respect
to each Portfolio for the period ended June 30, 2004 are listed below.
Distributions received from Ready Reserves are reflected as dividend income in
each Portfolio's statement of operations. Amounts relating to the Portfolios'
investments in Ready Reserves were as follows for the period ended June 30,
2004 (in thousands):
Percent
Sales Fees Dividend of Net
Portfolio Purchases Proceeds Waived Income Value Assets
--------- --------- -------- ------ -------- ------- -------
Growth.............. $ 35,563 $ 38,106 $ 7 $ 6 $ 3,273 1.2%
Tax-Managed Growth.. 941 1,064 -- -- 2 0.1
Large Cap Growth.... 1,634 1,762 1 -- 107 1.7
Small Cap Growth.... 165,494 193,169 89 76 14,797 2.3
Small-Mid Cap Growth 9,442 8,761 -- 2 761 5.3
International Growth 136,438 212,025 153 132 23,483 0.9
International Equity 1,835 1,499 -- -- 336 9.7
Value Discovery..... 42,580 46,904 20 17 2,172 0.8
(3) Investment Transactions
Investment transactions, excluding money market instruments, for the period
ended June 30, 2004 were as follows (in thousands):
Portfolio Purchases Sales
--------- --------- --------
Growth.............. $ 46,582 $ 56,341
Tax-Managed Growth.. 690 1,827
Large Cap Growth.... 1,703 795
Small Cap Growth.... 336,529 249,858
Small-Mid Cap Growth 12,176 2,793
International Growth 1,586,293 931,285
International Equity 2,897 79
Value Discovery..... 63,297 44,338
Income.............. 59,224 49,442
(4) Foreign Currency Forward Contracts
To protect itself against a decline in the value of foreign currency against
the U.S. dollar, the International Growth and International Equity Portfolios
enter into foreign currency forward contracts with its custodian and others.
The Portfolios bear the market risk that arises from changes in foreign
currency rates and bears the credit risk if the counterparty fails to perform
under the contract. The net realized and unrealized gains and losses associated
with foreign currency forward contracts are reflected in the accompanying
financial statements. There were no open foreign currency forward contracts at
June 30, 2004.
June 30, 2004 William Blair Funds 61
(6) Fund Share Transactions
The following table summarizes the activity in capital shares of each Portfolio
(in thousands):
Sales (Dollars)
- - ----------------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
- - ------------------------------ --------------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- --------- -------- --------- ---------- -------- ----------
Growth.............. $ 9,380 $ 8,856 $ 18,236 $ 7,157 $ 21,956 $ 29,113
Tax-Managed Growth.. -- 131 131 36 1,123 1,159
Large Cap Growth.... 99 1,169 1,268 116 1,031 1,147
Small Cap Growth.... 91,575 48,765 140,340 298,425 101,709 400,134
Small Mid-Cap Growth 3,714 6,451 10,165 699 2,989 3,688
International Growth 548,239 227,009 775,248 758,408 254,587 1,012,995
International Equity 39 3,254 3,293 -- -- --
Value Discovery..... 11,716 31,352 43,068 3,825 49,356 53,181
Income.............. 18,103 20,894 38,997 48,173 90,922 139,095
Ready Reserves...... 811,071 -- 811,071 1,648,639 -- 1,648,639
Reinvested Distributions (Dollars)
----------------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
------------------------------ --------------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- --------- -------- --------- ---------- -------- ----------
Growth.............. $ -- $ -- $ -- $ -- $ -- $ --
Tax-Managed Growth.. -- -- -- -- -- --
Large Cap Growth.... -- -- -- -- -- --
Small Cap Growth.... -- -- -- 4,718 2,482 7,200
Small Mid-Cap Growth -- -- -- -- -- --
International Growth -- -- -- 1,375 1,082 2,457
International Equity -- -- -- -- -- --
Value Discovery..... -- -- -- -- -- --
Income.............. 1,025 3,536 4,561 1,695 8,512 10,207
Ready Reserves...... 2,739 -- 2,739 8,334 -- 8,334
Redemptions (Dollars)
----------------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
------------------------------ --------------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- --------- -------- --------- ---------- -------- ----------
Growth.............. $ 4,724 $ 20,775 $ 25,499 $ 8,875 $ 51,809 $ 60,684
Tax-Managed Growth.. 41 1,301 1,342 14 831 845
Large Cap Growth.... 30 434 464 104 2,058 2,162
Small Cap Growth.... 57,356 12,726 70,082 40,291 13,239 53,530
Small Mid-Cap Growth 55 33 88 -- -- --
International Growth 162,582 33,725 196,307 238,935 98,076 337,011
International Equity -- -- -- -- -- --
Value Discovery..... 3,688 25,797 29,485 12,601 60,972 73,573
Income.............. 7,879 25,964 33,843 23,206 52,035 75,241
Ready Reserves...... 920,487 -- 920,487 1,827,009 -- 1,827,009
Net Change in Net Assets relating to Fund Share Activity (Dollars)
----------------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
------------------------------ --------------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- --------- -------- --------- ---------- -------- ----------
Growth.............. $ 4,656 $(11,919) $ (7,263) $ (1,718) $(29,853) $ (31,571)
Tax-Managed Growth.. (41) (1,170) (1,211) 22 292 314
Large Cap Growth.... 69 735 804 12 (1,027) (1,015)
Small Cap Growth.... 34,219 36,039 70,258 262,852 90,952 353,804
Small Mid-Cap Growth 3,659 6,418 10,077 699 2,989 3,688
International Growth 385,657 193,284 578,941 520,848 157,593 678,441
International Equity 39 3,254 3,293 -- -- --
Value Discovery..... 8,028 5,555 13,583 (8,776) (11,616) (20,392)
Income.............. 11,249 (1,534) 9,715 26,662 47,399 74,061
Ready Reserves...... (106,677) -- (106,677) (170,036) -- (170,036)
62 Semi-Annual Report June 30, 2004
Sales (Shares)
----------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
- - --------------------------- -----------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- -------- ------- -------- --------- ------- ---------
Growth.............. 958 870 1,828 824 2,476 3,300
Tax-Managed Growth.. -- 15 15 5 148 153
Large Cap Growth.... 17 194 211 22 201 223
Small Cap Growth.... 3,921 2,086 6,007 15,338 5,249 20,587
Small Mid-Cap Growth 364 631 995 70 299 369
International Growth 28,667 11,682 40,349 49,012 16,140 65,152
International Equity 4 325 329 -- -- --
Value Discovery..... 503 1,316 1,819 203 2,696 2,899
Income.............. 1,745 2,010 3,755 4,557 8,632 13,189
Ready Reserves...... 811,071 -- 811,071 1,648,639 -- 1,648,639
Reinvested Distributions (Shares)
----------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
--------------------------- -----------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- -------- ------- -------- --------- ------- ---------
Growth.............. -- -- -- -- -- --
Tax-Managed Growth.. -- -- -- -- -- --
Large Cap Growth.... -- -- -- -- -- --
Small Cap Growth.... -- -- -- 226 118 344
Small Mid-Cap Growth -- -- -- -- -- --
International Growth -- -- -- 77 60 137
International Equity -- -- -- -- -- --
Value Discovery..... -- -- -- -- -- --
Income.............. 99 344 443 162 811 973
Ready Reserves...... 2,739 -- 2,739 8,334 -- 8,334
Redemptions (Shares)
----------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
--------------------------- -----------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- -------- ------- -------- --------- ------- ---------
Growth.............. 468 2,045 2,513 1,027 5,796 6,823
Tax-Managed Growth.. 5 154 159 2 109 111
Large Cap Growth.... 5 73 78 20 415 435
Small Cap Growth.... 2,493 539 3,032 2,161 783 2,944
Small Mid-Cap Growth 6 2 8 -- -- --
International Growth 8,564 1,748 10,312 16,368 6,456 22,824
International Equity -- -- -- -- -- --
Value Discovery..... 159 1,097 1,256 767 3,409 4,176
Income.............. 764 2,514 3,278 2,198 4,957 7,155
Ready Reserves...... 920,487 -- 920,487 1,827,009 -- 1,827,009
Net Change in Shares Outstanding
relating to Fund Share Activity (Shares)
----------------------------------------------------------
Period Ended June 30, 2004 Year Ended December 31, 2003
--------------------------- -----------------------------
Portfolio Class N Class I Total Class N Class I Total
- --------- -------- ------- -------- --------- ------- ---------
Growth.............. 490 (1,175) (685) (203) (3,320) (3,523)
Tax-Managed Growth.. (5) (139) (144) 3 39 42
Large Cap Growth.... 12 121 133 2 (214) (212)
Small Cap Growth.... 1,428 1,547 2,975 13,403 4,584 17,987
Small Mid-Cap Growth 358 629 987 70 299 369
International Growth 20,103 9,934 30,037 32,721 9,744 42,465
International Equity 4 325 329 -- -- --
Value Discovery..... 344 219 563 (564) (713) (1,277)
Income.............. 1,080 (160) 920 2,521 4,486 7,007
Ready Reserves...... (106,677) -- (106,677) (170,036) -- (170,036)
June 30, 2004 William Blair Funds 63
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Growth Fund
Class N
- - -------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Net asset value, beginning of period..................... $ 9.97 $ 8.06 $ 10.87 $ 12.73 $20.10 $17.97
Income (loss) from investment operations:
Net investment income (loss)........................... (0.03) (0.06) (0.07) (0.06) (0.06) (0.01)
Net realized and unrealized gain (loss) on investments. 0.02 1.97 (2.74) (1.66) (1.52) 3.58
------ ------ ------- ------- ------ ------
Total from investment operations......................... (0.01) 1.91 (2.81) (1.72) (1.58) 3.57
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $ 9.96 $ 9.97 $ 8.06 $ 10.87 $12.73 $20.10
====== ====== ======= ======= ====== ======
Total return (%)......................................... (0.10) 23.70 (25.85) (13.53) (7.47) 19.98
Ratios to average daily net assets (%) (b):
Expenses............................................... 1.18 1.19 1.19 1.18 1.13 0.86
Net investment income (loss)........................... (0.54) (0.67) (0.73) (0.57) (0.34) (0.11)
Class I
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $10.08 $ 8.12 $ 10.93 $ 12.77 $20.10 $17.98
Income (loss) from investment operations:
Net investment income (loss)........................... (0.01) (0.04) (0.05) (0.04) (0.01) (0.01)
Net realized and unrealized gain (loss) on investments. 0.01 2.00 (2.76) (1.66) (1.53) 3.57
------ ------ ------- ------- ------ ------
Total from investment operations......................... -- 1.96 (2.81) (1.70) (1.54) 3.56
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $10.08 $10.08 $ 8.12 $ 10.93 $12.77 $20.10
====== ====== ======= ======= ====== ======
Total return (%)......................................... 0.00 24.14 (25.71) (13.33) (7.27) 19.91
Ratios to average daily net assets (%) (b):
Expenses............................................... 0.93 0.94 0.94 0.93 0.88 0.86
Net investment income (loss)........................... (0.29) (0.42) (0.48) (0.32) (0.06) (0.11)
- - ---------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $274,613 $281,654 $255,625 $386,096 $550,987 $818,443
Portfolio turnover rate (%) (b)............ 34 45 29 74 88 52
- ----------
(a)For the period from October 1, 1999 (Commencement of the Class) to December
31, 1999.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
64 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
Class N
- - --------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
- - --------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 8.41 $ 6.86 $ 9.07 $ 10.08 $ 10.18 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.04) (0.07) (0.06) (0.05) (0.02) --
Net realized and unrealized gain (loss) on investments.......... 0.13 1.62 (2.15) (0.96) (0.08) 0.18
------ ------ ------- ------- ------- ------
Total from investment operations.................................. 0.09 1.55 (2.21) (1.01) (0.10) 0.18
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 8.50 $ 8.41 $ 6.86 $ 9.07 $ 10.08 $10.18
====== ====== ======= ======= ======= ======
Total return (%).................................................. 1.07 22.59 (24.37) (10.02) (0.98) 1.80
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.55 1.49 1.36 1.36 1.36 1.36
Expenses, before waivers and reimbursements..................... 2.19 2.26 2.22 3.64 11.34 1.36
Net investment income (loss), net of waivers and reimbursements. (1.02) (0.91) (0.72) (0.57) (0.15) 0.75
Net investment income (loss), before waivers and reimbursements. (1.66) (1.68) (1.58) (2.85) (10.13) 0.75
Class I
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 8.50 $ 6.92 $ 9.12 $ 10.11 $ 10.18 $10.00
Income (loss) from investment operations:
Net investment income (loss)...................................... (0.03) (0.05) (0.04) (0.03) -- --
Net realized and unrealized gain (loss) on investments............ 0.14 1.63 (2.16) (0.96) (0.07) 0.18
------ ------ ------- ------- ------- ------
Total from investment operations.................................. 0.11 1.58 (2.20) (0.99) (0.07) 0.18
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 8.61 $ 8.50 $ 6.92 $ 9.12 $ 10.11 $10.18
====== ====== ======= ======= ======= ======
Total return (%).................................................. 1.29 22.83 (24.12) (9.79) (0.69) 1.80
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.30 1.24 1.11 1.11 1.11 1.11
Expenses, before waivers and reimbursements..................... 1.94 2.01 1.97 3.39 11.09 1.11
Net investment income (loss), net of waivers and reimbursements. (0.77) (0.66) (0.47) (0.32) 0.05 0.99
Net investment income (loss), before waivers and reimbursements. (1.41) (1.43) (1.33) (2.60) (9.93) 0.99
-----------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ----------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $5,720 $6,871 $5,303 $7,211 $5,001 $1,018
Portfolio turnover rate (%) (b)............ 22 37 44 37 32 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 65
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Large Cap Growth Fund
Class N
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 5.93 $ 4.80 $ 6.72 $ 8.45 $ 10.14 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.02) (0.04) (0.04) (0.05) (0.05) --
Net realized and unrealized gain (loss) on investments.......... (0.03) 1.17 (1.88) (1.68) (1.64) 0.14
------- ------- ------- ------- ------- ------
Total from investment operations.................................. (0.05) 1.13 (1.92) (1.73) (1.69) 0.14
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Net asset value, end of period.................................... $ 5.88 $ 5.93 $ 4.80 $ 6.72 $ 8.45 $10.14
======= ======= ======= ======= ======= ======
Total return (%).................................................. (0.84) 23.54 (28.57) (20.47) (16.67) 1.40
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.41 1.42 1.36 1.36 1.36 1.36
Expenses, before waivers and reimbursements..................... 2.31 2.39 2.45 3.01 2.84 1.36
Net investment income (loss), net of waivers and reimbursements. (0.61) (0.76) (0.71) (0.79) (0.58) (0.66)
Net investment income (loss), before waivers and
reimbursements................................................. (1.51) (1.73) (1.80) (2.44) (2.06) (0.66)
Class I
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 5.99 $ 4.82 $ 6.74 $ 8.47 $ 10.14 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.01) (0.03) (0.03) (0.04) (0.04) --
Net realized and unrealized gain (loss) on investments.......... (0.04) 1.20 (1.89) (1.69) (1.63) 0.14
------- ------- ------- ------- ------- ------
Total from investment operations.................................. (0.05) 1.17 (1.92) (1.73) (1.67) 0.14
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Total distributions -- -- -- -- -- --
------- ------- ------- ------- ------- ------
Net asset value, end of period.................................... $ 5.94 $ 5.99 $ 4.82 $ 6.74 $ 8.47 $10.14
======= ======= ======= ======= ======= ======
Total return (%) (0.83) 24.27 (28.49) (20.43) (16.47) 1.40
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.16 1.17 1.11 1.11 1.11 1.11
Expenses, before waivers and reimbursements..................... 2.06 2.14 2.20 2.76 2.59 1.11
Net investment income (loss), net of waivers and reimbursements. (0.36) (0.51) (0.46) (0.54) (0.35) (0.40)
Net investment income (loss), before waivers and
reimbursements................................................. (1.26) (1.48) (1.55) (2.19) (1.83) (0.40)
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $6,268 $5,519 $5,469 $5,991 $10,995 $1,153
Portfolio turnover rate (%) (b)................................. 28 33 52 87 95 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
66 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small Cap Growth Fund
Class N
- - ----------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999 (a)
- - --------- ---- ---- ---- ---- --------
Net asset value, beginning of period..................... $ 21.83 $ 13.72 $ 16.58 $ 13.16 $ 10.19 $10.00
Income (loss) from investment operations:
Net investment income (loss)........................... (0.15) (0.21) (0.19) (0.17) (0.11) --
Net realized and unrealized gain (loss) on investments. 2.67 8.68 (2.67) 3.59 3.51 0.19
-------- -------- ------- ------- ------- ------
Total from investment operations......................... 2.52 8.47 (2.86) 3.42 3.40 0.19
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- 0.36 -- -- 0.43 --
-------- -------- ------- ------- ------- ------
Total distributions...................................... -- 0.36 -- -- 0.43 --
-------- -------- ------- ------- ------- ------
Net asset value, end of period........................... $ 24.35 $ 21.83 $ 13.72 $ 16.58 $ 13.16 $10.19
======== ======== ======= ======= ======= ======
Total return (%)......................................... 11.54 61.88 (17.25) 25.99 33.68 1.90
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements............ 1.53 1.55 1.56 1.59 1.60 1.60
Expenses, before waivers and reimbursements............ 1.50 1.52 1.62 1.95 2.17 1.60
Net investment income (loss), net of waivers and
reimbursements........................................ (1.33) (1.22) (1.31) (1.15) (0.75) (1.60)
Net investment income (loss), before waivers and
reimbursements........................................ (1.30) (1.19) (1.37) (1.51) (1.32) (1.60)
Class I
----------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999 (a)
--------- ---- ---- ---- ---- --------
Net asset value, beginning of period..................... $ 22.03 $ 13.82 $ 16.65 $ 13.18 $ 10.19 $10.00
Income (loss) from investment operations:
Net investment income (loss)........................... (0.13) (0.18) (0.16) (0.13) (0.11) --
Net realized and unrealized gain (loss) on investments. 2.70 8.75 (2.67) 3.60 3.53 0.19
-------- -------- ------- ------- ------- ------
Total from investment operations......................... 2.57 8.57 (2.83) 3.47 3.42 0.19
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- 0.36 -- -- 0.43 --
-------- -------- ------- ------- ------- ------
Total distributions...................................... -- 0.36 -- -- 0.43 --
-------- -------- ------- ------- ------- ------
Net asset value, end of period $ 24.60 $ 22.03 $ 13.82 $ 16.65 $ 13.18 $10.19
======== ======== ======= ======= ======= ======
Total return (%)......................................... 11.67 62.15 (17.00) 26.33 33.87 1.90
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements............ 1.28 1.35 1.31 1.34 1.35 1.35
Expenses, before waivers and reimbursements............ 1.25 1.28 1.37 1.70 1.92 1.35
Net investment income (loss), net of waivers and
reimbursements........................................ (1.08) (1.02) (1.06) (0.90) (0.72) (1.35)
Net investment income (loss), before waivers and
reimbursements........................................ (1.05) (0.95) (1.12) (1.26) (1.29) (1.35)
----------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands)............. $651,503 $518,824 $78,581 $54,658 $28,778 $6,346
Portfolio turnover rate (%) (b)........................ 88 103 133 147 433 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 67
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
Class N
- - ---------------------------------------
Period Ended Period Ended December 31,
------------ -------------------------
6/30/2004 2003 (a)
- - --------- --------
Net asset value, beginning of period.............................. $ 9.94 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.06) --
Net realized and unrealized gain (loss) on investments.......... 0.76 (0.06)
------- ------
Total from investment operations.................................. 0.70 (0.06)
Less distributions from:
Net investment income........................................... -- --
Net realized gain............................................... -- --
------- ------
Total distributions............................................... -- --
------- ------
Net asset value, end of period.................................... $ 10.64 $ 9.94
======= ======
Total return (%).................................................. 7.04 (0.60)
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.54 1.54
Expenses, before waivers and reimbursements..................... 2.99 1.54
Net investment income (loss), net of waivers and reimbursements. (1.25) (1.54)
Net investment income (loss), before waivers and reimbursements. (2.70) (1.54)
Class I
---------------------------------------
Period Ended Period Ended December 31,
------------ -------------------------
6/30/2004 2003 (a)
--------- --------
Net asset value, beginning of period.............................. $ 9.94 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.05) --
Net realized and unrealized gain (loss) on investments.......... 0.76 (0.06)
------- ------
Total from investment operations.................................. 0.71 (0.06)
Less distributions from:
Net investment income........................................... -- --
Net realized gain............................................... -- --
------- ------
Total distributions............................................... -- --
------- ------
Net asset value, end of period.................................... $ 10.65 $ 9.94
======= ======
Total return (%).................................................. 7.14 (0.60)
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.29 1.29
Expenses, before waivers and reimbursements..................... 2.74 1.29
Net investment income (loss), net of waivers and reimbursements. (1.00) (1.29)
Net investment income (loss), before waivers and reimbursements. (2.45) (1.29)
---------------------------------------
Period Ended Period Ended December 31,
------------ -------------------------
6/30/2004 2003
--------- ----
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $14,436 $3,673
Portfolio turnover rate (%) (b)................................. 69 --
- ----------
(a)For the period from December 29, 2003 (Commencement of Operations) to
December 31, 2003.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004 and 2003 is based on the
average shares outstanding during the period.
68 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Growth Fund
Class N
- - ----------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Net asset value, beginning of period..................... $18.65 $13.13 $ 15.48 $ 17.93 $24.03 $14.62
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.02 0.02 (0.05) (0.02) (0.01) (0.04)
Net realized and unrealized gain (loss) on investments. 0.53 5.52 (2.30) (2.43) (2.04) 13.94
------ ------ ------- ------- ------ ------
Total from investment operations......................... 0.55 5.54 (2.35) (2.45) (2.05) 13.90
Less distributions from:
Net investment income.................................. -- 0.02 -- -- 0.08 --
Net realized gain...................................... -- -- -- -- 3.97 4.49
------ ------ ------- ------- ------ ------
Total distributions...................................... -- 0.02 -- -- 4.05 4.49
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $19.20 $18.65 $ 13.13 $ 15.48 $17.93 $24.03
====== ====== ======= ======= ====== ======
Total return (%)......................................... 2.95 42.21 (15.18) (13.66) (8.10) 96.25
Ratios to average daily net assets (%) (c):
Expenses............................................... 1.47 1.50 1.51 1.60 1.59 1.35
Net investment income (loss)........................... 0.18 0.05 (0.36) (0.11) (0.44) (0.43)
Class I
- - -----------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999 (b)
- - --------- ---- ---- ---- ---- --------
Net asset value, beginning of period..................... $18.85 $13.27 $ 15.60 $ 18.02 $24.03 $20.25
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.04 0.09 (0.01) 0.02 0.03 (0.04)
Net realized and unrealized gain (loss) on investments. 0.55 5.54 (2.32) (2.44) (2.03) 8.31
------ ------ ------- ------- ------ ------
Total from investment operations......................... 0.59 5.63 (2.33) (2.42) (2.00) 8.27
Less distributions from:
Net investment income.................................. -- 0.05 -- -- 0.04 --
Net realized gain...................................... -- -- -- -- 3.97 4.49
------ ------ ------- ------- ------ ------
Total distributions...................................... -- 0.05 -- -- 4.01 4.49
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $19.44 $18.85 $ 13.27 $ 15.60 $18.02 $24.03
====== ====== ======= ======= ====== ======
Total return (%) 3.13 42.42 (14.94) (13.43) (7.87) 41.71
Ratios to average daily net assets (%) (c):
Expenses............................................... 1.22 1.25 1.26 1.35 1.34 1.35
Net investment income (loss)........................... 0.43 0.30 (0.11) 0.14 (0.16) (0.43)
- - -----------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ----------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $2,536,318 $1,899,699 $778,788 $454,055 $333,888 $302,089
Portfolio turnover rate (%) (c)............ 85 57 73 112 116 122
- ----------
(a)Includes $0.03, $0.00, $0.00, $0.06 and $0.00 in PFIC transactions which are
treated as ordinary income for Federal tax purposes for the years 2003,
2002, 2001, 2000 and 1999, respectively.
(b)For the period from October 1, 1999 (Commencement of the Class) to December
31, 1999.
(c)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 69
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Equity Fund
Class N
- - ------------------------------
Period Ended June 30, 2004 (a)
------------------------------
Net asset value, beginning of period.............................. $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.01)
Net realized and unrealized gain (loss) on investments.......... 0.57
------
Total from investment operations.................................. 0.56
Less distributions from:
Net investment income........................................... --
Net realized gain............................................... --
------
Total distributions............................................... --
------
Net asset value, end of period.................................... $10.56
======
Total return (%).................................................. 5.60
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.50
Expenses, before waivers and reimbursements..................... 1.90
Net investment income (loss), net of waivers and reimbursements. (0.72)
Net investment income (loss), before waivers and reimbursements. (1.12)
Class I
------------------------------
Period Ended June 30, 2004 (a)
------------------------------
Net asset value, beginning of period.............................. $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... --
Net realized and unrealized gain (loss) on investments.......... 0.56
------
Total from investment operations.................................. 0.56
Less distributions from:
Net investment income........................................... --
Net realized gain............................................... --
------
Total distributions............................................... --
------
Net asset value, end of period.................................... $10.56
======
Total return (%).................................................. 5.60
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.25
Expenses, before waivers and reimbursements..................... 1.65
Net investment income (loss), net of waivers and reimbursements. (0.47)
Net investment income (loss), before waivers and reimbursements. (0.87)
------------------------------
Period Ended June 30, 2004
------------------------------
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $3,474
Portfolio turnover rate (%) (b)................................. 16
- ----------
(a)For the period from May 24, 2004 (Commencement of Operations) to June 30,
2004.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004 is based on the average
shares outstanding during the period.
70 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Value Discovery Fund
Class N
- - -----------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ---------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Net asset value, beginning of period.............................. $ 22.68 $ 16.28 $ 18.23 $ 16.20 $ 13.66 $ 12.96
Income (loss) from investment operations:
Net investment income (loss).................................... -- (0.06) (0.03) 0.08 0.05 0.10
Net realized and unrealized gain (loss) on investments.......... 1.19 6.46 (1.92) 2.74 2.52 0.69
-------- -------- -------- -------- ------- -------
Total from investment operations.................................. 1.19 6.40 (1.95) 2.82 2.57 0.79
Less distributions from:
Net investment income........................................... -- -- -- 0.03 0.03 0.09
Net realized gain............................................... -- -- -- 0.76 -- --
-------- -------- -------- -------- ------- -------
Total distributions............................................... -- -- -- 0.79 0.03 0.09
-------- -------- -------- -------- ------- -------
Net asset value, end of period.................................... $ 23.87 $ 22.68 $ 16.28 $ 18.23 $ 16.20 $ 13.66
======== ======== ======== ======== ======= =======
Total return (%).................................................. 5.25 39.31 (10.70) 17.39 18.85 6.10
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.38 1.49 1.53 1.61 1.64 1.35
Expenses, before waivers and reimbursements..................... 1.49 1.58 1.53 1.66 1.88 1.38
Net investment income (loss), net of waivers and reimbursements. 0.00 (0.30) (0.16) 0.28 0.40 0.78
Net investment income (loss), before waivers and
reimbursements................................................. (0.11) (0.39) (0.16) 0.23 0.16 0.75
Class I
-----------------------------------------------------------
Period Ended Years Ended December 31,
------------ ---------------------------------------------
6/30/2004 2003 2002 2001 2000 1999 (a)
--------- ---- ---- ---- ---- --------
Net asset value, beginning of period.............................. $ 22.76 $ 16.31 $ 18.19 $ 16.16 $ 13.64 $ 12.36
Income (loss) from investment operations:
Net investment income (loss).................................... 0.02 (0.03) 0.01 0.17 0.09 0.10
Net realized and unrealized gain (loss) on investments.......... 1.20 6.48 (1.89) 2.70 2.52 1.28
-------- -------- -------- -------- ------- -------
Total from investment operations.................................. 1.22 6.45 (1.88) 2.87 2.61 1.38
Less distributions from:
Net investment income........................................... -- -- -- 0.08 0.09 0.10
Net realized gain............................................... -- -- -- 0.76 -- --
-------- -------- -------- -------- ------- -------
Total distributions............................................... -- -- -- 0.84 0.09 0.10
-------- -------- -------- -------- ------- -------
Net asset value, end of period.................................... $ 23.98 $ 22.76 $ 16.31 $ 18.19 $ 16.16 $ 13.64
======== ======== ======== ======== ======= =======
Total return (%).................................................. 5.36 39.55 (10.34) 17.72 19.16 11.18
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.24 1.33 1.34 1.36 1.39 1.35
Expenses, before waivers and reimbursements..................... 1.24 1.33 1.34 1.41 1.63 1.38
Net investment income (loss), net of waivers and reimbursements. 0.14 (0.14) 0.03 0.53 0.61 0.78
Net investment income (loss), before waivers and
reimbursements................................................. 0.14 (0.14) 0.03 0.48 0.37 0.75
-----------------------------------------------------------
Period Ended Years Ended December 31,
------------ ---------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $263,214 $237,111 $190,802 $149,292 $74,093 $48,423
Portfolio turnover rate (%) (b)................................. 36 51 20 48 68 65
- ----------
(a)For the period from October 1, 1999 (Commencement of the Class) to December
31, 1999.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 71
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Income Fund
Class N
- - --------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Net asset value, beginning of period..................... $10.43 $10.62 $10.34 $10.22 $ 9.92 $10.49
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.32 0.40 0.55 0.55 0.62 0.62
Net realized and unrealized gain (loss) on investments. (0.36) (0.02) 0.25 0.17 0.33 (0.59)
------ ------ ------ ------ ------ ------
Total from investment operations......................... (0.04) 0.38 0.80 0.72 0.95 0.03
Less distributions from:
Net investment income.................................. 0.24 0.57 0.52 0.60 0.65 0.60
Net realized gain...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions...................................... 0.24 0.57 0.52 0.60 0.65 0.60
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $10.15 $10.43 $10.62 $10.34 $10.22 $ 9.92
====== ====== ====== ====== ====== ======
Total return (%)......................................... (0.44) 3.68 7.91 7.18 9.99 0.34
Ratios to average daily net assets (%) (c):
Expenses............................................... 0.76 0.77 0.81 0.94 0.92 0.70
Net investment income (loss)........................... 4.17 4.09 5.23 5.38 6.23 6.03
Class I
--------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------
6/30/2004 2003 2002 2001 2000 1999 (b)
--------- ---- ---- ---- ---- --------
Net asset value, beginning of period..................... $10.40 $10.62 $10.35 $10.24 $ 9.91 $10.05
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.35 0.43 0.57 0.58 0.64 0.62
Net realized and unrealized gain (loss) on investments. (0.38) (0.04) 0.24 0.15 0.34 (0.15)
------ ------ ------ ------ ------ ------
Total from investment operations......................... (0.03) 0.39 0.81 0.73 0.98 0.47
Less distributions from:
Net investment income.................................. 0.25 0.61 0.54 0.62 0.65 0.61
Net realized gain...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions...................................... 0.25 0.61 0.54 0.62 0.65 0.61
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $10.12 $10.40 $10.62 $10.35 $10.24 $ 9.91
====== ====== ====== ====== ====== ======
Total return (%)......................................... (0.33) 3.76 8.04 7.32 10.28 0.30
Ratios to average daily net assets (%) (c):
Expenses............................................... 0.61 0.62 0.66 0.79 0.77 0.70
Net investment income (loss)........................... 4.32 4.24 5.38 5.53 6.39 6.03
---------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $267,298 $265,062 $196,136 $176,264 $167,746 $173,375
Portfolio turnover rate (%) (c)............ 36 36 66 82 54 66
- ----------
(a)As required, in 2001, the Fund has adopted the provisions of the AICPA Audit
and Accounting Guide for Investment Companies and began treating any paydown
gain or losses on mortgage and asset backed securities as an adjustment to
income. The effect of this change for the year 2003, was to decrease net
investment income per share by $0.12 and increase the net realized and
unrealized gain loss per share by $0.12. It decreases the Ratio of Net
Investment Income to average net assets from 5.21% to 4.09% for Class N and
from 5.36% to 4.24% for Class I shares. The effect of this change for the
year 2002 and 2001 was to decrease net investment income per share by $.05
and increase the net realized and unrealized gain and loss per share by
$.05. It decreases the Ratio of Net Investment Income to Average Net Assets
from 5.75% to 5.23% and from 5.87% to 5.38% for Class N for 2002 and 2001,
respectively. It decreased the Ratio of Net Investment Income from 5.90% to
5.38% and 6.02% to 5.53% for Class I shares for 2002 and 2001, respectively.
Per share amounts and the Ratio of Net Investment Income to Average Net
Assets for periods prior to December 31, 2001 have not been restated to
reflect this change in presentation.
(b)For the period October 1, 1999 (Commencement of the Class) to December 31,
1999.
(c)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
72 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Ready Reserves Fund
Class N
- - -------------------------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ------------------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
- - --------- ---- ---- ---- ---- ----
Net asset value, beginning of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income (loss) from investment operations:
Net investment income (loss)............... 0.00 0.01 0.01 0.04 0.06 0.05
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations............. 0.00 0.01 0.01 0.04 0.06 0.05
Less distributions from:
Net investment income...................... 0.00 0.01 0.01 0.04 0.06 0.05
---------- ---------- ---------- ---------- ---------- ----------
Total distributions.......................... 0.00 0.01 0.01 0.04 0.06 0.05
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ========== ========== ==========
Total return (%) 0.25 0.66 1.28 3.66 5.91 4.63
Ratios to average daily net assets (%) (a):
Expenses................................... 0.66 0.66 0.67 0.67 0.70 0.72
Net investment income (loss)............... 0.53 0.66 1.28 3.63 5.78 4.52
Supplemental data:
Net assets at end of period (in thousands). $1,047,225 $1,153,932 $1,324,001 $1,403,740 $1,339,180 $1,052,803
- ----------
(a)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds.com.
June 30, 2004 William Blair Funds 73
Trustees and Officers. The trustees and officers of the William Blair Funds,
their ages, their principal occupations during the last five years, their
affiliations, if any, with William Blair & Company, L.L.C., and other
significant affiliations are set forth below. The address of each trustee and
officer is 222 West Adams Street, Chicago, Illinois 60606.
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------- ---------- ---------------------------------------
Interested Trustees
Conrad Fischer, 70* Chairman Since 1987 Principal, William Blair 12 Trustee Emeritus, Chicago Child Care
of the & Company, L.L.C.; Society, a non-profit organization, and
Board of Partner, APM Limited Partner, APM Limited Partnership
Trustees Partnership
Michelle Seitz, 38* Trustee Since 2002 Principal, William Blair 12 N/A
& Company, L.L.C.
Non-Interested Trustees
J. Grant Beadle, 71 Trustee Since 1997 Retired Chairman and 12 Batts Group and Oliver Products
Chief Executive Officer, Company, manufacturer of products
Union Special for the medical device, food and
Corporation, industrial grahics markets, Retired Associate
sewing machine Director, Northwestern University
manufacturer Institute for The Learning Sciences.
Theodore A. Bosler, 69 Trustee Since 1997 Retired Principal and 12 Crystal Lake Watershed Fund, Desert
Vice President, Lincoln Foothills Land Trust and Institute of
Capital Management Chartered Financial Analysts.
Ann P. McDermott, 64 Trustee Since 1996 Board member and 12 Junior League of Chicago,
officer for various civic Northwestern University, Women's
and charitable Board; Ravinia Festival Women's
organizations over the Board; Rush Presbyterian St. Luke's
past thirty years; Medical Center, Women's Board;
professional experience University of Chicago, Women's
prior thereto, registered Board; Visiting Nurses Association,
representative for New Honorary Director
York Stock Exchange
firm
John B. Schwemm, 69 Trustee Since 1990 Retired Chairman and 12 USG Corp., building material
Chief Executive Officer, manufacturer, and Walgreen Co.
R.R. Donnelley & Sons
Company
Donald L. Seeley, 60 Trustee Since 2003 Director, Applied 12 Beverly Enterprises, Inc., provider of
Investment Management eldercare and rehabilitative services;
Program, University of Modem Media, Inc., interactive
Arizona Department of services company
Finance, Formerly Vice
Chairman and Chief
Financial Officer, True
North Communications,
Inc., marketing
communications and
advertising firm
Robert E. Wood II, 65 Trustee Since 1999 Retired Executive 12 Chairman, Add-Vision, Inc.
Vice President, Morgan manufacturer of surface animation
Stanley Dean Witter systems, and Micro-Combustion, LLC
Officers
Marco Hanig, 46 President Since 1999 Principal, William Blair N/A N/A
& Company, L.L.C.;
former Senior Vice
President, First Chicago
NBD
74 Semi-Annual Report June 30, 2004
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -------------------------------
Michael P. Balkin, 45 Senior Vice Since 2000 Principal, William Blair N/A Exceed Corp.
President & Company, L.L.C.
Rocky Barber, 52 Senior Vice Since 2001 Principal, William Blair N/A YMCA of Metropolitan Chicago
President & Company, L.L.C.
Chief 1999-2001
Executive
Officer
Karl W. Brewer, 37 Senior Vice Since 2000 Principal, William Blair N/A N/A
President & Company, L.L.C.
Harvey H. Bundy, III, 59 Senior Vice Since 2003 Principal, William Blair N/A N/A
President & Company, L.L.C.
Mark A. Fuller, III, 47 Senior Vice Since 1993 Principal, William Blair N/A Partner, Fulsen Howney Partners
President & Company, L.L.C.
W. George Greig, 51 Senior Vice Since 1996 Principal, William Blair N/A N/A
President & Company, L.L.C.
Michael A. Jancosek, 44 Senior Vice Since 2004 Principal, William Blair N/A N/A
President & Company L.L.C.
Since 2000
Vice Associate, William Blair
President & Company, L.L.C.;
former Vice President,
First Chicago NBD
John F. Jostrand, 50 Senior Vice Since 1999 Principal, William Blair N/A N/A
President & Company, L.L.C.
James S. Kaplan, 43 Senior Vice Since 2004 Principal, William Blair N/A N/A
President & Company, L.L.C.
Since 1995
Vice Associate, William Blair
President & Company, L.L.C.
Robert C. Lanphier, IV, 47 Senior Vice Since 2003 Principal, William Blair N/A Chairman, AG. Med, Inc.
President & Company, L.L.C.
David S. Mitchell, 44 Senior Vice Since 2004 Principal, William Blair N/A N/A
President & Company, L.L.C.
Since 2003
Vice Associate, William Blair
President & Company, L.L.C.
Capucine E. Price, 39 Senior Vice Since 2004 Principal, William Blair N/A N/A
President & Company L.L.C.
Vice Since 2003
President Associate, William Blair
& Company, L.L.C.
Gregory J. Pusinelli, 45 Senior Vice Since 1999 Principal, William Blair N/A N/A
President & Company, L.L.C.;
former Principal and
Vice President, Stein
Roe & Farnham
Incorporated
Norbert W. Truderung, 51 Senior Vice Since 1992 Principal, William Blair N/A N/A
President & Company, L.L.C.
Jeffrey A. Urbina, 49 Senior Vice Since 1998 Principal, William Blair N/A N/A
President & Company, L.L.C.
June 30, 2004 William Blair Funds 75
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -----------------------
Christopher T. Vincent, 49 Senior Vice Since 2004 Principal, William Blair N/A Uhlich Children's Home
President & Company, L.L.C.
Since 2002
Vice Associate, William Blair
President & Company, L.L.C.;
former Managing
Director/Senior
Portfolio Manager,
Zurich Scudder
Investments
Terence M. Sullivan, 60 Vice Since 1997 Associate, William Blair N/A N/A
President & Company, L.L.C.
and
Treasurer
Colette M. Garavalia, 43 Secretary Since 2000 Associate, William Blair N/A N/A
& Company, L.L.C.;
former Assistant Vice
President, Scudder
Kemper Investments
- ----------
* Mr. Fischer and Ms. Seitz are interested persons of the William Blair Funds
because each is a principal of William Blair & Company, L.L.C., the Funds'
investment advisor and principal underwriter.
The Statement of Additional Information for the William Blair Funds includes
additional information about the trustees and is available without charge by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840) or by writing the Fund.
76 Semi-Annual Report June 30, 2004
Proxy Voting
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities and information regarding
how the Fund voted proxies relating to portfolio securities for the most recent
12-month period ended June 30 are available without charge, upon request, by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840), at
www.williamblairfunds.com and on the SEC's website at http://www.sec.gov.
Quarterly Portfolio Schedules
The Fund will file its complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters of each fiscal year (quarters ended March
31 and September 30) on Form N-Q. The Fund's Forms N-Q will be available on the
SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330.
June 30, 2004 William Blair Funds 77
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
Conrad Fischer, Chairman
Principal, William Blair & Company, L.L.C.
J. Grant Beadle
Retired Chairman and CEO, Union Special Corporation
Theodore A. Bosler
Retired Principal and Vice President, Lincoln Capital Management Company
Ann P. McDermott
Director and Trustee
Profit and not-for-profit organizations
Donald L. Seeley
Adjunct Lecturer and Director, University of Arizona Department of Finance
John B. Schwemm
Retired Chairman and CEO, R.R. Donnelley & Sons Company
Michelle Seitz
Principal, William Blair & Company, L.L.C.,
Robert E. Wood II
Retired Executive Vice President, Morgan Stanley Dean Witter
- --------------------------------------------------------------------------------
Officers
- --------------------------------------------------------------------------------
Marco Hanig, President
Michael P. Balkin, Senior Vice President
Rocky Barber, Senior Vice President
Karl W. Brewer, Senior Vice President
Harvey H. Bundy III, Senior Vice President
Mark A. Fuller, III, Senior Vice President
W. George Greig, Senior Vice President
Michael A. Jancosek, Senior Vice President
John F. Jostrand, Senior Vice President
James S. Kaplan, Senior Vice President
Robert C. Lanphier, IV, Senior Vice President
David S. Mitchell, Senior Vice President
Capucine E. Price, Senior Vice President
Gregory J. Pusinelli, Senior Vice President
Norbert W. Truderung, Senior Vice President
Jeffrey A. Urbina, Senior Vice President
Christopher T. Vincent, Senior Vice President
Terence M. Sullivan, Vice President and Treasurer
Colette M. Garavalia, Secretary
Investment Advisor
William Blair & Company, L.L.C.
Legal Counsel
Vedder, Price, Kaufman & Kammholz, P.C.
Transfer Agent
State Street Bank and Trust Company
P.O. Box 8506
Boston, MA 02266-8506
For customer assistance, call 1-800-635-2886
(Massachusetts 1-800-635-2840)
78 Date of First Use August, 2004
[LOGO APPEARS HERE] WILLIAM BLAIR FUNDS
GROWTH FUNDS
Growth Fund
Tax-Managed Growth Fund
Large Cap Growth Fund
Small Cap Growth Fund
Small-Mid Cap Growth Fund
International Growth Fund
International Equity Fund
OTHER FUNDS
Value Discovery Fund
Income Fund
Ready Reserves Fund
222 West Adams Street Chicago, Illinois 60606 800.742.7272
www.williamblairfunds.com
William Blair & Company, L.L.C., Distributors
[Logo Appears Here]
WILLIAM BLAIR FUNDS
INSTITUTIONAL INTERNATIONAL GROWTH FUND
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
JUNE 30, 2004
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Institutional International Growth Fund
An Overview from the Portfolio Manager. 2
Portfolio of Investments............... 5
Financial Statements..................... 8
Notes to Financial Statements............ 11
Board of Trustees........................ 20
Officers................................. 20
This report is submitted for the general information of the shareholders of the
William Blair Funds. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a prospectus of the William Blair
Funds. Please consider the Funds' investment objectives, risks, charges, and
expenses before investing. This and other information is contained in the
Funds' prospectus, which you may obtain by calling 1-800-742-7272. Read it
carefully before you invest or send money. (C)William Blair & Company, LLC.,
distributor.
June 30, 2004 William Blair Funds 1
[PHOTO]
GREIG
W. George Greig
- --------------------------------------------------------------------------------
INSTITUTIONAL INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
The Institutional International Growth Fund invests primarily in common stocks
of foreign growth companies of all sizes.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Institutional International Growth Fund posted a 3.01% gain for the 6
months ended June 30, 2004. By comparison, the Fund's benchmark, the MSCI All
Country World (Free) excluding US Index, rose 4.10%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The overall MSCI All Country World (Free) except US index fell modestly (0.69)%
during the second quarter, but a more severe correction in Asian markets and in
cyclical sectors globally impacted our relative performance.
On a regional basis, our relative emphasis on Asia (particularly emerging Asia)
at the expense of Europe accounted for all of the portfolio's performance
shortfall at mid-year. Asian markets continue to be viewed as extremely
sensitive to global liquidity and cyclical growth, but it is worth noting that
there has been no evidence of any significant slowdown in either economic
growth or corporate earnings up to this point.
The year started with international markets extending the strong rally that
began in 2003 into the first quarter. Broadly speaking, Asian markets and
emerging markets more generally outperformed, and small companies continued to
outpace large blue chip companies. Within that framework, however, shifting
returns reflected new data about the changing dynamic of the global growth
cycle.
The major new trend to emerge in the first quarter was the increasing strength
of Japan, both in economic and market terms. After lagging the rest of the
world early in the year, Japan came to life as more and more indicators pointed
to continued strong earnings growth and increasing confidence in the economy.
Our portfolio benefited from being overweight the benchmark in Japan, but
relative returns were impacted by our emphasis on export-oriented sectors.
The global equity market climate shifted during the second quarter, as
heightened concern about monetary tightening in the US and a state-directed
slowdown in China focused attention on potential risks to economic and profit
growth, particularly in cyclical sectors and regions.
What sectors had the biggest impact on portfolio performance?
Technology was the major laggard on a global basis during the second quarter,
reversing some of 2003's strong gains as cyclical concerns arose regarding
potential oversupply of components and the sustainability of corporate and
consumer spending growth in a variety of hardware categories. Conversely, the
best performing sector in the global market was Energy, and portfolio
positioning in these sectors also detracted from performance.
The portfolio continues to carry relatively low exposure to Europe, a position
that helped returns during the first quarter, as growth indicators remain
inconsistent and relatively weak in most European economies.
2 Semi-Annual Report June 30, 2004
What is your outlook for the international markets?
In both of the recent broad global economic cycles (1981-1990 and 1991-2000)
there was a sharp recovery, followed by a moderation of growth accompanied by
some monetary tightening. In each case the initial tightening occurred in the
'4' year (1984, 1994), and so the analogy is drawn that after the
liquidity-driven upturn of 2003, we should anticipate upward pressure on
interest rates, and that China and the US--the engines of global growth--could
slow significantly.
Leading economic indicators, many of them monetary, have indeed slowed on a
global basis, and some measures of investment spending and credit growth have
decelerated in China. While it is still too early to tell definitively how mild
or severe the coming slowdown will be, markets have readily anticipated a
relatively bearish scenario. Ironically, until there is clearer evidence of the
extent and effects of the slowdown, markets may overreact on the basis of fear
of the unknown.
Our view of the mid-cycle plateau is that it may well be milder and briefer
than the tightening cycle of 1994-95. There are few excesses in the global
economic picture and a diminished likelihood of instability in emerging
markets. As Asia cools down and Europe begins to reaccelerate, global growth
should move into better balance for the remainder of the economic expansion.
June 30, 2004 William Blair Funds 3
- --------------------------------------------------------------------------------
Institutional International Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual Total Return
--------------------------------------
6/30/2004(a) 12/31/2003 2002(a)(b)
------------ ---------- ----------
Institutional International Growth Fund
Morgan Stanley Capital................. 3.01% 42.47% (4.27)%
International (MSCI) All Country World
Free Ex-US Index...................... 4.10 41.41 (0.86)
--------------------------------------
Average Annual Total Return at 6/30/2004
--------------------------------------
Since
1 Year Inception(c)
------------ ------------ -
Institutional International Growth Fund 31.64% 19.22%
--------------------------------------
(a)Total return is not annualized for periods that
are less than one year.
(b)For the period from July 26, 2002 (Commencement
of Operations) to December 31, 2002.
(c)For the period from July 26, 2002 (Commencement
of Operations) to June 30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of income dividends
[CHART]
Institutional MSCI AC
International WLD Ex-US
Growth Fund Index
--------------- -----------
7/26/02 10,000 10,000
9/02 9,300 9,300
12/02 9,600 9,900
3/03 9,000 9,200
6/03 10,700 11,000
9/03 11,900 12,000
12/03 13,600 14,000
3/04 14,400 14,700
6/04 14,000 14,600
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. For the
most current month-end performance information, please call 1-800-742-7272, or
visit our Web site at www.williamblairfunds. com. International investing
involves special risk considerations, including currency fluctuations, lower
liquidity, economic and political risk.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Morgan Stanley Capital International (MSCI) All Country World Free ex-US
Index is an unmanaged index that includes developed and emerging markets and
reduced Japanese portion, making it more comparable to the Institutional
International Growth Fund in terms of investment approach.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
4 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Institutional International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------- ---------
Shares Value
- --------- --------------------------------------------- ---------
- ------------------------------------------------------- ---------
Common Stocks--Europe--24.9%
Austria--1.4%
66,200 Erste Bank Der Oester (Banking).............. $ 10,439
---------
Estonia--0.2%
216,400 Hansabank (Banking).......................... 1,827
---------
Finland--0.5%
40,500 Nokian Renkaat Oyj (Automotive).............. 3,959
---------
France--4.7%
118,300 Christian Dior (Apparel and luxury goods).... 7,695
37,300 Hermes International SCA (Apparel & luxury
goods)...................................... 7,496
354,300 *JC Decaux (Media)........................... 7,626
56,200 Klepierre (Real estate)...................... 3,857
55,500 Mr. Bricolage SA
(Home improvement--retail).................. 1,831
130,800 *Opera (Hospital and nursing management)..... 3,379
19,200 Rodriquez Group (Retail trade)............... 1,009
50,000 Sanofi-Synthelabo SA (Pharmaceuticals)....... 3,176
---------
36,069
---------
Germany--4.7%
174,800 Bayer Motoren Werke (Motor vehicles)......... 7,797
67,900 Did Deutscher Industrie Svc (Commercial
services)................................... 1,999
65,800 GFK AG (Commercial services)................. 2,315
20,800 Puma AG (Consumer non-durables).............. 5,330
111,700 SAP AG (Software)............................ 18,653
---------
36,094
---------
Greece--2.4%
313,100 Coca-Cola Hellenic Bottling S.A.
(Beverages)................................. 7,349
169,700 EFG Eurobank (Banking)....................... 3,715
105,200 Folli Follie S.A. (Apparel and footwear
retailer)................................... 3,369
164,190 National Bank of Greece (Banking)............ 3,589
---------
18,022
---------
Ireland--1.0%
314,700 Anglo Irish Bank plc (Finance)............... 4,945
352,000 *Grafton Group (Wholesale distributors)...... 2,815
---------
7,760
---------
Italy--2.4%
563,200 Banco Popolare Di Verona E N (Banking)....... 9,718
390,200 Credito Emiliano SpA (Banking)............... 3,219
153,100 Merloni Elettrodemestici SpA (Electronics and
appliances)................................. 2,735
74,300 Pirelli & C Real Estate (Real estate
development)................................ 2,792
---------
18,464
---------
Spain--1.2%
82,800 Banco Popular Espanol (Banking).............. 4,685
112,100 Grupo Ferrovial S.A. (Industrial services)... 4,680
---------
9,365
---------
Sweden--2.2%
4,082,000 *Ericsson LM-B Shares (Communications
equipment).................................. 12,212
182,200 Gunnebo AB (Producer manufacturing).......... 2,067
- ------------------------------------------------------- ---------
Shares Value
- --------- --------------------------------------------- ---------
- ------------------------------------------------------- ---------
Common Stocks--Europe--24.9%--(continued)
58,900 *Oriflame Cosmetics S.A. SDR (Household
products)................................... $ 2,104
---------
16,383
---------
Switzerland--4.2%
28,600 *Actelion (Biotechnology).................... 3,297
68,000 *Logitech International S.A. (Electronic
technology)................................. 3,113
48,483 *Micronas Semiconductor (Electronic
technology)................................. 2,216
12,200 Serono S.A., Class "B" (Biotechnology)....... 7,712
224,800 UBS AG (Banking)............................. 15,938
---------
32,276
---------
Common Stocks--United Kingdom--20.3%
380,900 *Acambis (Biotechnology)..................... 2,410
147,100 Astrazeneca plc (Pharmaceuticals)............ 6,645
2,198,700 BG Group plc (Industrial services)........... 13,621
1,269,000 *British Sky Broadcasting Group (Media)...... 14,385
1,337,000 Capita Group plc (Commercial services)....... 7,774
279,100 Carnival plc (Hotels, restaurants and leisure
activities)................................. 13,634
484,600 Cattle's Holdings plc (Finance and leasing).. 2,804
150,000 Cobham plc (Aerospace & defense)............. 3,823
1,056,000 Compass Group plc (Hotels, restaurants and
leisure activities)......................... 6,494
296,300 French Connection (Apparel and footwear
retail)..................................... 2,244
611,800 HBOS plc (Finance)........................... 7,631
207,400 MAN Group plc (Finance)...................... 5,406
228,400 McCarthy & Stone plc (Real estate)........... 2,421
1,573,600 *Michael Page International (Personnel
Services)................................... 5,142
202,200 Next plc (Multiline retail).................. 5,251
844,200 Premier Farnell (Electronics distributors)... 3,789
423,300 Reckitt Benckiser plc (Household products)... 12,066
863,300 Smith & Nephew plc (Health care equipment
and supplies)............................... 9,362
676,700 Standard Chartered plc (Banking)............. 11,089
3,303,800 Tesco plc (Food retailer).................... 16,057
262,800 Warner Chilcott plc (Pharmaceuticals)........ 3,320
---------
155,368
---------
Common Stocks--Canada--5.8%
196,800 *Alimentation Couche-Tard--Class "B" (Food
retail)..................................... 3,443
139,300 *Cognos Inc. (Software)...................... 5,026
44,200 *MacDonald Dettwiler & Associates (IT
consulting)................................. 860
386,100 Manulife Financial Corp. (Life and health
insurance).................................. 15,624
91,500 *Precision Drilling Corp. (Drilling)......... 4,366
71,400 *Research in Motion Ltd. (Wireless
telecommunication).......................... 4,890
148,500 *Shoppers Drug Mart Corp. (Retail trade)..... 3,713
262,600 Suncor Energy, Inc. (Energy minerals)........ 6,687
---------
44,609
---------
Common Stocks--Japan--24.8%
70,300 Aeon Credit Service Co., Ltd. (Consumer
finance).................................... 4,716
61,500 Aeon Mall Co., Ltd. (Real estate)............ 3,673
67,700 Arnest One Corp. (Real estate)............... 2,057
49,600 Askul Corporation (Retail trade)............. 3,131
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 5
- --------------------------------------------------------------------------------
Institutional International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------- ---------
Shares Value
- ---------- -------------------------------------------- ---------
Common Stocks--Japan--24.8%--(continued)
287,400 Canon, Inc. (Office electronics)............ $ 15,349
561,500 *Chiyoda Corp. (Construction)............... 4,026
15,000 Don Quijote Co., Ltd. (Multiline retail).... 957
102,500 Fast Retailing (Specialty retail)........... 8,373
1,037,300 Hino Motors Ltd. (Trucks, construction and
farm machinery)............................ 7,558
90,400 Hoya Corporation (Electronic technology).... 9,534
42,400 Kappa Create Co., Ltd. (Consumer non-
durables).................................. 2,942
40,590 Keyence Corporation (Electronic
technology)................................ 9,322
14,400 Koha Co., Ltd. (Electronic equipment and
instruments)............................... 544
92,500 Matsui Securities Co., Ltd. ( Financial
services).................................. 3,193
114,800 Misumi Corp. (Trading companies and
distributors).............................. 3,777
1,651 Mitsubishi Tokyo Financial (Banking)........ 15,455
35,000 Nakanishi Inc. (Medical specialties)........ 2,510
65,000 Neomax Co., Ltd. (Electronic equipment and
instruments)............................... 1,059
75,100 Nidec Corporation (Electronic equipment and
instruments)............................... 7,754
62,340 Nitori Company Ltd. (Specialty stores)...... 3,919
155,000 Nitto Denko Corporation (Electronic
technology)................................ 8,009
97,600 Orix Corporation (Consumer finance)......... 11,264
84,900 Park 24 Co., Ltd. (Commercial services)..... 3,249
957 Pasona Inc. (Personnel services)............ 3,438
88,590 Point Inc. (Apparel and footwear retail).... 2,406
58,300 Sawai Pharmaceutical Co., Ltd.
(Pharmaceuticals).......................... 2,467
731,900 Sharp Corp. (Electronics)................... 11,797
908,000 *Shinsei Bank, Ltd. (Banking)............... 5,805
66,100 SMC Corporation (Trucks, construction and
farm machinery)............................ 7,213
69,300 Sugi Pharmacy (Food and staple retailing)... 2,849
1,732,000 Sumitomo Trust & Banking Co. (Finance)...... 12,497
529,000 Toto Ltd. (Building products)............... 5,599
36,600 USS Co., Ltd. (Commercial services)......... 3,167
---------
189,609
---------
Common Stocks--Emerging Asia--7.6%
China--0.4%
4,506,000 Zhejiang Expressway Holding Co.
(Transportation infrastucture)............. 3,213
India--3.0%
119,800 Bharat Forge Ltd. (Machinery)............... 1,599
282,400 *Biocon Ltd. (Biotechnology)................ 3,082
378,500 HDFC Bank (Banking)......................... 3,055
277,300 Housing Development Finance Corp. (Financial
services).................................. 3,120
52,207 Infosys Technologies, Ltd. (Consulting and
software services)......................... 6,330
87,700 ING Vysya Bank, Ltd. (Banking).............. 706
441,600 *Maruti Udyog Ltd. (Automobiles)............ 3,878
230,000 Mphasis BFL, Ltd. (Information technology).. 1,311
---------
23,081
---------
Indonesia--0.8%
18,564,000 *Bank Rakyat Indonesia (Banking)............ 3,307
- ------------------------------------------------------- --------
Shares Value
- ---------- -------------------------------------------- --------
Common Stocks--Emerging Asia--7.6%--(continued)
7,164,000 Unilever Indonesia Tbk (Household and
personal care)............................. $ 3,002
--------
6,309
--------
South Korea--2.2%
115,200 Hyundai Motor Co., Ltd. (Automobiles)....... 4,457
29,700 Samsung Electronics Co. (Semiconductors).... 12,348
--------
16,805
--------
Taiwan--0.9%
5,750,448 EVA Airways Corp. (Airlines)................ 2,416
1,108,000 Hon Hai Precision Industry (Computers)...... 4,146
--------
6,562
--------
Thailand--0.3%
2,938,000 *Tisco Finance (Finance, rental and leasing) 1,957
--------
Common Stocks--Asia--5.9%
Australia--2.5%
290,700 Bendigo Bank Ltd. (Banking)................. 1,918
404,900 Billabong International Ltd. (Apparel and
luxury goods).............................. 2,343
202,400 Macquarie Bank, Ltd. (Financial services)... 4,815
70,000 Perpetual Trustees Australia (Investment
managers).................................. 2,305
481,800 Sigma Company, Ltd. (Medical distributors).. 2,765
679,500 Toll Holdings, Ltd. (Trucking).............. 5,102
--------
19,248
--------
Hong Kong--3.1%
5,038,000 China Insurance International (Insurance)... 2,243
21,778,000 Cnooc Ltd. (Oil and gas).................... 9,232
891,000 Esprit Holdings Ltd. (Apparel, footwear and
retail).................................... 3,999
2,148,250 Global Bio-Chem Technol (Food products)..... 1,200
1,836,500 Li & Fung (Distribution services)........... 2,697
2,432,000 Techtronic Industries Co. (Consumer
durables).................................. 3,893
--------
23,264
--------
Singapore--0.4%
2,522,200 Osim International Ltd. (Consumer sundries). 1,564
2,031,000 Unisteel Technology, Ltd. (Electronic
components)................................ 1,578
--------
3,142
--------
Common Stocks--Latin America--3.8%
Brazil--0.3%
123,400 *Natura Cosmeticos S.A. (Cosmetics)......... 1,984
--------
Chile--1.2%
124,900 *Cencosud S.A.--ADR 144A (Retail stores).... 2,312
205,300 Lan Chile S.A.--ADR (Airlines).............. 3,962
1,316,600 S.A.C.I. Falabella (Department stores)...... 2,591
--------
8,865
--------
Mexico--2.3%
4,616,700 America Movil S.A. (Communications)......... 8,402
648,000 *Consorcio Ara S.A (Homebuilding)........... 1,869
466,000 *Urbi Desarrollos Urbanos S.A. (Household
durables).................................. 1,502
See accompanying Notes to Financial Statements.
6 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Institutional International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- --------------------------------------------------- --------
Shares Value
- ----------- --------------------------------------- --------
- --------------------------------------------------- --------
Common Stocks--Latin America--3.8%--(continued)
1,894,000 Walmart de Mexico (Retail trade)....... $ 5,627
--------
17,400
--------
Common Stocks--Emerging Europe, Mid-East, Africa--3.8%
Egypt--0.7%
207,000 Orascom Contruction Industry
(Construction)........................ 3,073
280,300 *Orascom Telecommunication Holding GDR
(Telecommunications).................. 2,595
--------
5,668
--------
Israel--1.0%
111,000 Teva Pharmaceutical Inds.--ADR
(Pharmaceuticals)..................... 7,469
--------
Poland--0.4%
94,400 Bank Pekao S.A. (Banking).............. 3,170
--------
South Africa--1.3%
126,000 Edgars Consolidated Stores (Apparel,
footwear and retail).................. 3,028
947,700 *MTN Group Ltd. (Telecommunication
services)............................. 4,386
3,647,500 Network Healthcare Holdings (Health
services)............................. 2,635
--------
10,049
--------
Turkey--0.4%
142,958,101 *Enka Insaat (Industrial conglomerates) 2,938
--------
Total Common Stock--96.9%
(cost $641,099)................................... 741,368
--------
- -------------------------------------------- --------
Shares Value
- ---------- --------------------------------- --------
- -------------------------------------------- --------
Preferred Stock
Brazil--1.3%
73,910,000 Banco Itau Holding (Banking)..... $ 6,813
273,520 Geradau S.A. (Steel)............. 3,278
--------
Total Preferred Stock--1.3%
(cost $8,385)............................... 10,091
--------
Investment in Affiliate
2,164,170 William Blair Ready Reserves Fund 2,164
--------
Total Investments in Affiliate--0.3%
(cost $2,164)............................... 2,164
--------
Short-Term Investments
7,099,000 American Express Demand Note, VRN
1.17% due 7/1/04................ 7,099
--------
Total Short-term Investments--0.9%
(cost $7,099)............................... 7,099
--------
Total Investments--99.4%
(cost $658,747)............................. 760,722
Cash and other assets, less liabilities--0.6% 4,245
--------
Net assets--100.0%........................... $764,967
========
- ----------
* Non-income producing securities
ADR = American Depository Receipt
GDR = Global Depository Receipt
All securities excluding those traded on exchanges in this hemisphere, are fair
valued pursuant to Valuation Procedures adopted by the Board of Trustees.
At June 30, 2004 the Fund's Portfolio of Investments includes the following
industry categories:
Financials................ 26.8%
Consumer Discretionary.... 21.5%
Information Technology.... 15.2%
Industrials and Services.. 12.0%
Healthcare................ 8.0%
Consumer Staples.......... 7.8%
Energy.................... 4.5%
Telecommunication Services 2.7%
Materials................. 1.5%
------
100.0%
======
At June 30, 2004 the Fund's Portfolio of Investments includes the following
currency categories:
Japanese Yen.......... 25.2%
British Pound Sterling 20.7%
Euro.................. 18.9%
Canadian Dollar....... 5.9%
Swiss Franc........... 4.3%
Hong Kong Dollar...... 3.5%
Indian Rupee.......... 3.1%
Australian Dollar..... 2.6%
Mexico Nuevo Peso..... 2.3%
South Korean Won...... 2.2%
Swedish Krona......... 2.2%
United States Dollar.. 2.2%
Brazilian Real........ 1.6%
South African Rand.... 1.3%
All other currencies.. 4.0%
------
100.0%
======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 7
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 2004 (all dollar amounts in thousands) (unaudited)
Institutional International Growth Fund
Assets
Investments in securities, at cost.................................. $ 656,583
Investments in Affiliated Fund, at cost............................. 2,164
-----------
Investments in securities, at value................................. $ 758,558
Investments in Affiliated Fund, at value............................ 2,164
Foreign currency, at value (cost $193).............................. 188
Receivable for investment securities sold........................... 13,288
Receivable from Advisor............................................. 54
Dividends and interest receivable................................... 704
-----------
Total assets................................................. 774,956
Liabilities
Payable for investment securities purchased......................... 9,157
Payable for fund shares redeemed.................................... 96
Management fee payable.............................................. 625
Other accrued expenses.............................................. 111
-----------
Total liabilities............................................ 9,989
-----------
Net Assets.................................................. $ 764,967
===========
Capital
Composition of Net Assets:
Par value of shares of beneficial interest........................ $ 55
Capital paid in excess of par value............................... 658,294
Undistributed net investment income (loss)........................ 285
Accumulated net realized loss..................................... 4,368
Net unrealized appreciation of investments and foreign currencies. 101,965
-----------
Net Assets.................................................. $ 764,967
===========
Net Assets........................................................ $ 764,967
Shares Outstanding................................................ 54,589,033
Net Asset Value Per Share......................................... $ 14.01
See accompanying Notes to Financial Statements.
8 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 (all dollar amounts in thousands) (unaudited)
Institutional International Growth Fund
Investment income
Dividends.................................................................................................... $ 6,005
Less foreign tax withheld.................................................................................... (643)
Interest..................................................................................................... 128
-------
Total income............................................................................................... 5,490
Expenses
Investment advisory fees..................................................................................... 3,185
Custodian fees............................................................................................... 375
Professional fees............................................................................................ 27
Transfer agent fees.......................................................................................... 21
Registration fees............................................................................................ 22
Other expenses............................................................................................... 51
-------
Total expenses before waiver............................................................................... 3,681
Less expenses waived and absorbed by the Advisor........................................................... (103)
-------
Net expenses............................................................................................... 3,578
-------
Net investment income...................................................................................... 1,912
Net realized and unrealized loss on investments, foreign currency transactions and other assets and liabilities
Net realized gain on investments........................................................................... 9,799
Net realized loss on foreign currency transactions and other assets and liabilities........................ (3,119)
-------
Total net realized gain.................................................................................... 6,680
Change in net unrealized appreciation on investments and other assets and liabilities.......................... 6,320
-------
Net increase in net assets resulting from operations........................................................... $14,912
=======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 9
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 and the Year Ended December 31, 2003 (all
amounts in thousands) (unaudited)
Institutional International Growth Fund
6/30/2004
- - ---------
Operations
Net investment income (loss)................................................................................. $ 1,912
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities...... 6,680
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other
assets and liabilities...................................................................................... 6,320
--------
Net increase (decrease) in net assets resulting from operations.............................................. 14,912
Distributions to shareholders from
Net investment income........................................................................................ --
Net realized gain............................................................................................ --
--------
--
Capital stock transactions
Net proceeds from sale of shares............................................................................. 291,710
Shares issued in reinvestment of income dividends and capital gain distributions............................. --
Less cost of shares redeemed................................................................................. (19,166)
--------
Net increase (decrease) in net assets resulting from capital stock transactions.............................. 272,544
--------
Increase (decrease) in net assets............................................................................ 287,456
Net assets
Beginning of the period...................................................................................... 477,511
--------
End of the period............................................................................................ $764,967
========
Undistributed net investment income (loss) at the end of the period............................................ $ 285
========
Capital stock transactions
Shares sold.................................................................................................. 20,855
Shares issued in reinvestment of income dividends and capital gain distributions............................. --
Less shares redeemed......................................................................................... (1,365)
--------
Change from capital stock transactions......................................................................... 19,490
========
2003
- - --------
Operations
Net investment income (loss)................................................................................. $ 861
Net realized gain (loss) on investments, foreign currency transactions and other assets and liabilities...... 1,169
Change in net unrealized appreciation (depreciation) on investments, foreign currency transactions and other
assets and liabilities...................................................................................... 94,217
--------
Net increase (decrease) in net assets resulting from operations.............................................. 96,247
Distributions to shareholders from
Net investment income........................................................................................ (1,120)
Net realized gain............................................................................................ --
--------
(1,120)
Capital stock transactions
Net proceeds from sale of shares............................................................................. 247,919
Shares issued in reinvestment of income dividends and capital gain distributions............................. 1,069
Less cost of shares redeemed................................................................................. (16,452)
--------
Net increase (decrease) in net assets resulting from capital stock transactions.............................. 232,536
--------
Increase (decrease) in net assets............................................................................ 327,663
Net assets
Beginning of the period...................................................................................... 149,848
--------
End of the period............................................................................................ $477,511
========
Undistributed net investment income (loss) at the end of the period............................................ $ (1,627)
========
Capital stock transactions
Shares sold.................................................................................................. 20,772
Shares issued in reinvestment of income dividends and capital gain distributions............................. 82
Less shares redeemed......................................................................................... (1,412)
--------
Change from capital stock transactions......................................................................... 19,442
========
See accompanying Notes to Financial Statements.
10 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
(a) Description of the Fund
William Blair Funds (the "Fund") is a diversified mutual fund registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. The number of shares authorized for this Fund is unlimited.
The Fund currently consists of the following twelve portfolios (the
"Portfolios"), each with its own investment objectives and policies.
Equity Portfolios International Portfolios
- ----------------- ------------------------
Growth International Growth
Tax-Managed Growth International Equity
Large Cap Growth Institutional International Growth
Small Cap Growth Institutional International Equity
Small-Mid Cap Growth Fixed Income Portfolio
----------------------
Value Discovery Income
Money Market Portfolio
----------------------
Ready Reserves
The investment objectives of the Portfolios are as follows:
Equity....... Long-term capital appreciation.
International Long-term capital appreciation.
Fixed Income. High level of current income with
relative stability of principal.
Money Market. Current income, a stable share price and daily
liquidity.
The Institutional International Growth Fund (the "Portfolio") is the only
Portfolio covered in this report. The Institutional International Equity Fund
has not commenced operations as of the date of this report.
(b) Investment Valuation
The market value of domestic equity securities and options is determined by
valuing securities traded on national securities exchanges or markets or in the
over-the-counter markets at the last sales price or, if applicable, the
official closing price or, in the absence of a sale on the date of valuation,
at the latest bid price.
From January 1, 2003 until November 24, 2003, the value of foreign securities
was determined based upon the last sale price on the foreign exchange or market
on which it is primarily traded or, if there had been no sale on the date of
valuation, at the latest bid price. The Board of Trustees approved amendments
to the Fund's valuation procedures in October 2003 relating to the manner in
which the Funds' foreign securities are valued. This change was implemented
November 24, 2003. To reflect this change, if the foreign exchange or market on
which a security is primarily traded closes before the close of regular trading
on the New York Stock Exchange (4:00 p.m. Eastern time), the Funds use an
independent pricing service on a daily basis to estimate the fair value price
as of the close of regular trading on the New York Stock Exchange. Otherwise,
the value of foreign equity securities is determined based on the last sale
price on the foreign exchange or market on which it is primarily traded or, if
there have been no sales during that day, at the latest bid price. Foreign
currency forward contracts and foreign currencies are valued at the forward and
current exchange rates, respectively, prevailing on the date of valuation.
Investments in other funds are valued at the underlying fund's net asset value
on the date of valuation. Other securities, and all other assets, including
securities for which a market price is not available, or the value of which is
affected by a significant valuation event, are valued at fair value as
determined in good faith by, or under the direction of the Board of Trustees
and in accordance with the Fund's valuation procedures. As of June 30, 2004,
there were securities held in the Institutional International Growth Portfolio
requiring fair valuation by the Board of Trustees pursuant to the Fund's
valuation procedures.
June 30, 2004 William Blair Funds 11
(c) Investment income and investment transactions
Dividend income is recorded on the ex-dividend date, except for those dividends
from certain foreign securities which are recorded as soon as the information
is available.
Premiums and discounts are accreted and amortized on a straight-line basis for
short-term investments and on an effective interest method for long-term
investments.
Interest income is determined on the basis of the interest accrued, adjusted
for amortization of premium or discount. Variable rate bonds and floating rate
notes earn interest at coupon rates that fluctuate at specific time intervals.
The Portfolio utilizes the straight-line method of amortization of premiums and
discounts for short-term securities (maturities less than one year) and the
effective interest method for long-term securities (maturities greater than one
year).
Securities transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on an identified cost basis.
(d) Share Valuation and Dividends to Shareholders
Shares are sold and redeemed on a continuous basis at net asset value. The net
asset value per share is determined by dividing the Portfolio's net assets by
the number of shares outstanding as of the close of regular trading on the New
York Stock Exchange, which is generally 3:00 p.m. Central time (4:00 p.m.
Eastern time), on each day the Exchange is open.
Dividends from net investment income, if any, are declared at least annually.
Capital gain distributions, if any, are declared at least annually in December.
Dividends payable to shareholders are recorded on the ex-dividend date.
The timing and characterization of certain income and capital gain
distributions are determined annually in accordance with Federal income tax
regulations that may differ from accounting principles generally accepted in
the United States. As a result, net investment income or loss and net realized
gain or loss for a reporting period may differ from the amount distributed
during such period. In addition, the Portfolio may periodically record
reclassifications among certain capital accounts to reflect differences between
financial reporting and income tax basis distributions. The reclassifications
were reported in order to reflect the tax treatment for certain permanent
differences that exist between income tax regulations and accounting principles
generally accepted in the United States. The reclassifications relate to
section 988 currency gains and losses, and recharterization of unrealized
appreciation on PFICs. (Passive Foreign Investment Corporations). These
reclassifications have no impact on the net asset values of the Portfolio.
Accordingly, at December 31, 2003, the following reclassifications were
recorded (in thousands):
Accumulated
Undistributed Capital
Undistributed Net Net Realized Paid In Excess
Portfolio Investment Income/(Loss) Gain/ (Loss) of Par Value
--------- ------------------------ ------------ ------------
Institutional
International
Growth............ $(1,263) $1,263 $--
Distributions from net realized gains for book purposes may include short-term
capital gains, which are included as ordinary income for tax purposes. The tax
character of distributions paid during 2003 and 2002 was as follows (in
thousands):
Distributions Paid In 2003 Distributions Paid In 2002
- -------------------------- --------------------------
Ordinary Long-Term Ordinary Long-Term
Portfolio Income Capital Gains Income Capital Gains
--------- ------ ------------- ------ -------------
Institutional
International
Growth............ $1,120 $-- $32 $--
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows (in thousands):
Net
Undistributed Accumulated Undistributed Unrealized
Ordinary Capital and Long-Term Appreciation /
Portfolio Income Other Losses Gain (Depreciation)
- --------- ------ ------------ ---- --------------
Institutional International
Growth..................... $605 $2,901 $-- $94,002
(e) Foreign Currency Translation and Foreign Currency Forward Contracts
The Institutional International Growth Portfolio may invest in securities
denominated in foreign currencies. As such, assets and liabilities denominated
in foreign currencies are translated into U.S. dollar amounts at the current
exchange rate on the
12 Semi-Annual Report June 30, 2004
date of valuation. This Portfolio may enter into foreign currency forward
contracts (1) as a means of managing the risks associated with changes in the
exchange rates for the purchase or sale of a specific amount of a particular
foreign currency, and (2) to hedge the value, in U.S. dollars, of portfolio
securities. Gains and losses from foreign currency transactions associated with
purchases and sales of investments and foreign currency forward contracts are
included with the net realized and unrealized gain or loss on investments.
(f) Income Taxes
The Portfolio intends to comply with the special provisions of the Internal
Revenue Code available to regulated investment companies and, therefore, no
provision for Federal income taxes has been made in the accompanying financial
statements since the Portfolio intends to distribute substantially all of its
taxable income to its shareholders and be relieved of all Federal income taxes.
The Institutional International Growth Portfolio has elected to mark-to-market
its investments in Passive Foreign Investment Companies ("PFICs") for Federal
income tax purposes. In accordance with this election, the Portfolio recognized
net unrealized appreciation (depreciation) of $1,229 (in thousands) in 2003 and
$209 in 2002, all of which has been treated as an adjustment to the cost of
investments for tax purposes. The Portfolio also treats the deferred loss
associated with current and prior year wash sales as an adjustment to the cost
of investments for tax purposes. The cost of investments for Federal income tax
purposes and related gross unrealized appreciation/(depreciation) and net
unrealized appreciation/(depreciation) at June 30, 2004, were as follows (in
thousands):
Net
Gross Gross Unrealized
Cost of Unrealized Unrealized Appreciation /
Portfolio Investments Appreciation Depreciation (Depreciation)
--------- ----------- ------------ ------------ --------------
Institutional
International
Growth............ $659,660 $115,520 $14,458 $101,062
At December 31, 2003, the Portfolio had unused capital loss carryforwards
available for Federal income tax purposes to be applied against future capital
gains, if any. If not applied, the carryforwards will expire as follows (in
thousands):
Portfolio 2010 2011 Total
--------- ---- ---- -----
Institutional International Growth $2,107 $-- $2,107
For the period November 1, 2003 through December 31, 2003, the Portfolio
incurred net realized capital or foreign currency losses. The Portfolio intends
to treat this loss as having occurred in fiscal year 2004 for Federal income
tax purposes (in thousands):
Capital Currency
Portfolio Loss Loss
--------- ---- ----
Institutional International Growth $-- $794
(g) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from those estimates.
(2) Transactions with Affiliates
(a) Management and Expense Limitation Agreements
The Portfolio has a management agreement with William Blair & Company L.L.C.
(the "Company") for investment advisory, administrative, and other accounting
services. The Portfolio pays the Company an annual fee, payable monthly, based
on a specified percentage of its average daily net assets. A summary of the
annual rates expressed as a percentage of average daily net assets is as
follows:
Institutional International Growth
First $500 million............... 1.00%
Next $500 million................ 0.95%
In excess of $1 billion.......... 0.90%
June 30, 2004 William Blair Funds 13
The Portfolio has also entered into an Expense Limitation Agreement with the
Company. Under terms of this Agreement, the Company has agreed to waive its
advisory fees and absorb other operating expenses through April 30, 2005, if
total expenses of the Portfolio exceeds 1.10% of average daily net assets.
For a period of three years subsequent to the Commencement of Operations of the
Fund, the Company is entitled to reimbursement from the Institutional
International Growth Portfolio for previously waived fees and expenses to the
extent the overall expense ratio remains below the percentages indicated. The
total amount available for recapture at June 30, 2004 is $327 (in thousands).
As a result, the total expense ratio for the Portfolio during the period the
agreement is in effect, will not fall below the percentage indicated.
For the period ended June 30, 2004, the investment advisory fees incurred by
the Portfolio and related fee waivers were as follows (in thousands) :
Expenses
Recovered or
Gross Fee Net (Absorbed)
Portfolio Advisory Fee Waiver Advisory Fee by Advisor
- --------- ------------ ------ ------------ ----------
Institutional International Growth $3,185 $103 $3,082 $--
(b) Trustees Fees
The Portfolio incurred fees of $15 (in thousands) to non-interested trustees of
the Fund for the period ended June 30, 2004. Interested trustees are not
compensated.
(c) Investments in Affiliated Portfolio
Pursuant to an Exemptive Order granted by the Securities and Exchange
Commission in January, 2001, each of the Portfolios of the Fund may invest in
the William Blair Ready Reserves Portfolio ("Ready Reserves"), an open-end
money market portfolio managed by the Advisor. Ready Reserves Portfolio is used
as a cash management option to the other Portfolios in the Fund. The Advisor
waives management fees and shareholder service fees earned from the other
Portfolios investment in the Ready Reserves Fund. The fees waived with respect
to the Portfolio for the period ended June 30, 2004 are listed below.
Distributions received from Ready Reserves are reflected as dividend income in
the Portfolio's statement of operations. Amounts relating to the Portfolio's
investments in Ready Reserves were as follows for the period ended June 30,
2004 (in thousands):
Percent
Sales Fees Dividend of Net
Portfolio Purchases Proceeds Waived Income Value Assets
--------- --------- -------- ------ ------ ----- ------
Institutional
International
Growth............ $79,731 $97,620 $37 $31 $2,164 0.3%
(3) Investment Transactions
Investment transactions, excluding money market instruments, for the period
ended June 30, 2004 were as follows (in thousands):
Portfolio Purchases Sales
--------- --------- -----
Institutional
International
Growth............ $544,016 $251,261
(4) Foreign Currency Forward Contracts
To protect itself against a decline in the value of foreign currency against
the U.S. dollar, the Institutional International Growth Portfolio enters into
foreign currency forward contracts with its custodian and others. The Portfolio
bears the market risk that arises from changes in foreign currency rates and
bears the credit risk if the counterparty fails to perform under the contract.
The net realized and unrealized gains and losses associated with foreign
currency forward contracts are reflected in the accompanying financial
statements. There were no open foreign currency forward contracts at June 30,
2004.
14 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Institutional International Growth Fund
Periods Ended
----------------------------------
6/30/2004 12/31/2003 12/31/2002 (a)
--------- ---------- --------------
Net asset value, beginning of period.............................. $13.60 $ 9.567 $10.000
Income from investment operations:
Net investment income........................................... 0.04 0.073 --
Net realized and unrealized loss on investments................. 0.37 3.993 (0.430)
------ ------- -------
Total from investment operations.................................. 0.41 4.066 (0.430)
Less distributions from:
Net investment income........................................... -- 0.033 0.003
Net realized gain............................................... -- -- --
------ ------- -------
Total distributions............................................... -- 0.033 0.003
------ ------- -------
Net asset value, end of period.................................... $14.01 $13.600 $ 9.567
====== ======= =======
Total return (%).................................................. 3.01 42.47 (4.27)
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.10 1.10 1.10
Expenses, before waivers and reimbursements..................... 1.13 1.16 1.29
Net investment income (loss), net of waivers and reimbursements. 0.58 0.37 (0.05)
Net investment income (loss), before waivers and reimbursements. 0.55 0.31 (0.24)
-------------------------------------------------------
Periods Ended
--------- -----------------------------------
6/30/2004 12/31/2003 12/31/2002 (a)
--------- - - - - ---------- - --------------
Supplemental data:
Net assets at end of period (in thousands). $764,967 $477,511 $149,848
Portfolio turnover rate (%) (b)............ 82 56 59
- ----------
(a)For the period from July 26, 2002 (Commencement of Operations) to December
31, 2002.
(b)Rates are annualized for periods that are less than a year.
Past performance does not guarantee future results and current performance may
be lower or higher that the data quoted. Results shown are annual returns,
which assume reinvestment of dividends and capital gains. Investment returns
and principal will fluctuate and you may have a gain or loss when you sell
shares. For the most current month-end performance information, please call
1-800-742-7272, or visit our Web site at www.williamblairfunds. com.
Note: Net investment income (loss) per share for 2004, 2003, and 2002 is based
on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 15
Trustees and Officers. The trustees and officers of the William Blair Funds,
their ages, their principal occupations during the last five years, their
affiliations, if any, with William Blair & Company, L.L.C., and other
significant affiliations are set forth below. The address of each trustee and
officer is 222 West Adams Street, Chicago, Illinois 60606.
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------- ---------- ---------------------------------------
Interested Trustees
Conrad Fischer, 70* Chairman Since 1987 Principal, William Blair 12 Trustee Emeritus, Chicago Child Care
of the & Company, L.L.C.; Society, a non-profit organization, and
Board of Partner, APM Limited Partner, APM Limited Partnership
Trustees Partnership
Michelle Seitz, 38* Trustee Since 2002 Principal, William Blair 12 N/A
& Company, L.L.C.
Non-Interested Trustees
J. Grant Beadle, 71 Trustee Since 1997 Retired Chairman and 12 Batts Group and Oliver Products
Chief Executive Officer, Company, manufacturer of products
Union Special for the medical device, food and
Corporation, industrial graphics markets, Retired Associate
sewing machine Director, Northwestern University
manufacturer Institute for The Learning Sciences.
Theodore A. Bosler, 69 Trustee Since 1997 Retired Principal and 12 Crystal Lake Watershed Fund, Desert
Vice President, Lincoln Foothills Land Trust and Institute of
Capital Management Chartered Financial Analysts.
Ann P. McDermott, 64 Trustee Since 1996 Board member and 12 Junior League of Chicago,
officer for various civic Northwestern University, Women's
and charitable Board; Ravinia Festival Women's
organizations over the Board; Rush Presbyterian St. Luke's
past thirty years; Medical Center, Women's Board;
professional experience University of Chicago, Women's
prior thereto, registered Board; Visiting Nurses Association,
representative for New Honorary Director
York Stock Exchange
firm
John B. Schwemm, 69 Trustee Since 1990 Retired Chairman and 12 USG Corp., building material
Chief Executive Officer, manufacturer, and Walgreen Co.
R.R. Donnelley & Sons
Company
Donald L. Seeley, 60 Trustee Since 2003 Director, Applied 12 Beverly Enterprises, Inc., provider of
Investment Management eldercare and rehabilitative services;
Program, University of Modem Media, Inc., interactive
Arizona Department of services company
Finance, Formerly Vice
Chairman and Chief
Financial Officer, True
North Communications,
Inc., marketing
communications and
advertising firm
Robert E. Wood II, 65 Trustee Since 1999 Retired Executive 12 Chairman, Add-Vision, Inc.,
Vice President, Morgan manufacturer of surface animation
Stanley Dean Witter systems, and Micro-Combustion, LLC
16 Semi-Annual Report June 30, 2004
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -------------------------------
Officers
Marco Hanig, 46 President Since 1999 Principal, William Blair N/A N/A
& Company, L.L.C.;
former Senior Vice
President, First Chicago
NBD
Michael P. Balkin, 44 Senior Since 2000 Principal, William Blair N/A Exceed Corp.
Vice & Company, L.L.C.
President
Rocky Barber, 52 Senior Since 2001 Principal, William Blair N/A YMCA of Metropolitan Chicago
Vice & Company, L.L.C.
President
Chief 1999-2001
Executive
Officer
Karl W. Brewer, 37 Senior Since 2000 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Harvey H. Bundy, III, 59 Senior Since 2003 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Mark A. Fuller, III, 47 Senior Since 1993 Principal, William Blair N/A Partner, Fulsen Howney Partners
Vice & Company, L.L.C.
President
W. George Greig, 51 Senior Since 1996 Principal, William Blair N/A N/A
Vice & Company, L.L.C.;
President
Michael A. Jancosek, 44 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company L.L.C.
President Since 2000
Associate, William Blair
Vice & Company, L.L.C.;
President former Vice President,
First Chicago NBD
John F. Jostrand, 50 Senior Since 1999 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
James S. Kaplan, 43 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Vice Since 1995 Associate, William Blair N/A N/A
President & Company, L.L.C.
Robert C. Lanphier, IV, 47 Senior Since 2003 Principal, William Blair N/A Chairman, AG. Med, Inc.
Vice & Company, L.L.C.
President
June 30, 2004 William Blair Funds 17
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -----------------------
David S. Mitchell, 44 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President Since 2003
Associate, William Blair
Vice & Company, L.L.C.
President
Capucine E. Price, 39 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company L.L.C.
President Since 2003
Associate, William Blair
Vice & Company, L.L.C.
President
Gregory J. Pusinelli, 45 Senior Since 1999 Principal, William Blair N/A N/A
Vice & Company, L.L.C.;
President
Norbert W. Truderung, 51 Senior Since 1992 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Jeffrey A. Urbina, 49 Senior Since 1998 Principal, William Blair N/A N/A
Vice & Company, L.L.C.;
President former Director of
Emerging Market
Research and Portfolio
Manager, Van Kampen
American Capital
Christopher T. Vincent, 49 Senior Since 2004 Principal, William Blair N/A Uhlich Children's Home
Vice & Company, L.L.C.
President Since 2002
Associate, William Blair
Vice & Company, L.L.C.;
President former Managing
Director/Senior
Portfolio Manager,
Zurich Scudder
Investments
Terence M. Sullivan, 60 Vice Since 1997 Associate, William Blair N/A N/A
President & Company, L.L.C.
and
Treasurer
Colette M. Garavalia, 43 Secretary Since 2000 Associate, William Blair N/A N/A
& Company, L.L.C.;
former Assistant Vice
President, Scudder
Kemper Investments
- ----------
* Mr. Fischer and Ms. Seitz are interested persons of the William Blair Funds
because each is a principal of William Blair & Company, L.L.C., the Funds'
investment advisor and principal underwriter.
The Statement of Additional Information for the William Blair Funds includes
additional information about the trustees and is available without charge by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840) or by writing the Fund.
18 Semi-Annual Report June 30, 2004
Proxy Voting
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities and information regarding
how the Fund voted proxies relating to portfolio securities for the most recent
12-month period ended June 30 are available without charge, upon request, by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840), at
www.williamblairfunds.com and on the SEC's website at http://www.sec.gov.
Quarterly Portfolio Schedules
The Fund will file its complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters of each fiscal year (quarters ended March
31 and September 30) on Form N-Q. The Fund's Forms N-Q will be available on the
SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330.
June 30, 2004 William Blair Funds 19
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
Conrad Fischer, Chairman
Principal, William Blair & Company, L.L.C.
J. Grant Beadle
Retired Chairman and CEO, Union Special Corporation
Theodore A. Bosler
Retired Principal and Vice President, Lincoln Capital Management Company
Ann P. McDermott
Director and Trustee
Profit and not-for-profit organizations
Donald L. Seeley
Adjunct Lecturer and Director, University of Arizona Department of Finance
John B. Schwemm
Retired Chairman and CEO, R.R. Donnelley & Sons Company
Michelle Seitz
Principal, William Blair & Company, L.L.C.
Robert E. Wood II
Retired Executive Vice President, Morgan Stanley Dean Witter
- --------------------------------------------------------------------------------
Officers
- --------------------------------------------------------------------------------
Marco Hanig, President
Michael P. Balkin, Senior Vice President
Rocky Barber, Senior Vice President
Karl W. Brewer, Senior Vice President
Harvey H. Bundy III, Senior Vice President
Mark A. Fuller, III, Senior Vice President
W. George Greig, Senior Vice President
Michael A. Jancosek, Senior Vice President
John F. Jostrand, Senior Vice President
James S. Kaplan, Senior Vice President
Robert C. Lanphier, IV, Senior Vice President
David S. Mitchell, Senior Vice President
Capucine E. Price, Senior Vice President
Gregory J. Pusinelli, Senior Vice President
Norbert W. Truderung, Senior Vice President
Jeffrey A. Urbina, Senior Vice President
Christopher T. Vincent, Senior Vice President
Terence M. Sullivan, Vice President and Treasurer
Colette M. Garavalia, Secretary
Investment Advisor
William Blair & Company, L.L.C.
Legal Counsel
Vedder, Price, Kaufman & Kammholz, P.C.
Transfer Agent
State Street Bank and Trust Company
P.O. Box 8506
Boston, MA 02266-8506
For customer assistance, call 1-800-635-2886
(Massachusetts 1-800-635-2840)
20 Date of First Use August, 2004
[Logo Appears Here]
WILLIAM BLAIR FUNDS
Institutional International Growth Fund
222 West Adams Street . Chicago, Illinois 60606 . 800.742.7272 . www.williamblairfunds.com
William Blair & Company, L.L.C., Distributors
[LOGO APPEARS HERE] WILLIAM BLAIR FUNDS
SEMI-ANNUAL REPORT
CLASS A, CLASS B, CLASS C
- --------------------------------------------------------------------------------
JUNE 30, 2004
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
A Letter from the President............. 2
Growth Fund
An Overview from the Portfolio Manager.. 4
Portfolio of Investments................ 7
Tax-Managed Growth Fund
An Overview from the Portfolio Managers. 8
Portfolio of Investments................ 12
Large Cap Growth Fund
An Overview from the Portfolio Managers. 13
Portfolio of Investments................ 16
Small Cap Growth Fund
An Overview from the Portfolio Managers. 17
Portfolio of Investments................ 20
Small-Mid Cap Growth Fund
An Overview from the Portfolio Managers. 21
Portfolio of Investments................ 24
International Growth Fund
An Overview from the Portfolio Manager.. 25
Portfolio of Investments................ 28
International Equity Fund
An Overview from the Portfolio Manager.. 31
Portfolio of Investments................ 32
Value Discovery Fund
An Overview from the Portfolio Managers. 34
Portfolio of Investments................ 37
Income Fund
An Overview from the Portfolio Managers. 39
Portfolio of Investments................ 42
Financial Statements...................... 45
Notes to Financial Statements............. 51
Officers.................................. 76
Board of Trustees......................... 80
This report is submitted for the general information of the shareholders of the
William Blair Funds. It is not authorized for distribution to prospective
investors unless accompanied or preceded by a prospectus of the William Blair
Funds. Please read the prospectus carefully before you invest or send money.
June 30, 2004 William Blair Funds 1
[PHOTO]
Marco Hanig
Marco Hanig
- --------------------------------------------------------------------------------
A LETTER FROM THE PRESIDENT
- --------------------------------------------------------------------------------
Dear Shareholders:
In the first half of this year, the stock market advanced modestly. The
Standard & Poor's 500 Index of large cap stocks was up 3.44%, the Russell 2000
Index of small cap stocks increased 6.76%, and the MSCI World ex-US Index of
foreign stocks gained 4.10%.
Last year's tax cut and low interest rates were supposed to provide a powerful
stimulus to the economy--which indeed responded with strong growth in GDP and
corporate earnings. As a result, the market bounced back from its March low
point and ended last year 25-45% higher.
This year two opposing forces are at work. On the one hand, the economy is
fundamentally healthy with continued GDP and corporate earnings growth, albeit
at a more normal pace. On the other hand, the Fed raised interest rates to slow
down growth, as it wants to prevent the economy from overheating and make sure
that inflation remains in check--particularly in light of the recent rise in
energy prices. So far, it appears that the Fed is "tapping on the breaks" in
just the right measure, succeeding in slowing down the growth without choking
it off. The result is a stock market that has been rising at a moderate,
sustainable pace.
The market dislikes uncertainty, and there are several areas of concern, such
as the outcome of the upcoming election, the impact of rising interest rates,
the possibility of another major terrorist act, and anxiety over the future
direction of our Middle East policy. Hence, most observers expect the market to
continue to move mostly sideways in the next few quarters. Should some of this
uncertainty be resolved, the underlying strength of the economy would suggest
that we might expect single-digit, or even low teen returns over the coming
years.
Looking across different asset classes, in the first half of the year small cap
stocks did slightly better than large caps, and value stocks a bit better than
growth stocks, but these differences were not very pronounced. This reinforces
the picture of a market essentially in equilibrium, without strong currents
favoring any one sector or capitalization range. Our belief is that this should
favor our bottom-up fundamental research approach that focuses on individual
stock selection.
Total Returns by Fund Category*
January 1 through June 30, 2004
Value Blend Growth
----- ----- ------
Large Cap......................................... 3.46% 2.78% 2.42%
Mid Cap........................................... 6.21% 5.50% 4.57%
Small Cap......................................... 7.86% 7.11% 4.09%
So far this year, the relative returns for most of the William Blair Funds were
somewhat disappointing, with all but two funds underperforming their respective
benchmarks--albeit by fairly modest amounts. The two notable exceptions were
the Small Cap Growth Fund (Class N Shares), which posted an 11.54% return vs.
5.68% for the Russell 2000(R) Growth benchmark, and the recently launched
Small-Mid Cap Growth Fund (Class N Shares), which had a 7.04% return vs. 5.65%
for the Russell 2500(TM) Growth index. The reasons for the over- or
under-performance vary from fund to fund, and are discussed in detail in the
portfolio manager letters included in this report. While we want to be candid
when our results do not shine, we frankly do not attach much significance to
relative performance (either good or bad) over such a short time period.
As always, we thank you for investing with us!
/s/ Marco Hanig
Marco Hanig
- ----------
* Morningstar category returns represent the (non-weighted) average annual
composite performance of all mutual funds listed in a particular category
(such as Large Cap Growth) by Morningstar.
2 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
PERFORMANCE AS OF JUNE 30, 2004--CLASS A SHARES
- --------------------------------------------------------------------------------
Year to Since Inception
Date 1 Yr 3 Yr Inception Date
------- ----- ----- --------- ---------
Growth Fund -5.85 6.55 -5.88 -3.34 10/19/99
Russell 3000(R) Growth 2.96 18.82 -3.48 -5.45
Standard & Poor's 500 3.44 19.11 -0.69 -0.65
Tax-Managed Growth Fund
Return before Taxes -4.74 7.84 -4.48 -4.82 12/27/99
After Taxes on Distributions -4.74 7.84 -4.48 -4.82
After Tax on Distributions and Redemptions -5.09 3.08 -4.09 -4.26
Russell 3000(R) Growth 2.96 18.82 -3.48 -10.38
Large Cap Growth Fund -6.55 5.79 -7.94 -12.29 12/27/99
Russell 1000(R) Growth 2.74 17.88 -3.74 -10.83
Small Cap Growth Fund 5.05 35.90 14.00 21.57 12/27/99
Russell 2000(R) Growth 5.68 31.55 -0.22 -4.53
The Small Cap Growth Fund's performance during 2000 was primarily attributable to investments in initial public offerings (IPOs)
during a rising market. Since then, IPOs have had an insignificant effect on the Fund's performance.
Small-Mid Cap Growth Fund 0.79 -- -- -5.60 12/29/03
Russell 2500(TM) Growth 5.65 -- -- 5.00
International Growth Fund -2.92 24.22 3.32 5.62 10/21/99
MSCI All Country World Free Ex-US 4.10 32.50 5.25 0.24
International Equity Fund -0.57 -- -- -0.57 5/24/04
MSCI All Country World Free Ex-US 5.18 5.18
Value Discovery Fund -0.82 24.09 7.54 14.53 11/2/99
Russell 2000(R) 6.76 33.37 6.24 8.34
Russell 2000(R) Value 7.83 35.17 12.15 16.11
Income Fund -2.49 -1.89 4.10 5.69 10/25/99
Lehman Intermediate Govt./Credit Bond Index -0.11 -0.06 6.21 7.14
Past performance does not guarantee future results. Returns shown are
average annual total returns, which assume reinvestment of dividends and
capital gains. Returns shown reflect the effects of maximum sales loads.
Investment returns and principal will fluctuate and you may have a gain or a
loss when you sell shares. Investing in smaller companies involves special
risks, including higher volatility and lower liquidity. International and
emerging markets investing involves special risk considerations, including
currency fluctuations, lower liquidity, economic and political risk. From time
to time, the investment advisor may waive fees or reimburse expenses for
certain Funds. Without these waivers, performance would be lower. Class A
shares are not available for sale.
Tax-Managed Growth Fund's after-tax returns are calculated using the highest
historical individual federal marginal income tax rates, and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on the
investor's tax situation and may differ from those shown. After-tax returns
shown are not relevant to investors who hold their fund shares through
tax-deferred arrangements such as 401(k) plans or individual retirement
accounts. After-tax returns are shown only for Class A and the after-tax
returns for other classes will vary.
For more complete information about the Funds, including risk
considerations, charges, and expenses, call 1-800-742-7272 to obtain a
prospectus. Read it carefully before you invest or send money. (C)William Blair
& Company, L.L.C., distributor. 6/04
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 3
[PHOTO]
JOSTRAND
John F. Jostrand
- --------------------------------------------------------------------------------
GROWTH FUND
- --------------------------------------------------------------------------------
The Growth Fund invests primarily in a diversified portfolio of common stocks
of domestic growth companies with sustainable, above-average growth from one
business cycle to the next.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Growth Fund posted a -5.85% loss on a total return basis (Class A Shares
reflecting the impact of the maximum sales load) for the 6 months ended June
30, 2004. By comparison, the Fund's benchmarks, the Russell 3000(R) Growth
Index increased 2.96%, while the Standard & Poor's 500 Index increased 3.44%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The first six months of the year the market continued some of the trend seen in
late 2003, when companies with lower earnings quality outperformed. With
regards to the Fund's first half of the year, one major element of the Growth
Fund's underperformance to the Russell 3000(R) Growth Index came in the
technology sector. As is frequently true, the technology sector proved a
challenging place to invest, with various sub-categories turning in widely
disparate returns. Internet services stocks continued to enjoy strong
appreciation, while computer hardware companies were up modestly and
semiconductors were in negative territory.
As we mentioned before, low quality, low price stocks ruled the performance
derby in 2003. Most of these stocks outperformed based on expectations that
these companies would stand to benefit the most from an economic recovery.
Consistent with our philosophy, these low quality growth stocks, however, do
not meet our Fund's investment criteria. Late in the first quarter, with the
tempo of the economy slowing, higher quality stocks did begin to show signs of
strength. Companies with interest rate sensitivity, particularly financial and
consumer discretionary stocks were also laggards as concerns loomed with the
Federal Reserve set to raise interest rates. Although the Fund underperformed
early in the first quarter as the winners of 2003 had one last run, the Fund
outperformed when the market weakened. By the end of the first quarter, the
Fund worked back to almost even with its benchmark.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Health Care sector was the largest contributor to our performance. Within
the sector, Alcon and Zimmer Holdings continue to be strong outperformers with
first half returns of 30% and 25% respectively. Alcon, the global medical
company that specializes in eye care related products, continues to execute
their business strategy. Their most recent quarter saw earning's gains of 35%
spread throughout each of their divisions. We are confident that Alcon will
continue to gain market share and increase sales per account with new products
continuing to come to market. Zimmer's orthopedic sales remain robust. We
expect strong double-digit earnings growth through 2006. Pricing remains
favorable, and the demographic backdrop (aging baby-boomers) should extend
revenue growth.
4 Semi-Annual Report June 30, 2004
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
The consumer discretionary sector weighed on the Fund's first six months'
performance. CarMax, a leading retailer of used cars and trucks had a difficult
first half of the year. Consumers have been substituting new cars in place of
used because of automobile manufacturers increasing usage of incentives.
Although the industry has been under stress, CarMax continues to take market
share.
Switching from autos to airplanes, another holding that underperformed in the
first half was Ryanair based out of Ireland. From a profitability standpoint
they remain the leader, but a combination of unfavorable government regulations
and stepped up competition has impacted their margins.
What is your current strategy? How is the Fund positioned?
The next boost to the economy is more likely to come from corporate spending,
as many companies now maintain record levels of cash. We expect as consumer
spending slows, the corporate sector will take the baton and increase capital
expenditures. As business executives' optimism increases, they will begin to
increase their profit reinvestment or raise their dividends to shareholders. To
facilitate the reinvestment, businesses will have to increase hiring, which
should modestly revitalize consumer spending.
Our recent increase in Danaher this quarter illustrates our positioning given
our outlook of higher interest rates and increased capital spending. Danaher's
diversified industrial customer base has much stronger balance sheets than
year's past. To maintain its growth, Danaher's customers will need to reinvest
in its businesses.
Earnings strength remained positive into the end of the first half. However, we
are now entering the point of the earnings cycle where relatively easy
comparisons are over and companies' earnings acceleration slows. In our
opinion, earnings will remain solid; however, they will likely slow to
approximate historical trend line growth. As this transition occurs, quality
growth tends to outperform the leveraged, lower-quality companies as higher
interest rates make financing more challenging.
June 30, 2004 William Blair Funds 5
- --------------------------------------------------------------------------------
Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
-----------------------------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999
------------ ------ --------- ------ ------ -----
Growth Fund Class A......... (0.10)% 23.85% (25.94)% (13.46)% (7.47)% 23.29%(a)(b)
Russell 3000(R) Growth Index 2.96 30.97 (28.03) (19.63) (22.42) 33.82
S&P 500 Index............... 3.44 28.68 (22.10) (11.88) (9.11) 21.04
--------------------------------------------------------------------------
Average Annual Total Return at 6/30/2004 reflecting the maximum sales load
-----------------------------------------------------------------------
Since
1 Year 3 Year Inception
------------ ------ ---------
Growth Fund Class A......... 6.55% (5.88)% (3.34)%(c)
Growth Fund Class B......... 7.07 (5.85) (5.29)(d)
Growth Fund Class C......... 11.09 (4.77) (4.79)(d)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 19, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from October 19, 1999 to June 30,
2004.
(d)For the period from November 2, 1999 to June 30,
2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
Growth Fund - Russell 3000/R/ S&P 500
Class A Growth Index Index
10/99 $9,400 $10,000 $10,000
12/99 11,600 12,700 11,700
6/00 12,300 13,200 11,600
12/00 10,800 9,900 10,600
6/01 9,600 8,500 9,900
12/01 9,300 7,900 9,400
6/02 7,900 6,300 8,100
12/02 6,900 5,700 7,300
6/03 7,500 6,500 8,100
12/03 8,500 7,500 9,400
6/04 8,500 7,700 9,700
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. Class A,
B, and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 3000(R) Growth Index consists of large, medium, and
small-capitalization companies with above average price-to-book ratios and
forecasted growth rates. The index is weighted by market capitalization and
large/medium/small companies make up approximately 80%/15%/5% of the index.
The S&P 500 Index indicates broad larger capitalization equity market
performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
6 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- --------------------------------------------------- --------
Shares Value
- --------- ----------------------------------------- --------
Common Stocks
Information Technology--32.3%
288,200 *BEA Systems, Inc........................ $ 2,369
89,900 CDW Corporation.......................... 5,732
94,700 *Cognos, Inc.+........................... 3,424
224,900 *Dell, Inc............................... 8,056
49,000 *Digital Insight, Inc.................... 1,016
398,100 *EMC Corporation......................... 4,538
243,200 First Data Corporation................... 10,827
136,400 *Intuit, Inc............................. 5,262
138,525 *Iron Mountain, Inc...................... 6,685
179,525 *Jabil Circuit, Inc...................... 4,520
124,700 Linear Technology Corporation............ 4,922
157,800 Paychex, Inc............................. 5,346
201,900 SAP AG-ADR............................... 8,442
172,700 *Skillsoft Plc-ADR....................... 1,313
37,500 StarTek, Inc............................. 1,343
308,600 *SunGard Data Systems, Inc............... 8,024
838,651 Taiwan Semiconductor Mfg. Co. Ltd.--ADR.. 6,969
--------
88,788
--------
Health Care--26.2%
100,200 Alcon, Inc.+............................. 7,881
110,000 *Amgen, Inc.............................. 6,003
182,700 *Axcan Pharma, Inc.+..................... 3,855
102,175 Eli Lilly & Company...................... 7,143
78,400 *Express Scripts, Inc., Class "A"........ 6,212
73,900 *Integra LifeSciences Holding Corporation 2,606
171,800 Medtronic, Inc........................... 8,370
242,275 Pfizer, Inc.............................. 8,305
81,200 *ResMed, Inc............................. 4,138
117,900 UnitedHealth Group, Inc.................. 7,339
113,500 *Zimmer Holdings, Inc.................... 10,011
--------
71,863
--------
Industrials and Services--12.0%
101,500 C.H. Robinson Worldwide, Inc............. 4,653
213,196 Danaher Corporation...................... 11,054
140,000 *Education Management Corporation........ 4,600
171,000 *Knight Transportation, Inc.............. 4,913
159,500 *Labor Ready, Inc........................ 2,472
103,300 *Ryanair Holdings plc--ADR............... 3,386
15,900 Strayer Education, Inc................... 1,774
--------
32,852
--------
- ----------
*Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
- ---------------------------------------------- --------
Shares Value
- --------- ------------------------------------ --------
Common Stocks--(continued)
Consumer Discretionary--11.8%
185,350 *Bed, Bath & Beyond, Inc............ $ 7,127
141,700 *CarMax, Inc........................ 3,099
98,075 *Cox Communications, Inc., Class "A" 2,725
108,900 *Entercom Communications Corporation 4,062
161,550 Family Dollar Stores, Inc........... 4,914
106,550 Harley-Davidson, Inc................ 6,600
89,900 *Kohl's Corporation................. 3,801
--------
32,328
--------
Financials--8.0%
165,205 SEI Investments Company............. 4,798
174,050 SLM Corporation..................... 7,040
138,650 State Street Corporation............ 6,799
43,500 XL Capital Ltd., Class "A"+......... 3,283
--------
21,920
--------
Consumer Staples--3.4%
175,200 PepsiCo, Inc........................ 9,440
--------
Energy--2.7%
66,700 Apache Corporation.................. 2,905
178,300 Suncor Energy, Inc.+................ 4,566
--------
7,471
--------
Materials--2.3%
200,600 Ecolab, Inc......................... 6,359
--------
Total Common Stock--98.7%
(cost $217,557).............................. 271,021
--------
Investment in Affiliate
3,273,228 William Blair Ready Reserves Fund... 3,273
--------
Total Investment in Affiliate--1.2%
(cost $3,273)................................ 3,273
--------
Total Investments--99.9%
(cost $220,830).............................. 274,294
Cash and other assets, less liabilities--0.1%. 319
--------
Net assets--100.0%............................ $274,613
========
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 7
[PHOTO]
FULLER
Mark A. Fuller III
[PHOTO]
PUSINELLI
Gregory J. Pusinelli
- --------------------------------------------------------------------------------
TAX-MANAGED GROWTH FUND
- --------------------------------------------------------------------------------
The Tax-Managed Growth Fund invests primarily in a diversified portfolio of
common stocks of domestic growth companies with sustainable, above-average
growth from one business cycle to the next.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
For the six-month period ended June 30, 2004, the Tax-Managed Growth Fund lost
- -4.74% on a total return basis (Class A Shares reflecting the impact of the
maximum sales load). By comparison, the Fund's benchmark, the Russell 3000(R)
Growth Index, increased 2.96%, while the Standard & Poor's 500 Index increased
3.44%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
Weakness in two sectors--Consumer Discretionary and Information Technology were
largely responsible for the Fund's underperformance versus its benchmark at
mid-year.
The speculative, lower quality stock rally that dominated the equity markets in
2003 spilled over into early 2004. As we have stated, most of last year's
top-performing stocks were lower-quality and more speculative companies with no
demonstrated history of earnings growth. Investors believed these companies
would be the greatest beneficiaries of an economic and stock market recovery.
The majority of these types of companies, however, do not fit our high quality
growth criteria.
In the latter half of the first quarter, higher quality issues such as those
the Fund invests in began to close the performance gap with their lower quality
counterparts. We believe investors began to move towards more predictable
businesses with solid, demonstrated track records of earnings growth. These
companies will be the best equipped to effectively manage their businesses in a
more temperate economic climate.
The equity markets moved sideways during the second quarter, as the major stock
market indexes moved in a trading range for weeks ahead of the Federal
Reserve's policy-making Open Market Committee meeting on June 30. The mood was
a subdued one as investors mulled over the prospects for rising interest rates,
inflation and the tenuous situation in Iraq.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Industrials and Healthcare sectors were where the Fund had its best
performers, with Industrial stocks, in particular, benefiting from signs of
strength in the economy. Three of the second quarter's top six performing
issues were Industrials, including Expeditors International, a transportation
and logistics company focused on imports from the Far East; Knight
Transportation, a trucking company; and Choicepoint, a company which conducts
background security checks for firms hiring new employees. As employment
numbers have grown, Choicepoint has seen greater demand for its services.
Within the Healthcare sector, Alcon, Stryker and Zimmer Holdings also were
strong performers. Alcon is a global leader in developing, manufacturing, and
selling ophthalmology
8 Semi-Annual Report June 30, 2004
drugs, supplies, and surgical devices, and also sells consumer eye-care
products such as contact lens-cleaning solution. Stryker and Zimmer Holdings
are both firms involved in the design and manufacture of orthopedic products
and devices.
The Fund's best performing investment--for both the second quarter as well as
the year-to-date period--was Whole Foods, in the Consumer Staples sector. The
company has benefited from the heightened focus by consumers on eating
healthier foods, and to a lesser extent as consumers and investors avoided
supermarket retailers involved in recent labor disputes. Whole Foods also
dominates a market segment in which there is no strong "number two" competitor.
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
As previously mentioned, the Consumer Discretionary and Information Technology
sectors accounted for most of the weakness in the Fund's portfolio.
The worst-performing issue for the quarter as well as the year-to-date period
was Vistacare, in the Health Care sector. Vistacare is a hospice-care provider
which has grown rapidly since the company first went public in 2003. The
company has seen a slowdown in admissions growth, partly due to a
reorganization of its sales force and sales process. As a result, the company
has lowered its earnings "guidance" (forecasts) going forward. We believe this
company is facing a challenging and more competitive market environment in the
near-term, as the business attracts new entrants and is subjected to downward
pricing pressure. We will be closely monitoring the company to see if Vistacare
has hit a "pothole" in the road, or if its business is undergoing a fundamental
change.
CarMax was the second worst-performing stock. CarMax was hurt by continued
dealer incentives for new cars, as well as rising used car prices. The price
increase in used cars is attributed to the low cost of financing new cars,
which results in a decrease in leased cars. Fewer leased cars means that fewer
used cars are returned to dealer fleets when the leases expire. Finally, a
number of current car owners have negative "equity" in their cars as the value
of their car loans exceeds the trade-in value of their vehicles. We nonetheless
remain convinced that the rationale for originally investing in CarMax is
intact: the company has an excellent management team, it has a superior
business proposition for consumers, no dominant competitors, and the company is
still in the very early stage of significant long-term growth.
Other poor performers included Weight Watchers, which reflected migrating
consumer preferences to try out other dieting alternatives, such as the current
"low-carb" diet fad, and Family Dollar Stores, whose customers have been hurt
by the recent rise in energy prices. Family Dollar customers' disposable income
is disproportionately impacted by higher gasoline prices, so an increase at the
pump means that its customers will have less to spend in their stores.
Lastly, Technology was a volatile sector during the first quarter, and many of
the chip manufacturers came under pressure, with some profit-taking occurring
amid impressions that demand might be moderating along with growth in the
economy.
What is your current strategy? How is the Fund positioned?
Unlike the speculative market environment of 2003, the stock market has shifted
this year towards profitable companies with good balance sheets and higher
returns on invested capital. It is an environment in which we expect our high
quality growth emphasis to have a greater impact on performance.
June 30, 2004 William Blair Funds 9
With the economic recovery on solid footing, we are evaluating our industry
focus and companies that will stand to benefit from the expansion in the
economy. As we search for promising candidates for the Fund's portfolio of
investments, we intend to maintain reasonable weightings in different sectors,
and are not inclined to change our over- or under-weighting in any particular
area.
We remain committed to our Consumer Discretionary holding in spite of the
weakness in that sector. One sector we will be closely monitoring is Media,
where two of our holdings, Univision and Clear Channel, are not experiencing
the increase in ad spending we would expect at this point in the economic
recovery compared to historic trends, especially in advance of the upcoming
presidential election.
As always, we will continue to focus on and emphasize high-quality names that
we believe will serve our investors well.
10 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Returns without the maximum sales load
-------------------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ------ ------ ----------
Tax-Managed Growth Fund Class A 1.07% 22.63% (24.39)% (10.12)% (0.98)% 1.80%
Russell 3000(R) Growth Index... 2.96 30.97 (28.03) (19.63) (22.42) 0.79
S&P 500 Index.................. 3.44 28.68 (22.10) (11.88) (9.11) 0.85
--------------------------------------
Average Annual Total Return at 6/30/2004 reflecting the maximum sales load
----------------------------------------------------------------------
Since
1 Year 3 Year Inception(c)
----------- ------ ------------
Tax-Managed Growth Fund Class A 7.84% (4.47)% (4.82)%
Tax-Managed Growth Fund Class B 8.57 (4.38) (4.82)
Tax-Managed Growth Fund Class C 12.57 3.34 (4.30)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
12/27/99 6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04
Tax-Managed
Growth Fund
Class A $9,400 9,800 9,500 8,700 8,500 7,200 6,500 7,000 7,900 8,000
Russell 3000(R)
Growth Index $10,000 10,500 7,800 6,800 6,300 5,000 4,500 5,100 5,900 6,100
S&P 500 Index $10,000 10,000 9,200 8,600 8,100 7,000 6,300 7,000 8,100 8,400
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. From time
to time, the investment adviser may waive fees or reimburse expenses for the
Fund. Without these waivers, performance would be lower. Class A, B, and C
shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 3000(R) Growth Index consists of large, medium, and
small-capitalization companies with above average price-to-book ratios and
forecasted growth rates. The index is weighted by market capitalization and
large/medium/small companies make up approximately 80%/15%/5% of the index.
The S&P 500 Index indicates broad larger capitalization equity market
performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 11
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- --------------------------------------------- ------
Shares Value
- ------ -------------------------------------- ------
Common Stocks
Health Care--21.3%
2,115 Alcon, Inc.+.......................... $ 166
805 Allegran, Inc......................... 72
1,855 *Amgen, Inc........................... 101
2,265 *Express Scripts, Inc., Class "A"..... 179
1,425 Guidant Corporation................... 80
3,675 Pfizer, Inc........................... 126
3,190 *ResMed, Inc.......................... 163
1,400 Stryker Corporation................... 77
2,260 *Vistacare, Inc., Class "A"........... 42
2,390 *Zimmer Holdings, Inc................. 211
------
1,217
------
Information Technology--21.2%
5,775 *BISYS Group.......................... 81
1,380 *Caci International, Inc., Class "A".. 56
1,640 CDW Corporation....................... 105
3,240 First Data Corporation................ 144
2,955 *Fiserv, Inc.......................... 115
3,165 *Intuit, Inc.......................... 122
3,595 *Jabil Circuit, Inc................... 90
2,610 Microchip Technology, Inc............. 82
3,930 Microsoft Corporation................. 112
1,740 Paychex, Inc.......................... 59
4,495 *SunGard Data Systems, Inc............ 117
8,539 Taiwan Semiconductor Mfg. Co. Ltd--ADR 71
1,790 Xilinx, Inc........................... 60
------
1,214
------
Consumer Discretionary--17.7%
2,100 *Bed, Bath & Beyond, Inc.............. 80
2,750 *CarMax, Inc.......................... 60
2,200 Clear Channel Communications.......... 81
4,200 *Comcast Corporation, Class "A"....... 116
3,355 Family Dollar Stores, Inc............. 102
3,280 *InterActiveCorp...................... 99
990 *Kohl's Corporation................... 42
2,925 Lowe's Companies, Inc................. 154
2,135 Regis Corporation..................... 95
1,840 *Univision Communications, Inc........ 59
3,695 *Williams-Sonoma, Inc................. 122
------
1,010
------
Industrials and Services--16.8%
2,485 C.H. Robinson Worldwide, Inc.......... 114
1,400 *ChoicePoint, Inc..................... 64
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = US. listed foreign security
- ----------------------------------------------- ------
Shares Value
- ------ ---------------------------------------- ------
Common Stocks--(continued)
4,030 Danaher Corporation..................... $ 209
2,475 Expeditors International of Washington.. 122
3,170 Fastenal Company........................ 180
3,605 General Electric Company................ 117
2,370 *Knight Transportation, Inc............. 68
2,725 *Ryanair Holdings plc--ADR.............. 90
------
964
------
Financials--9.7%
2,240 American International Group............ 160
2,270 Investors Financial Services Corporation 99
2,145 Moody's Corporation..................... 138
1,665 State Street Corporation................ 82
1,010 XL Capital Ltd., Class "A"+............. 76
------
555
------
Consumer Staples--7.3%
1,110 Colgate-Palmolive Company............... 65
3,115 PepsiCo, Inc............................ 168
2,395 Walgreen Co............................. 87
1,040 Whole Foods Market, Inc................. 99
------
419
------
Materials--5.0%
5,930 Airgas, Inc............................. 142
2,320 Ecolab, Inc............................. 74
1,810 Praxair, Inc............................ 72
------
288
------
Energy--2.7%
6,060 Suncor Energy, Inc.+.................... 155
------
Total Common Stock--101.7%
(Cost $4,545)................................. 5,822
------
Investment in Affiliate
1,598 William Blair Ready Reserves Fund....... 2
------
Total Investment in Affiliate--0.1%
(Cost $2)..................................... 2
------
Total Investments--101.8%
(Cost $4,547)................................. 5,824
Liabilities plus cash and other assets--(1.8)%. (104)
------
Net assets--100.0%............................. $5,720
======
See accompanying Notes to Financial Statements.
12 Semi-Annual Report June 30, 2004
[PHOTO]
BARBER
Rocky Barber
[PHOTO]
JOSTRAND
John F. Jostrand
[PHOTO]
Norbert W. Truderung
Norbert W. Truderung
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Large Cap Growth Fund invests primarily in common stocks of large domestic
growth companies of high quality that have demonstrated sustained growth over a
long period of time.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Large Cap Growth Fund posted a -6.55% loss on a total return basis (Class A
Shares reflecting the impact of the maximum sales load) for the 6 months ended
June 30, 2004. By comparison, the Fund's benchmark, the Russell 1000 Growth(R)
Index, increased 2.74%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
During the first few months of 2004 the market seemed to be digesting the gains
achieved in 2003. With respect to the Fund's first half, one major element of
the Large Cap Growth Fund's underperformance to the Russell 1000(R) Growth
Index came in the technology sector. As is frequently true, the technology
sector proved a challenging place to invest, with various sub-categories
turning in widely disparate returns. Internet services stocks continued to
enjoy strong appreciation, while computer hardware companies were up modestly
and semiconductors were in negative territory.
As we mentioned before, low quality, low price stocks ruled the performance
derby in 2003. Most of these stocks outperformed based on expectations that
these companies would stand to benefit the most from an economic recovery.
Consistent with our philosophy, these low quality growth stocks, however, do
not meet our Fund's investment criteria.
Late in the first quarter, with the tempo of the economy slowing, higher
quality stocks did begin to show signs of strength. Companies with interest
rate sensitivity, particularly financial and consumer discretionary stocks were
also laggards as concerns loomed with the Federal Reserve set to raise interest
rates. Although the Fund underperformed early in the first quarter as the
low-quality winners of 2003 had one last run, the Fund outperformed when the
market weakened. By the end of the first quarter, the Fund worked back to
almost even with its benchmark.
What were among the best performing sectors for the Fund? Were there any
investment themes that produced the best results?
The Health Care sector was the largest contributor to our performance. Within
the Health Care sector, Alcon and Zimmer Holdings continue to be strong
outperformers with second quarter returns of 24% and 20% respectively. Alcon,
the global medical company that specializes in eye care related products,
continues to execute its business strategy. Alcon's most recent quarter saw
earnings gains of 35% spread throughout each of its divisions. We are confident
that Alcon will continue to gain market share and increase sales per account
with new products continuing to come to market. Zimmer's orthopedic sales
remain robust. We expect strong double-digit earnings growth through 2006.
Pricing remains favorable, and the demographic backdrop (aging baby-boomers)
should extend revenue growth.
June 30, 2004 William Blair Funds 13
What were among the weakest performing sectors for the Fund? Were there any
investments that did not measure up to your expectations?
BEA Systems, a software company, proved a significant detractor from
performance. Our initial rationale for the purchase was BEA's dominant software
offering. Although we still believe its products have relative strengths,
customers are currently indicating a stronger interest in purchasing
lower-priced (and in our opinion, lower quality) bundled software offerings.
The Fund's consumer discretionary holdings did not keep pace with the overall
market. Cox Communication was the largest detractor during the first half of
the year. With the majority of the costs associated with the deployment of the
next generation of cable behind them, the cable companies' balance sheets are
in much better shape. However the market is now concerned with satellite's
growing subscriber companies becoming more of a competitor.
What is your current strategy? How is the Fund positioned?
The next boost to the economy is more likely to come from corporate spending,
as many companies now have record levels of cash. We expect as consumer
spending slows, the corporate sector will take the baton and increase capital
expenditures. As business executives' optimism increases, we believe they will
begin to increase their profit reinvestment or raise their dividends to
shareholders. To facilitate the reinvestment, businesses will have to increase
hiring, which should modestly revitalize consumer spending.
Our recent increase in Danaher illustrates our positioning given our outlook
for increased capital spending. Danaher's diversified industrial customer base
has a much stronger balance sheet than in years past. To maintain their growth,
Danaher's customers will need to reinvest in its businesses.
Earnings strength remained positive into the end of the first half. However, we
are now entering the point of the earnings cycle where relatively easy
comparisons are over and companies' earnings acceleration slows. In our
opinion, earnings will remain solid; however, they will likely slow to the
approximate historical trend line growth. As this transition occurs, quality
growth tends to outperform the leveraged, lower quality companies as higher
interest rates make financing more challenging.
14 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Large Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
--------------------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ------ ------ ----------
Large Cap Growth Fund Class A............................ (0.84)% 23.85% (28.55)% (20.83)% (16.67)% 1.40%
Russell 1000(R) Growth Index............................. 2.74 29.75 (27.88) (20.42) (22.42) 0.46
- -----------------------------
Average Annual Total Return at 6/30/2004 reflecting
the maximum sales load
--------------------------------------
Since
1 Year 3 Year Inception(c)
------ ------ ------------
Large Cap Growth Fund Class A.......................... 5.79% (7.94)% (12.29)%
Large Cap Growth Fund Class B.......................... 6.42 (7.96) (12.55)
Large Cap Growth Fund Class C.......................... 10.44 (6.85) (11.88)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
Large Cap
Growth Fund Russell 1000/R/
Class A Growth Index
12/27/99 $9,400 $10,000
6/00 9,500 10,500
12/00 8,000 7,800
6/01 6,700 6,700
12/01 6,300 6,200
6/02 5,100 4,900
12/02 4,500 4,500
6/03 4,900 5,100
12/03 5,600 5,800
6/04 5,500 6,000
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. From time
to time, the investment adviser may waive fees or reimburse expenses for the
Fund. Without these waivers, performance would be lower. Class A, B and C
shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 1000(R) Growth Index consists of large-capitalization companies
with above average-to-book ratios and forecasted growth rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 15
- --------------------------------------------------------------------------------
Large Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------------------------------------------- ------
Shares Value
- ------- --------------------------------------- ------
Common Stocks
Information Technology--28.1%
10,050 *BEA Systems, Inc...................... $ 83
7,450 *Dell, Inc............................. 267
9,600 *EMC Corporation....................... 110
6,500 First Data Corporation................. 289
3,450 *Intuit, Inc........................... 133
3,935 Linear Technology Corporation.......... 155
3,400 Paychex, Inc........................... 115
5,475 SAP AG--ADR............................ 229
8,635 *SunGard Data Systems, Inc............. 225
19,052 Taiwan Semiconductor Mfg. Co. Ltd.--ADR 158
------
1,764
------
Health Care--24.7%
2,500 Alcon, Inc.+........................... 197
3,285 *Amgen, Inc............................ 179
2,255 Eli Lilly & Company.................... 158
4,790 Medtronic, Inc......................... 233
9,465 Pfizer, Inc............................ 324
3,740 UnitedHealth Group, Inc................ 233
2,550 *Zimmer Holdings, Inc.................. 225
------
1,549
------
Consumer Discretionary--12.8%
5,200 *Bed, Bath & Beyond, Inc............... 200
3,685 Clear Channel Communications, Inc...... 136
7,000 *Cox Communications, Inc., Class "A"... 195
2,300 Harley-Davidson, Inc................... 142
3,000 *Kohl's Corporation.................... 127
------
800
------
Financials--10.6%
2,250 Federal National Mortgage Association.. 160
6,000 SLM Corporation........................ 243
3,770 State Street Corporation............... 185
975 XL Capital Ltd., Class "A"+............ 74
------
662
------
- ----------
* Non-income producing securities
+ U.S. listed foreign security
ADR = American Depository Receipt
- -------------------------------------------- ------
Shares Value
- --------- ---------------------------------- ------
Common Stocks--(continued)
Consumer Staples--10.5%
2,900 Avon Products, Inc................ $ 134
3,150 PepsiCo, Inc...................... 170
2,600 Wal-Mart Stores, Inc.............. 137
6,025 Walgreen Co....................... 218
------
659
------
Industrials and Services--7.0%
5,212 Danaher Corporation............... 270
5,150 General Electric Company.......... 167
------
437
------
Energy--2.3%
1,450 Apache Corporation................ 63
3,250 Suncor Energy, Inc.+.............. 83
------
146
------
Materials--2.3%
4,550 Ecolab, Inc....................... 144
------
Total Common Stock--98.3%
(cost $5,382)............................... 6,161
------
Investment in Affiliate
106,899 William Blair Ready Reserves Fund. 107
------
Total Investment in Affiliate--1.7%
(cost $107)................................. 107
------
Total Investments--100.0%
(cost $5,489)............................... 6,268
Cash and other assets, less liabilities--0.0% --
------
Net assets--100.0%........................... $6,268
======
See accompanying Notes to Financial Statements.
16 Semi-Annual Report June 30, 2004
[PHOTO]
Michael P. Balkin
Michael P. Balkin
[PHOTO]
BREWER
Karl W. Brewer
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Small Cap Growth Fund invests primarily in common stocks of small domestic
growth companies that are expected to have solid growth in earnings.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Small Cap Growth Fund posted a 5.05% gain on a total return basis (Class A
Shares reflecting the impact of the maximum sales load) for the 6 months ended
June 30, 2004. This was ahead of its benchmark, the Russell 2000 Growth(R)
Index, which increased 5.68% during the period, and the Russell 2000(R) Index,
which rose 6.76%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's outperformance versus the benchmark?
When compared to its benchmark, the Small Cap Growth Fund had outperformance in
every significant sector (i.e., sectors with over a 5% weight in the Russell
2000(R) Growth Index) in the first half of the year.
Small cap stocks were again the best performing asset class in the first
quarter as the Russell 2000(R) Index closed at an all time high versus the S&P
500 on a trailing 52-week relative return basis. In the second quarter, the
Russell 2000(R) achieved its fifth consecutive up quarter in a row, which had
not happened since 1995-96, when the Russell 2000(R) posted six consecutive
positive quarters. A change in leadership occurred in the second quarter, as
the larger capitalization stocks, as measured by the S&P 500 and Russell 1000
Indices, modestly outpaced the small cap stocks. In contrast to 2003, the most
significant impact on the Russell 2000(R) Growth's performance in the first
half of the year came from the larger market cap companies in the index as
investors shifted their focus away from the more speculative, low-priced micro
cap stocks. In the Fund, stock selection in the middle of the small
capitalization range was a large benefit to relative performance.
While the small cap markets were relatively strong in the first quarter, the
second quarter witnessed a more turbulent period. Following a negative start in
April and early May, the equity markets turned in the middle of the second
quarter and ended in positive territory. Mixed signals on the economic and
political fronts created increased volatility and uncertainty during the
period. With continued instability in the Middle East contributing to higher
oil prices, energy stocks performed well in the second quarter both for the
benchmark and the Fund. With the virtually "pre-announced" 0.25% increase in
rates by the Federal Reserve, and some remaining concerns about future rate
increases, Financial Services, Consumer and Technology stocks in the Russell
2000(R) Growth Index were hit the hardest in the quarter.
Which sectors enhanced the Fund's return? What were among the best performing
investments for the Fund?
The Fund outperformed the benchmark in most sectors, including all of the four
major sectors (Consumer Discretionary, Healthcare, Technology and Financial
Services) during the first half of the year. The Fund's most significant
contributors to absolute performance for the first half of the year were in the
Consumer Discretionary and Health Care Sectors, while
June 30, 2004 William Blair Funds 17
Technology was the largest contributor to relative performance. The Fund was
slightly overweight the Energy sector and our holdings outperformed those in
the benchmark. Quicksilver Resources, Inc., a natural gas producer focused
primarily on the western United States and Canada, was one of our top
contributors to performance. The stock was up significantly in the second
quarter due to a combination of successful drilling on several key properties
along with an overall strong energy market.
The Health Care sector was our biggest contributor to performance in the second
quarter and the second largest contributor for the first half of 2004. Although
we had a slight underweight in the group relative to the benchmark, our strong
stock selection allowed us to significantly outperform the index. Performance
was led by three medical device companies (Cyberonics, Kensey Nash Corporation
and Integra LifeSciences).
Were there any investment strategies or themes that did not measure up to your
expectations?
While there were no major themes or sectors that disappointed us in the first
half, there were individual stocks that performed poorly. Examples of weaker
performing stocks include: Vistacare, Inc., a hospice care provider; Alliance
Gaming, a casino operator; Asyst Technologies, a manufacturer of ultra-clean
semi-conductor systems. In each case, the company gave disappointing earnings
guidance, causing the stocks' price to decline.
What is your current strategy? How is the Fund positioned?
While we were pleased with our performance at mid-year, we believe that the
second half of the year could be a more difficult environment. Concerns over
higher interest rates, continued instability in the Middle East, increasing
energy prices and a slowdown in consumer spending could create some headwinds.
Also, uncertainty regarding the outcome of the upcoming Presidential election
is likely to create increased volatility in the market. Given these issues, we
anticipate that the market could remain in a trading range over the next
several quarters. Regardless of overall market trends, we will continue to seek
smaller capitalization companies that generally offer interesting opportunities
for growth. We believe that the Fund is well positioned for what we think is a
"stock pickers" type of market.
18 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Small Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
----------------------------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ------ ------------ ----- ------ ----------
Small Cap Growth Fund Class A 11.46% 61.81% (17.20)% 25.91% 33.68% 1.90%
Russell 2000(R) Growth Index. 5.68 48.54 (30.26) (9.23) (22.43) 5.22
Russell 2000(R) Index........ 6.76 47.25 (20.48) 2.49 (3.02) 4.26
----------------------------------------------------------------------------
Average Annual Total Return at 6/30/2004 reflecting the maximum sales load
----------------------------------------------------------------------
Since
1 Year 3 Year Inception(c)
-------------- ------ ------------
Small Cap Growth Fund Class A 35.90% 14.00% 21.57%
Small Cap Growth Fund Class B 38.14 14.63 22.01
Small Cap Growth Fund Class C 42.20 15.38 22.24
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 27, 1999
(Commencement of Operations) to December 31,
1999.
(c)For the period from December 27, 1999 to June
30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distribution
[CHART]
Russell
Small Cap 2000(R) Russell
Growth Fund Growth 2000(R)
Class A Index Index
12/99 $ 9,400 $10,000 $10,000
6/00 14,100 10,700 10,700
12/00 12,800 8,200 10,100
6/01 15,400 8,200 10,800
12/01 16,200 7,400 10,400
6/02 15,500 6,100 9,900
12/02 14,400 5,200 8,200
6/03 16,700 6,200 9,700
12/03 21,700 7,700 12,100
6/04 24,100 8,100 13,000
IPOs made significant contributions to the performance of the Fund in the year
2000. There can be no assurance that such contributions will continue. Recent
market volatility has significantly impacted performance and the Fund's current
performance may be more or less than that shown.
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. Investing
in smaller companies involves special risks, including higher volatility and
lower liquidity. From time to time, the investment advisor may waive fees or
reimburse expenses for the Fund. Without these waivers, performance would be
lower. Class A, B and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2000(R) Growth Index consists of small-capitalization companies
with above average price-to-book ratios and forecasted growth rates.
The Russell 2000(R) Index is an unmanaged composite of the smallest 2000 stocks
of the Russell 3000(R) Index.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 19
- --------------------------------------------------------------------------------
Small Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------ --------
Shares Value
- ------------------------------------------------------ --------
Common Stocks
Consumer Discretionary--38.6%
416,065 *4 Kids Entertainment, Inc................. $ 9,952
380,575 *Alliance Gaming Corporation............... 6,531
1,138,630 *Casual Male Retail Group, Inc............. 8,312
358,100 *Century Casinos, Inc...................... 1,952
191,047 *Charles River Associates.................. 5,913
1,079,355 *chinadotcom corporation+.................. 7,966
326,195 *Corrections Corporation of America........ 12,881
343,830 *Cross Country Healthcare, Inc............. 6,241
395,710 *Cumulus Media, Inc., Class "A"............ 6,652
203,700 *Elizabeth Arden, Inc...................... 4,286
313,580 *Emmis Communications Corporation,
Class "A"................................. 6,579
1,266,025 *eUniverse, Inc............................ 2,811
220,560 *FirstService Corporation+................. 5,514
358,650 Fred's, Inc................................ 7,923
114,235 *Getty Images, Inc......................... 6,854
203,925 *Guitar Center, Inc........................ 9,068
670,515 *Kforce, Inc............................... 6,330
678,630 *Labor Ready, Inc.......................... 10,519
493,020 *Laureate Education, Inc................... 18,853
1,878,430 *Lions Gate Entertainment Corporation+..... 13,111
283,935 *Multimedia Games, Inc..................... 7,615
375,520 Ruby Tuesday, Inc.......................... 10,308
429,870 *Scientific Games Corporation, Class "A"... 8,228
308,661 *Shuffle Master, Inc....................... 11,207
724,720 *SkillSoft plc--ADR........................ 5,508
287,920 Speedway Motorsports, Inc.................. 9,628
225,680 StarTek, Inc............................... 8,079
74,570 Strayer Education, Inc..................... 8,320
363,100 *TiVo, Inc................................. 2,574
640,380 *ValueClick, Inc........................... 7,671
463,005 *ValueVision Media, Inc., Class "A"........ 6,028
623,600 World Wrestling Entertainment, Inc......... 7,951
--------
251,365
--------
Health Care--19.8%
193,588 *Accredo Health, Inc....................... 7,540
385,900 *American Healthways, Inc.................. 10,273
757,770 *Axcan Pharma, Inc.+....................... 15,989
916,940 *Cell Therapeutics, Inc.................... 6,758
393,280 *Connectics Corporation.................... 7,944
1,228,019 *Discovery Partners International, Inc..... 6,263
144,010 *Icon PLC--ADR............................. 6,335
371,775 *Intergra Lifesciences Holdings Corporation 13,113
240,755 *Kensey Nash Corporation................... 8,306
297,340 *Lifepoint Hospitals, Inc.................. 11,067
331,325 *Matria Healthcare, Inc.................... 8,306
357,720 *Sangamo Biosciences, Inc.................. 2,153
144,770 *Taro Pharmaceutical Industries, Inc.+..... 6,297
345,795 *Telik, Inc................................ 8,254
3,051,885 *VitalWorks, Inc........................... 10,560
--------
129,158
--------
Technology--18.2%
485,990 *AMIS Holdings, Inc........................ 8,223
629,590 *Answerthink, Inc.......................... 3,607
- ----------
*Non-income producing securities
**Security Fair Valued pursuant to Valuation Procedures adopted by Board of
Trustees.
ADR = American Depository Receipt
+ = U.S. listed foreign security
++ = Restricted security. The Fund purchased 507,788 restricted shares on May
18, 2003 at a cost of $6,136 (in thousands). The value of the Fund's holding
was 0.75% of net assets at June 30, 2004.
- --------------------------------------------------- --------
Shares Value
- --------------------------------------------------- --------
Common Stocks--(continued)
469,140 *Artisan Components, Inc................ $ 12,104
776,280 *Aspen Technology, Inc.................. 5,636
198,655 Harris Corporation...................... 10,082
936,300 *LCC International, Inc., Class "A"..... 4,588
2,463,900 *Loudeye Corporation.................... 3,890
502,450 *Mercury Computer Systems, Inc.......... 12,461
19,540 *Nuance Communications, Inc............. 89
316,530 *Open Solutions, Inc.................... 7,907
338,775 *Open Text Corporation+................. 10,807
723,710 *OPNET Technologies, Inc................ 9,480
1,583,985 *Scansoft, Inc.......................... 7,841
297,030 *Semtech Corporation.................... 6,992
807,788 *Ultimate Software Group, Inc.**++...... 7,763
314,785 *WebEx Communications, Inc.............. 6,850
--------
118,320
--------
Financial Services--10.1%
197,195 *Affiliated Managers Group, Inc......... 9,933
400,285 *Commercial Capital Bancorp, Inc........ 6,953
449,890 *Credit Acceptance Corp................. 6,780
491,657 *Electronic Clearing House.............. 4,573
279,840 *Euronet Worldwide, Inc................. 6,473
128,840 Global Payments, Inc.................... 5,800
226,350 Investors Financial Services Corporation 9,864
341,095 National Financial Partners Corporation. 12,030
361,130 *Rewards Network, Inc................... 3,250
--------
65,656
--------
Other Energy--4.4%
330,335 *Comstock Resources, Inc................ 6,428
1,698,955 *Gasco Energy, Inc...................... 3,313
1,342,360 *Grey Wolf, Inc......................... 5,692
99,530 *Quicksilver Resources, Inc............. 6,676
185,245 *Ultra Petroleum Corporation............ 6,915
--------
29,024
--------
Producer Durables--3.0%
607,180 *Crown Castle International Corporation. 8,956
242,450 *Providence Service Corporation......... 4,556
377,480 *Ultratech, Inc......................... 6,145
--------
19,657
--------
Materials and Processing--2.6%
437,795 Airgas, Inc............................. 10,468
1,039,610 *Comfort Systems USA, Inc............... 6,643
--------
17,111
--------
Utilities--0.4%
143,800 Intrado, Inc............................ 2,314
--------
Total Common Stock--97.1%
(Cost $528,779)................................... 632,605
--------
Investment in Affiliate
14,796,841 William Blair Ready Reserves Fund....... 14,797
--------
Total Investment in Affiliate--2.3%
(Cost $14,797).................................... 14,797
--------
Total Investments--99.4%
(Cost $543,576)................................... 647,402
Cash and other assets, less liabilities--0.6%...... 4,101
--------
Net assets--100.0%................................. $651,503
========
See accompanying Notes to Financial Statements.
20 Semi-Annual Report June 30, 2004
[PHOTO]
Karl W. Brewer
Karl W. Brewer
[PHOTO]
Harvey H. Bundy, III
Harvey H. Bundy, III
[PHOTO]
Robert Lanphier, IV
Robert C. Lanphier, IV
- --------------------------------------------------------------------------------
SMALL-MID CAP GROWTH FUND
- --------------------------------------------------------------------------------
The Small-Mid Cap Growth Fund primarily invests in a diversified portfolio of
common stocks of small and medium-sized domestic growth companies that are
expected to experience solid growth in earnings.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform in the first half of the year? How did the Fund's
performance compare to its benchmark?
The Small-Mid Cap Growth Fund gained 0.79% (Class A shares reflecting the
impact of the maximum sales load) on a total return basis for the six months
ended June 30, 2004, compared with a 5.65% increase for the Fund's benchmark,
the Russell 2500/TM/ Growth Index.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's outperformance versus the benchmark?
The year opened with a continuation of the speculative frenzy of 2003, as the
lower quality names retained their market leadership. However, as the first
quarter progressed, we observed a gradual rotation toward quality growth
companies.
Following a negative start in April and early May, the equity markets ended the
second quarter in positive territory. Mixed signals on the economic and
political fronts caused the markets to seek a clear direction during the
period. Geopolitical issues also caused oil prices to rise during the quarter.
In the first half of the year, the strongest performing sectors in the Russell
2500/TM/ Growth Index were Healthcare and Energy while Technology was the only
major sector to report a negative return. The Small-Mid Cap Fund's stock
selection was the primary contributor to performance in the first half of the
year. Healthcare and Transportation were two of the strongest performing
sectors in the portfolio. While we were underweight Technology, which
contributed to relative performance, we also had strong stock selection in this
industry.
One of the Small-Mid Cap Fund's strongest performing holdings was Corporate
Executive Board. This company provides subscription-based research and
information services to senior executives in major corporations in order to
enhance management practices. With relatively low capital expenditures, the
company is able to significantly leverage its services and achieve high margin
growth. During the softer economy, we believed that many new clients put their
intentions to subscribe on hold, and would sign up for services once the
economy strengthened. This thesis came to fruition as subscriptions increased
significantly and the market recognized the outstanding potential for solid
earnings growth.
Within the Transportation sector, three stocks that fared very well were
Expeditors International, C.H. Robinson, and Knight Transportation. Along with
strong managements and good business infrastructures, these companies are
poised to benefit from the economic recovery as product deployment is on the
rise. Due to our fundamental process and conviction in these names, we are
carrying an overweight position in Transportation stocks versus the Russell
2500/TM/ Growth Index.
June 30, 2004 William Blair Funds 21
Which strategies did not measure up to your expectations?
Two industries in which our companies did not meet our expectations were
Retailing and Technology Software. In Retailing, 99 Cents Only stores
experienced a significant stock price decrease. The company had fared well in
their home state of California, but ran into significant difficulty executing
their strategy in their newly opened Texas sites. Another Retailing company
that had some difficulty during the first half of the year was CarMax. CarMax
is a company that has strong management and is well-positioned within the used
car sales business, but suffered from significant competition from incentives
in the new car market which severely hampered sales. The company continues to
be a dominant player in this market and has an ability to be relatively
flexible with its product offering, which we believe will bring their earnings
back slowly over time.
Software companies Intuit and BEA Systems were also disappointments. BEA
Systems disappointed investors with their earnings report. Our analysis
concluded that BEA would not be able to achieve our expectations on subsequent
earnings growth and we exited the position. Slowing revenue growth at Intuit
disappointed investors. However, we believe that the current valuation more
than discounts this trend. We are still positive on Intuit's ability to
generate strong annual growth in earnings and we maintain our position in
Intuit.
What is your current strategy? How is the Fund Positioned?
Our focus continues to be on selecting quality growth companies that should
perform well in a moderate economic growth environment. Of the four largest
sectors in the Russell 2500/TM/ Growth Index, we are currently overweight
Consumer Discretionary, and underweight Technology. Healthcare and Financial
Services sectors in the portfolio are relatively close to their respective
benchmark weights.
22 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
--------------------------------------
6/30/2004(a) 2003(a)(b)
------------ ----------
Small-Mid Cap Growth Fund Class A 6.94% (0.60)%
Russell 2500(TM) Growth Index.... 5.65 (0.61)
--------------------------------------
Average Annual Total Return at 6/30/2004
reflecting the maximum sales load
--------------------------------------
Since
Inception(c)
------------
Small-Mid Growth Fund Class A (5.60)%
Small-Mid Growth Fund Class B 0.90
Small-Mid Growth Fund Class C 4.90
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from December 29, 2003
(Commencement of Operations) to December 31,
2003.
(c)For the period from December 29, 2003 to June
30, 2004.
Illustration of an assumed investment of $10,000
[CHART]
Small-Mid Cap Russell 2500
Fund Class A Growth Index
------------- ------------
12/03 $ 9,400 $10,000
1/04 9,500 10,400
2/04 9,700 10,400
3/04 9,700 10,500
4/04 9,700 10,000
5/04 9,700 10,300
6/04 10,000 10,500
Past performance does not guarantee future results and current performance may
be lower or higher than the data quoted. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. Investing
in smaller companies involves special risks, including higher volatility and
lower liquidity. From time to time, the investment advisor may waive fees or
reimburse expenses for the Fund. Without these waivers, performance would be
lower. Class A, B, and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2500(TM) Growth Index measures the performance of those Russell
2500 companies with above average price-to-book ratios and forcasted growth
rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 23
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- -------------------------------------------------- ------
Shares Value
- ------- ------------------------------------------ ------
Common Stocks
Consumer Discretionary--32.1%
5,400 *99 Cents Only Stores..................... $ 82
4,200 *Bed, Bath and Beyond, Inc................ 161
12,800 *CarMax, Inc.............................. 280
6,300 CDW Corporation........................... 402
4,200 Cintas Corporation........................ 200
6,300 Corporate Executive Board Co.............. 364
4,700 *Corrections Corporation of America....... 186
9,800 *Cross Country Healthcare, Inc............ 178
4,100 *Entercom Communications Corporation...... 153
6,700 Fastenal Company.......................... 381
2,600 *Getty Images, Inc........................ 156
4,400 *Guitar Center, Inc....................... 196
4,800 *Hewitt Associates, Inc., Class "A"....... 132
6,300 *Iron Mountain, Inc....................... 304
5,100 *Lamar Advertising Company................ 221
11,400 *Laureate Education, Inc.................. 436
8,700 *O'Reilly Automotive, Inc................. 393
4,000 *Shuffle Master, Inc...................... 145
13,000 *Skillsoft PLC--ADR....................... 99
1,500 Strayer Education, Inc.................... 167
------
4,636
------
Health Care--19.2%
1,700 *Atrix Labs, Inc.......................... 58
14,600 *Axcan Pharma, Inc.+...................... 308
10,700 *Connectics Corporation................... 216
6,100 *Express Scripts, Inc..................... 483
2,700 *IDEXX Laboratories, Inc.................. 170
8,300 *Integra LifeSciences Holdings Corporation 293
5,800 *IVAX Corporation......................... 139
4,200 *Kensey Nash Corporation.................. 145
4,700 *Medicines Company........................ 144
2,800 *Patterson Companies, Inc................. 214
5,000 *ResMed, Inc.............................. 255
3,900 *Stericycle, Inc.......................... 202
6,400 *Telik, Inc............................... 153
------
2,780
------
Technology--14.9%
5,100 Adobe Systems, Inc........................ 237
8,600 *Artisan Components, Inc.................. 222
8,300 *Cognos, Inc.+............................ 300
8,000 *Intuit, Inc.............................. 309
11,200 *Jabil Circuit, Inc....................... 282
12,400 Microchip Technology, Inc................. 391
11,800 *OPNET Technologies, Inc.................. 155
3,600 Xilinx, Inc............................... 120
1,500 *Zebra Technologies Corp., Class "A"...... 130
------
2,146
------
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
- ------------------------------------------------ -------
Shares Value
- ------------------------------------------------ -------
Common Stocks--(continued)
Financial Services--10.2%
4,500 *Affiliated Managers Group.............. $ 227
5,000 East West Bancorp, Inc.................. 153
7,500 *Fiserv, Inc............................ 292
8,500 Investors Financial Services Corporation 370
11,200 *SunGard Data Systems, Inc.............. 291
1,800 XL Capital Ltd., Class "A"+............. 136
-------
1,469
-------
Autos and Transportation--8.1%
4,800 C.H. Robinson Worldwide, Inc............ 220
8,600 Expeditors International of Washington.. 425
4,600 Gentex Corporation...................... 183
11,700 *Knight Transportation, Inc............. 336
-------
1,164
-------
Other Energy--4.1%
6,500 Apache Corporation...................... 283
5,600 *Smith International, Inc............... 312
-------
595
-------
Producer Durables--3.1%
18,200 *Crown Castle International Corporation. 268
5,200 Pentair, Inc............................ 175
-------
443
-------
Materials and Processing--2.3%
14,000 Airgas, Inc............................. 335
-------
Total Common Stock--94.0%
(Cost $12,895)................................. 13,568
-------
Investment in Affiliate
760,777 William Blair Ready Reserves Fund....... 761
-------
Total Investment in Affiliate--5.3%
(Cost $761).................................... 761
-------
Total Investments--99.3%
(Cost $13,656)................................. 14,329
Cash and other assets, less liabilities--0.7%... 107
-------
Net assets--100.0%.............................. $14,436
=======
See accompanying Notes to Financial Statements.
24 Semi-Annual Report June 30, 2004
[PHOTO]
GREIG
W. George Greig
- --------------------------------------------------------------------------------
INTERNATIONAL GROWTH FUND
- --------------------------------------------------------------------------------
The International Growth Fund invests primarily in common stocks of foreign
growth companies of all sizes.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The International Growth Fund posted a -2.92% loss (Class A Shares reflecting
the impact of the maximum sales load) for the 6 months ended June 30, 2004. By
comparison, the Fund's benchmark, the MSCI All Country World Free excluding US
Index, rose 4.10%
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The overall MSCI All Country World (Free) except US index fell modestly (0.69)%
during the second quarter, but a more severe correction in Asian markets and in
cyclical sectors globally impacted our relative performance.
On a regional basis, our relative emphasis on Asia (particularly emerging Asia)
at the expense of Europe accounted for all of the portfolio's performance
shortfall at mid-year. Asian markets continue to be viewed as extremely
sensitive to global liquidity and cyclical growth, but it is worth noting that
there has been no evidence of any significant slowdown in either economic
growth or corporate earnings up to this point.
The year started with international markets extending the strong rally that
began in 2003 into the first quarter. Broadly speaking, Asian markets and
emerging markets more generally outperformed, and small companies continued to
outpace large blue chip companies. Within that framework, however, shifting
returns reflected new data about the changing dynamic of the global growth
cycle.
The major new trend to emerge in the first quarter was the increasing strength
of Japan, both in economic and market terms. After lagging the rest of the
world early in the year, Japan came to life as more and more indicators pointed
to continued strong earnings growth and increasing confidence in the economy.
Our portfolio benefited from being overweight the benchmark in Japan, but
relative returns were impacted by our emphasis on export-oriented sectors.
The global equity market climate shifted during the second quarter, as
heightened concern about monetary tightening in the US and a state-directed
slowdown in China focused attention on potential risks to economic and profit
growth, particularly in cyclical sectors and regions.
What sectors had the biggest impact on portfolio performance?
Technology was the major laggard on a global basis during the second quarter,
reversing some of 2003's strong gains as cyclical concerns arose regarding
potential oversupply of components and the sustainability of corporate and
consumer spending growth in a variety of hardware categories. Conversely, the
best performing sector in the global market was Energy, and portfolio
positioning in these sectors also detracted from performance.
June 30, 2004 William Blair Funds 25
The portfolio continues to carry relatively low exposure to Europe, a position
that helped returns during the first quarter, as growth indicators remain
inconsistent and relatively weak in most European economies.
What is your outlook for the international markets?
In both of the recent broad global economic cycles (1981-1990 and 1991-2000)
there was a sharp recovery, followed by a moderation of growth accompanied by
some monetary tightening. In each case the initial tightening occurred in the
'4' year (1984, 1994), and so the analogy is drawn that after the
liquidity-driven upturn of 2003, we should anticipate upward pressure on
interest rates, and that China and the US--the engines of global growth--could
slow significantly.
Leading economic indicators, many of them monetary, have indeed slowed on a
global basis, and some measures of investment spending and credit growth have
decelerated in China. While it is still too early to tell definitively how mild
or severe the coming slowdown will be, markets have readily anticipated a
relatively bearish scenario. Ironically, until there is clearer evidence of the
extent and effects of the slowdown, markets may overreact on the basis of fear
of the unknown.
Our view of the mid-cycle plateau is that it may well be milder and briefer
than the tightening cycle of 1994-95. There are few excesses in the global
economic picture and a diminished likelihood of instability in emerging
markets. As Asia cools down and Europe begins to reaccelerate, global growth
should move into better balance for the remainder of the economic expansion.
26 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
----------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ------ ------ ----------
International Growth Fund Class A..... 3.01% 42.10% (15.14)% (13.63)% (8.11)% 39.12%
Morgan Stanley Capital - International
(MSCI) All Country World Free
Ex-U.S. Index........................ 4.10 41.41 (14.67) (19.50) (15.09) 30.91
Lipper International Index............ 3.86 36.00 (13.84) (19.34) (14.72) 37.83
--------------------------------------
Average Annual Total Return at 6/30/2004 reflecting
the maximum sales load
--------------------------------------
Since
1 Year 3 Year Inception
------ ------ ---------
International Growth Fund Class A 24.22% 3.32% 5.62%(c)
International Growth Fund Class B 25.74 3.66 5.05(d)
International Growth Fund Class C 29.74 4.56 5.41(d)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 21, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from October 21, 1999 to June 30,
2004.
(d)For the period from November 2, 1999
(Commencement of the Class) to June 30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
International
Growth Fund MSCI AC WLD Lipper Int'l
Class A Ex-US Index Index
10/99 $ 9,400 $10,000 $10,000
12/99 13,100 10,300 9,600
6/00 13,400 10,000 9,200
12/00 12,000 8,800 8,200
6/01 11,000 7,600 7,200
12/01 10,400 7,100 6,600
6/02 10,500 7,000 6,600
12/02 8,800 6,000 5,700
6/03 9,800 8,300 7,800
12/03 12,500 10,500 9,800
6/04 12,900 11,000 10,100
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares.
International investing involves special risk considerations, including
currency fluctuations, lower liquidity, economic and political risk. Class A,
B, and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Morgan Stanley Capital International (MSCI) All Country World Free ex-U.S.
Index is an unmanaged index that includes developed and emerging markets and
reduced Japanese portion, making it more comparable to the International Growth
Fund in terms of investment approach.
The Lipper International Index is a composite of international growth mutual
funds.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 27
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------- --------
Shares Value
- ---------- -------------------------------------------- --------
Common Stocks--Europe--24.5%
Austria--1.3%
211,500 Erste Bank Der Oester (Banking)............. $ 33,350
--------
Estonia--0.2%
731,560 Hansabank (Banking)......................... 6,178
--------
Finland--0.5%
136,300 Nokian Renkaat Oyj (Automotive)............. 13,324
--------
France--4.6%
376,204 Christian Dior (Apparel and luxury goods)... 24,472
119,500 Hermes International SCA (Apparel and luxury
goods)..................................... 24,016
1,139,100 *JC Decaux (Media).......................... 24,518
185,200 Klepierre (Real estate)..................... 12,709
183,397 Mr. Bricolage SA (Home
improvement--retail)....................... 6,052
407,368 *Opera (Hospital and nursing management).... 10,525
81,982 Rodriquez Group (Retail trade).............. 4,307
152,900 Sanofi-Synthelabo SA (Pharmaceuticals)...... 9,712
--------
116,311
--------
Germany--4.7%
575,000 Bayer Motoren Werke (Motor vehicles)........ 25,648
223,561 Did Deutscher Industrie Svc (Commercial
services).................................. 6,583
211,000 GFK AG (Commercial services)................ 7,424
66,800 Puma AG (Consumer non-durables)............. 17,116
367,200 SAP AG (Software)........................... 61,319
--------
118,090
--------
Greece--2.3%
1,031,700 Coca-Cola Hellenic Bottling S.A.
(Beverages)................................ 24,215
548,800 EFG Eurobank (Banking)...................... 12,013
364,100 Folli Follie S.A. (Apparel and footwear
retailer).................................. 11,659
530,920 National Bank of Greece (Banking)........... 11,607
--------
59,494
--------
Ireland--1.0%
1,020,200 Anglo Irish Bank plc (Finance).............. 16,029
1,123,600 *Grafton Group (Wholesale distributors)..... 8,987
--------
25,016
--------
Italy--2.4%
1,797,700 Banco Popolare Di Verona E N (Banking)...... 31,019
1,260,800 Credito Emiliano SpA (Banking).............. 10,402
559,584 Merloni Elettrodemestici SpA
(Electronics and appliances)............... 9,994
249,852 Pirelli & C Real Estate (Real estate
development)............................... 9,390
--------
60,805
--------
Spain--1.2%
267,700 Banco Popular Espanol (Banking)............. 15,148
358,400 Grupo Ferrovial S.A. (Industrial services).. 14,963
--------
30,111
--------
Sweden--2.1%
13,200,000 *Ericsson LM-B Shares (Communications
equipment)................................. 39,490
- -------------------------------------------------------- --------
Shares Value
- ---------- --------------------------------------------- --------
Common Stocks--Europe--24.5%--(continued)
616,800 Gunnebo AB (Producer manufacturing).......... $ 6,997
190,500 *Oriflame Cosmetics S.A. SDR (Household
products)................................... 6,806
--------
53,293
--------
Switzerland--4.2%
96,900 *Actelion (Biotechnology).................... 11,172
244,300 *Logitech International S.A. (Electronic
technology)................................. 11,183
156,850 *Micronas Semiconductor (Electronic
technology)................................. 7,168
39,100 Serono S.A., Class "B" (Biotechnology)....... 24,717
741,800 UBS AG (Banking)............................. 52,591
--------
106,831
--------
United Kingdom--19.7%
1,280,700 *Acambis (Biotechnology)..................... 8,103
477,800 Astrazeneca plc (Pharmaceuticals)............ 21,583
7,132,300 BG Group plc (Industrial services)........... 44,185
4,023,300 *British Sky Broadcasting Group (Media)...... 45,607
4,336,900 Capita Group plc (Commercial services)....... 25,216
844,600 Carnival plc (Hotels, restaurants and leisure
activities)................................. 41,257
1,571,800 Cattle's Holdings plc (Finance and leasing).. 9,096
486,300 Cobham plc (Aerospace and defense)........... 12,395
3,496,200 Compass Group plc (Hotels, restaurants and
leisure activities)......................... 21,501
961,000 French Connection (Apparel and footwear
retail)..................................... 7,279
1,983,100 HBOS plc (Finance)........................... 24,736
652,700 MAN Group plc (Finance)...................... 17,012
695,300 McCarthy & Stone plc (Real estate)........... 7,370
5,209,700 *Michael Page International (Personnel
Services)................................... 17,024
655,400 Next plc (Multiline retail).................. 17,022
2,762,600 Premier Farnell (Electronics distributors)... 12,399
1,372,200 Reckitt Benckiser plc (Household products)... 39,113
2,770,000 Smith & Nephew plc (Health care equipment
and supplies)............................... 30,038
2,193,600 Standard Chartered plc (Banking)............. 35,945
10,709,500 Tesco plc (Food retailer).................... 52,051
804,500 Warner Chilcott plc (Pharmaceuticals)........ 10,163
--------
499,095
--------
Canada--5.8%
632,900 *Alimentation Couche-Tard--Class "B"
(Food retail)............................... 11,073
447,700 *Cognos Inc. (Software)...................... 16,152
180,800 *MacDonald Dettwiler & Associates
(IT consulting)............................. 3,519
1,281,600 Manulife Financial Corp. (Life and
health insurance)........................... 51,861
294,000 *Precision Drilling Corp. (Drilling)......... 14,028
234,800 *Research in Motion Ltd. (Wireless
telecommunication).......................... 16,081
477,300 *Shoppers Drug Mart Corp. (Retail trade)..... 11,935
883,300 Suncor Energy, Inc. (Energy minerals)........ 22,491
--------
147,140
--------
Japan--24.5%
230,500 Aeon Credit Service Co., Ltd.
(Consumer finance).......................... 15,463
199,300 Aeon Mall Co., Ltd. (Real estate)............ 11,902
See accompanying Notes to Financial Statements.
28 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ---------- -------------------------------------------- --------
Shares Value
- ---------- -------------------------------------------- --------
Common Stocks--Japan--24.3%--(continued)
194,000 Arnest One Corp. (Real estate).............. $ 5,894
168,300 Askul Corporation (Retail trade)............ 10,624
944,400 Canon, Inc. (Office electronics)............ 50,437
1,848,000 *Chiyoda Corp. (Construction)............... 13,251
60,200 Don Quijote Co., Ltd. (Multiline retail).... 3,840
336,800 Fast Retailing (Specialty retail)........... 27,513
3,408,500 Hino Motors Ltd. (Trucks, construction and
farm machinery)............................ 24,834
294,000 Hoya Corporation (Electronic technology).... 31,005
145,900 Kappa Create Co., Ltd. (Consumer
non-durables).............................. 10,126
137,560 Keyence Corporation (Electronic
technology)................................ 31,593
54,200 Koha Co., Ltd. (Electronic equipment and
instruments)............................... 2,048
304,400 Matsui Securities Co., Ltd. (Financial
services).................................. 10,509
372,250 Misumi Corp. (Trading companies and
distributors).............................. 12,247
5,424 Mitsubishi Tokyo Financial (Banking)........ 50,775
112,000 Nakanishi Inc. (Medical specialties)........ 8,032
217,000 Neomax Co., Ltd. (Electronic equipment and
instruments)............................... 3,537
243,600 Nidec Corporation (Electronic equipment and
instruments)............................... 25,151
202,060 Nitori Company Ltd. (Specialty stores)...... 12,701
509,600 Nitto Denko Corporation (Electronic
technology)................................ 26,331
321,000 Orix Corporation (Consumer finance)......... 37,046
274,600 Park 24 Co., Ltd. (Commercial services)..... 10,506
3,105 Pasona Inc. (Personnel services)............ 11,157
299,700 Point Inc. (Apparel and footwear retail).... 8,140
189,100 Sawai Pharmaceutical Co., Ltd.
(Pharmaceuticals).......................... 8,002
2,417,200 Sharp Corp. (Electronics)................... 38,960
2,943,000 *Shinsei Bank, Ltd. (Banking)............... 18,816
214,200 SMC Corporation (Trucks, construction and
farm machinery)............................ 23,373
224,500 Sugi Pharmacy (Food and staple retailing)... 9,229
5,695,000 Sumitomo Trust & Banking Co. (Finance)...... 41,092
1,714,000 Toto Ltd. (Building products)............... 18,142
118,400 USS Co., Ltd. (Commercial services)......... 10,246
--------
622,522
--------
Emerging Asia--7.6%
China--0.4%
14,030,000 Zhejiang Expressway Holding Co.
(Transportation infrastructure)............ 10,003
--------
India--3.0%
392,601 Bharat Forge Ltd. (Machinery)............... 5,239
925,600 *Biocon Ltd. (Biotechnology)................ 10,103
1,240,400 HDFC Bank (Banking)......................... 10,012
908,600 Housing Development Finance Corp. (Financial
services).................................. 10,225
171,206 Infosys Technologies, Ltd. (Consulting and
software services)......................... 20,758
322,500 ING Vysya Bank, Ltd. (Banking).............. 2,598
1,447,300 *Maruti Udyog Ltd. (Automobiles)............ 12,709
854,728 Mphasis BFL, Ltd. (Information technology).. 4,871
--------
76,515
--------
- ---------- ------------------------------------------------ --------
Shares Value
- ---------- ------------------------------------------------ --------
Emerging Asia--7.6%--(continued)
Indonesia--0.8%
60,744,500 *Bank Rakyat Indonesia (Banking)................ $ 10,820
24,963,500 Unilever Indonesia Tbk (Household and
personal care)................................. 10,461
--------
21,281
--------
South Korea--2.2%
377,400 Hyundai Motor Co., Ltd. (Automobiles)........... 14,600
97,800 Samsung Electronics Co. (Semiconductors)........ 40,661
--------
55,261
--------
Taiwan--0.9%
19,646,794 EVA Airways Corp. (Airlines).................... 8,255
4,136,800 Hon Hai Precision Industry (Computers).......... 15,480
--------
23,735
--------
Thailand--0.3%
9,708,300 *Tisco Finance (Finance, rental and leasing).... 6,468
--------
Asia--6.0%
Australia--2.6%
1,080,890 Bendigo Bank Ltd. (Banking)..................... 7,131
1,312,200 Billabong International Ltd. (Apparel and luxury
goods)......................................... 7,594
663,100 Macquarie Bank, Ltd. (Financial services)....... 15,774
235,800 Perpetual Trustees Australia (Investment
managers)...................................... 7,763
1,578,831 Sigma Company, Ltd. (Medical distributors)...... 9,060
2,308,900 Toll Holdings, Ltd. (Trucking).................. 17,338
--------
64,660
--------
Hong Kong--3.0%
16,510,000 China Insurance International (Insurance)....... 7,352
71,262,000 Cnooc Ltd. (Oil and gas)........................ 30,209
2,887,500 Esprit Holdings Ltd. (Apparel, footwear and
retail)........................................ 12,960
7,775,000 Global Bio-Chem Technol (Food products)......... 4,431
5,949,000 Li & Fung (Distribution services)............... 8,736
7,858,200 Techtronic Industries Co. (Consumer
durables)...................................... 12,579
--------
76,267
--------
Singapore--0.4%
8,482,800 Osim International Ltd. (Consumer sundries)..... 5,260
6,582,000 Unisteel Technology, Ltd. (Electronic
components).................................... 5,114
--------
10,374
--------
Latin America--3.8%
Brazil--0.3%
404,400 *Natura Cosmeticos S.A. (Cosmetics)............. 6,502
--------
Chile--1.2%
412,900 *Cencosud S.A.--ADR 144A (Retail stores)........ 7,642
675,400 Lan Chile S.A.--ADR (Airlines).................. 13,035
4,567,464 S.A.C.I. Falabella (Department stores).......... 8,988
--------
29,665
--------
Mexico--2.3%
15,184,400 America Movil S.A. (Communications)............. 27,636
2,024,800 *Consorcio Ara S.A (Homebuilding)............... 5,840
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 29
- --------------------------------------------------------------------------------
International Growth Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------- ----------------------------------------- ----------
Shares Value
- ----------- ----------------------------------------- ----------
Latin America--3.8%--(continued)
1,648,000 *Urbi Desarrollos Urbanos S.A. (Household
durables)............................... $ 5,311
6,139,000 Walmart de Mexico (Retail trade)......... 18,239
----------
57,026
----------
Emerging Europe, Mid-East, Africa--3.7%
Egypt--0.7%
744,000 Orascom Construction Industry
(Construction).......................... 11,044
851,000 *Orascom Telecommunication Holding GDR
(Telecommunications).................... 7,880
----------
18,924
----------
Israel--0.9%
360,100 Teva Pharmaceutical Inds.--ADR
(Pharmaceuticals)....................... 24,231
----------
Poland--0.4%
292,744 Bank Pekao S.A. (Banking)................ 9,829
----------
South Africa--1.3%
414,963 Edgars Consolidated Stores (Apparel,
footwear and retail).................... 9,972
3,120,700 *MTN Group Ltd. (Telecommunication
services)............................... 14,441
11,312,500 Network Healthcare Holdings (Health
services)............................... 8,174
----------
32,587
----------
Turkey--0.4%
463,403,928 *Enka Insaat (Industrial conglomerates).. 9,523
----------
Total Common Stock--95.6%
(cost $2,006,237)................................... 2,424,411
----------
- ----------
* Non-income producing securities
ADR = American Depository Receipt
GDR = Global Depository Receipt
All securities excluding those traded on exchanges in this hemisphere, are fair
valued pursuant to Valuation Procedures adopted by the Board of Trustees.
At June 30, 2004 the Fund's Portfolio of Investments includes the following
industry categories:
Financials................ 26.8%
Consumer Discretionary.... 21.4%
Information Technology.... 15.4%
Industrials and Services.. 12.0%
Healthcare................ 7.9%
Consumer Staples.......... 7.8%
Energy.................... 4.5%
Telecommunication Services 2.7%
Materials................. 1.5%
------
100.0%
======
- ----------- --------------------------------- ----------
Shares or Principal Amount Value
- --------------------------------------------- ----------
Preferred Stock
Brazil--1.4%
243,070,000 Banco Itau Holding (Banking)..... $ 22,408
979,620 Geradau S.A. (Steel)............. 11,738
----------
Total Preferred Stock--1.4%
(cost $27,753).............................. 34,146
----------
Investment in Affiliate
23,482,852 William Blair Ready Reserves Fund 23,483
----------
Total Investments in Affiliate--0.9%
(cost $23,483).............................. 23,483
----------
Short-Term Investments
27,746,000 American Express Demand Note, VRN
1.17% due 7/1/04................ 27,746
----------
Total Short-term Investments--1.1%
(cost $27,746).............................. 27,746
----------
Total Investments--99.0%
(cost $2,085,219)........................... 2,509,786
Cash and other assets, less liabilities--1.0% 26,532
----------
Net assets--100.0%........................... $2,536,318
==========
At June 30, 2004 the Fund's Portfolio of Investments includes the following
currency categories:
Japanese Yen.......... 25.3%
British Pound Sterling 20.3%
Euro.................. 18.8%
Canadian Dollar....... 6.0%
Swiss Franc........... 4.4%
Hong Kong Dollar...... 3.5%
Indian Rupee.......... 3.1%
Australian Dollar..... 2.6%
Mexico Nuevo Peso..... 2.3%
South Korean Won...... 2.3%
Swedish Krona......... 2.2%
United States Dollar.. 2.1%
Brazilian Real........ 1.7%
South African Rand.... 1.3%
All other currencies.. 4.1%
------
100.0%
======
See accompanying Notes to Financial Statements.
30 Semi-Annual Report June 30, 2004
[PHOTO]
GREIG
W. George Greig
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
The International Equity Fund invests primarily in common stocks of large and
medium-sized companies included in the Morgan Stanley Capital International All
Country World ex-U.S. Index.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGER
- --------------------------------------------------------------------------------
We are pleased to have the International Equity Fund become the newest addition
to the William Blair Fund Family and would like to thank our shareholders for
investing with us.
The International Equity Fund commenced operations on May 24, 2004. Through the
period ended June 30, 2004, the Fund posted a loss of -0.57% (Class A shares
reflecting the impact of the maximum sales load), behind the 5.18% increase in
the Fund's benchmark, the MSCI All Country World (Free) except US Index, for
this brief period.
I am very enthusiastic about the investment opportunities available to the
International Equity Fund. As you may already know, the Fund will primarily
invest in large and medium-sized companies in developed market economies and to
a limited extent in small-sized companies and Emerging Markets countries.
Our investment process seeks to find high quality growth companies for the
International Equity Fund's portfolio of investments. These are companies that
historically have had superior growth, profitability and quality relative to
local markets and relative to companies within the same industry worldwide, and
that are expected to continue such performance. In terms of growth, we aim to
find companies that have the capability of growing in real terms at least twice
the economic growth rate of the markets in which they participate. In terms of
quality, we seek to invest in companies with strong management, proprietary
market positions, strong asset bases and solid financial characteristics.
International Outlook: Moving Toward Mid-Cycle
In both of the recent broad global economic cycles (1981-1990 and 1991-2000)
there was a sharp recovery, followed by a moderation of growth accompanied by
some monetary tightening. In each case the initial tightening occurred in the
'4' year (1984, 1994), and so the analogy is drawn that after the
liquidity-driven upturn of 2003, we should anticipate upward pressure on
interest rates, and that China and the US--the engines of global growth--could
slow significantly.
Leading economic indicators, many of them monetary, have indeed slowed on a
global basis, and some measures of investment spending and credit growth have
decelerated in China. While it is still too early to tell definitively how mild
or severe the coming slowdown will be, markets have readily anticipated a
relatively bearish scenario. Ironically, until there is clearer evidence of the
extent and effects of the slowdown, markets may overreact on the basis of fear
of the unknown.
Our view of the mid-cycle plateau is that it may well be milder and briefer
than the tightening cycle of 1994-95. There are few excesses in the global
economic picture and a diminished likelihood of instability in emerging
markets. As Asia cools down and Europe begins to reaccelerate, global growth
should move into better balance for the remainder of the economic expansion.
June 30, 2004 William Blair Funds 31
- --------------------------------------------------------------------------------
International Equity Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------- -----
Shares Value
- ------- ----------------------------------------------- -----
Common Stocks--Europe--31.2%
Austria--2.7%
600 Erste Bank Der Oester (Banking)................ $ 95
----
France--2.3%
400 Hermes International (Apparel and luxury goods) 80
----
Germany--11.5%
2,100 Bayer Motoren Werke (Motor vehicles)........... 94
300 Puma AG (Consumer non-durables)................ 77
800 SAP AG (Software and programming).............. 134
8,200 *T-Online International AG (Information
technology)................................... 94
----
399
----
Greece--1.8%
2,900 EFG Eurobank Egrasias (Banking)................ 63
----
Ireland--1.7%
3,800 Anglo Irish Bank plc (Finance)................. 60
----
Italy--2.8%
5,700 Banco Popolare di Verona E N (Banking)......... 98
----
Spain--1.8%
1,500 Grupo Ferrovial S.A. (Industrial services)..... 63
----
Sweden--3.8%
44,000 *Ericsson (Communications equipment)........... 132
----
Switzerland--2.8%
150 Serono S.A (Biotechnology)..................... 95
----
United Kingdom--21.9%
15,200 BG Group plc (Industrial services)............. 94
8,100 *British Sky Broadcasting Group (Media)........ 92
3,300 *Cairn Energy plc (Energy)..................... 85
10,900 Capita Group plc (Commercial services)......... 63
3,500 Next (Multiline retail)........................ 91
2,700 Premier Farnell (Electronics distributors)..... 12
3,400 Reckitt Benckiser plc (Household products)..... 97
8,700 Smith & Nephew (Healthcare equipment and
supplies)..................................... 94
26,900 Tesco plc (Food retailer)...................... 131
----
759
----
Canada--5.7%
2,400 Manulife Financial Corp. (Life and health
insurance).................................... 97
1,000 *Research in Motion Ltd. (Wireless
telecommunication)............................ 69
1,300 Suncor Energy, Inc. (Energy minerals).......... 33
----
199
----
- ----------
* Non-income producing securities
ADR = American Depository Receipt
+ = U.S. listed foreign security
All securities excluding those traded on exchanges in this hemisphere, are fair
valued pursuant to Valuation Procedures adopted by the Board of Trustees.
- ------------------------------------------------------- ------
Shares or Principal Amount Value
- ------------------------------------------------------- ------
Common Stocks--(continued)
Japan--18.2%
1,800 Canon, Inc. (Office electronics)............... $ 96
800 Fast Retailing Co. Ltd. (Specialty retail)..... 65
10,000 Hino Motors Ltd. (Trucks, construction and farm
machinery).................................... 73
800 Hoya Corporation (Electronic technology)....... 84
300 Keyence Corporation (Electronic technology).... 69
1,100 Nitto Denko Corporation (Electronic technology) 57
5,000 Sharp Corp. (Electronics)...................... 81
15,000 Sumitomo Trust & Banking Co. (Finance)......... 108
------
633
------
Asia--3.7%
Australia--1.8%
2,600 Macquarie Bank, Ltd. (Financial services)...... 62
------
Hong Kong--1.9%
14,500 Esprit Holdings (Apparel, footwear and retail). 65
------
Latin America--1.8%
Mexico--1.8%
34,800 America Movil S.A. (Communications)............ 63
------
Emerging Europe, Mid-East, Africa--3.8%
Israel--1.7%
900 Teva Pharmaceutical Inds.--ADR
(Pharmaceuticals)............................. 60
------
South Africa--2.1%
10,300 Standard Bank Group Ltd. (Banking)............. 72
------
Total Common Stock--86.3%
(cost $2,816)......................................... 2,998
------
Investment in Affiliate
336,121 William Blair Ready Reserves Fund.............. 336
------
Total Investment in Affiliate--9.7%
(Cost $336) 336
------
Short-Term Investments
141,000 American Express Demand Note, VRN
1.17% due 7/1/04.............................. 141
------
Total Short-term Investments--4.0%
(cost $141)........................................... 141
------
Total Investments--100.0%
(cost $3,293)......................................... 3,475
Liabilities, plus cash and other assets--0.0%.......... (1)
------
Net assets--100.0%..................................... $3,474
======
See accompanying Notes to Financial Statements.
32 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
International Equity Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
At June 30, 2004, the Fund's Portfolio of Investments includes the following
industry categories:
Financials................ 21.9%
Consumer Discretionary.... 21.5%
Information Technology.... 20.7%
Healthcare................ 8.3%
Consumer Staples.......... 7.6%
Energy.................... 7.1%
Industrials............... 6.6%
Telecommunication Services 4.4%
Materials................. 1.9%
------
100.0%
======
At June 30, 2004 the Fund's Portfolio of Investments includes the following
currency categories:
Euro.................. 28.6%
British Pound Sterling 25.3%
Japanese Yen.......... 21.1%
Canadian Dollar....... 6.6%
Swedish Krona......... 4.4%
Swiss Franc........... 3.2%
South African Rand.... 2.4%
Hong Kong Dollar...... 2.2%
Mexico Nuevo Peso..... 2.1%
Australian Dollar..... 2.1%
United States Dollar.. 2.0%
------
100.0%
======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 33
[PHOTO]
MITCHEL
David S. Mitchell
[PHOTO]
PRICE
Capucine "Cappy" Price
- --------------------------------------------------------------------------------
VALUE DISCOVERY FUND
- --------------------------------------------------------------------------------
The Value Discovery Fund invests in small companies that we believe offer a
long-term investment value. We do this by seeking to identify undervalued
companies with sound business fundamentals--"broken stocks not broken
companies."
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Value Discovery Fund posted a -0.82% loss on a total return basis (Class A
Shares reflecting the impact of the maximum sales load) for the 6 months ended
June 30, 2004. By comparison, the Fund's primary benchmark, the Russell 2000(R)
Index, increased 6.76% and the Russell 2000(R) Value Index, rose 7.83%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
At mid-year, our results lagged the benchmark. Underperformance resulted
primarily from earnings' disappointments either in actual reported or lower
than expected guidance. As the economy has improved and valuations have become
richer, the market is much less forgiving of companies that are not delivering
results here and now. That being said, earnings misses due to near term
inability to recapture spikes in raw material prices (as evidenced in steel,
copper, gas, and numerous food commodities) are much more likely to be overcome
than those driven by weaker-than-expected demand or an increasingly difficult
competitive environment.
Which investment strategies enhanced the Fund's return? What were among the
best performing sectors for the Fund?
Within the portfolio, three sectors stood out from a positive relative
contribution perspective during the first half of the year: Other Energy,
Producer Durables and Autos and Transportation.
Other Energy was the best-performing sector in both absolute and contribution
terms during the first half of the year. Veritas, a provider of geophysical
studies and exploration services to the petroleum industry, was the top
performer. Veritas posted strong year-to-date figures, reflecting an upsurge in
demand for their services. Consol Energy, a multi-fuel (coal and gas) energy
producer, also posted strong results, reflecting solid performance by its core
businesses.
Producer Durables was the second-best-performing sector in absolute terms.
Performance was driven primarily by Pentair. Historically, Pentair has operated
in three business segments: Tools, Water and Enclosures. The marketplace
responded favorably to Pentair's announcement to divest itself from its
lower-margin tool business to Black & Decker. Additionally, Pentair made an
advantageous acquisition of a water technology company.
Stock selection was the primary driver of out-performance for our holdings in
the Autos and Transportation sector. Landstar System, a transportation services
company that provides truckload carrier services, inter-modal transportation
services, and expedited air and truck services to shippers, reflected strong
revenue growth driven by increasing demand for shipping services. (We have
since exited the stock entirely due to valuation.) SCS Transportation, a
provider of regional and interregional less-than-truckload and selected
truckload service, reported an 89% first quarter year-over-year earnings
increase citing an increase in operational efficiency, an enhancement in
revenues, as well as an improving economy.
34 Semi-Annual Report June 30, 2004
What were among the weakest performing sectors for the Fund?
During the first half of the year, three sectors stood out as detractors from
performance: Health Care, Consumer Staples, and Technology.
Within the Healthcare sector, First Health Group, a provider of PPO services,
clinical cost management, and fee schedule/cost management services, missed
analysts' earnings expectations, citing increased competition among health
plans trying to gain market share.
The lion's share of the shortfall in the Consumer Staples sector came from
Interstate Bakeries. Interstate Bakeries is the largest wholesale baker and
distributor of fresh baked bread and sweet goods in the U.S. Year to date,
Interstate Bakeries has suffered amid the popularity of the current
low-carbohydrate diet fads, coupled with rising prices in food commodities such
as eggs.
Within the Technology sector, Overland Storage, a designer and manufacturer of
magnetic tape data storage systems cut its revenue guidance during the first
half of the year, pointing to lower-than-expected original equipment
manufacturer revenue. This appears to be a function of supply chain management
changes at its largest customer, Hewlett Packard, as opposed to weakening end
market demand.
Are there any specific investments you would like to highlight?
Examples of some of the positions that were added to the Fund's portfolio of
investments in recent months include the following:
.. Nautilus Group is a marketer, developer and manufacturer of branded health
and fitness products sold under such names as Nautilus, Bowflex,
TreadClimber, Schwinn, StairMaster and Trimline. We are enthusiastic with
this "turnaround" story, as Nautilus introduces new products and redirects
their marketing focus to the retail channel.
.. Spatialight develops, designs, manufactures and markets miniature
high-resolution active matrix liquid crystal displays for computer, video
and other applications. We expect Spatialight to greatly benefit from the
migration to high-definition video equipment.
.. Restoration Hardware is a retailer of home furnishings, functional and
decorative hardware and related merchandise. We are impressed with the
vision new senior management brings to this company to increase sales and
margins.
.. General Cable is engaged in the development, design, manufacturing,
marketing and distribution of copper, aluminum and fiber-optic wire and
cable products. This company is well poised to lead the way as the wire and
cable industry recovers and construction and infrastructure spending and
demand increases.
The following positions were eliminated during the second quarter as they
achieved our price targets and we took profits re-deploying proceeds to more
attractive opportunities:
.. Yellow Roadway, a provider of transportation services to the
less-then-truckload market throughout North America.
.. Bank of Hawaii, a provider of a range of financial products and services in
Hawaii and the Pacific Islands.
.. NCI Building Systems, a manufacturer and marketer of building and framing
systems, self-storage buildings, overhead doors and other components for the
residential, commercial, industrial and agricultural markets.
.. Landstar System, a transportation services company that provides truckload
carrier services, inter-modal transportation services, and expedited air and
truck services to shippers.
June 30, 2004 William Blair Funds 35
What is your current strategy? How is the Fund positioned?
Despite lagging the benchmark near-term, early returns from the earnings season
subsequent to quarter end are running positive and we have taken multiple
opportunities to re-deploy profits into more attractive expected returns both
within and previously outside the portfolio.
A combination of inflationary pressure, uncertainty regarding the upcoming
election, and a slow-down in mutual funds cash inflows continues to contribute
to excessive market volatility. Market turmoil creates opportunity and we
diligently work to uncover companies benefiting from short-term neglect or
undervaluation.
We continue to emphasize companies with strong managements, solid financials,
and competitive positions that should experience earnings growth in even modest
economic expansion.
36 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Value Discovery Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
----------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ----- ------ ----- ----- ----------
Value Discovery Fund Class A 5.23% 39.12% (10.54)% 17.42% 19.09% 9.01%
Russell 2000(R) Index....... 6.76 47.25 (20.48) 2.49 (3.02) 21.26
Russell 2000(R) Value Index. 7.83 46.03 (11.43) 14.03 22.83 (1.49)
----------------------------------------------------
Average Annual Total Return at 6/30/2004 reflecting
the maximum sales load
----------------------------------------------------
Since
1 Year 3 Year Inception
------ ------ ---------
Value Discovery Fund Class A 24.09% 7.54% 14.53%(c)
Value Discovery Fund Class B 25.67 7.99 14.81(c)
Value Discovery Fund Class C 29.66 8.84 14.97(d)
------------------------------------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from November 2, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from November 2, 1999 to June 30,
2004.
(d)For the period from November 3, 1999
(Commencement of the Class) to June 30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
Value Russell Russell
Discovery 2000(R) 2000(R)
Fund Class A Index Value
11/99 $9,400 $10,000 $10,000
12/99 10,300 11,700 10,300
06/00 11,500 12,100 10,900
12/00 12,200 11,300 12,600
06/01 14,300 12,100 14,200
12/01 14,400 11,600 14,400
06/02 16,100 11,100 15,400
12/02 12,900 9,200 12,700
06/03 14,300 10,900 14,800
12/03 17,900 13,600 18,600
6/04 18,800 14,500 20,100
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. Investing
in smaller companies involves special risks, including higher volatility and
lower liquidity. From time to time, the investment adviser may waive fees or
reimburse expenses for the Fund. Without these waivers, performance would be
lower. Class A, B and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Russell 2000(R) Index is the Fund's primary benchmark. The Russell 2000(R)
Index is unmanaged composite of the smallest 2000 stocks of the Russell 3000
Index.
The Russell 2000(R) Value Index consists of small-capitalization companies with
below average price-to-book ratios and forecasted growth rates.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all stocks in the Fund performed the same, nor is
there any guarantee that these stocks will perform as well in the future.
Market forecasts provided in this report may not necessarily come to pass.
June 30, 2004 William Blair Funds 37
- --------------------------------------------------------------------------------
Value Discovery Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
- ----------------------------------------------- -------
Shares Value
- ------- --------------------------------------- -------
Common Stocks
Financial Services--21.7%
114,100 Agree Realty Corporation............... $ 2,887
234,905 American Financial Realty Trust........ 3,357
132,790 AmerUs Group, Class "A"................ 5,498
65,810 Astoria Financial Corporation.......... 2,407
103,585 Brandywine Realty Trust................ 2,816
49,436 City Bank (Lynnwood, WA)............... 1,583
130,655 Donegal Group, Inc., Class "A"......... 2,618
86,085 First Financial Holdings, Inc.......... 2,480
225,985 *Franklin Bank Corporation............. 3,575
583,750 *Meadowbrook Insurance Group, Inc...... 3,094
232,610 National Financial Partners Corporation 8,204
130,020 Ryder System, Inc...................... 5,210
329,220 *U.S.I. Holdings Corporation........... 5,202
309,080 *United Rentals, Inc................... 5,529
260,390 Winston Hotels, Inc.................... 2,695
-------
57,155
-------
Consumer Discretionary--21.6%
208,910 *BJ's Wholesale Club, Inc.............. 5,223
198,621 Cadmus Communications Corporation...... 2,930
142,280 Christopher & Banks Corporation........ 2,520
391,590 *Elizabeth Arden, Inc.................. 8,239
77,140 Ethan Allen Interiors Inc.............. 2,770
126,340 *Heidrick & Struggles International.... 3,750
343,335 *K2, Inc............................... 5,390
50,855 Michaels Stores, Inc................... 2,797
144,195 Nautilus Group, Inc.................... 2,813
211,100 *Navigant Consulting, Inc.............. 4,526
310,515 *Prime Hospitality Corporation......... 3,298
404,605 *Restoration Hardware, Inc............. 2,958
86,345 *Sharper Image Corporation............. 2,710
142,450 *Tech Data Corporation................. 5,574
178,800 *Whitehall Jewellers, Inc.............. 1,337
-------
56,835
-------
Materials and Processing--14.0%
91,865 Boise Cascade Corporation.............. 3,458
196,645 Ferro Corporation...................... 5,246
632,505 *GrafTech International Ltd............ 6,616
138,475 *Jones Lang LaSalle, Inc............... 3,753
342,976 LSI Industries, Inc.................... 3,944
557,280 Polyone Corporation.................... 4,146
140,830 Spartech Corporation................... 3,653
214,430 Watsco, Inc............................ 6,019
-------
36,835
-------
Technology--9.0%
193,902 Avnet, Inc............................. 4,402
553,490 *Borland Software Corporation.......... 4,699
197,975 *Checkpoint Systems, Inc............... 3,550
258,200 *Overland Storage, Inc................. 3,431
167,410 *SPSS, Inc............................. 3,008
471,022 *Tier Technologies, Inc., Class "B".... 4,588
-------
23,678
-------
Other Energy--7.7%
167,156 Consol Energy, Inc..................... 6,018
192,250 *Forest Oil Corporation................ 5,334
- ----------
* Non-income producing
** = Fair Valued pursuant to Valuation Procedures adopted by the Board of
Trustees.
ADR= American Depository Receipt
----------------------------------------------- --------
Shares or Principal Amount Value
----------------------------------------------- --------
Common Stocks--(continued)
468,530 *Newpark Resources, Inc................ $ 2,905
258,075 *Veritas DGC, Inc...................... 5,974
--------
20,231
--------
Health Care--7.2%
206,275 *Albany Molecular Research............. 2,667
184,210 Alpharma, Inc., Class "A".............. 3,773
480,965 *Discovery Partners International, Inc. 2,453
525,435 *Encore Medical Corporation............ 3,310
160,395 *First Health Group Corporation........ 2,504
240,570 *SOLA International, Inc............... 4,145
--------
18,852
--------
Producer Durables--7.1%
198,400 *Agco Corporation...................... 4,042
301,220 *Artesyn Technologies, Inc............. 2,711
131,315 Belden, Inc............................ 2,814
488,700 General Cable Corporation.............. 4,178
92,885 Pentair, Inc........................... 3,125
77,290 Robbins & Myers, Inc................... 1,735
--------
18,605
--------
Consumer Staples--4.3%
492,810 *Del Monte Foods Company............... 5,007
316,725 *Interstate Bakeries Corporation....... 3,436
75,815 *Robert Mondavi Corporation, Class "A". 2,807
--------
11,250
--------
Utilities--3.0%
194,620 Atmos Energy Corporation............... 4,980
171,090 *IDT Corporation....................... 3,085
--------
8,065
--------
Autos and Transportation--3.0%
105,810 BorgWarner, Inc........................ 4,631
128,675 *SCS Transportation, Inc............... 3,396
--------
8,027
--------
Consumer Cyclical--0.6%
255,655 *Spatialight, Inc...................... 1,547
--------
Total Common Stock--99.2%
(cost $203,695)............................... 261,080
--------
Convertible Bonds
2,157 Midwest Express Holdings,
6.750%, due 10/1/08**................. 1,799
--------
Total Convertible Bonds--0.7%
(Cost $2,157)................................. 1,799
--------
Investment in Affiliate
2,172 William Blair Ready Reserves Fund...... 2,172
--------
Total Investment in Affiliate--0.8%
(cost $2,172)................................. 2,172
--------
Total Investments--100.7%
(cost $208,024)............................... 265,051
Liabilities, plus cash and other assets--(0.7)% (1,837)
--------
Net assets--100.0%............................. $263,214
========
See accompanying Notes to Financial Statements.
38 Semi-Annual Report June 30, 2004
[PHOTO]
KAPLAN
James S. Kaplan
[PHOTO]
Chris Vincent
Christopher T. Vincent
- --------------------------------------------------------------------------------
INCOME FUND
- --------------------------------------------------------------------------------
The Income Fund invests in intermediate-term income-producing debt securities.
- --------------------------------------------------------------------------------
AN OVERVIEW FROM THE PORTFOLIO MANAGERS
- --------------------------------------------------------------------------------
How did the Fund perform over the last year?
The Income Fund posted a -2.49% loss on a total return basis (Class A Shares
reflecting the impact of the maximum sales load) for the 6 months ended June
30, 2004. By comparison, the Fund's benchmark, the Lehman Intermediate
Government/Credit Bond Index, declined 0.11%, while the Fund's peer group, the
Morningstar Short-Term Bond Category decreased 0.06%.
What were the most significant factors impacting Fund performance? What factors
were behind the Fund's underperformance versus the benchmark?
The Fund's slight underperformance versus its benchmark largely reflected the
performance of its mortgage-backed and asset-backed securities. Mortgage-backed
and asset-backed securities performed relatively well during the first quarter,
although prices of the mortgage-backed sector lagged equivalent duration
Treasury prices in March, based on expectations prepayments would increase
during the months ahead. One asset-backed security was unexpectedly downgraded
by a rating agency during the first quarter, which acted as a slight drag on
portfolio performance, and helped contribute to modest underperformance versus
our benchmark during that period. The Fund gained ground during the second
quarter, reflecting the yield advantage of corporate, mortgage and asset-backed
securities versus U.S. Treasury securities.
The first quarter was marked by a significant drop in interest rates, which was
sparked by the February U.S. employment report. The Labor Department reported
in early March that the economy added 83,000 jobs in February, which was down
sharply from January's gain and well below the type of growth experienced in
the 1980's and 1990's. The meager gain in jobs coupled with the overall
unemployment rate holding steady at 5.6% caused interest rates to decline
sharply and bond prices rallied. For example, prices on 10-year U.S. Treasury
notes gained by 4.6% during the first quarter.
Corporate bond spreads were relatively stable during the first quarter, after
experiencing a major bull market in 2003. Corporate bonds considerably
outperformed Treasury securities during most of last year, as the prices of
these bonds rallied in response to signs that an economic rebound would improve
the credit outlook for companies issuing bonds.
Interest rates were the biggest driver of Fund performance during the second
quarter. Interest rates made a significant move higher during the quarter, only
to recede slightly at the end of June. For example, the yield on 10-year U.S.
Treasury Notes stood at 3.84% on March 31, rose to 4.87% by June 14, and eased
back to 4.58% on June 30.
The rise in rates mirrored the signs of improved business confidence in the
economy and its prospects. The Labor Department reported that employers added
208,000 jobs to non-farm payrolls in May, and that hiring in March and April
was more robust than had previously been reported.
As mentioned, the positive yield advantage across all of the "spread" sectors
contributed to the Fund's performance. This positive differential was
especially noticeable in the mortgage- and asset-backed sectors of the
fixed-income markets, which benefited from a decline in prepayments.
June 30, 2004 William Blair Funds 39
Late in the second quarter geopolitical events had a positive impact on the
markets, as the U.S. transfer of sovereignty to an interim Iraqi government
ahead of the June 30/th/ deadline calmed those investors who were anxious about
the potential for problems.
Which investment strategies enhanced the Fund's return?
Were there any investment strategies that produced the best results?
Our investment strategy through the first half of the year has been to exploit
the yield advantage of corporate, mortgage and asset-backed securities versus
U.S. Treasury securities. These securities have generated higher yields and
exhibited relatively stable returns for the quarter.
Corporate bond spreads have been underpinned by a lack of supply and a dearth
of new issuance. In addition, as corporations have benefited from productivity
gains, credit quality has improved. As a result of the improved credit quality,
there have been fewer downgrades of corporate issues and an increased number of
upgrades, when compared to the environment a several years ago.
The market has gone from a period where corporate bonds were too
cheap--reflecting a lack of demand in the aftermath of a period of corporate
scandals--to a period during the first quarter of this year marked by fair
value and renewed investor confidence, and finally to an environment in the
second quarter which there has been less discrimination in terms of bond
valuations.
What were among the weakest performing sectors for the Fund?
There really was not any sector that stood out in terms of weaker-than expected
performance during the first half of the year. As we mentioned, one
asset-backed security was unexpectedly downgraded by a rating agency during the
first quarter, which acted as a slight drag on portfolio performance. That
security was subsequently sold out of the Fund's portfolio of investments.
What is your current strategy? How is the Fund positioned?
We remain on the "defensive side" with respect to interest rates. The
fixed-income markets are currently "discounting,"--that is, expecting--the
possibility that the Federal Reserve Board will nudge interest rates higher, in
a series of three-to-four 0.25% rate hikes over the balance of 2004.
We believe corporate bond spreads should remain supported by improving credit
fundamental considerations and by the favorable supply/demand characteristics
we mentioned earlier. It is worth noting that the fixed income markets--and the
corporate bond market in particular--have yet to experience any "crowding out"
from any increased borrowing demands on the part of the U.S. Government to
finance the budget deficit.
We expect rates to move higher in an orderly manner, and have confidence owning
"callable" mortgage-backed and asset-backed securities. We believe a great deal
of "call risk' has left the market. The refinancing boom is largely over, and
the outlook for prepayments has significantly improved from earlier this year
as well as one year ago.
We intend to maintain our commitment to our current strategy within the
Corporate, Asset-backed and Mortgage-backed markets, deploying new money as it
becomes available within each sector. Consequently, the Fund will remain
overweight in favor of corporate bonds as well as mortgage-backed and
asset-backed issues, and underweight in Treasury and Agency securities. We
still see value in a variety of sectors and asset classes, and believe we can
add significant value as managers in our ability to reinvest principal and
interest in sectors, such as asset-backed securities, that will provide the
Fund's portfolio with meaningful differentiation in yield when compared to U.S.
Treasury securities.
40 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Performance Highlights
- --------------------------------------------------------------------------------
Annual Total Return without the maximum sales load
----------------------------------------------------
6/30/2004(a) 2003 2002 2001 2000 1999(a)(b)
------------ ---- ---- ---- ----- ----------
Income Fund Class A.......... (0.50)% 3.56% 7.86% 7.26% 10.20% 0.63%
Lehman Intermediate
Government/Credit Bond Index (0.11) 4.31 9.84 8.96 10.12 0.39
--------------------------------------
Average Annual Total Return at 6/30/2004 reflecting
the maximum sales load
--------------------------------------
Since
1 Year 3 Year Inception
------ ------ ---------
Income Fund Class A (1.89)% 4.10% 5.69%(c)
Income Fund Class B (2.56) 3.22 4.84(d)
Income Fund Class C (1.48) 4.10 5.12(e)
--------------------------------------
(a)Total return is not annualized for periods that
are less than a full year.
(b)For the period from October 25, 1999
(Commencement of the Class) to December 31, 1999.
(c)For the period from October 25, 1999 to June 30,
2004.
(d)For the period from November 2, 1999
(Commencement of the Class) to June 30, 2004.
(e)For the period from November 3, 1999
(Commencement of the Class) to June 30, 2004.
Illustration of an assumed investment of $10,000
with reinvestment of capital gain distributions and
income dividends
[CHART]
Income Fund Lehman Intermediate
Class A Gov/Credit Index
10/99 $9,800 $10,000
12/99 9,900 10,100
06/00 10,200 10,400
12/00 10,900 11,100
06/01 11,200 11,500
12/01 11,600 12,100
06/02 12,000 12,500
12/02 12,600 13,300
06/03 12,900 13,800
12/03 13,000 13,800
6/04 12,900 13,800
Past performance does not guarantee future results. Total returns shown assume
reinvestment of dividends and capital gains. Investment returns and principal
will fluctuate and you may have a gain or loss when you sell shares. Class A, B
and C shares are not available for sale.
The performance highlights and graph presented above do not reflect the
deduction of taxes that a shareholder would pay on fund distributions or the
redemption of fund shares.
The Lehman Intermediate Government/Credit Bond Index indicates broad
intermediate government/corporate bond market performance.
This report identifies the Fund's investments on June 30, 2004. These holdings
are subject to change. Not all investments in the Fund performed the same, nor
is there any guarantee that these investments will perform as well in the
future. Market forecasts provided in this report may not necessarily come to
pass.
June 30, 2004 William Blair Funds 41
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all amounts in thousands) (unaudited)
- ------------------------------------------------------- ------
Principal Amount Value
- ------------------------------------------------------- ------
U.S. Government and U.S. Government Agency--7.4%
U.S. Treasury--5.1%
$ 3,000 U.S. Treasury Note, 6.000%, due 8/15/09........ $3,297
8,000 U.S. Treasury Note, 6.500%, due 2/15/10........ 9,014
1,500 1,434
- ------- U.S. Treasury Note, 3.875%, due 2/15/13........ ------
12,500 13,745
- ------- Total U.S. Treasury Obligations................ ------
Government National Mortgage Association (GNMA)--
2.2%
3,543 #616250, 6.000%, due 2/15/24................... 3,654
2,250 2,331
- ------- #2002-48, Tranche 0B, 6.000%, due 5/16/30...... ------
5,793 5,985
- ------- Total Government National Mortgage Association. ------
Small Business Administration--0.1%
-- Receipt for Multiple Originator Fees, #3,
0.814%, due 11/01/08 (Interest Only) WAC...... 64
149 157
- ------- Loan #100023, 9.375%, due 11/25/14............. ------
149 221
- ------- Total Small Business Administration Obligations ------
Federal Home Loan Mortgage Corp. (FHLMC)--18.9%
1,084 #G10067, 7.000%, due 1/1/08.................... 1,131
354 #G10147, 8.500%, due 2/1/08.................... 371
2,200 #1601, Tranche PJ, 6.000%, due 10/15/08, VRN... 2,275
1,561 #1612, Tranche SE, 8.100%, due 11/15/08, VRN... 1,639
1,444 #E80050, 6.000%, due 10/1/09................... 1,513
1,011 #G90028, 7.000%, due 5/15/09................... 1,072
1,185 #G90019, 7.500%, due 12/17/09.................. 1,260
5,500 7.000%, due 3/15/10............................ 6,196
901 #E65418, 7.000%, due 8/1/10.................... 940
1,003 #G10457, 7.000%, due 2/1/11.................... 1,065
924 #E00436, 7.000%, due 6/1/11.................... 981
2,396 #E90630, 6.000%, due 7/1/12.................... 2,507
587 #G10708, 6.500%, due 8/1/12.................... 622
1,539 #E91999, 5.000%, due 10/1/12................... 1,568
372 #G11218, 7.000%, due 10/1/12................... 395
2,537 #E96147, 5.000%, due 5/1/13.................... 2,581
1,915 #E95846, 4.500%, due 5/1/13.................... 1,917
2,287 #G10839, 5.500%, due 10/1/13................... 2,352
2,310 #E72924, 7.000%, due 10/1/13................... 2,451
2,795 #E00639, 5.000%, due 3/1/14.................... 2,824
438 #E81908, 8.500%, due 12/1/15................... 469
1,707 #G90022, 8.000%, due 9/17/16................... 1,791
2,379 #G11486, 7.500%, due 4/1/17.................... 2,535
2,649 #E90398, 7.000%, due 5/1/17.................... 2,811
914 #M30028, 5.500%, due 5/1/17.................... 947
1,912 #G11549, 7.000%, due 7/1/17.................... 2,029
2,821 #G90027, 6.000%, due 11/15/17.................. 2,938
531 #C67537, 9.500%, due 8/1/21.................... 594
870 878
- ------- #G21, Tranche J, 6.250%, due 8/25/22........... ------
48,126 50,652
- ------- Total FHLMC Mortgage Obligations............... ------
- ------- --------------------------------------------- ------
Principal Amount Value
- ----------------------------------------------------- ------
Federal National Mortgage Association (FNMA)--19.3%
$ 1,347 #545560, 8.000%, due 5/1/07.................. $1,416
1,163 #93-196, Tranche SA, 18.723%, due 10/25/08,
VRN......................................... 1,363
520 #1993-221, Tranche SG, 12.992%, due 12/25/08,
VRN......................................... 556
818 #765396, 5.500%, due 1/1/09.................. 845
1,633 #731691, 7.000%, due 9/1/09.................. 1,731
1,142 #695512, 8.000%, due 9/1/10.................. 1,217
2,273 #725479, 8.500%, due 10/1/10................. 2,443
3,393 #255056, 5.000%, due 11/1/10................. 3,440
6,600 6.250%, due 2/1/11........................... 7,086
1,181 #313816, 6.000%, due 4/1/11.................. 1,235
553 #577393, 10.000%, due 6/1/11................. 610
1,499 #577395, 10.000%, due 8/1/11................. 1,661
3,102 # 254705, 5.500%, due 3/1/13................. 3,218
1,260 #254788, 6.500%, due 4/1/13.................. 1,334
1,724 #725315, 8.000%, due 5/1/13.................. 1,843
692 #593561, 9.500%, due 8/1/14.................. 776
3,052 #567027, 7.000%, due 9/1/14.................. 3,243
3,529 #567026, 6.500%, due 10/1/14................. 3,736
1,144 #458124, 7.000%, due 12/15/14................ 1,199
1,443 #598453, 7.000%, due 6/1/15.................. 1,532
1,225 #555747, 8.000%, due 5/1/16.................. 1,310
698 #643217 , 6.500%, due 6/1/17................. 737
1,773 #682075, 5.500%, due 11/1/17................. 1,819
3,943 #662925, 6.000%, due 12/1/17................. 4,130
371 #1996-14, Tranche B, 3.801%, due 4/25/23..... 371
11 #1993-19, Tranche SH, 11.233%, due 4/25/23,
VRN......................................... 14
1,711 #254797, 5.000%, due 6/1/23.................. 1,691
1,050 1,100
- ------- #733897, 6.500%, due 12/1/32................. ------
48,850 51,656
- ------- Total FNMA Mortgage Obligations.............. ------
See accompanying Notes to Financial Statements.
42 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ------------------------------- ----------- --------
Collateralized Mortgage Obligations--22.2%
$ 2,500 Security National Mortgage Loan
Trust, 2002-2, Tranche M2,
6.460%, due 8/25/08........... A+ $ 2,511
614 GRP 2004-1 3.960%, due
3/25/09....................... A 613
5,125 Condor Auto, 2003-A, Tranche B,
7.000%, due 12/15/09.......... A3 5,228
2,040 Countrywide Alternative Loan
Trust, 2003-11T1, Tranche M,
4.750% due 7/25/18............ AA 1,968
1,818 Cityscape Home Equity Loan
Trust, 1997-4, Tranche M2,
7.710%, due 10/25/18.......... A 1,816
1,900 ABFS, 2002-2, Tranche A6,
5.850%, due 3/15/19........... AAA 1,976
2,960 Security National Mortgage
Loan Trust, 2001-2A,
Tranche B, 8.100%, due
10/25/20...................... BBB 2,978
3,172 Countrywide, 2001-HLV1,
Tranche B1, 9.385%,
due 5/10/22................... BBB 3,275
244 First Plus, 1998-3, Tranche A7,
6.950%, due 10/10/22.......... AAA 244
1,216 First Plus, 1997-4, Tranche M2,
7.330%, due 9/11/23........... A 1,215
973 First Plus, 1997-4, Tranche A8,
7.310%, due 9/11/23........... AAA 972
712 First Plus, 1998-2, Tranche M2,
7.510%, due 5/10/24........... A2 711
208 First Plus, 1998-3, Tranche M2,
7.420%, due 5/10/24........... A2 209
2,144 Security National Mortgage Loan
Trust, 2000-2, Tranche B,
9.510%, due 9/25/24........... A2 2,238
630 Security National Mortgage
Loan Trust, 2001-2A,
Tranche M, 8.100%, due
11/25/24...................... A 643
1,577 CIT Group Home Equity Loan
Trust, 98-1 M2, 6.720%, due
9/15/27....................... A2 1,616
3,035 GMAC Mortgage Corporation
Loan Trust, 2000-CL1,
Tranche M, 8.720%, due
6/25/26....................... AA+ 3,109
4,425 Green Tree Home Improvement
Loan Trust, 1998-E,
Tranche HEM2, 7.270%, due
6/15/28....................... A+ 4,499
2,313 Delta Funding Home Equity Loan
Trust, 2000-2, Tranche A6F,
7.970%, due 8/15/30........... AAA 2,264
2,700 Bear Stearns ABS, 2001-A,
Tranche M1 7.540%, due
2/15/31....................... A 2,860
2,000 Countrywide, 2000-2,
Tranche MF2, 9.000%, due
6/25/31....................... A 2,054
590 Countrywide, 2001-1,
Tranche MF2, 7.511%, due
7/25/31....................... AA- 608
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- -------------------------------- ----------- --------
Collateralized Mortgage Obligations--(continued)
$ 2,222 IMSA, 2001-5, Tranche M1
7.250%, due 8/25/31............ AA $ 2,297
4,635 Origin, 2001-A, Tranche A5,
7.080%, due 3/15/32............ Aaa 4,738
1,600 Security National Mortgage
Loan Trust, 2004-1A,
Tranche M2, 6.750%, due
06/25/32....................... A 1,590
1,164 Structured Assets Security
Corporation, 2002-17,
Tranche B3, 6.077%, due
9/25/32........................ BBB 1,135
943 GRP Real Estate Asset Trust,
2003-1, Tranche A, 5.970%,
due 11/25/32................... A 942
2,934 LSSCO, 2004-2, Tranche M1,
5.177%, due 2/28/33............ AA 2,964
324 ABFS, 2002-2, Tranche A-7,
5.125%, 6/15/33................ AAA 332
1,500 ABFS, 2002-3, Tranche MI, 1,530
------- 5.402%, 9/15/33................ AA --------
58,218 Total Collateralized Mortgage 59,135
------- Obligations.................... --------
Corporate Obligations--30.3%
3,499 Block Financial Corporation,
8.500%, due 4/15/07............ A 3,927
2,000 Mellon Bank NA, 7.375%, due
5/15/07........................ A+ 2,195
1,336 Ford Motor Credit, 7.200%, due
6/15/07........................ BBB 1,421
2,775 Applied Materials, Inc., 6.750%,
due 10/15/07................... A- 3,039
1,000 Amgen Inc., 6.500%, due
12/01/07....................... A+ 1,090
2,550 DaimlerChrysler, NA Holdings,
4.750%, due 1/15/08............ A3 2,571
2,200 Lehman Brothers Holdings
4.000%, due 1/22/08............ A+ 2,196
1,650 Target Corporation,
3.375%, due 3/1/08............. A+ 1,623
2,350 Wells Fargo Company,
3.500%, due 4/4/08............. AA 2,316
2,225 Cardinal Health, Inc.,
6.250%, due 7/15/08............ A 2,384
2,425 CIT Group Inc.,
3.375%, due 4/1/09............. A 2,303
3,475 ConocoPhillips, Inc.,
8.750%, due 5/25/10............ A- 4,200
2,300 Household Finance Corporation,
8.000%, due 7/15/10............ A 2,669
2,399 Boeing Capital Corporation,
7.375%, due 9/27/10............ A+ 2,713
2,500 Citigroup, Inc.,
7.250%, due 10/1/10............ A+ 2,816
2,125 Comcast Cable Communications
Corp., 6.750%, due
1/30/11........................ BBB 2,293
2,600 Sprint Capital Corp., 7.625%,
due 1/30/11.................... BBB 2,874
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 43
- --------------------------------------------------------------------------------
Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments, June 30, 2004 (all dollar amounts in thousands)
(unaudited)
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ---------------------------- ----------- --------
Corporate Obligations--(continued)
$ 2,600 Countrywide Financial Corp.,
4.000%, due 3/22/11........ A $ 2,425
1,900 Time Warner, 6.750%, due
4/15/11.................... BBB+ 2,046
3,200 Morgan Stanley, 6.750%, due
4/15/11.................... A+ 3,507
3,000 General Motors Acceptance
Corporation, 6.875%, due
9/15/11.................... BBB+ 3,076
1,500 Ford Motor Credit Co., Inc.
7.250%, due 10/25/11....... BBB+ 1,566
2,850 National Rural Utility
Cooperative, 7.250%, due
3/1/12..................... A 3,236
2,500 Weyerhaeuser Company,
6.750%, due 3/15/12........ BBB 2,707
2,500 GE Capital Corporation,
6.000%, due 6/15/12........ AAA 2,638
2,000 SLM Corporation, 5.125%, due
8/27/12.................... A+ 1,976
2,550 Verizon Global Funding
Corporation, 7.375%, due
9/1/12..................... A+ 2,868
- ----------
WAC = Weighted Average Coupon
VRN = Variable Rate Note
NRSRO = Nationally Recognized Statistical Rating Organization, such as S&P,
Moody's or Fitch
The obligations of certain U.S. Government-sponsored entities are neither
issued nor guaranteed by the United States Treasury.
NRSRO
Principal Rating
Amount (unaudited) Value
- --------- ----------------------------- ----------- --------
Corporate Obligations--(continued)
$ 2,360 Cox Communications Inc.,
7.125%, due 10/1/12......... BBB $ 2,586
3,200 IBM Corporation, 4.750%, due
11/29/12.................... A+ 3,131
2,400 Kroger Company, 5.500%, due
2/1/13...................... BBB 2,393
1,900 Ohio Power Company, 5.500%,
due 2/15/13................. A3 1,914
2,000 TXU Energy Company, 7.00%, 2,178
- -------- due 3/15/13................. BBB --------
75,869 80,877
- -------- Total Corporate Obligations.. --------
249,505 Total Long Term Investments--98.1% $262,271
- -------- (Cost $261,797)....................... --------
Short-Term Investments--0.9%
2,345 American Express Corporation, 2,345
- -------- VRN 1.170%, due 7/1/04...... A+ --------
2,345 Total Short-Term Investments 2,345
- -------- (Cost $2,345)............. --------
$251,850 Total Investments--99.0%
======== (Cost $264,142)........... 264,616
Cash and other assets,
less liabilities--1.0%...... 2,682
--------
Net Assets--100.0%........... $267,298
========
See accompanying Notes to Financial Statements.
44 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 2004 (all amounts in thousands) (unaudited)
Tax- Small-
Managed Large Cap Small Cap Mid Cap
Growth Growth Growth Growth
Growth Fund Fund Fund Fund Fund
- - ----------- ------- --------- --------- -------
Assets
Investments in securities, at cost...................................... $217,557 $ 4,545 $ 5,382 $528,779 $12,895
Investments in Affiliated Fund, at cost................................. 3,273 2 107 14,797 761
-------- ------- ------- -------- -------
Investments in securities, at value..................................... $271,021 $ 5,822 $ 6,161 $632,605 $13,568
Investments in Affiliated Fund, at value................................ 3,273 2 107 14,797 761
Cash.................................................................... -- -- -- 86 --
Receivable for fund shares sold......................................... 459 -- -- 327 148
Receivable for investment securities sold............................... -- -- -- 7,096 --
Receivable from Advisor................................................. -- 2 8 -- 33
Dividend and interest receivable........................................ 248 4 6 91 5
-------- ------- ------- -------- -------
Total assets..................................................... 275,001 5,830 6,282 655,002 14,515
Liabilities
Payable for investment securities purchased............................. -- 94 -- 1,998 37
Payable for fund shares redeemed........................................ 94 -- -- 673 --
Management fee payable.................................................. 184 4 4 530 11
Distribution and shareholder services fee payable....................... 9 -- -- 177 1
Other accrued expenses.................................................. 101 12 10 121 30
-------- ------- ------- -------- -------
Total liabilities................................................ 388 110 14 3,499 79
-------- ------- ------- -------- -------
Net Assets...................................................... $274,613 $ 5,720 $ 6,268 $651,503 $14,436
======== ======= ======= ======== =======
Capital
Composition of Net Assets
Par value of shares of beneficial interest............................ $ 27 $ 1 $ 1 $ 27 $ 1
Capital paid in excess of par value................................... 244,507 6,557 11,007 509,436 13,770
Accumulated net investment income (loss).............................. (454) (25) (11) (3,676) (50)
Accumulated realized gain (loss)...................................... (22,931) (2,090) (5,508) 41,890 42
Net unrealized appreciation (depreciation) of investments and foreign
currencies........................................................... 53,464 1,277 779 103,826 673
-------- ------- ------- -------- -------
Net Assets...................................................... $274,613 $ 5,720 $ 6,268 $651,503 $14,436
======== ======= ======= ======== =======
Class A Shares
Net Assets............................................................ $ 2 $ 2 $ 1 $ 5 $ 2
Shares Outstanding.................................................... 200 200 200 200 200
Maximum offering price reflecting 5.75% sales load.................... $ 10.57 $ 9.01 $ 6.23 $ 25.80 $ 11.28
Net Asset Value Per Share............................................. $ 9.96 $ 8.49 $ 5.87 $ 24.32 $ 10.63
Class B Shares
Net Assets............................................................ $ 2 $ 2 $ 1 $ 5 $ 2
Shares Outstanding.................................................... 200 200 200 200 200
Net Asset Value Per Share............................................. $ 9.56 $ 8.20 $ 5.66 $ 23.47 $ 10.59
Class C Shares
Net Assets............................................................ $ 2 $ 2 $ 1 $ 5 $ 2
Shares Outstanding.................................................... 200 200 200 200 200
Net Asset Value Per Share............................................. $ 9.55 $ 8.20 $ 5.65 $ 23.48 $ 10.59
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 45
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 (all dollar amounts in thousands) (unaudited)
Small-Mid
Cap
Tax-Managed Large Cap Small Cap Growth
Growth Fund Growth Fund Growth Fund Growth Fund Fund
- - ----------- ----------- ----------- ----------- ---------
Investment income
Dividends.................................................... $ 905 $ 17 $ 24 $ 594 $ 14
Less foreign tax withheld.................................... (31) -- -- -- --
Interest..................................................... 6 -- -- -- --
------- ----- ----- ------- ----
Total income............................................... 880 17 24 594 14
Expenses
Investment advisory fees..................................... 1,025 25 24 3,182 45
Distribution fees............................................ 52 -- -- 462 4
Shareholder services fees.................................... -- -- -- -- --
Custodian fees............................................... 31 8 7 68 16
Transfer agent fees.......................................... 110 4 5 172 15
Professional fees............................................ 18 8 7 22 15
Registration fees............................................ 16 15 15 58 11
Other expenses............................................... 82 2 4 142 26
------- ----- ----- ------- ----
Total expenses before waiver............................... 1,334 62 62 4,106 132
Plus expenses recovered by the advisor..................... -- -- -- 164
Less expenses waived or absorbed by the Advisor............ -- (20) (27) -- (68)
------- ----- ----- ------- ----
Net expenses............................................... 1,334 42 35 4,270 64
------- ----- ----- ------- ----
Net investment income (loss)............................... (454) (25) (11) (3,676) (50)
Net realized and unrealized gain (loss) on investments, foreign
currency transactions and other assets and liabilities
Net realized gain (loss) on investments.................... 8,810 256 137 39,748 42
------- ----- ----- ------- ----
Change in net unrealized appreciation (depreciation) on
investments and other assets and liabilities.................. (8,134) (171) (181) 26,349 694
------- ----- ----- ------- ----
Net increase (decrease) in net assets resulting from operations $ 222 $ 60 $ (55) $62,421 $686
======= ===== ===== ======= ====
See accompanying Notes to Financial Statements.
46 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 and the Year Ended December 31, 2003 (all
amounts in thousands) (unaudited)
Tax-
Managed
Growth Growth
Fund Fund
- - ------------------ --------------- -------
2004 2003 2004 2003 2004
- - -------- -------- ------- ------ ------
Operations
Net investment income (loss)............................................... $ (454) $ (1,214) $ (25) $ (40) $ (11)
Net realized gain (loss) on investments, foreign currency transactions and
other assets and liabilities.............................................. 8,810 758 256 (483) 137
Change in net unrealized appreciation (depreciation) on investments,
foreign currency transactions and other assets and liabilities............ (8,134) 58,056 (171) 1,777 (181)
-------- -------- ------- ------ ------
Net increase (decrease) in net assets resulting from operations............ 222 57,600 60 1,254 (55)
Distributions to shareholders from
Net investment income...................................................... -- -- -- -- --
Net realized gain.......................................................... -- -- -- -- --
-------- -------- ------- ------ ------
-- -- -- -- --
Capital stock transactions
Net proceeds from sale of shares........................................... 18,236 29,113 131 1,159 1,268
Shares issued in reinvestment of income dividends and capital gain
distributions............................................................. -- -- -- -- --
Less cost of shares redeemed............................................... (25,499) (60,684) (1,342) (845) (464)
-------- -------- ------- ------ ------
Net increase (decrease) in net assets resulting from capital share
transactions.............................................................. (7,263) (31,571) (1,211) 314 804
-------- -------- ------- ------ ------
Increase (decrease) in net assets.......................................... (7,041) 26,029 (1,151) 1,568 749
Net assets
Beginning of period........................................................ 281,654 255,625 6,871 5,303 5,519
-------- -------- ------- ------ ------
End of period.............................................................. $274,613 $281,654 $ 5,720 $6,871 $6,268
======== ======== ======= ====== ======
Undistributed net investment income (loss) at the end of the period.......... $ (454) $ -- $ (25) $ -- $ (11)
======== ======== ======= ====== ======
Large Cap Small Cap Small-Mid Cap
Growth Growth Growth
Fund Fund Fund
- - -------- ------------------ ---------------
2003 2004 2003 2004 2003(a)
- - ------- -------- -------- ------- -------
Operations
Net investment income (loss)............................................... $ (26) $ (3,676) $ (2,137) $ (50) $ --
Net realized gain (loss) on investments, foreign currency transactions and
other assets and liabilities.............................................. (553) 39,748 20,759 42 --
Change in net unrealized appreciation (depreciation) on investments,
foreign currency transactions and other assets and liabilities............ 1,644 26,349 75,261 694 (21)
------- -------- -------- ------- ------
Net increase (decrease) in net assets resulting from operations............ 1,065 62,421 93,883 686 (21)
Distributions to shareholders from
Net investment income...................................................... -- -- -- -- --
Net realized gain.......................................................... -- -- (7,443) -- --
------- -------- -------- ------- ------
-- -- (7,443) -- --
Capital stock transactions
Net proceeds from sale of shares........................................... 1,147 140,340 400,134 10,165 3,694
Shares issued in reinvestment of income dividends and capital gain
distributions............................................................. -- -- 7,200 -- --
Less cost of shares redeemed............................................... (2,162) (70,082) (53,530) (88) --
------- -------- -------- ------- ------
Net increase (decrease) in net assets resulting from capital share
transactions.............................................................. (1,015) 70,258 353,804 10,077 3,694
------- -------- -------- ------- ------
Increase (decrease) in net assets.......................................... 50 132,679 440,243 10,763 3,673
Net assets
Beginning of period........................................................ 5,469 518,824 78,581 3,673 --
------- -------- -------- ------- ------
End of period.............................................................. $ 5,519 $651,503 $518,824 $14,436 $3,673
======= ======== ======== ======= ======
Undistributed net investment income (loss) at the end of the period.......... $ -- $ (3,676) $ -- $ (50) $ --
======= ======== ======== ======= ======
- ----------
(a)For the period from December 29, 2003 (Commencement of Operations) to
December 31, 2003.
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 47
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 2004 (all dollar amounts in thousands) (unaudited)
International International Value
Growth Equity Discovery
Fund Fund Fund
- - ------------- ------------- ---------
Assets
Investments in securities, at cost................................................. $2,061,736 $2,957 $205,852
Investments in Affiliated Fund, at cost............................................ 23,483 336 2,172
---------- ------ --------
Investments in securities, at value................................................ $2,486,303 $3,139 $262,879
Investments in Affiliated Fund, at value........................................... 23,483 336 2,172
Cash............................................................................... -- -- --
Foreign currency, at value (cost $714 )............................................ 697 -- --
Receivable for fund shares sold.................................................... 14,034 -- 20
Receivable for investment securities sold.......................................... 40,933 -- 2,773
Receivable from Advisor............................................................ -- 11 23
Dividend and interest receivable................................................... 2,388 1 194
---------- ------ --------
Total assets................................................................ 2,567,838 3,487 268,061
Liabilities
Payable for investment securities purchased........................................ 27,349 -- 4,403
Payable for fund shares redeemed................................................... 1,309 -- 67
Management fee payable............................................................. 2,054 3 234
Distribution and shareholder services fee payable.................................. 357 -- 34
Dividend payable................................................................... -- -- --
Other accrued expenses............................................................. 451 10 109
---------- ------ --------
Total liabilities........................................................... 31,520 13 4,847
---------- ------ --------
Net Assets................................................................. $2,536,318 $3,474 $263,214
========== ====== ========
Capital
Composition of Net Assets
Par value of shares of beneficial interest....................................... $ 132 $ -- $ 11
Capital paid in excess of par value.............................................. 2,170,553 3,299 185,109
Accumulated net investment income (loss)......................................... (244) (1) 149
Accumulated realized gain (loss)................................................. (58,675) (6) 20,918
Net unrealized appreciation (depreciation) of investments and foreign currencies. 424,552 182 57,027
---------- ------ --------
Net Assets................................................................. $2,536,318 $3,474 $263,214
========== ====== ========
Class A Shares
Net Assets....................................................................... $ 4 $ 2 $ 5
Shares Outstanding............................................................... 200 200 200
Maximum offering price reflecting 5.75% sales load for equity funds, and 2% for
Income Fund..................................................................... $ 20.36 $11.19 $ 24.14
Net Asset Value Per Share........................................................ $ 19.19 $10.55 $ 22.75
Class B Shares
Net Assets....................................................................... $ 3 $ 2 $ 5
Shares Outstanding............................................................... 200 200 200
Net Asset Value Per Share........................................................ $ 18.29 $10.55 $ 23.26
Class C Shares
Net Assets....................................................................... $ 3 $ 2 5
Shares Outstanding............................................................... 200 200 200
Net Asset Value Per Share........................................................ $ 18.29 $10.55 $ 23.27
Income
Fund
- - --------
Assets
Investments in securities, at cost................................................. $264,142
Investments in Affiliated Fund, at cost............................................ --
--------
Investments in securities, at value................................................ $264,616
Investments in Affiliated Fund, at value........................................... --
Cash............................................................................... 81
Foreign currency, at value (cost $714 )............................................ --
Receivable for fund shares sold.................................................... 203
Receivable for investment securities sold.......................................... --
Receivable from Advisor............................................................ --
Dividend and interest receivable................................................... 2,630
--------
Total assets................................................................ 267,530
Liabilities
Payable for investment securities purchased........................................ --
Payable for fund shares redeemed................................................... 66
Management fee payable............................................................. 112
Distribution and shareholder services fee payable.................................. 7
Dividend payable................................................................... --
Other accrued expenses............................................................. 47
--------
Total liabilities........................................................... 232
--------
Net Assets................................................................. $267,298
========
Capital
Composition of Net Assets
Par value of shares of beneficial interest....................................... $ 27
Capital paid in excess of par value.............................................. 280,237
Accumulated net investment income (loss)......................................... (538)
Accumulated realized gain (loss)................................................. (12,902)
Net unrealized appreciation (depreciation) of investments and foreign currencies. 474
--------
Net Assets................................................................. $267,298
========
Class A Shares
Net Assets....................................................................... $ 1
Shares Outstanding............................................................... 200
Maximum offering price reflecting 5.75% sales load for equity funds, and 2% for
Income Fund..................................................................... $ 6.18
Net Asset Value Per Share........................................................ $ 6.06
Class B Shares
Net Assets....................................................................... $ 2
Shares Outstanding............................................................... 200
Net Asset Value Per Share........................................................ $ 10.00
Class C Shares
Net Assets....................................................................... $ 2
Shares Outstanding............................................................... 200
Net Asset Value Per Share........................................................ $ 10.15
See accompanying Notes to Financial Statements.
48 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Statements of Operations
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 (all dollar amounts in thousands) (unaudited)
International International Value
Growth Equity Discovery
Fund Fund Fund
- - ------------- ------------- ---------
Investment income
Dividends.......................................................................... $ 20,796 $ 2 $ 1,643
Less foreign tax withheld.......................................................... (2,204) -- --
Interest........................................................................... 192 1 73
-------- ---- -------
Total income..................................................................... 18,784 3 1,716
Expenses
Investment advisory fees........................................................... 11,347 3 1,410
Distribution fees.................................................................. 2,054 -- 37
Shareholder services fees.......................................................... -- -- --
Custodian fees..................................................................... 1,045 4 42
Transfer agent fees................................................................ 865 1 66
Professional fees.................................................................. 65 2 16
Registration fees.................................................................. 87 4 10
Other expenses..................................................................... 519 1 9
-------- ---- -------
Total expenses before waiver..................................................... 15,982 15 1,590
Less expenses repaid to (waived and absorbed by) the Advisor..................... -- (11) (23)
-------- ---- -------
Net expenses..................................................................... 15,982 4 1,567
-------- ---- -------
Net investment income (loss)..................................................... 2,802 (1) 149
Net realized and unrealized gain (loss) on investments, foreign currency transactions
and other assets and liabilities
Net realized gain (loss) on investments.......................................... 76,358 (2) 16,473
Net realized gain (loss) on foreign currency transactions and other assets and
liabilities..................................................................... (7,519) (4) --
-------- ---- -------
Total net realized gain (loss)................................................... 68,839 (6) 16,473
Change in net unrealized appreciation (depreciation) on investments and other assets
and liabilities..................................................................... (13,963) 182 (4,102)
-------- ---- -------
Net increase (decrease) in net assets resulting from operations...................... $ 57,678 $175 $12,520
======== ==== =======
Income
Fund
- - -------
Investment income
Dividends.......................................................................... $ --
Less foreign tax withheld.......................................................... --
Interest........................................................................... 6,618
-------
Total income..................................................................... 6,618
Expenses
Investment advisory fees........................................................... 658
Distribution fees.................................................................. 40
Shareholder services fees.......................................................... --
Custodian fees..................................................................... 37
Transfer agent fees................................................................ 49
Professional fees.................................................................. 15
Registration fees.................................................................. 24
Other expenses..................................................................... 36
-------
Total expenses before waiver..................................................... 859
Less expenses repaid to (waived and absorbed by) the Advisor..................... --
-------
Net expenses..................................................................... 859
-------
Net investment income (loss)..................................................... 5,759
Net realized and unrealized gain (loss) on investments, foreign currency transactions
and other assets and liabilities
Net realized gain (loss) on investments.......................................... (2,404)
Net realized gain (loss) on foreign currency transactions and other assets and
liabilities..................................................................... --
-------
Total net realized gain (loss)................................................... (2,404)
Change in net unrealized appreciation (depreciation) on investments and other assets
and liabilities..................................................................... (4,409)
-------
Net increase (decrease) in net assets resulting from operations...................... $(1,054)
=======
See accompanying Notes to Financial Statements.
June 30, 2004 William Blair Funds 49
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
for the Period Ended June 30, 2004 and the Year Ended December 31, 2003 (all
amounts in thousands) (unaudited)
International
Growth
Fund
- - ----------------------
2004 2003
- - ---------- ----------
Operations
Net investment income (loss)................................................................ $ 2,802 $ 1,037
Net realized gain (loss) on investments, foreign currency transactions and other assets and
liabilities................................................................................ 68,839 (14,894)
Change in net unrealized appreciation (depreciation) on investments, foreign currency
transactions and other assets and liabilities.............................................. (13,963) 459,102
---------- ----------
Net increase (decrease) in net assets resulting from operations............................. 57,678 445,245
Distributions to shareholders from
Net investment income....................................................................... -- (2,775)
Net realized gain........................................................................... -- --
---------- ----------
-- (2,775)
Capital stock transactions
Net proceeds from sale of shares............................................................ 775,248 1,012,995
Shares issued in reinvestment of income dividends and capital gain distributions............ -- 2,457
Less cost of shares redeemed................................................................ (196,307) (337,011)
---------- ----------
Net increase (decrease) in net assets resulting from capital stock transactions............. 578,941 678,441
---------- ----------
Increase (decrease) in net assets........................................................... 636,619 1,120,911
Net assets
Beginning of period......................................................................... 1,899,699 778,788
---------- ----------
End of period............................................................................... $2,536,318 $1,899,699
========== ==========
Undistributed net investment income (loss) at the end of the period........................... $ (244) $ (3,046)
========== ==========
International Value
Equity Discovery
Fund Fund
- - ------------- ------------------
2004(a) 2004 2003
- - ------------- -------- --------
Operations
Net investment income (loss)................................................................ $ (1) $ 149 $ (310)
Net realized gain (loss) on investments, foreign currency transactions and other assets and
liabilities................................................................................ (6) 16,473 6,425
Change in net unrealized appreciation (depreciation) on investments, foreign currency
transactions and other assets and liabilities.............................................. 182 (4,102) 60,586
------ -------- --------
Net increase (decrease) in net assets resulting from operations............................. 175 12,520 66,701
Distributions to shareholders from
Net investment income....................................................................... -- -- --
Net realized gain........................................................................... -- -- --
------ -------- --------
-- -- --
Capital stock transactions
Net proceeds from sale of shares............................................................ 3,299 43,068 53,181
Shares issued in reinvestment of income dividends and capital gain distributions............ -- -- --
Less cost of shares redeemed................................................................ -- (29,485) (73,573)
------ -------- --------
Net increase (decrease) in net assets resulting from capital stock transactions............. 3,299 13,583 (20,392)
------ -------- --------
Increase (decrease) in net assets........................................................... 3,474 26,103 46,309
Net assets
Beginning of period......................................................................... -- 237,111 190,802
------ -------- --------
End of period............................................................................... $3,474 $263,214 $237,111
====== ======== ========
Undistributed net investment income (loss) at the end of the period........................... $ (1) $ 149 $ --
====== ======== ========
Income
Fund
- - ------------------
2004 2003
- - -------- --------
Operations
Net investment income (loss)................................................................ $ 5,759 $ 10,144
Net realized gain (loss) on investments, foreign currency transactions and other assets and
liabilities................................................................................ (2,404) 865
Change in net unrealized appreciation (depreciation) on investments, foreign currency
transactions and other assets and liabilities.............................................. (4,409) (2,342)
-------- --------
Net increase (decrease) in net assets resulting from operations............................. (1,054) 8,667
Distributions to shareholders from
Net investment income....................................................................... (6,425) (13,802)
Net realized gain........................................................................... -- --
-------- --------
(6,425) (13,802)
Capital stock transactions
Net proceeds from sale of shares............................................................ 38,997 139,094
Shares issued in reinvestment of income dividends and capital gain distributions............ 4,561 10,207
Less cost of shares redeemed................................................................ (33,843) (75,240)
-------- --------
Net increase (decrease) in net assets resulting from capital stock transactions............. 9,715 74,061
-------- --------
Increase (decrease) in net assets........................................................... 2,236 68,926
Net assets
Beginning of period......................................................................... 265,062 196,136
-------- --------
End of period............................................................................... $267,298 $265,062
======== ========
Undistributed net investment income (loss) at the end of the period........................... $ (538) $ 128
======== ========
- ----------
(a)For the period from May 24, 2004 (Commencement of Operations) to June 30,
2004.
See accompanying Notes to Financial Statements.
50 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
(a) Description of the Fund
William Blair Funds (the "Fund") is a diversified mutual fund registered under
the Investment Company Act of 1940, as amended, as an open-end management
investment company. For each Portfolio the number of shares authorized is
unlimited. The Fund currently consists of the following twelve portfolios (the
"Portfolios"), each with its own investment objectives and policies.
Equity Portfolios International Portfolios
- ----------------- ------------------------
Growth International Growth
Tax-Managed Growth International Equity
Large Cap Growth Institutional International Growth
Small Cap Growth Institutional International Equity
Small-Mid Cap Growth Fixed Income Portfolio
----------------------
Value Discovery Income
Money Market Portfolio
----------------------
Ready Reserves
The investment objectives of the Portfolios are as follows:
Equity....... Long-term capital appreciation.
International Long-term capital appreciation.
Fixed Income. High level of current income with
relative stability of principal.
Money Market. Current income, a stable share price and daily
liquidity.
The Institutional International Growth Fund issues a separate report. The Ready
Reserves Fund which only offers Class N shares issues a separate report. The
Institutional International Equity Fund has not commenced operations as of the
date of this report.
(b) Share Classes
Five different classes of shares currently exist. These share classes were
offered for sale from November 2, 1999 until May 25, 2001. Currently, William
Blair and Company, L.L.C., is the only shareholder in Class A, Class B, and
Class C. All of the remaining shareholders in these classes exchanged their
shares to Class N shares of their respective portfolio as of May 25, 2001. The
table below describes the Class A shares, Class B shares and Class C shares
covered by this report:
Class Description
- ----- -----------
A Class A shares are sold to investors subject to
an initial sales charge (maximum amount 5.75% for
equity, and international funds, 2.0% for fixed
income portfolio) and is subject to ongoing
shareholder service fees of 0.25% of average
daily net assets of Class A.
B Class B shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares in the form of shareholder
service fees of 0.25% and distribution fees under
a Rule 12b-1 plan of 0.75% of average daily net
assets of Class B and a contingent deferred sales
charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares
seven years after issuance (three years for the
Income Portfolio).
C Class C shares are sold without an initial sales
charge but are subject to higher ongoing expenses
than Class A shares in the form of shareholder
service fees of 0.25% and distribution fees under
a Rule 12b-1 plan of 0.75% of average daily net
assets of Class B and a contingent deferred sales
charge payable upon certain redemptions within
one year of purchase.
Investment income, realized and unrealized gains and losses, and certain
portfolio level expenses and expense reductions, if any, are allocated based on
the relative net assets of each class, except for certain class specific
expenses which are charged directly to the appropriate class. Differences in
class expenses may result in the payment of different per share dividends by
class. All share classes of the Portfolios have equal rights with respect to
voting subject to class specific arrangements.
June 30, 2004 William Blair Funds 51
(c) Investment Valuation
The market value of domestic equity securities and options is determined by
valuing securities traded on national securities exchanges or markets or in the
over-the-counter markets at the last sales price or, if applicable, the
official closing price or, in the absence of a sale on the date of valuation,
at the latest bid price.
From January 1, 2003 until November 24, 2003, the value of foreign securities
was determined based upon the last sale price on the foreign exchange or market
on which it is primarily traded or, if there had been no sale on the date of
valuation, at the latest bid price. The Board of Trustees approved amendments
to the Fund's valuation procedures in October 2003 relating to the manner in
which the Funds' foreign securities are valued. This change was implemented
November 24, 2003. To reflect this change, if the foreign exchange or market on
which a security is primarily traded closes before the close of regular trading
on the New York Stock Exchange (4:00 p.m. Eastern time), the Funds use an
independent pricing service on a daily basis to estimate the fair value price
as of the close of regular trading on the New York Stock Exchange. Otherwise,
the value of foreign equity securities is determined based on the last sale
price on the foreign exchange or market on which it is primarily traded or, if
there have been no sales during that day, at the latest bid price. Foreign
currency forward contracts and foreign currencies are valued at the forward and
current exchange rates, respectively, prevailing on the date of valuation.
Long-term, fixed income securities are valued based on market quotations, or by
independent pricing services that use prices provided by market makers or by
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics.
Investments in other funds are valued at the underlying fund's net asset value
on the date of valuation. Other securities, and all other assets, including
securities for which a market price is not available, or the value of which is
affected by a significant valuation event, are valued at fair value as
determined in good faith by, or under the direction of the Board of Trustees
and in accordance with the Fund's valuation procedures. As of June 30, 2004,
there were securities held in Small Cap Growth, Value Discovery, International
Growth and International Equity Portfolios requiring fair valuation pursuant to
the Fund's valuation procedures.
(d) Investment income and investment transactions
Dividend income is recorded on the ex-dividend date, except for those dividends
from certain foreign securities which are recorded as soon as the information
is available.
Premiums and discounts are accreted and amortized on a straight-line basis for
short-term investments and on an effective interest method for long-term
investments.
Interest income is determined on the basis of the interest accrued, adjusted
for amortization of premium or discount. Variable rate bonds and floating rate
notes earn interest at coupon rates that fluctuate at specific time intervals.
The interest rates shown in the Portfolio of Investments for the Income
Portfolio were the rates in effect on June 30, 2004. Put bonds may be redeemed
at the discretion of the holder on specified dates prior to maturity. The
Portfolios utilize the straight-line method of amortization of premiums and
discounts for short-term securities (maturities less than one year) and the
effective interest method for long-term securities (maturities greater than one
year).
Paydown gains and losses on mortgage and asset-backed securities are treated as
an adjustment to interest income. For the period ended June 30, 2004, the
Income Portfolio recognized a reduction in interest income and a reduction in
net realized loss of $1,290 (in thousands). For the years ended December 31,
2003 and 2002, the Income Portfolio recognized a reduction in interest income
and reduction in net realized loss of $2,691 and $948 (in thousands),
respectively. This reclassification has no effect on the net asset value of the
Portfolio.
Securities transactions are recorded on the trade date. Realized gains and
losses from securities transactions are reported on an high cost basis.
(e) Share Valuation and Dividends to Shareholders
Shares are sold and redeemed on a continuous basis at net asset value. The net
asset value per share is determined separately for each class by dividing the
Portfolio's net assets attributable to that class by the number of shares of
the class outstanding as of the close of regular trading on the New York Stock
Exchange, which is generally 3:00 p.m. Central time (4:00 p.m. Eastern time),
on each day the Exchange is open.
52 Semi-Annual Report June 30, 2004
Dividends from net investment income, if any, of the Growth, Tax-Managed
Growth, Large Cap Growth, Small Cap Growth, Small-Mid Cap Growth, International
Growth, International Equity and Value Discovery Portfolios are declared at
least annually. Dividends from the Income Portfolio are declared monthly.
Capital gain distributions, if any, are declared at least annually in December.
Dividends payable to shareholders are recorded on the ex-dividend date.
The timing and characterization of certain income and capital gain
distributions are determined annually in accordance with Federal income tax
regulations that may differ from accounting principles generally accepted in
the United States. As a result, net investment income or loss and net realized
gain or loss for a reporting period may differ from the amount distributed
during such period. In addition, the Portfolios may periodically record
reclassifications among certain capital accounts to reflect differences between
financial reporting and income tax basis distributions. The reclassifications
were reported in order to reflect the tax treatment for certain permanent
differences that exist between income tax regulations and accounting principles
generally accepted in the United States. The reclassifications relate to net
operating losses, Section 988 currency gains and losses, mortgage paydown
securities gains and losses associated with securities issued before June 8,
1997, and recharacterization of dividends received from investments in REITs.
These reclassifications have no impact on the net asset values of the
Portfolios. Accordingly, at December 31, 2003, the following reclassifications
were recorded (in thousands):
Accumulated
Undistributed Capital
Undistributed Net Net Realized Paid In Excess
Portfolio Investment Income/(Loss) Gain/ (Loss) of Par Value
--------- ------------------------ ------------ ------------
Growth.............. $1,214 $ (54) $(1,160)
Tax-Managed Growth.. 40 -- (40)
Large Cap Growth.... 26 -- (26)
Small Cap Growth.... 2,137 (2,137) --
Small-Mid Cap Growth -- -- --
International Growth (860) 860 --
Value Discovery..... 310 170 (480)
Income.............. 2,683 (2,686) 3
Distributions from net realized gains for book purposes may include short-term
capital gains, which are included as ordinary income for tax purposes. The tax
character of distributions in 2004, will be determined at the close of the
fiscal year in December. The tax character of distributions paid during 2003
and 2002 was as follows (in thousands):
Distributions Paid In 2003 Distributions Paid In 2002
- -------------------------- --------------------------
Ordinary Long-Term Ordinary Long-Term
Portfolio Income Capital Gains Income Capital Gains
--------- ------ ------------- ------ -------------
Growth.............. $ -- $ -- $ -- $--
Tax-Managed Growth.. -- -- -- --
Large Cap Growth.... -- -- -- --
Small Cap Growth.... 1,139 6,304 -- --
Small-Mid Cap Growth -- -- -- --
International Growth 2,775 -- -- --
Value Discovery..... -- -- -- --
Income.............. 13,802 -- 9,411 --
As of December 31, 2003, the components of distributable earnings on a tax
basis were as follows (in thousands):
Net
Undistributed Accumulated Undistributed Unrealized
Ordinary Capital and Long-Term Appreciation /
Portfolio Income Other Losses Gain (Depreciation)
--------- ------ ------------ ---- --------------
Growth.............. $ -- $ 29,466 $ -- $ 59,304
Tax-Managed Growth.. -- 2,331 -- 1,433
Large Cap Growth.... -- 5,592 -- 907
Small Cap Growth.... 2,198 -- 985 76,436
Small-Mid Cap Growth -- -- -- (21)
International Growth 2,615 126,136 -- 431,476
Value Discovery..... -- -- 5,515 60,059
Income.............. 133 10,401 -- 4,780
June 30, 2004 William Blair Funds 53
(f) Options
The Portfolios may engage in options transactions on security indices and other
financial indices and in doing so achieve similar objectives to what they would
achieve through the sale or purchase of options on individual securities or
other instruments.
Option writing. When the Portfolio writes an option, an amount equal to the
premium received by the Portfolio is recorded as a liability and is
subsequently adjusted to the current fair value of the option written. Premiums
received from writing options that expire unexercised are treated by the
Portfolio on the expiration date as realized gains from investments. The
difference between the premium and the amount paid on effecting a closing
purchase transaction, including brokerage commissions, is also treated as a
realized gain, or, if the premium is less than the amount paid for the closing
purchase transaction, as a realized loss. If a call option is exercised, the
premium is added to the proceeds from the sale of the underlying security or
currency in determining whether the Portfolio has realized a gain or loss. If a
put option is exercised, the premium reduces the cost basis of the securities
purchased by the Portfolio. The Portfolio as writer of an option bears the
market risk of an unfavorable change in the price of the security underlying
the written option. There were no open options at June 30, 2004.
(g) Foreign Currency Translation and Foreign Currency Forward Contracts
The International Growth and International Equity Portfolios may invest in
securities denominated in foreign currencies. As such, assets and liabilities
denominated in foreign currencies are translated into U.S. dollar amounts at
the current exchange rate on the date of valuation. These Portfolios may enter
into foreign currency forward contracts (1) as a means of managing the risks
associated with changes in the exchange rates for the purchase or sale of a
specific amount of a particular foreign currency, and (2) to hedge the value,
in U.S. dollars, of portfolio securities. Gains and losses from foreign
currency transactions associated with purchases and sales of investments and
foreign currency forward contracts are included with the net realized and
unrealized gain or loss on investments.
(h) Income Taxes
Each Portfolio intends to comply with the special provisions of the Internal
Revenue Code available to regulated investment companies and, therefore, no
provision for Federal income taxes has been made in the accompanying financial
statements since each Portfolio intends to distribute substantially all of its
taxable income to its shareholders and be relieved of all Federal income taxes.
The cost of investments for Federal income tax purposes and related gross
unrealized appreciation/(depreciation) and net unrealized
appreciation/(depreciation) at June 30, 2004, were as follows (in thousands):
Net
Gross Gross Unrealized
Cost of Unrealized Unrealized Appreciation /
Portfolio Investments Appreciation Depreciation (Depreciation)
--------- ----------- ------------ ------------ --------------
Growth.............. $ 223,124 $ 65,321 $14,151 $ 51,170
Tax-Managed Growth.. 4,562 1,422 160 1,262
Large Cap Growth.... 5,514 985 231 754
Small Cap Growth.... 544,008 123,085 19,691 103,394
Small-Mid Cap Growth 13,655 1,162 488 674
International Growth 2,089,257 465,076 44,546 420,530
International Equity 3,293 190 8 182
Value Discovery..... 209,045 62,598 6,592 56,006
Income.............. 264,245 4,137 3,766 371
At December 31, 2003, the following Portfolios have unused capital loss
carryforwards available for Federal income tax purposes to be applied against
future capital gains, if any. If not applied, the carryforwards will expire as
follows (in thousands):
Portfolio 2004 2005 2006 2007 2008 2009 2010 2011 Total
- --------- ---- ---- ---- ---- ---- ---- ---- ---- -----
Growth.............. $ -- $ -- $ -- $ -- $ -- $ 4,332 $23,082 $ 2,032 $ 29,446
Tax-Managed Growth.. -- -- -- -- 94 732 1,037 468 2,331
Large Cap Growth.... -- -- -- -- 493 2,714 1,582 769 5,558
Small Cap Growth.... -- -- -- -- -- -- -- -- --
Small-Mid Cap Growth -- -- -- -- -- -- -- -- --
International Growth -- -- -- -- -- 31,564 59,888 34,482 125,934
Value Discovery..... -- -- -- -- -- -- -- -- --
Income.............. 2,156 -- -- 1,249 3,292 -- 1,692 1,582 9,971
54 Semi-Annual Report June 30, 2004
The International Growth Portfolio has elected to mark-to-market its
investments in Passive Foreign Investment Companies ("PFICs") for Federal
income tax purposes. In accordance with this election, the Portfolio recognized
net unrealized appreciation (depreciation) of $4,938 (in thousands) in 2003,
all of which has been reclassified from unrealized gain (loss) on investments
to undistributed net investment income.
For the period November 1, 2003 through December 31, 2003, the following
Portfolios incurred net realized capital or foreign currency losses. Each
Portfolio intends to treat this loss as having occurred in fiscal year 2004 for
Federal income tax purposes (in thousands):
Portfolio Amount
--------- ------
Growth.............. $ --
Tax-Managed Growth.. --
Large Cap Growth.... 34
Small Cap Growth.... --
Small-Mid Cap Growth --
International Growth 202
Value Discovery..... --
Income.............. 430
(i) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results may differ from those estimates.
(2) Transactions with Affiliates
(a) Management and Expense Limitation Agreements
Each Portfolio has a management agreement with William Blair & Company L.L.C.
(the "Company") for investment advisory, administrative, and other accounting
services. Each Portfolio pays the Company an annual fee, payable monthly, based
on a specified percentage of its average daily net assets. A summary of the
annual rates expressed as a percentage of average daily net assets is as
follows:
Equity Portfolios International Portfolios
- ----------------- ------------------------
Growth......................................... 0.75% International Growth and International Equity
Tax-Managed Growth............................. 0.80% First $250 million......................... 1.10%
Large Cap Growth............................... 0.80% In excess of $250 million.................. 1.00%
Small Cap Growth............................... 1.10%
Small-Mid Cap Growth........................... 1.00%
Value Discovery................................ 1.15%
Fixed Income Portfolio
- ---------------------- -
Income*
First $250 million............................ 0.25%
In excess of $250 million..................... 0.20%
- ----------
*Management fee also includes a charge of 5% of
gross income.
Some of the Portfolios have also entered into Expense Limitation Agreements
with the Company. Under the terms of these Agreements, the Company has agreed
to waive its advisory fees and absorb other operating expenses through April
30, 2005, if total expenses for each class of the following Portfolios exceed
the following rates (as a percentage of average daily net assets):
Class A Shares Class B & C Shares
- ------------------------- -------------------------
Through Effective Through Effective
April 30, 2004 May 1, 2004 April 30, 2004 May 1, 2004
- -------------- ----------- -------------- -----------
Tax-Managed Growth.. 1.55% 1.54% 2.30% 2.29%
Large Cap Growth.... 1.45% 1.34% 2.20% 2.09%
Small Cap Growth.... 1.63% 1.65% 2.38% 2.40%
Small-Mid Cap Growth 1.54% 1.54% 2.29% 2.29%
International Equity N/A 1.50% N/A 2.25%
Value Discovery..... 1.58% 1.50% 2.33% 2.25%
June 30, 2004 William Blair Funds 55
For a period of five years subsequent to the Commencement of Operations of each
Fund, the Company is entitled to reimbursement from the Tax-Managed Growth,
Large Cap Growth, and Small Cap Growth Portfolios for previously waived fees
and expenses to the extent the overall expense ratio remains below the
percentages indicated. As a result, the total expense ratio for the Portfolios
during the period the agreement is in effect, will not fall below the
percentages indicated. The total amount available for recapture at June 30,
2004 is $433 (in thousands) for Tax-Managed Growth, $415 (in thousands) for
Large Cap Growth, and $0 for Small Cap Growth. The Small Cap Growth Portfolio
reimbursed the Advisor $164,000, for the period ended June 30, 2004 and
$186,000 for the year ended December 31, 2003.
For a period of three years subsequent to the Commencement of Operations of the
Small-Mid Cap Growth and the International Equity Portfolios, the Company is
entitled to reimbursement for previously waived fees and expenses to the extent
the overall expense ratio remains below the percentages indicated. The total
amount available for recapture at June 30, 2004 is $68 (in thousands) for the
Small-Mid Cap Growth Portfolio and $11 for the International Equity Portfolio.
For the period ended June 30, 2004, the investment advisory fees incurred by
the Portfolios and related fee waivers were as follows (in thousands):
Expenses
Recovered or
Gross Fee Net (Absorbed)
Portfolio Advisory Fee Waiver Advisory Fee by Advisor
--------- ------------ ------ ------------ ----------
Growth.............. $ 1,025 $-- $ 1,025 $ --
Tax-Managed Growth.. 25 20 5 --
Large Cap Growth.... 24 24 -- 3
Small Cap Growth.... 3,182 -- 3,182 (164)
Small-Mid Cap Growth 45 45 -- 23
International Growth 11,347 -- 11,347 --
International Equity 3 3 -- 8
Value Discovery..... 1,410 -- 1,410 --
Income.............. 658 -- 658 --
(b) Underwriting, Distribution Services and Service Agreement
Each Portfolio has a Distribution Agreement and a Shareholder Services
Agreement with the Company for distribution and account services. Each
Portfolio pays the Company an annual fee, payable monthly, based on a specified
percentage of its average daily net assets of specified share classes. The
annual rates for Distribution fees expressed as a percentage of average daily
net assets for Class B and Class C is 0.75%. The annual rate for shareholder
services fees expressed as a percentage of average daily net assets for Class
A, Class B and Class C is 0.25%.
Distribution and shareholder services fees incurred by Class A, Class B and
Class C of the Portfolios to the Company, for the period ended June 30, 2004,
were as follows:
Distribution Shareholder
Portfolio Fees Service Fee
--------- ------------ -----------
Growth.............. $ 6 $14
Tax-Managed Growth.. 6 12
Large Cap Growth.... 5 8
Small Cap Growth.... 17 34
Small-Mid Cap Growth 6 14
International Growth 14 28
International Equity 1 3
Value Discovery..... 17 34
Income.............. 5 14
(c) Trustees Fees
The Portfolios incurred fees of $129 (in thousands) to non-interested trustees
of the Fund for the period ended June 30, 2004. Interested trustees are not
compensated.
56 Semi-Annual Report June 30, 2004
(d) Investments in Affiliated Portfolio
Pursuant to an Exemptive Order granted by the Securities and Exchange
Commission in January, 2001, each of the Portfolios of the Fund may invest in
the William Blair Ready Reserves Portfolio ("Ready Reserves"), an open-end
money market portfolio managed by the Advisor. Ready Reserves Portfolio is used
as a cash management option to the other Portfolios in the Fund. The Advisor
waives management fees and shareholder service fees earned from the other
Portfolios investment in the Ready Reserves Fund. The fees waived with respect
to each Portfolio for the period ended June 30, 2004 are listed below.
Distributions received from Ready Reserves are reflected as dividend income in
each Portfolio's statement of operations. Amounts relating to the Portfolios'
investments in Ready Reserves were as follows for the period ended June 30,
2004 (in thousands):
Percent
Sales Fees Dividend of Net
Portfolio Purchases Proceeds Waived Income Value Assets
--------- --------- -------- ------ -------- ------- -------
Growth.............. $ 35,563 $ 38,106 $ 7 $ 6 $ 3,273 1.2%
Tax-Managed Growth.. 941 1,064 -- -- 2 0.1
Large Cap Growth.... 1,634 1,762 1 -- 107 1.7
Small Cap Growth.... 165,494 193,169 89 76 14,797 2.3
Small-Mid Cap Growth 9,442 8,761 -- 2 761 5.3
International Growth 136,438 212,025 153 132 23,483 0.9
International Equity 1,835 1,499 -- -- 336 9.7
Value Discovery..... 42,580 46,904 20 17 2,172 0.8
(3) Investment Transactions
Investment transactions, excluding money market instruments, for the period
ended June 30, 2004 were as follows (in thousands):
Portfolio Purchases Sales
--------- --------- --------
Growth.............. $ 46,582 $ 56,341
Tax-Managed Growth.. 690 1,827
Large Cap Growth.... 1,703 795
Small Cap Growth.... 336,529 249,858
Small-Mid Cap Growth 12,176 2,793
International Growth 1,586,293 931,285
International Equity 2,897 79
Value Discovery..... 63,297 44,338
Income.............. 59,224 49,442
(4) Foreign Currency Forward Contracts
To protect itself against a decline in the value of foreign currency against
the U.S. dollar, the International Growth Portfolio enters into foreign
currency forward contracts with its custodian and others. The Portfolio bears
the market risk that arises from changes in foreign currency rates and bears
the credit risk if the counterparty fails to perform under the contract. The
net realized and unrealized gains and losses associated with foreign currency
forward contracts are reflected in the accompanying financial statements. There
were no open foreign currency forward contracts at June 30, 2004.
(6) Fund Share Transactions
There were no Fund share transactions to report for the Funds' Class A, Class
B, and Class C shares with the exception of International Equity Fund which
commenced operations on May 24, 2004. International Equity Fund sold 200 shares
of Class A, Class B, and Class C shares at a $10.00 NAV for a total of 600
shares and $6,000. The Class A, B and C shares of this Fund are closed to any
additional investors. For all other Funds, Class A shares, Class B shares and
Class C shares, each have one open account held by William Blair & Company,
L.L.C. There have been no purchases, reinvestments of dividends or redemptions
in these accounts since they initially opened with 200 shares each on May 25,
2001.
June 30, 2004 William Blair Funds 57
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Growth Fund
Class A
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $ 9.97 $ 8.05 $ 10.87 $ 12.72 $20.09 $17.48
Income (loss) from investment operations:
Net investment income (loss)........................... (0.02) (0.06) (0.07) (0.05) (0.06) --
Net realized and unrealized gain (loss) on investments. 0.01 1.98 (2.75) (1.66) (1.52) 4.05
------ ------ ------- ------- ------ ------
Total from investment operations......................... (0.01) 1.92 (2.82) (1.71) (1.58) 4.05
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $ 9.96 $ 9.97 $ 8.05 $ 10.87 $12.72 $20.09
====== ====== ======= ======= ====== ======
Total return (%)......................................... (0.10) 23.85 (25.94) (13.46) (7.47) 23.29
Ratios to average daily net assets (%) (c):
Expenses............................................... 1.18 1.19 1.19 1.18 1.13 1.31
Net investment income (loss)........................... (0.54) (0.67) (0.73) (0.57) (0.29) (0.23)
Class B
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(b)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $ 9.61 $ 7.82 $ 10.63 $ 12.56 $20.07 $19.15
Income (loss) from investment operations:
Net investment income (loss)........................... (0.06) (0.12) (0.13) (0.14) (0.20) (0.02)
Net realized and unrealized gain (loss) on investments. 0.01 1.91 (2.68) (1.65) (1.52) 3.38
------ ------ ------- ------- ------ ------
Total from investment operations......................... (0.05) 1.79 (2.81) (1.79) (1.72) 2.36
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $ 9.56 $ 9.61 $ 7.82 $ 10.63 $12.56 $20.07
====== ====== ======= ======= ====== ======
Total return (%)......................................... (0.52) 22.89 (26.43) (14.27) (8.17) 12.43
Ratios to average daily net assets (%) (c):
Expenses............................................... 1.93 1.94 1.94 1.93 1.88 2.03
Net investment income (loss)........................... (1.29) (1.42) (1.48) (1.32) (1.04) (1.00)
---------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $274,613 $281,654 $255,625 $386,096 $550,987 $818,443
Portfolio turnover rate (%) (c):........... 34 45 29 74 88 52
- ----------
(a)For the period from October 19, 1999 (Commencement of the Class) to December
31, 1999.
(b)For the period November 2, 1999 (Commencement of the Class) to December 31,
1999.
(c)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
58 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Growth Fund
Class C
- - ------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(b)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $ 9.60 $ 7.82 $ 10.63 $ 12.54 $20.06 $19.15
Income (loss) from investment operations:
Net investment income (loss)........................... (0.06) (0.12) (0.13) (0.14) (0.20) (0.03)
Net realized and unrealized gain (loss) on investments. 0.01 1.90 (2.68) (1.63) (1.53) 2.38
------ ------ ------- ------- ------ ------
Total from investment operations......................... (0.05) 1.78 (2.81) (1.77) (1.73) 2.35
Less distributions from:
Net investment income.................................. -- -- -- -- -- --
Net realized gain...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- 0.14 5.79 1.44
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $ 9.55 $ 9.60 $ 7.82 $ 10.63 $12.54 $20.06
====== ====== ======= ======= ====== ======
Total return (%)......................................... (0.52) 22.76 (26.43) (14.13) (8.22) 12.38
Ratios to average daily net assets (%) (c):
Expenses............................................... 1.93 1.94 1.94 1.93 1.88 2.01
Net investment income (loss)........................... (1.29) (1.42) (1.48) (1.32) (1.01) (1.06)
- - ---------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $274,613 $281,654 $255,625 $386,096 $550,987 $818,443
Portfolio turnover rate (%) (c)............ 39 45 29 74 88 52
- ----------
(a)For the period from October 19, 1999 (Commencement of the Class) to December
31, 1999.
(b)For the period November 2, 1999 (Commencement of the Class) to December 31,
1999.
(c)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 59
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
Class A
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 8.40 $ 6.85 $ 9.06 $ 10.08 $ 10.18 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.04) (0.07) (0.06) (0.04) (0.04) --
Net realized and unrealized gain (loss) on investments.......... 0.13 1.62 (2.15) (0.98) (0.06) 0.18
------ ------ ------- ------- ------- ------
Total from investment operations.................................. 0.09 1.55 (2.21) (1.02) (0.10) 0.18
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 8.49 $ 8.40 $ 6.85 $ 9.06 $ 10.08 $10.18
====== ====== ======= ======= ======= ======
Total return (%).................................................. 1.07 22.63 (24.39) (10.12) (0.98) 1.80
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 1.55 1.49 1.36 1.36 1.36 1.36
Expenses, before waivers and reimbursements..................... 2.19 2.26 2.22 3.64 11.34 1.36
Net investment income (loss), net of waivers and reimbursements. (1.02) (0.91) (0.72) (0.57) (0.41) 0.73
Net investment income (loss), before waivers and reimbursements. (1.66) (1.68) (1.58) (2.85) (10.39) 0.73
Class B
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 8.14 $ 6.69 $ 8.93 $ 10.01 $ 10.18 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.07) (0.12) (0.11) (0.11) (0.12) --
Net realized and unrealized gain (loss) on investments.......... 0.13 1.57 (2.13) (0.97) (0.05) 0.18
------ ------ ------- ------- ------- ------
Total from investment operations.................................. 0.06 1.45 (2.24) (1.08) (0.17) 0.18
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 8.20 $ 8.14 $ 6.69 $ 8.93 $ 10.01 $10.18
====== ====== ======= ======= ======= ======
Total return (%).................................................. 0.74 21.67 (25.08) (10.79) (1.67) 1.80
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 2.30 2.24 2.11 2.11 2.11 2.11
Expenses, before waivers and reimbursements..................... 2.94 3.01 2.97 4.39 12.09 2.11
Net investment income (loss), net of waivers and reimbursements. (1.77) (1.66) (1.47) (1.32) (1.16) (0.01)
Net investment income (loss), before waivers and reimbursements. (2.41) (2.43) (2.33) (3.60) (11.14) (0.01)
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $5,720 $6,871 $ 5,303 $ 7,211 $ 5,001 $1,018
Portfolio turnover rate (%) (b)................................. 22 37 44 37 32 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
60 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Tax-Managed Growth Fund
Class C
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 8.14 $ 6.69 $ 8.93 $ 10.01 $ 10.18 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.07) (0.12) (0.11) (0.11) (0.12) --
Net realized and unrealized gain (loss) on investments.......... 0.13 1.57 (2.13) (0.97) (0.05) 0.18
------ ------ ------- ------- ------- ------
Total from investment operations.................................. 0.06 1.45 (2.24) (1.08) (0.17) 0.18
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 8.20 $ 8.14 $ 6.69 $ 8.93 $ 10.01 $10.18
====== ====== ======= ======= ======= ======
Total return (%).................................................. 0.74 21.67 (25.08) (10.79) (1.67) 1.80
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 2.30 2.24 2.11 2.11 2.11 2.11
Expenses, before waivers and reimbursements..................... 2.94 3.01 2.97 4.39 12.09 2.11
Net investment income (loss), net of waivers and reimbursements. (1.77) (1.66) (1.47) (1.32) (1.15) (0.01)
Net investment income (loss), before waivers and reimbursements. (2.41) (2.43) (2.33) (3.60) (11.13) (0.01)
-----------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $5,720 $6,871 $5,303 $7,211 $5,001 $1,018
Portfolio turnover rate (%) (b)............ 22 37 44 37 32 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 61
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Large Cap Growth Fund
Class A
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 5.92 $ 4.78 $ 6.69 $ 8.45 $ 10.14 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.02) (0.04) (0.04) (0.06) (0.07) --
Net realized and unrealized gain (loss) on investments.......... (0.03) 1.18 (1.87) (1.70) (1.62) 0.14
------ ------ ------- ------- ------- ------
Total from investment operations.................................. (0.05) 1.14 (1.91) (1.76) (1.69) 0.14
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 5.87 $ 5.92 $ 4.78 $ 6.69 $ 8.45 $10.14
====== ====== ======= ======= ======= ======
Total return (%).................................................. (0.84) 23.85 (28.55) (20.83) (16.67) 1.40
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 1.41 1.42 1.36 1.36 1.36 1.36
Expenses, before waivers and reimbursements..................... 2.31 2.39 2.45 3.01 2.84 1.36
Net investment income (loss), net of waivers and reimbursements. (0.61) (0.76) (0.71) (0.79) (0.68) (0.48)
Net investment income (loss), before waivers and reimbursements. (1.51) (1.73) (1.80) (2.44) (2.16) (0.48)
Class B
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 5.73 $ 4.67 $ 6.58 $ 8.39 $ 10.14 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.04) (0.08) (0.08) (0.11) (0.13) --
Net realized and unrealized gain (loss) on investments.......... (0.03) 1.14 (1.83) (1.70) (1.62) 0.14
------ ------ ------- ------- ------- ------
Total from investment operations.................................. (0.07) 1.06 (1.91) (1.81) (1.75) 0.14
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 5.66 $ 5.73 $ 4.67 $ 6.58 $ 8.39 $10.14
====== ====== ======= ======= ======= ======
Total return (%).................................................. (1.22) 22.70 (29.03) (21.57) (17.26) 1.40
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 2.16 2.17 2.11 2.11 2.11 2.11
Expenses, before waivers and reimbursements..................... 3.06 3.14 3.20 3.76 3.59 2.11
Net investment income (loss), net of waivers and reimbursements. (1.36) (1.51) (1.46) (1.54) (1.43) (1.41)
Net investment income (loss), before waivers and reimbursements. (2.26) (2.48) (2.55) (3.19) (2.91) (1.41)
------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $6,268 $5,519 $5,469 $5,991 $10,995 $1,153
Portfolio turnover rate (%) (b)............ 28 33 52 87 95 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
62 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Large Cap Growth Fund
Class C
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $ 5.72 $ 4.66 $ 6.57 $ 8.39 $ 10.14 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.04) (0.08) (0.08) (0.11) (0.14) --
Net realized and unrealized gain (loss) on investments.......... (0.03) 1.14 (1.83) (1.71) (1.61) 0.14
------ ------ ------- ------- ------- ------
Total from investment operations.................................. (0.07) 1.06 (1.91) (1.82) (1.75) 0.14
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Total distributions............................................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Net asset value, end of period.................................... $ 5.65 $ 5.72 $ 4.66 $ 6.57 $ 8.39 $10.14
====== ====== ======= ======= ======= ======
Total return (%).................................................. (1.22) 22.75 (29.07) (21.69) (17.26) 1.40
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 2.16 2.17 2.11 2.11 2.11 2.11
Expenses, before waivers and reimbursements..................... 3.06 3.14 3.20 3.76 3.59 2.11
Net investment income (loss), net of waivers and reimbursements. (1.36) (1.51) (1.46) (1.54) (1.41) (1.41)
Net investment income (loss), before waivers and reimbursements. (2.26) (2.48) (2.55) (3.19) (2.89) (1.41)
------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $6,268 $5,519 $5,469 $5,991 $10,995 $1,153
Portfolio turnover rate (%) (b)............ 28 33 52 87 95 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 63
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small Cap Growth Fund
Class A
-----------------------------------------------------
Period Ended Years Ended December 31,
- - ------------ ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $21.82 $13.72 $ 16.57 $13.16 $10.19 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.15) (0.21) (0.19) (0.11) (0.14) --
Net realized and unrealized gain (loss) on investments.......... 2.65 8.67 (2.66) 3.52 3.54 0.19
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 2.50 8.46 (2.85) 3.41 3.40 0.19
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $24.32 $21.82 $ 13.72 $16.57 $13.16 $10.19
====== ====== ======= ====== ====== ======
Total return (%).................................................. 11.46 61.81 (17.20) 25.91 33.68 1.90
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements..................... 1.53 1.60 1.56 1.59 1.60 1.60
Expenses, before waivers and reimbursements..................... 1.50 1.53 1.62 1.95 2.17 1.60
Net investment income (loss), net of waivers and reimbursements. (1.33) (1.27) (1.31) (1.15) (0.85) (1.60)
Net investment income (loss), before waivers and reimbursements. (1.30) (1.20) (1.37) (1.51) (1.42) (1.60)
Class B
-----------------------------------------------------
Period Ended Years Ended December 31,
------------ ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $21.13 $13.40 $ 16.31 $13.05 $10.19 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.23) (0.34) (0.30) (0.22) (0.24) --
Net realized and unrealized gain (loss) on investments.......... 2.57 8.43 (2.61) 3.48 3.53 0.19
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 2.34 8.09 (2.91) 3.26 3.29 0.19
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $23.47 $21.13 $ 13.40 $16.31 $13.05 $10.19
====== ====== ======= ====== ====== ======
Total return (%).................................................. 11.07 60.51 (17.84) 24.98 32.60 1.90
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements..................... 2.28 2.35 2.31 2.34 2.35 2.35
Expenses, before waivers and reimbursements..................... 2.25 2.28 2.37 2.70 2.92 2.35
Net investment income (loss), net of waivers and reimbursements. (2.08) (2.02) (2.06) (1.90) (1.70) (2.35)
Net investment income (loss), before waivers and reimbursements. (2.05) (1.95) (2.12) (2.26) (2.27) (2.35)
--------------------------------------------------------
Period Ended Years Ended December 31,
------------ - ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- - ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $651,503 $518,824 $78,581 $54,658 $28,778 $6,346
Portfolio turnover rate (%)................ 88 103 133 147 433 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
64 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small Cap Growth Fund
Class C
-----------------------------------------------------
Period Ended Years Ended December 31,
------------ ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $21.14 $13.40 $ 16.32 $13.05 $10.19 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.23) (0.34) (0.30) (0.22) (0.25) --
Net realized and unrealized gain (loss) on investments.......... 2.57 8.44 (2.62) 3.49 3.54 0.19
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 2.34 8.10 (2.92) 3.27 3.29 0.19
Less distributions from:
Net investment income........................................... -- -- -- -- -- --
Net realized gain............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- 0.36 -- -- 0.43 --
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $23.48 $21.14 $ 13.40 $16.32 $13.05 $10.19
====== ====== ======= ====== ====== ======
Total return (%).................................................. 11.07 60.59 (17.89) 25.06 32.60 1.90
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements..................... 2.28 2.35 2.31 2.34 2.35 2.35
Expenses, before waivers and reimbursements..................... 2.25 2.28 2.37 2.70 2.92 2.35
Net investment income (loss), net of waivers and reimbursements. (2.68) (2.02) (2.06) (1.90) (1.70) (2.35)
Net investment income (loss), before waivers and reimbursements. (2.05) (1.95) (2.12) (2.26) (2.27) (2.35)
----------------------------------------------------
Period Ended Years Ended December 31,
------------ ---------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $651,503 $518,824 $78,581 $54,658 $28,778 $6,346
Portfolio turnover rate (%)................ 88 103 133 147 433 --
- ----------
(a)For the period from December 27, 1999 (Commencement of Operations) to
December 31, 1999.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 65
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
Class A
- - -------------------------------------------
Period Ended Period Ended December 31,
- - ------------ - - -------------------------
6/30/2004 2003(a)
- - --------- - - -------
Net asset value, beginning of period.............................. $ 9.94 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.06) --
Net realized and unrealized gain (loss) on investments.......... 0.75 (0.06)
------ - - ------
Total from investment operations.................................. 0.69 (0.06)
Less distributions from:
Net investment income........................................... -- --
Net realized gain............................................... -- --
------ - - ------
Total distributions............................................... -- --
------ - - ------
Net asset value, end of period.................................... $10.63 $ 9.94
====== = = ======
Total return (%).................................................. 6.94 (0.60)
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.54 1.54
Expenses, before waivers and reimbursements..................... 2.99 1.54
Net investment income (loss), net of waivers and reimbursements. (1.25) (1.54)
Net investment income (loss), before waivers and reimbursements. (2.70) (1.54)
Class B
-------------------------------------------
Period Ended Period Ended December 31,
------------ - - -------------------------
6/30/2004 2003(a)
--------- - - -------
Net asset value, beginning of period $ 9.94 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.10) --
Net realized and unrealized gain (loss) on investments.......... 0.75 (0.06)
------ - - ------
Total from investment operations.................................. 0.65 (0.06)
Less distributions from:
Net investment income........................................... -- --
Net realized gain............................................... -- --
------ - - ------
Total distributions............................................... -- --
------ - - ------
Net asset value, end of period.................................... $10.59 $ 9.94
====== = = ======
Total return (%).................................................. 6.54 (0.60)
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 2.29 2.29
Expenses, before waivers and reimbursements..................... 3.79 2.29
Net investment income (loss), net of waivers and reimbursements. (2.00) (2.29)
Net investment income (loss), before waivers and reimbursements. (3.45) (2.29)
-------------------------------------------
Period Ended Period Ended December 31,
------------ - - -------------------------
6/30/2004 2003
- - --------- - - ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $14,436 $3,673
Portfolio turnover rate (%) (b)............ 69 --
- ----------
(a)For the period from December 29, 2003 (Commencement of Operations) to
December 31, 2003.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004 and 2003 is based on the
average shares outstanding during the period.
66 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Small-Mid Cap Growth Fund
Class C
---------------------------------------
Period Ended Period Ended December 31,
------------ -------------------------
6/30/2004 2003(a)
--------- -------
Net asset value, beginning of period.............................. $ 9.94 $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.10) --
Net realized and unrealized gain (loss) on investments.......... 0.75 (0.06)
------ ------
Total from investment operations.................................. 0.65 (0.06)
Less distributions from:
Net investment income........................................... -- --
Net realized gain............................................... -- --
------ ------
Total distributions............................................... -- --
------ ------
Net asset value, end of period.................................... $10.59 $ 9.94
====== ======
Total return (%).................................................. 6.54 (0.60)
Ratios to average daily net assets (%) (b)
Expenses, net of waivers and reimbursements..................... 2.29 2.29
Expenses, before waivers and reimbursements..................... 3.74 2.29
Net investment income (loss), net of waivers and reimbursements. (2.00) (2.29)
Net investment income (loss), before waivers and reimbursements. (3.45) (2.29)
--------------------------------------
Period Ended Period Ended December 31,
------------ -------------------------
6/30/2004 2003
--------- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $14,436 $3,673
Portfolio turnover rate (%) (b)............ 69 --
- ----------
(a)For the period from December 29, 2003 (Commencement of Operations) to
December 31, 2003.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004 and 2003 is based on the
average shares outstanding during the period.
June 30, 2004 William Blair Funds 67
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Growth Fund
Class A
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(b)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $18.63 $13.12 $ 15.46 $ 17.90 $24.01 $20.61
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.01 0.03 (0.05) 0.07 (0.04) (0.03)
Net realized and unrealized gain (loss) on investments. 0.55 5.49 (2.29) (2.51) (2.01) 7.92
------ ------ ------- ------- ------ ------
Total from investment operations......................... 0.56 5.52 (2.34) (2.44) (2.05) 7.89
Less distributions from:
Net investment income.................................. -- -- -- -- 0.09 --
Net realized gain...................................... -- 0.01 -- -- 3.97 4.49
------ ------ ------- ------- ------ ------
Total distributions...................................... -- 0.01 -- -- 4.06 4.49
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $19.19 $18.63 $ 13.12 $ 15.46 $17.90 $24.01
====== ====== ======= ======= ====== ======
Total return (%)......................................... 3.01 42.10 (15.14) (13.63) (8.11) 39.12
Ratios to average daily net assets (%) (d)
Expenses............................................... 1.47 1.50 1.51 1.60 1.59 1.60
Net investment income (loss)........................... 0.18 0.05 (0.36) (0.11) (0.37) (1.25)
Class B
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(c)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $17.83 $12.64 $ 15.01 $ 17.52 $23.98 $21.33
Income (loss) from investment operations:
Net investment income (loss) (a)....................... (0.06) (0.09) (0.15) (0.07) (0.23) (0.04)
Net realized and unrealized gain (loss) on investments. 0.52 5.28 (2.22) (2.44) (1.99) 7.18
------ ------ ------- ------- ------ ------
Total from investment operations......................... 0.46 5.19 (2.37) (2.51) (2.22) 7.14
Less distributions from:
Net investment income.................................. -- -- -- -- 0.27 --
Net realized gain...................................... -- -- -- -- 3.97 4.49
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- -- 4.24 4.49
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $18.29 $17.83 $ 12.64 $ 15.01 $17.52 $23.98
====== ====== ======= ======= ====== ======
Total return (%)......................................... 2.58 41.06 (15.79) (14.33) (8.79) 34.28
Ratios to average daily net assets (%) (d)
Expenses............................................... 2.22 2.25 2.26 2.35 2.34 2.35
Net investment income (loss)........................... (0.57) (0.70) (1.11) (0.86) (1.16) (1.93)
-----------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $2,536,318 $1,899,699 $778,788 $454,055 $333,888 $302,089
Portfolio turnover rate (%) (d)............ 85 57 73 112 116 122
- ----------
(a)Includes $0.03, $0.00, $0.00, $0.06 and $0.00 in PFIC transactions which are
treated as ordinary income for Federal tax purposes for the years 2003,
2002, 2001, 2000 and 1999, respectively.
(b)For the period from October 21, 1999 (Commencement of the Class) to December
31, 1999
(c)For the period November 2, 1999 (Commencement of the Class) to December 31,
1999.
(d)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
68 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Growth Fund
Class C
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(c)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $17.83 $12.64 $ 15.01 $ 17.52 $23.98 $21.33
Income (loss) from investment operations:
Net investment income (loss) (a)....................... (0.06) (0.09) (0.15) (0.07) (0.23) (0.04)
Net realized and unrealized gain (loss) on investments. 0.52 5.28 (2.22) (2.44) (1.99) 7.18
------ ------ ------- ------- ------ ------
Total from investment operations......................... 0.46 5.19 (2.37) (2.51) (2.22) 7.14
Less distributions from:
Net investment income.................................. -- -- -- -- 0.27 --
Net realized gain...................................... -- -- -- -- 3.97 4.49
------ ------ ------- ------- ------ ------
Total distributions...................................... -- -- -- -- 4.24 4.49
------ ------ ------- ------- ------ ------
Net asset value, end of period........................... $18.29 $17.83 $ 12.64 $ 15.01 $17.52 $23.98
====== ====== ======= ======= ====== ======
Total return (%)......................................... 2.58 41.06 (15.79) (14.33) (8.81) 34.28
Ratios to average daily net assets (%) (d)
Expenses............................................... 2.22 2.25 2.26 2.35 2.34 2.35
Net investment income (loss)........................... (0.57) (0.70) (1.11) (0.86) (1.10) (1.93)
------------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $2,536,318 $1,899,699 $778,788 $454,055 $333,888 $302,089
Portfolio turnover rate (%) (d)............ 85 57 73 112 116 122
- ----------
(a)Includes $0.03, $0.00, $0.00, $0.06 and $0.00 in PFIC transactions which are
treated as ordinary income for Federal tax purposes for the years 2003,
2002, 2001, 2000 and 1999, respectively.
(b)For the period from October 1, 1999 (Commencement of the Class) to December
31, 1999.
(c)For the period November 3, 1999 (Commencement of the Class) to December 31,
1999.
(d)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 69
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Equity Fund
Class A
---------------------
Period Ended June 30,
---------------------
2004(a)
-------
Net asset value, beginning of period.............................. $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.01)
Net realized and unrealized gain (loss) on investments.......... 0.56
------
Total from investment operations.................................. 0.55
Less distributions from:
Net investment income........................................... --
Net realized gain............................................... --
------
Total distributions............................................... --
------
Net asset value, end of period.................................... $10.55
======
Total return (%).................................................. 5.50
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 1.50
Expenses, before waivers and reimbursements..................... 1.90
Net investment income (loss), net of waivers and reimbursements. (0.72)
Net investment income (loss), before waivers and reimbursements. (1.12)
Class B
---------------------
Period Ended June 30,
---------------------
2004(a)
-------
Net asset value, beginning of period.............................. $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.02)
Net realized and unrealized gain (loss) on investments.......... 0.57
------
Total from investment operations.................................. 0.55
Less distributions from:
Net investment income........................................... --
Net realized gain............................................... --
------
Total distributions............................................... --
------
Net asset value, end of period.................................... $10.55
======
Total return (%).................................................. 5.50
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 2.25
Expenses, before waivers and reimbursements..................... 2.65
Net investment income (loss), net of waivers and reimbursements. (1.47)
Net investment income (loss), before waivers and reimbursements. (1.87)
----------------------
Period Ended June 30,
---------------------
2004(a)
-------
Supplemental data for all classes:
Net assets at end of period (in thousands)...................... $3,474
Portfolio turnover rate (%) (b)................................. 16
- ----------
(a)For the period from May 24, 2004 (Commencement of Operations) to June 30,
2004.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004 is based on the average
shares outstanding during the period.
70 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
International Equity Fund
Class C
---------------------
Period Ended June 30,
---------------------
2004(a)
-------
Net asset value, beginning of period.............................. $10.00
Income (loss) from investment operations:
Net investment income (loss).................................... (0.02)
Net realized and unrealized gain (loss) on investments.......... 0.57
------
Total from investment operations.................................. 0.55
Less distributions from:
Net investment income........................................... --
Net realized gain............................................... --
------
Total distributions............................................... --
------
Net asset value, end of period.................................... $10.55
======
Total return (%).................................................. 5.50
Ratios to average daily net assets (%) (b):
Expenses, net of waivers and reimbursements..................... 2.25
Expenses, before waivers and reimbursements..................... 2.65
Net investment income (loss), net of waivers and reimbursements. (1.47)
Net investment income (loss), before waivers and reimbursements. (1.87)
---------------------
Period Ended June 30,
---------------------
2004(a)
-------
Supplemental data for all classes:
Net assets at end of period (in thousands). $3,474
Portfolio turnover rate (%) (b)............ 16
- ----------
(a)For the period from May 24, 2004 (Commencement of Operations) to June 30,
2004.
(b)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004 is based on the average
shares outstanding during the period.
June 30, 2004 William Blair Funds 71
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Value Discovery Fund
Class A
----------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $21.62 $15.54 $ 17.37 $16.25 $13.72 $12.60
Income (loss) from investment operations:
Net investment income (loss).................................... (0.01) (0.07) (0.04) 0.09 0.09 0.02
Net realized and unrealized gain (loss) on investments.......... 1.14 6.15 (1.79) 2.75 2.53 1.12
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 1.13 6.08 (1.83) 2.84 2.62 1.14
Less distributions from:
Net investment income........................................... -- -- -- 0.96 0.09 0.02
Net realized gain............................................... -- -- -- 0.76 -- --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- -- -- 1.72 0.09 0.02
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $22.75 $21.62 $ 15.54 $17.37 $16.25 $13.72
====== ====== ======= ====== ====== ======
Total return (%).................................................. 5.23 39.12 (10.54) 17.42 19.09 9.01
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements..................... 1.49 1.58 1.59 1.61 1.64 1.64
Expenses, before waivers and reimbursements..................... 1.49 1.58 1.59 1.66 1.88 1.67
Net investment income (loss), net of waivers and reimbursements. (0.11) (0.39) (0.22) 0.28 0.47 1.28
Net investment income (loss), before waivers and reimbursements. (0.11) (0.39) (0.22) 0.23 0.23 1.25
Class B
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(a)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $22.20 $16.07 $ 18.10 $16.18 $13.72 $12.60
Income (loss) from investment operations:
Net investment income (loss).................................... (0.10) (0.20) (0.18) (0.06) (0.07) 0.02
Net realized and unrealized gain (loss) on investments.......... 1.16 6.33 (1.85) 2.74 2.53 1.11
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 1.06 6.13 (2.03) 2.68 2.46 1.13
Less distributions from:
Net investment income........................................... -- -- -- -- -- 0.01
Net realized gain............................................... -- -- -- 0.76 -- --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- -- -- 0.76 -- 0.01
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $23.26 $22.20 $ 16.07 $18.10 $16.18 $13.72
====== ====== ======= ====== ====== ======
Total return (%).................................................. 4.77 38.15 (11.22) 16.54 17.93 8.95
Ratios to average daily net assets (%) (c):
Expenses, net of waivers and reimbursements..................... 2.24 2.33 2.34 2.36 2.39 2.39
Expenses, before waivers and reimbursements..................... 2.24 2.33 2.34 2.41 2.63 2.42
Net investment income (loss), net of waivers and reimbursements. (0.86) (1.14) (0.97) (0.47) (0.27) 0.31
Net investment income (loss), before waivers and reimbursements. (0.86) (1.14) (0.97) (0.52) (0.51) 0.28
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $263,214 $237,111 $190,802 $149,292 $74,093 $48,423
Portfolio turnover rate (%) (c)............ 36 51 20 48 68 65
- ----------
(a)For the period from November 2, 1999 (Commencement of the Class) to December
31, 1999.
(b)For the period November 3, 1999 (Commencement of the Class) to December 31,
1999.
(c)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
72 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Value Discovery Fund
Class C
------------------------------------------------------
Period Ended Years Ended December 31,
------------ ----------------------------------------
6/30/2004 2003 2002 2001 2000 1999(b)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period.............................. $22.20 $16.07 $ 18.11 $16.19 $13.72 $12.67
Income (loss) from investment operations:
Net investment income (loss).................................... (0.10) (0.20) (0.18) (0.06) (0.06) 0.02
Net realized and unrealized gain (loss) on investments.......... 1.17 6.33 (1.86) 2.74 2.53 1.04
------ ------ ------- ------ ------ ------
Total from investment operations.................................. 1.07 6.13 (2.04) 2.68 2.47 1.06
Less distributions from:
Net investment income........................................... -- -- -- -- -- 0.01
Net realized gain............................................... -- -- -- 0.76 -- --
------ ------ ------- ------ ------ ------
Total distributions............................................... -- -- -- 0.76 -- 0.01
------ ------ ------- ------ ------ ------
Net asset value, end of period.................................... $23.27 $22.20 $ 16.07 $18.11 $16.19 $13.72
====== ====== ======= ====== ====== ======
Total return (%).................................................. 4.83 38.15 (11.26) 16.53 18.00 8.37
Ratios to average daily net assets (%):
Expenses, net of waivers and reimbursements..................... 2.24 2.33 2.34 2.36 2.39 2.39
Expenses, before waivers and reimbursements..................... 2.24 2.33 2.34 2.41 2.63 2.42
Net investment income (loss), net of waivers and reimbursements. (0.86) (1.14) (0.97) (0.47) (0.37) 1.53
Net investment income (loss), before waivers and reimbursements. (0.86) (1.14) (0.97) (0.52) (0.61) 1.50
-------------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $263,214 $237,111 $190,802 $149,292 $74,093 $48,423
Portfolio turnover rate (%) (c)............ 36 51 20 48 68 65
- ----------
(a)For the period from November 2, 1999 (Commencement of the Class) to December
31, 1999.
(b)For the period November 3, 1999 (Commencement of the Class) to December 31,
1999.
(c)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 73
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Income Fund
Class A
--------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------
6/30/2004 2003 2002 2001 2000 1999(b)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $ 6.23 $ 6.40 $ 6.21 $10.37 $ 9.94 $ 9.95
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.26 0.22 0.32 4.80 0.63 0.07
Net realized and unrealized gain (loss) on investments. (0.29) -- 0.16 (4.16) 0.35 (0.01)
------ ------ ------ ------ ------ ------
Total from investment operations......................... (0.03) 0.22 0.48 0.64 0.98 0.06
Less distributions from:
Net investment income.................................. 0.14 0.39 0.29 4.80 0.55 0.07
Net realized gain...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions...................................... 0.14 0.39 0.29 4.80 0.55 0.07
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $ 6.06 $ 6.23 $ 6.40 $ 6.21 $10.37 $ 9.94
====== ====== ====== ====== ====== ======
Total return (%)......................................... (0.50) 3.56 7.86 7.26 10.20 0.63
Ratios to average daily net assets (%) (e):
Expenses............................................... 0.76 0.77 0.81 0.94 1.02 0.99
Net investment income (loss)........................... 4.17 4.09 5.23 5.38 6.25 5.78
Class B
--------------------------------------------------
Period Ended Years Ended December 31,
------------ ------------------------------------
6/30/2004 2003 2002 2001 2000 1999(c)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $10.28 $10.51 $10.24 $10.23 $ 9.94 $10.05
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.35 0.33 0.47 0.63 0.57 0.06
Net realized and unrealized gain (loss) on investments. (0.43) (0.04) 0.24 0.01 0.32 (0.11)
------ ------ ------ ------ ------ ------
Total from investment operations......................... (0.08) 0.29 0.71 0.64 0.89 (0.05)
Less distributions from:
Net investment income.................................. 0.20 0.52 0.44 0.63 0.60 0.06
Net realized gain...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions...................................... 0.20 0.52 0.44 0.63 0.60 0.06
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $10.00 $10.28 $10.51 $10.24 $10.23 $ 9.94
====== ====== ====== ====== ====== ======
Total return (%)......................................... (0.77) 2.82 7.15 6.37 9.25 (0.51)
Ratios to average daily net assets (%) (e):
Expenses............................................... 1.51 1.52 1.56 1.69 1.77 1.77
Net investment income (loss)........................... 3.42 3.34 4.48 4.63 5.38 4.91
---------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $267,298 $265,062 $196,136 $176,264 $167,746 $173,375
Portfolio turnover rate (%) (e)............ 36 36 66 82 54 66
- ----------
(a)As required, in 2001, the Fund has adopted the provisions of the AICPA Audit
and Accounting Guide for Investment Companies and began treating any paydown
gain or losses on mortgage and asset backed securities as an adjustment to
income. The effect of this change for the year 2003, was to decrease net
investment income per share by $0.12 and increase the net realized and
unrealized gain loss per share by $0.12. It decreases the Ratio of Net
Investment Income to average net assets from 5.21% to 4.09% for Class A and
from 4.46% to 3.34% for Class B and C shares. The effect of this change for
the year 2002 and 2001 was to decrease net investment income per share by
$.05 and increase the net realized and unrealized gain and loss per share by
$.05. It decreases the Ratio of Net Investment Income to Average Net Assets
from 5.75% to 5.23% and from 5.87% to 5.38% for Class A for 2002 and 2001,
respectively. It decreased the Ratio of Net Investment Income from 5.00% to
4.48% and 5.12% to 4.63% for Class B and C shares for 2002 and 2001,
respectively. Per share amounts and the Ratio of Net Investment Income to
Average Net Assets for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(b)For the period October 25, 1999 (Commencement of the Class) to December 31,
1999.
(c)For the period November 2, 1999 (Commencement of the Class) to December 31,
1999.
(d)For the period November 3, 1999 (Commencement of the Class) to December 31,
1999.
(e)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
74 Semi-Annual Report June 30, 2004
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Income Fund
Class C
-------------------------------------------------
Period Ended Years Ended December 31,
------------ -----------------------------------
6/30/2004 2003 2002 2001 2000 1999(d)
--------- ---- ---- ---- ---- -------
Net asset value, beginning of period..................... $10.43 $10.66 $10.39 $10.27 $ 9.93 $10.06
Income (loss) from investment operations:
Net investment income (loss) (a)....................... 0.35 0.33 0.47 0.53 0.53 0.08
Net realized and unrealized gain (loss) on investments. (0.43) (0.03) 0.25 0.12 0.34 (0.13)
------ ------ ------ ------ ------ ------
Total from investment operations......................... (0.08) 0.30 0.72 0.65 0.87 (0.05)
Less distributions from:
Net investment income.................................. 0.20 0.53 0.45 0.53 0.53 0.08
Net realized gain...................................... -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total distributions...................................... 0.20 0.53 0.45 0.53 0.53 0.08
------ ------ ------ ------ ------ ------
Net asset value, end of period........................... $10.15 $10.43 $10.66 $10.39 $10.27 $ 9.93
====== ====== ====== ====== ====== ======
Total return (%)......................................... (0.76) 2.85 7.09 6.41 9.05 (0.53)
Ratios to average daily net assets (%) (e):
Expenses............................................... 1.51 1.52 1.56 1.69 1.77 1.71
Net investment income (loss)........................... 3.42 3.34 4.48 4.63 5.35 5.11
---------------------------------------------------------
Period Ended Years Ended December 31,
------------ --------------------------------------------
6/30/2004 2003 2002 2001 2000 1999
--------- ---- ---- ---- ---- ----
Supplemental data for all classes:
Net assets at end of period (in thousands). $267,298 $265,062 $196,136 $176,264 $167,746 $173,375
Portfolio turnover rate (%) (e)............ 36 36 66 82 54 66
- ----------
(a)As required, in 2001, the Fund has adopted the provisions of the AICPA Audit
and Accounting Guide for Investment Companies and began treating any paydown
gain or losses on mortgage and asset backed securities as an adjustment to
income. The effect of this change for the year 2003, was to decrease net
investment income per share by $0.12 and increase the net realized and
unrealized gain loss per share by $0.12. It decreases the Ratio of Net
Investment Income to average net assets from 5.21% to 4.09% for Class A and
from 4.46% to 3.34% for Class B and C shares. The effect of this change for
the year 2002 and 2001 was to decrease net investment income per share by
$.05 and increase the net realized and unrealized gain and loss per share by
$.05. It decreases the Ratio of Net Investment Income to Average Net Assets
from 5.75% to 5.23% and from 5.87% to 5.38% for Class A for 2002 and 2001,
respectively. It decreased the Ratio of Net Investment Income from 5.00% to
4.48% and 5.12% to 4.63% for Class B and C shares for 2002 and 2001,
respectively. Per share amounts and the Ratio of Net Investment Income to
Average Net Assets for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(b)For the period October 25, 1999 (Commencement of the Class) to December 31,
1999.
(c)For the period November 2, 1999 (Commencement of the Class) to December 31,
1999.
(d)For the period November 3, 1999 (Commencement of the Class) to December 31,
1999.
(e)Rates are annualized for periods that are less than a year.
Note: Net investment income (loss) per share for 2004, 2003, 2002, 2001 and
2000 is based on the average shares outstanding during the period.
June 30, 2004 William Blair Funds 75
Trustees and Officers. The trustees and officers of the William Blair Funds,
their ages, their principal occupations during the last five years, their
affiliations, if any, with William Blair & Company, L.L.C., and other
significant affiliations are set forth below. The address of each trustee and
officer is 222 West Adams Street, Chicago, Illinois 60606.
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------- ---------- ---------------------------------------
Interested Trustees
Conrad Fischer, 70* Chairman Since 1987 Principal, William Blair 12 Trustee Emeritus, Chicago Child Care
of the & Company, L.L.C.; Society, a non-profit organization, and
Board of Partner, APM Limited Partner, APM Limited Partnership
Trustees Partnership
Michelle Seitz, 38* Trustee Since 2002 Principal, William Blair 12 N/A
& Company, L.L.C.
Non-Interested Trustees
J. Grant Beadle, 71 Trustee Since 1997 Retired Chairman and 12 Batts Group and Oliver Products
Chief Executive Officer, Company, manufacturer of products
Union Special for medical device, food and graphics
Corporation, industrial markets. Retired Associate Director,
sewing machine Northwestern University Institute for
manufacturer The Learning Sciences.
Theodore A. Bosler, 69 Trustee Since 1997 Retired Principal and 12 Crystal Lake Watershed Fund, Desert
Vice President, Lincoln Foothills Land Trust and Institute of
Capital Management Chartered Financial Analysts.
Ann P. McDermott, 64 Trustee Since 1996 Board member and 12 Junior League of Chicago,
officer for various civic Northwestern University, Women's
and charitable Board; Ravinia Festival Women's
organizations over the Board; Rush Presbyterian St. Luke's
past thirty years; Medical Center, Women's Board;
professional experience University of Chicago, Women's
prior thereto, registered Board; Visiting Nurses Association,
representative for New Honorary Director
York Stock Exchange
firm
John B. Schwemm, 69 Trustee Since 1990 Retired Chairman and 12 USG Corp., building material
Chief Executive Officer, manufacturer and Walgreen Co.
R.R. Donnelley & Sons
Company
Donald L. Seeley, 60 Trustee Since 2003 Director, Applied 12 Beverly Enterprises, Inc., provider of
Investment Management eldercare and rehabilitative services;
Program, University of Modem Media, Inc., interactive
Arizona Department of services company
Finance, Formerly Vice
Chairman and Chief
Financial Officer, True
North Communications,
Inc., marketing
communications and
advertising firm
Robert E. Wood II, 65 Trustee Since 1999 Retired Executive 12 Chairman, Add-Vision, Inc.
Vice President, Morgan manufacturer of surface animation
Stanley Dean Witter systems and Micro-Combustion, LLC
76 Semi-Annual Report June 30, 2004
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -------------------------------
Officers
Marco Hanig, 46 President Since 1999 Principal, William Blair N/A N/A
& Company, L.L.C.;
former Senior Vice
President, First Chicago
NBD
Michael P. Balkin, 45 Senior Since 2000 Principal, William Blair N/A Exceed Corp.
Vice & Company, L.L.C.
President
Rocky Barber, 52 Senior Since 2001 Principal, William Blair N/A YMCA of Metropolitan Chicago
Vice & Company, L.L.C.
President
Chief 1999-2001
Executive
Officer
Karl W. Brewer, 37 Senior Since 2000 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Harvey H. Bundy, III, 59 Senior Since 2003 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Mark A. Fuller, III, 47 Senior Since 1993 Principal, William Blair N/A Partner, Fulsen Howney Partners
Vice & Company, L.L.C.
President
W. George Greig, 51 Senior Since 1996 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Michael A. Jancosek, 44 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President Since 2000 N/A N/A
Associate, William Blair
Vice & Company, L.L.C.;
President former Vice President,
First Chicago NBD
John F. Jostrand, 50 Senior Since 1999 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
James S. Kaplan, 43 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President Since 1995 N/A N/A
Associate, William Blair
Vice & Company, L.L.C.
President
Robert C. Lanphier, IV, 47 Senior Since 2003 Principal, William Blair N/A Chairman, AG. Med, Inc.
Vice & Company, L.L.C.
President
June 30, 2004 William Blair Funds 77
Number of
Portfolios
Term of in Fund
Position(s) Office and Principal Complex
Held with Length of Occupation(s) Overseen Other Directorships
Name and Age Fund Time Served During Past 5 Years by Trustee Held by Trustee/Officer
- ------------ ----------- ----------- ------------------------ ---------- -----------------------
David S. Mitchell, 44 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President Since 2003 N/A N/A
Associate, William Blair
Vice & Company, L.L.C.
President
Capucine E. Price, 39 Senior Since 2004 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President Since 2003 N/A N/A
Associate, William Blair
Vice & Company, L.L.C.
President
Gregory J. Pusinelli, 45 Senior Since 1999 Principal, William Blair N/A N/A
Vice & Company, L.L.C.;
President former Principal and
Vice President, Stein
Roe & Farnham
Incorporated
Norbert W. Truderung, 51 Senior Since 1992 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Jeffrey A. Urbina, 49 Senior Since 1998 Principal, William Blair N/A N/A
Vice & Company, L.L.C.
President
Christopher T. Senior Since 2004 Principal, William Blair N/A Uhlich Children's Home
Vincent, 49 Vice & Company, L.L.C.
President Since 2002 N/A N/A
Associate, William Blair
Vice & Company, L.L.C.;
President former Managing
Director/Senior
Portfolio Manager,
Zurich Scudder
Investments
Terence M. Sullivan, 59 Vice Since 1997 Associate, William Blair N/A N/A
President & Company, L.L.C.
and
Treasurer
Colette M. Garavalia, 43 Secretary Since 2000 Associate, William Blair N/A N/A
& Company, L.L.C.;
former Assistant Vice
President, Scudder
Kemper Investments
- ----------
* Mr. Fischer and Ms. Seitz are interested persons of the William Blair Funds
because each is a principal of William Blair & Company, L.L.C., the Funds'
investment advisor and principal underwriter.
78 Semi-Annual Report June 30, 2004
The Statement of Additional Information for the William Blair Funds includes
additional information about the trustees and is available without charge by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840) or by writing the Fund.
Proxy Voting
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities and information regarding
how the Fund voted proxies relating to portfolio securities for the most recent
12-month period ended June 30 are available without charge, upon request, by
calling 1-800-635-2886 (in Massachusetts 1-800-635-2840), at
www.williamblairfunds.com and on the SEC's website at http://www.sec.gov.
Quarterly Portfolio Schedules
The Fund will file its complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters of each fiscal year (quarters ended March
31 and September 30) on Form N-Q. The Fund's Forms N-Q will be available on the
SEC's website at http://www.sec.gov and may be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330.
June 30, 2004 William Blair Funds 79
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BOARD OF TRUSTEES
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Conrad Fischer, Chairman
Principal, William Blair & Company, L.L.C.
J. Grant Beadle
Retired Chairman and CEO, Union Special Corporation
Theodore A. Bosler
Retired Principal and Vice President, Lincoln Capital Management Company
Ann P. McDermott
Director and Trustee
Profit and not-for-profit organizations
Donald L. Seeley
Adjunct Lecturer and Director, University of Arizona Department of Finance
John B. Schwemm
Retired Chairman and CEO, R.R. Donnelley & Sons Company
Michelle Seitz
Principal, William Blair & Company, L.L.C.,
Robert E. Wood II
Retired Executive Vice President, Morgan Stanley Dean Witter
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Officers
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Marco Hanig, President
Michael P. Balkin, Senior Vice President
Rocky Barber, Senior Vice President
Karl W. Brewer, Senior Vice President
Harvey H. Bundy III, Senior Vice President
Mark A. Fuller, III, Senior Vice President
W. George Greig, Senior Vice President
Michael A. Jancosek, Senior Vice President
John F. Jostrand, Senior Vice President
James S. Kaplan, Senior Vice President
Robert C. Lanphier IV, Senior Vice President
David S. Mitchell, Senior Vice President
Capucine E. Price, Senior Vice President
Gregory J. Pusinelli, Senior Vice President
Norbert W. Truderung, Senior Vice President
Jeffrey A. Urbina, Senior Vice President
Christopher T. Vincent, Senior Vice President
Terence M. Sullivan, Vice President and Treasurer
Colette M. Garavalia, Secretary
Investment Advisor
William Blair & Company, L.L.C.
Legal Counsel
Vedder, Price, Kaufman & Kammholz, P.C.
Transfer Agent
State Street Bank and Trust Company
P.O. Box 8506
Boston, MA 02266-8506
For customer assistance, call 1-800-635-2886
(Massachusetts 1-800-635-2840)
80 Date of First Use August, 2004
[LOGO APPEARS HERE] WILLIAM BLAIR FUNDS
GROWTH FUNDS
Growth Fund
Tax-Managed Growth Fund
Large Cap Growth Fund
Small Cap Growth Fund
Small-Mid Cap Growth Fund
International Growth Fund
International Equity Fund
OTHER FUNDS
Value Discovery Fund
Income Fund
222 West Adams Street . Chicago, Illinois 60606 .
800.742.7272 . www.williamblairfunds.com
William Blair & Company, L.L.C., Distributors
Item 2. Code of Ethics
Not applicable to this filing.
Item 3. Audit Committee Financial Expert
Not applicable to this filing
Item 4. Principal Accountant Fees and Services
Not applicable to this filing
Item 5. Audit Committee of Listed Registrant
Not Applicable to this Registrant, insofar as the Registrant is not a listed
company.
Item 6. Schedule of Investments
Not applicable to this filing
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable to this Registrant, insofar as the Registrant is not a closed-end
management investment company.
Item 8. Purchase of Equity Securities by Closed end Management Investment
Companies and Affiliated Purchasers
Not applicable to this Registrant, insofar as the Registrant is not a closed-end
management investment company.
Item 9. Submission of Matters to a Vote of Security Holders
The Nominating and Governance Committee is responsible for the identification
and recommendation of individuals for Board membership. Pursuant to the
Registrant's Governance Procedures and Guidelines, other Board members,
shareholders and the Registrant's investment adviser may submit suggestions for
Board candidates to the Nominating and Governance Committee. Shareholders may
submit suggestions for candidates by sending a resume of the candidate to the
Secretary of the Registrant for the attention of the Nominating and Governance
Committee.
Item 10. Controls and Procedures
(a) The Registrant's principal executive and principal financial officer, or
persons performing similar functions, have concluded that the Registrant's
Disclosure Controls and Procedures (as defined in Rule 30-a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3
(c)) are effective, as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph, based on their
evaluation of these controls and procedures required by Rule 30a-3 (b) under the
1940 Act (17 CFR 270.30a-3(b) and Rules 13a-15(b) or 15d-15(b) under the
Exchange Act (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the Registrant's internal controls 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 that has materially
affected, or is reasonably likely to materially affect, the Registrant's
internal control over financial reporting.
Item 11. Exhibits
Item 11 (a) Code of Ethics
Not applicable to this filing
11. (a)(2)(1) Certification of Principal Executive Officer
Required by Rule 30a-2(a) of the Investment Company Act
11. (a)(2)(2) Certification of Principal Financial Officer
Required by Rule 30a-2(a) of the Investment Company Act.
11. (a)(3) Any written solicitation to purchase securities under Rule 23c-1
under the 40 Act (17 CFR 270.23c-1) sent or given during the period covered by
the report by or on behalf of the registrant to 10 or more persons.
Not applicable to this Registrant, insofar as the Registrant is not a closed-end
management investment company.
11. (b) Certification of Chief Executive Officer and
Chief Financial Officer Certification Required by Rule 30a-2(b) of the
Investment Company Act
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.
William Blair Funds
/s/ Marco Hanig
------------------------------------
By: Marco Hanig
President
Date: August 26, 2004
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.
/s/ Marco Hanig
------------------------------------
By: Marco Hanig
President
Date: August 26, 2004
/s/ Terence M. Sullivan
------------------------------------
By: Terence M. Sullivan
Treasurer
Date: August 26, 2004