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 811-21482
---------------------------------------
SunAmerica Specialty Series
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Harborside Financial Center, 3200 Plaza 5 Jersey City, NJ 07311
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
John T. Genoy
Senior Vice President
SunAmerica Asset Management Corp.
Harborside Financial Center,
3200 Plaza 5
Jersey City, NJ 07311
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (201) 324-6414
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Date of fiscal year end: October 31
------------------------
Date of reporting period: October 31, 2010
------------------------
Item 1. Reports to Stockholders
2010 ANNUAL REPORT
SUNAMERICA SPECIALTY SERIES
High Watermark Funds
2015 High Watermark Fund
2020 High Watermark Fund
SunAmerica
Alternative Strategies Fund
[GRAPHIC]
[LOGO]
TABLE OF CONTENTS
MESSAGE FROM THE PRESIDENT.............................. 1
EXPENSE EXAMPLE......................................... 3
STATEMENT OF ASSETS AND LIABILITIES..................... 5
STATEMENT OF OPERATIONS................................. 7
STATEMENT OF CHANGES IN NET ASSETS...................... 8
FINANCIAL HIGHLIGHTS.................................... 9
PORTFOLIO OF INVESTMENTS................................ 12
NOTES TO FINANCIAL STATEMENTS........................... 20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. 36
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY
AGREEMENTS.............................................. 37
TRUSTEE AND OFFICER INFORMATION......................... 42
SHAREHOLDER TAX INFORMATION............................. 44
COMPARISONS: FUNDS VS. INDICES.......................... 45
A MESSAGE FROM THE PRESIDENT
Dear Shareholders,
We are pleased to present you with the financial report for the SunAmerica
Alternative Strategies Fund and SunAmerica High Watermark Funds for the annual
period ended October 31, 2010. These Funds offer investors important tools with
which to potentially enhance portfolio diversification and manage risk.
The annual period started on an optimistic note as government-sponsored
liquidity fueled investors' appetite for risk and spurred a rally in the equity
market that continued through the first quarter of 2010. However, critical
issues continued to challenge the economic landscape: high unemployment, the
uncertain impact of consumer de-leveraging on the economy, a growing federal
budget deficit, and future inflationary threats.
The second half of the annual period reintroduced uncertainty over the
direction of the U.S. economy and brought the seemingly straight-up recovery of
the stock market to an end. A clear slowdown in the economic recovery,
exemplified by anemic job growth and declining consumer confidence, weighed on
the equity markets.
In September 2010, the National Bureau of Economic Research, the official
arbiter of the U.S. economy, confirmed that the recession which officially
began in December 2007 ended in June 2009. The equity market took on a
schizophrenic character with each new release of data: rallying when signs of
economic growth or even mere stabilization appeared and selling off when the
economic data on growth, employment or housing appeared to signal another
recession. However, the equity market ended the annual period on a high note
with the S&P 500 Index* returning 8.92% during the month of September and 3.81%
during the month of October. For the entire annual period, the S&P 500 returned
16.52%.
The SunAmerica Alternative Strategies Fund is an open-end mutual fund that
seeks to provide long-term total return by utilizing an actively-managed,
quantitative investment process to provide exposure to a diversified portfolio
of alternative, or non-traditional, investment strategies and asset classes,
and by investing in U.S. government securities and other fixed income
securities. The Fund may provide investors with a way to smooth volatility in
their overall portfolios since the returns generated by this exposure are
generally expected to provide a low correlation to the returns of equity and
fixed income investments.
The High Watermark Funds, pursuant to a proprietary methodology developed by
the Funds' subadviser, Trajectory Asset Management LLC, seek to provide
investors with risk-controlled exposure to the S&P 500 Index in addition to
downside protection and a target maturity. In addition, the Funds, subject to
certain conditions, offer a feature that is designed to preserve principal and
investment gains over the life of each Fund.
The High Watermark Funds do not purchase individual securities but rather
invest in S&P 500 Index futures and related options and high-quality, fixed
income instruments. Therefore, it is important to understand the broad
movements of the S&P 500 Index, the U.S. Government bond market, and each
Fund's asset allocation in order to evaluate performance. It is also worth
noting that the proprietary methodology used by Trajectory continued to result
in a very low level of equity exposure for the High Watermark Funds during the
annual period.
On the following pages, you will find financial statements for the Funds as
well as detailed commentary on each Fund. Please review this information to
help you better understand the Funds' financial position, as well as the Funds'
positioning and performance during the annual period. Thank you for including
SunAmerica Mutual Funds in your investment plan. We value your ongoing
confidence in us and look forward to serving your investment needs in the
future. As always, you may contact your financial adviser or visit
www.sunamericafunds.com for more information about any of our mutual funds.
Sincerely,
/s/ Peter A. Harbeck
Peter A. Harbeck
President & CEO
SunAmerica Asset Management Corp.
1
A MESSAGE FROM THE PRESIDENT (CONTINUED)
- --------
Past performance is no guarantee of future results. Diversification does not
guarantee a profit nor protect against a loss.
* The S&P 500 Index is Standard & Poor's 500 Composite Stock Price Index, a
widely-recognized, unmanaged index of common stock prices. Indices are not
managed and an investor cannot invest directly in an index.
The High Watermark Funds' subadviser employs a disciplined quantitative
approach through a proprietary, computer-assisted methodology to construct and
rebalance the Funds' portfolios. This construction and rebalancing process is
similar to asset allocation except that it controls not only portfolio assets
such as U.S. government securities but also the portfolios' exposures to equity
markets via futures contracts and from time to time options contracts. Under
certain circumstances, the Funds may be required to invest 100% of their assets
in U.S. government securities. In these circumstances, the Funds may not
participate meaningfully in any subsequent recovery in the equity markets. Use
of fixed income securities reduces the Funds' ability to participate as fully
in upward equity market movements, and therefore, represents some loss of
opportunity compared to portfolios that are fully invested in equities. Asset
allocation does not guarantee a profit nor does it protect against loss.
On each High Watermark Fund's Protected Maturity Date, the Fund is designed to
return to shareholders the highest net asset value (NAV) attained during the
life of the Fund, adjusted as a result of dividends, distribution and
extraordinary expenses. This NAV is the Fund's Protected High Watermark Value.
Each High Watermark Fund's undertaking (the "Payment Undertaking") that
shareholders in the Fund will be entitled to redeem their shares on the
Protected Maturity Date for the Protected High Watermark Value is backed by a
master agreement ("Master Agreement") between SunAmerica Specialty Series, on
behalf of the High Watermark Funds, and Prudential Global Funding ("PGF"),
under which PGF will pay to a Fund any shortfall between the Protected High
Watermark Value and the actual NAV per share of the Fund's Protected Maturity
Date, provided certain conditions are met. PGF's obligations are guaranteed by
its parent company, Prudential Financial Inc., ("Prudential Financial"). The
Master Agreement is solely the obligation of PGF and Prudential Financial. The
Master Agreement is an obligation that runs solely to the High Watermark Funds,
not to the High Watermark Funds' shareholders. PGF's obligations under the
Master Agreement are dependent on the financial condition of PGF and Prudential
Financial. A shareholder's payout will be reduced by any redemption of High
Watermark Fund shares or dividends and distributions taken in cash, sales
charges and extraordinary fund expenses. Dividends and distributions from the
High Watermark Funds are taxable whether or not you reinvest them in additional
shares of the High Watermark Funds. The Payment Undertaking does not apply to
shares redeemed prior to the Protected Maturity Date and shareholders can lose
money on shares redeemed early. If certain obligations are not performed under
the Master Agreement (Master Agreement risk), shareholders will receive upon
redemption the then-current net asset value, which may be lower than the
current high watermark value. Neither the High Watermark Funds nor SunAmerica
Asset Management Corp., the Funds' investment adviser, is obligated to replace
the Master Agreement provider or Prudential Financial should they be unable to
make payments under the Master Agreement. The Master Agreement increases the
High Watermark Funds' expenses and could lower fund performance. If the Master
Agreement is terminated, the fee payable under a new agreement may be higher.
The SunAmerica Alternative Strategies Fund is not a complete investment program
and should not be an investor's sole investment because its performance is
linked to the performance of highly volatile commodities and hedge funds. The
Fund may also hold investments through the managed futures strategy that may
fluctuate significantly in value over short periods of time. Investors should
consider buying shares of the SunAmerica Alternative Strategies Fund only as
part of an overall portfolio strategy that includes other asset classes, such
as fixed income and equity investments. Investors in the SunAmerica Alternative
Strategies Fund should be willing to assume greater risks of potentially
significant short-term share price fluctuation because of the SunAmerica
Alternative Strategies Fund's investments in commodity-linked and hedge
fund-linked instruments and in managed futures.
2
SUNAMERICA SPECIALTY SERIES
EXPENSE EXAMPLE -- OCTOBER 31, 2010 -- (UNAUDITED)
DISCLOSURE OF FUND EXPENSES IN SHAREHOLDER REPORTS
As a shareholder of a Fund (each a "Fund" and collectively, the "Funds") in the
SunAmerica Specialty Series (the "Trust"), you may incur two types of costs:
(1) transaction costs, including applicable sales charges (loads) on purchase
payments and contingent deferred sales charges and (2) ongoing costs, including
management fees; distribution and service fees; and other Fund expenses. This
Example is intended to help you understand your ongoing costs (in dollars) on
investing in the Funds and to compare these costs with the ongoing costs of
investing in other mutual funds. The Example is based on an investment of
$1,000 invested at May 1, 2010 and held until October 31, 2010.
ACTUAL EXPENSES
The "Actual" section of the table provides information about your actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the column under the heading entitled "Expenses Paid
During the Six Months Ended October 31, 2010" to estimate the expenses you paid
on your account during this period. For shareholder accounts in classes other
than Class I and Class W, the "Expenses Paid During the Six Months Ended
October 31, 2010" column does not include small account fees that may be
charged if your balance is below $500 ($250 for retirement plan accounts). In
addition, the "Expenses Paid During the Six Months Ended October 31, 2010"
column does not include administrative or other fees that may apply to
qualified retirement plan accounts and accounts held through financial
institutions. See the Funds' prospectuses, your retirement plan document and/or
materials from your financial advisers for a full description of these fees.
Had these fees, if applicable, been included, the "Expenses Paid During the Six
Months Ended October 31, 2010" column would have been higher and the "Ending
Account Value" would have been lower.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The "Hypothetical" section of the table provides information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is
not the Fund's actual return. The hypothetical account values and expenses may
not be used to estimate the actual ending account balance or expenses you paid
for the period. You may use this information to compare the ongoing costs of
investing in other Funds. To do so, compare this 5% hypothetical example with
the 5% hypothetical examples that appear in the shareholder reports of other
Funds. For shareholder accounts in classes other than Class I and Class W, the
"Expenses Paid During the Six Months Ended October 31, 2010" column does not
include small account fees that may be charged if your balance is below $500
($250 for retirement plan accounts). In addition, the "Expenses Paid During the
Six Months Ended October 31, 2010" column does not include administrative or
other fees that may apply to qualified retirement plan accounts and accounts
held through financial institutions. See the Funds' prospectuses, your
retirement plan document and/or materials from your financial advisers for a
full description of these fees. Had these fees, if applicable, been included,
the "Expenses Paid During the Six Months Ended October 31, 2010" column would
have been higher and the "Ending Account Value" would have been lower.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transaction costs, including sales
charges on purchase payments, contingent deferred sales charges; small account
fees and administrative fees, if applicable, to your account. Please refer to
your prospectus, your retirement plan document and/or materials from your
financial adviser, for more information. Therefore, the "Hypothetical" example
is useful in comparing ongoing costs only, and will not help you determine the
relative total costs of owning different funds. In addition, if these
transactional costs and other fees were included, your costs would have been
higher.
3
SUNAMERICA SPECIALTY SERIES
EXPENSE EXAMPLE -- OCTOBER 31, 2010 -- (UNAUDITED) (CONTINUED)
ACTUAL HYPOTHETICAL
------------------------------------------ -------------------------------------------
EXPENSES PAID ENDING ACCOUNT EXPENSES PAID
ENDING ACCOUNT DURING THE VALUE USING A DURING THE
BEGINNING VALUE USING SIX MONTHS BEGINNING HYPOTHETICAL 5% SIX MONTHS
ACCOUNT VALUE ACTUAL RETURN ENDED ACCOUNT VALUE ASSUMED RETURN ENDED
AT MAY 1, AT OCTOBER 31, OCTOBER 31, AT MAY 1, AT OCTOBER 31, OCTOBER 31,
2010 2010 2010* 2010 2010 2010*
------------- -------------- ------------- ------------- --------------- -------------
2015 HIGH WATERMARK FUND
Class A#.............................. $1,000.00 $1,073.12 $ 6.43 $1,000.00 $1,019.00 $ 6.26
Class C#.............................. $1,000.00 $1,070.39 $ 9.81 $1,000.00 $1,015.73 $ 9.55
Class I#.............................. $1,000.00 $1,076.92 $ 3.98 $1,000.00 $1,021.37 $ 3.87
2020 HIGH WATERMARK FUND
Class A#.............................. $1,000.00 $1,111.66 $ 7.93 $1,000.00 $1,017.69 $ 7.58
Class C#.............................. $1,000.00 $1,107.10 $11.37 $1,000.00 $1,014.42 $10.87
Class I#.............................. $1,000.00 $1,112.48 $ 5.43 $1,000.00 $1,020.06 $ 5.19
SUNAMERICA ALTERNATIVE STRATEGIES FUND@
Class A#.............................. $1,000.00 $1,000.00 $ 8.67 $1,000.00 $1,016.53 $ 8.74
Class C#.............................. $1,000.00 $ 996.17 $11.92 $1,000.00 $1,013.26 $12.03
Class W#.............................. $1,000.00 $1,000.95 $ 7.67 $1,000.00 $1,017.54 $ 7.73
EXPENSE
RATIO AS OF
OCTOBER 31,
2010*
-----------
2015 HIGH WATERMARK FUND
Class A#.............................. 1.23%
Class C#.............................. 1.88%
Class I#.............................. 0.76%
2020 HIGH WATERMARK FUND
Class A#.............................. 1.49%
Class C#.............................. 2.14%
Class I#.............................. 1.02%
SUNAMERICA ALTERNATIVE STRATEGIES FUND@
Class A#.............................. 1.72%
Class C#.............................. 2.37%
Class W#.............................. 1.52%
- --------
* Expenses are equal to the Fund's annualized expense ratio multiplied by the
average account value over the period, multiplied by 184 days divided by 365
days. These ratios do not reflect transaction costs, including sales charges
on purchase payments, contingent deferred sales charges, small account fees
and administrative fees, if applicable to your account. Please refer to your
prospectus, your retirement plan document and/or materials from your
financial adviser, for more information.
# During the stated period, the investment adviser either waived a portion or
all of the fees and assumed a portion of or all expenses for the Funds or
through recoupment provisions, recovered a portion of or all fees and
expenses waived or reimbursed in the previous two fiscal years. As a result,
if these fees and expenses had not been waived, the "Actual/Hypothetical
Ending Account Value" would have been lower and the "Actual/Hypothetical
Expenses Paid During the Six Months Ended October 31, 2010" and the "Expense
Ratios" would have been higher. If these fees and expenses had not been
recouped, the "Actual/Hypothetical Ending Account Value" would have been
higher and the "Actual/Hypothetical Expenses Paid During the Six Months
Ended October 31, 2010" and the "Expense Ratios" would have been lower.
@ Consolidated; See Note 2.
4
SUNAMERICA SPECIALTY SERIES
STATEMENT OF ASSETS AND LIABILITIES -- OCTOBER 31, 2010
SUNAMERICA
2015 HIGH 2020 HIGH ALTERNATIVE
WATERMARK WATERMARK STRATEGIES FUND#
------------ ------------ ----------------
ASSETS:
Investments at value (unaffiliated)*.................................. $196,711,287 $ 67,399,552 $359,806,278
Repurchase agreements (cost approximates market value)................ 552,000 754,000 18,030,457
------------ ------------ ------------
Total investments.................................................... 197,263,287 68,153,552 377,836,735
------------ ------------ ------------
Cash.................................................................. 328 622 166
Receivable for:
Shares of beneficial interest sold................................... -- 45,678 1,033,420
Dividends and interest............................................... -- 1 943,038
Prepaid expenses and other assets..................................... 2,777 2,235 3,299
Due from investment adviser for expense reimbursements/fee waivers.... 205,076 53,462 192,452
Variation margin on futures contracts................................. 20 20 --
------------ ------------ ------------
Total assets......................................................... 197,471,488 68,255,570 380,009,110
------------ ------------ ------------
LIABILITIES:
Payable for:
Shares of beneficial interest redeemed............................... 579,080 46,811 598,712
Investment advisory and management fees.............................. 109,457 39,211 385,498
Distribution and service maintenance fees............................ 99,488 28,748 121,278
Transfer agent fees and expenses..................................... 45,992 18,067 78,306
Trustees' fees and expenses.......................................... 2,060 611 2,604
Prudential Global Funding, Inc. (Note 1)............................. 58,939 21,114 --
Other accrued expenses............................................... 62,982 25,196 72,322
Call and put options written, at value @.............................. -- -- 1,773,257
Variation margin on futures contracts................................. -- -- 67,943
------------ ------------ ------------
Total liabilities.................................................... 957,998 179,758 3,099,920
------------ ------------ ------------
NET ASSETS............................................................ $196,513,490 $ 68,075,812 $376,909,190
============ ============ ============
NET ASSETS REPRESENTED BY:
Paid-in capital....................................................... 201,852,468 81,882,855 360,389,794
Accumulated undistributed net investment income (loss)................ 2,321,618 1,037,080 62,161
Accumulated undistributed net realized gain (loss) on investments,
futures and options contracts........................................ (25,066,153) (23,441,354) 2,237,023
Unrealized appreciation (depreciation) on investments................. 17,401,819 8,593,493 7,542,033
Unrealized appreciation (depreciation) on futures contracts and
written options contracts............................................ 3,738 3,738 6,678,179
------------ ------------ ------------
NET ASSETS............................................................ $196,513,490 $ 68,075,812 $376,909,190
============ ============ ============
* Cost
Investments (unaffiliated)........................................... $179,309,468 $ 58,806,059 $352,264,245
============ ============ ============
@ Premiums received on options written................................ $ -- $ -- $ 1,720,840
============ ============ ============
- --------
# Consolidated; See Note 2.
See Notes to Financial Statements
5
SUNAMERICA SPECIALTY SERIES
STATEMENT OF ASSETS AND LIABILITIES -- OCTOBER 31, 2010 -- (CONTINUED)
SUNAMERICA
2015 HIGH 2020 HIGH ALTERNATIVE
WATERMARK WATERMARK STRATEGIES FUND#
----------- ----------- ----------------
CLASS A (UNLIMITED SHARES AUTHORIZED):
Net assets........................................ $93,887,540 $35,826,853 $320,124,814
Shares of beneficial interest issued and
outstanding...................................... 9,007,771 4,000,585 30,469,055
Net asset value and redemption price per share
(excluding any applicable contingent deferred
sales charge).................................... $ 10.42 $ 8.96 $ 10.51
Maximum sales charge (5.75% of offering price).... $ 0.64 $ 0.55 $ 0.64
----------- ----------- ------------
Maximum offering price to public.................. $ 11.06 $ 9.51 $ 11.15
=========== =========== ============
CLASS C (UNLIMITED SHARES AUTHORIZED):
Net assets........................................ $76,836,932 $16,228,792 $ 31,080,599
Shares of beneficial interest issued and
outstanding...................................... 7,430,305 1,826,247 2,984,450
Net asset value, offering and redemption price
per share (excluding any applicable contingent
deferred sales charge)........................... $ 10.34 $ 8.89 $ 10.41
=========== =========== ============
CLASS I (UNLIMITED SHARES AUTHORIZED):
Net assets........................................ $25,789,018 $16,020,167 $ --
Shares of beneficial interest issued and
outstanding...................................... 2,455,871 1,779,453 --
Net asset value, offering and redemption price
per share........................................ $ 10.50 $ 9.00 $ --
=========== =========== ============
CLASS W (UNLIMITED SHARES AUTHORIZED):
Net assets........................................ $ -- $ -- $ 25,703,777
Shares of beneficial interest issued and
outstanding...................................... -- -- 2,440,434
Net asset value, offering and redemption price
per share........................................ $ -- $ -- $ 10.53
=========== =========== ============
- --------
# Consolidated; See Note 2.
See Notes to Financial Statements
6
SUNAMERICA SPECIALTY SERIES
STATEMENT OF OPERATIONS -- FOR THE YEAR ENDED OCTOBER 31, 2010
2015 HIGH 2020 HIGH SUNAMERICA
WATERMARK WATERMARK ALTERNATIVE
FUND FUND STRATEGIES FUND#
----------- ----------- ----------------
INVESTMENT INCOME:
Dividends (unaffiliated).................................................... $ -- $ -- $ 1,506,830
Interest (unaffiliated)..................................................... 5,857,176 2,285,777 4,961,411
----------- ----------- -----------
Total investment income.................................................... 5,857,176 2,285,777 6,468,241
----------- ----------- -----------
Expenses:
Investment advisory and management fees.................................... 1,357,953 434,100 3,769,808
Distribution and service maintenance fees:
Class A.................................................................. 351,342 131,259 960,103
Class C.................................................................. 817,506 158,082 277,609
Service Fees:
Class I.................................................................. 66,954 33,684 --
Class W.................................................................. -- -- 24,952
Transfer agent fees and expenses:
Class A.................................................................. 234,114 91,169 628,655
Class C.................................................................. 190,867 39,336 67,249
Class I.................................................................. 60,183 30,937 --
Class W.................................................................. -- -- 38,721
Registration fees:
Class A.................................................................. 13,641 16,029 44,949
Class C.................................................................. 11,573 12,000 12,652
Class I.................................................................. 7,819 11,733 --
Class W.................................................................. -- -- 11,281
Custodian and accounting fees.............................................. 52,152 26,751 93,062
Reports to shareholders.................................................... 63,579 23,223 96,317
Audit and tax fees......................................................... 36,350 36,348 56,105
Legal fees................................................................. 25,512 14,689 77,261
Fees paid to Prudential Global Funding, Inc. (Note 1)...................... 731,205 233,746 --
Trustees' fees and expenses................................................ 23,777 7,316 33,521
Other expenses............................................................. 23,148 18,346 30,564
----------- ----------- -----------
Total expenses before fee waivers, expense reimbursements, expense
recoupments, custody credits............................................ 4,067,675 1,318,748 6,222,809
Net (fees waived and expenses reimbursed)/recouped by investment
advisor (Note 4)........................................................ (965,916) (258,924) (593,687)
Custody credits earned on cash balances.................................. (4) (10) (116)
----------- ----------- -----------
Net expenses............................................................. 3,101,755 1,059,814 5,629,006
----------- ----------- -----------
Net investment income (loss)................................................ 2,755,421 1,225,963 839,235
----------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCY:
Net realized gain (loss) on investments (unaffiliated)...................... 1,967,779 1,263 13,905,356
Net realized gain (loss) on futures contracts and written options contracts. 5,073 5,073 (3,610,249)
----------- ----------- -----------
Net realized gain (loss) on investments..................................... 1,972,852 6,336 10,295,107
----------- ----------- -----------
Change in unrealized appreciation (depreciation) on investments
(unaffiliated)............................................................. 11,416,901 5,527,622 (7,886,183)
Change in unrealized appreciation (depreciation) on futures contracts and
written options contracts.................................................. 3,170 3,170 7,159,896
----------- ----------- -----------
Net unrealized gain (loss) on investments................................... 11,420,071 5,530,792 (726,287)
----------- ----------- -----------
Net realized and unrealized gain (loss) on investments...................... 13,392,923 5,537,128 9,568,820
----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............. $16,148,344 $ 6,763,091 $10,408,055
=========== =========== ===========
- --------
# Consolidated; See Note 2.
See Notes to Financial Statements
7
SUNAMERICA SPECIALTY SERIES
STATEMENT OF CHANGES IN NET ASSETS -- OCTOBER 31, 2010
SUNAMERICA ALTERNATIVE
2015 HIGH WATERMARK FUND 2020 HIGH WATERMARK FUND STRATEGIES FUND#
-------------------------- ------------------------ -----------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED NOVEMBER 4,
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31, 2008@ THROUGH
2010 2009 2010 2009 2010 OCTOBER 31, 2009
------------ ------------ ----------- ----------- ------------ ----------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income (loss)........... $ 2,755,421 $ 3,017,986 $ 1,225,963 $ 1,098,912 $ 839,235 $ 34,112
Net realized gain (loss) on investments 1,972,852 3,067,801 6,336 (4,118,493) 10,295,107 (5,636,221)
Net unrealized gain (loss) on
investments.......................... 11,420,071 9,422,681 5,530,792 8,174,866 (726,287) 14,946,499
------------ ------------ ----------- ----------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations.............. 16,148,344 15,508,468 6,763,091 5,155,285 10,408,055 9,344,390
------------ ------------ ----------- ----------- ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (Class A)........ (1,665,114) (1,739,111) (646,560) (813,455) (889,037) --
Net investment income (Class C)........ (754,683) (912,472) (176,460) (219,641) -- --
Net investment income (Class I)........ (529,049) (556,548) (263,803) (277,527) -- --
Net investment income (Class W)........ -- -- -- -- (72,685) --
Net realized gain on securities (Class
A)................................... -- -- -- -- -- --
Net realized gain on securities (Class
C)................................... -- -- -- -- -- --
Net realized gain on securities (Class
I)................................... -- -- -- -- -- --
Net realized gain on securities (Class
W)................................... -- -- -- -- -- --
------------ ------------ ----------- ----------- ------------ ------------
Total distributions to shareholders..... (2,948,846) (3,208,131) (1,086,823) (1,310,623) (961,722) --
------------ ------------ ----------- ----------- ------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM CAPITAL SHARE
TRANSACTIONS (NOTE 7).................. (42,027,155) (11,382,804) (5,407,676) 1,413,712 99,989,745 258,128,722
------------ ------------ ----------- ----------- ------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS. (28,827,657) 917,533 268,592 5,258,374 109,436,078 267,473,112
NET ASSETS:
Beginning of period..................... 225,341,147 224,423,614 67,807,220 62,548,846 267,473,112 --
------------ ------------ ----------- ----------- ------------ ------------
End of period+.......................... $196,513,490 $225,341,147 $68,075,812 $67,807,220 $376,909,190 $267,473,112
============ ============ =========== =========== ============ ============
- --------
+ Includes accumulated undistributed
net investment income (loss)........... $ 2,321,618 $ 2,515,043 $ 1,037,080 $ 897,940 $ 62,161 $ 62,838
============ ============ =========== =========== ============ ============
@ Commencement of operations.
# Consolidated; See Note 2.
See Notes to Financial Statements
8
SUNAMERICA SPECIALTY SERIES
FINANCIAL HIGHLIGHTS
NET GAIN
(LOSS) ON
NET INVESTMENT NET NET
ASSET (BOTH DIVIDENDS DISTRIBUTIONS ASSET ASSETS RATIO OF
VALUE NET REALIZED TOTAL FROM FROM NET FROM TOTAL VALUE END OF EXPENSE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT NET REALIZED DISTRI- END OF TOTAL PERIOD TO AVERAGE
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(2) (000'S) NET ASSETS(3)
- ------------ --------- ---------- ----------- ---------- ---------- ------------- ------- ------ --------- -------- -------------
2015 HIGH WATERMARK FUND
------------------------
CLASS A
-------
10/31/06 $10.69 $0.32 $ 0.90 $ 1.22 $(0.16) $(0.08) $(0.24) $11.67 11.62% $ 88,219 1.65%
10/31/07 11.67 0.34 0.78 1.12 (0.32) (0.76) (1.08) 11.71 10.28 100,199 1.65
10/31/08 11.71 0.18 (1.67) (1.49) (0.33) (0.65) (0.98) 9.24 (13.76) 110,924 1.65
10/31/09 9.24 0.14 0.53 0.67 (0.15) -- (0.15) 9.76 7.22 108,280 1.44
10/31/10 9.76 0.15 0.66 0.81 (0.15) -- (0.15) 10.42 8.46 93,888 1.29
CLASS C
-------
10/31/06 $10.62 $0.25 $ 0.90 $ 1.15 $(0.10) $(0.08) $(0.18) $11.59 10.94% $ 45,450 2.30%
10/31/07 11.59 0.27 0.77 1.04 (0.25) (0.76) (1.01) 11.62 9.54 53,232 2.30
10/31/08 11.62 0.11 (1.64) (1.53) (0.26) (0.65) (0.91) 9.18 (14.18) 86,196 2.30
10/31/09 9.18 0.08 0.52 0.60 (0.10) -- (0.10) 9.68 6.51 88,676 2.09
10/31/10 9.68 0.09 0.65 0.74 (0.08) -- (0.08) 10.34 7.75 76,837 1.94
CLASS I
-------
10/31/06 $10.72 $0.37 $ 0.92 $ 1.29 $(0.21) $(0.08) $(0.29) $11.72 12.22% $ 25,097 1.18%
10/31/07 11.72 0.40 0.77 1.17 (0.37) (0.76) (1.13) 11.76 10.71 27,845 1.18
10/31/08 11.76 0.23 (1.67) (1.44) (0.38) (0.65) (1.03) 9.29 (13.28) 27,304 1.18
10/31/09 9.29 0.19 0.53 0.72 (0.19) -- (0.19) 9.82 7.76 28,385 0.97
10/31/10 9.82 0.20 0.66 0.86 (0.18) -- (0.18) 10.50 8.95 25,789 0.82
RATIO
OF NET
INVESTMENT
INCOME TO
AVERAGE PORTFOLIO
NET ASSETS(3) TURNOVER
- ------------- ---------
2.94% 1%
3.09 14
1.85 26
1.48 46
1.51 0
2.28% 1%
2.44 14
1.16 26
0.83 46
0.86 0
3.42% 1%
3.56 14
2.34 26
1.95 46
1.98 0
- --------
(1)Calculated based upon average shares outstanding.
(2)Total return is not annualized and does not reflect sales load, but does
include expense reimbursements and expense reductions.
(3)Net of following expense reimbursements, waivers, (recoupments) and custody
credits, if applicable (based on average net assets):
10/31/06 10/31/07 10/31/08 10/31/09 10/31/10
-------- -------- -------- -------- --------
2015 High Watermark Fund Class A........ 0.07% 0.08% 0.04% 0.26% 0.41%
2015 High Watermark Fund Class C........ 0.08 0.09 0.05 0.26 0.41
2015 High Watermark Fund Class I........ 0.48 0.42 0.41 0.67 0.79
See Notes to Financial Statements
9
SUNAMERICA SPECIALTY SERIES
FINANCIAL HIGHLIGHTS -- (CONTINUED)
NET GAIN
(LOSS) ON
NET INVESTMENT NET NET
ASSET (BOTH DIVIDENDS DISTRIBUTIONS ASSET ASSETS RATIO OF
VALUE NET REALIZED TOTAL FROM FROM NET FROM TOTAL VALUE END OF EXPENSE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT NET REALIZED DISTRI- END OF TOTAL PERIOD TO AVERAGE
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(2) (000'S) NET ASSETS(3)
- ------------ --------- ---------- ----------- ---------- ---------- ------------- ------- ------ --------- ------- -------------
2020 HIGH WATERMARK FUND
------------------------
CLASS A
-------
10/31/06 $10.85 $0.34 $ 1.03 $ 1.37 $(0.16) $(0.09) $(0.25) $11.97 12.75% $34,897 1.65%
10/31/07 11.97 0.37 0.84 1.21 (0.33) (0.86) (1.19) 11.99 10.88 41,679 1.65
10/31/08 11.99 0.20 (3.30) (3.10) (0.36) (0.79) (1.15) 7.74 (28.39) 37,762 1.65
10/31/09 7.74 0.14 0.50 0.64 (0.16) -- (0.16) 8.22 8.32 38,471 1.59
10/31/10 8.22 0.16 0.72 0.88 (0.14) -- (0.14) 8.96 10.90 35,827 1.53
CLASS C
-------
10/31/06 $10.79 $0.26 $ 1.03 $ 1.29 $(0.09) $(0.09) $(0.18) $11.90 12.07% $14,751 2.30%
10/31/07 11.90 0.30 0.83 1.13 (0.27) (0.86) (1.13) 11.90 10.10 15,411 2.30
10/31/08 11.90 0.13 (3.27) (3.14) (0.28) (0.79) (1.07) 7.69 (28.82) 14,330 2.30
10/31/09 7.69 0.08 0.50 0.58 (0.11) -- (0.11) 8.16 7.59 16,839 2.24
10/31/10 8.16 0.10 0.72 0.82 (0.09) -- (0.09) 8.89 10.14 16,229 2.18
CLASS I
-------
10/31/06 $10.89 $0.39 $ 1.04 $ 1.43 $(0.20) $(0.09) $(0.29) $12.03 13.34% $10,621 1.18%
10/31/07 12.03 0.43 0.83 1.26 (0.38) (0.86) (1.24) 12.05 11.32 13,135 1.18
10/31/08 12.05 0.25 (3.31) (3.06) (0.41) (0.79) (1.20) 7.79 (27.97) 10,457 1.18
10/31/09 7.79 0.17 0.50 0.67 (0.20) -- (0.20) 8.26 8.66 12,497 1.12
10/31/10 8.26 0.20 0.71 0.91 (0.17) -- (0.17) 9.00 11.34 16,020 1.06
RATIO
OF NET
INVESTMENT
INCOME TO
AVERAGE PORTFOLIO
NET ASSETS(3) TURNOVER
- ------------- ---------
3.06% 0%
3.27 4
2.05 50
1.68 14
1.89 0
2.42% 0%
2.62 4
1.41 50
1.03 14
1.25 0
3.55% 0%
3.74 4
2.53 50
2.15 14
2.37 0
- --------
(1)Calculated based upon average shares outstanding.
(2)Total return is not annualized and does not reflect sales load, but does
include expense reimbursements and expense reductions.
(3)Net of following expense reimbursements, waivers, (recoupments) and custody
credits, if applicable (based on average net assets):
10/31/06 10/31/07 10/31/08 10/31/09 10/31/10
-------- -------- -------- -------- --------
2020 High Watermark Fund Class A........ 0.19% 0.17% 0.15% 0.23% 0.30%
2020 High Watermark Fund Class C........ 0.22 0.21 0.20 0.26 0.34
2020 High Watermark Fund Class I........ 0.65 0.53 0.59 0.64 0.70
See Notes to Financial Statements
10
SUNAMERICA SPECIALTY SERIES
FINANCIAL HIGHLIGHTS -- (CONTINUED)
NET GAIN
(LOSS) ON
NET INVESTMENT NET NET
ASSET (BOTH DIVIDENDS DISTRIBUTIONS ASSET ASSETS RATIO OF
VALUE NET REALIZED TOTAL FROM FROM NET FROM TOTAL VALUE END OF EXPENSE
BEGINNING INVESTMENT AND INVESTMENT INVESTMENT NET REALIZED DISTRI- END OF TOTAL PERIOD TO AVERAGE
PERIOD ENDED OF PERIOD INCOME(1) UNREALIZED) OPERATIONS INCOME GAINS BUTIONS PERIOD RETURN(2) (000'S) NET ASSETS(4)
- ------------ --------- ---------- ----------- ---------- ---------- ------------- ------- ------ --------- -------- -------------
SUNAMERICA ALTERNATIVE STRATEGIES FUND#
---------------------------------------
CLASS A
-------
11/04/08@-
10/31/09 $10.00 $ 0.00 $0.22 $0.22 $ -- $-- $ -- $10.22 2.20% $235,868 1.72%(3)
10/31/10 10.22 0.03 0.30 0.33 (0.04) -- (0.04) 10.51 3.21 320,125 1.72
CLASS C
-------
11/04/08@-
10/31/09 $10.00 $(0.03) $0.19 $0.16 $ -- $-- $ -- $10.16 1.60% $ 19,728 2.37%(3)
10/31/10 10.16 (0.03) 0.28 0.25 -- -- -- 10.41 2.46 31,081 2.37
CLASS W
-------
11/04/08@-
10/31/09 $10.00 $ 0.04 $0.21 $0.25 $ -- $-- $ -- $10.25 2.50% $ 11,877 1.52%(3)
10/31/10 10.25 0.05 0.29 0.34 (0.06) -- (0.06) 10.53 3.29 25,704 1.52
RATIO
OF NET
INVESTMENT
INCOME TO
AVERAGE PORTFOLIO
NET ASSETS(4) TURNOVER
- ------------- ---------
0.02%(3) 51%
0.31 141
(0.34)%(3) 51%
(0.34) 141
0.50%(3) 51%
0.51 141
- --------
# Consolidated; See Note 2.
@ Commencement of operations.
(1)Calculated based upon average shares outstanding.
(2)Total return is not annualized and does not reflect sales load, but does
include expense reimbursements and expense reductions.
(3)Annualized
(4)Net of following expense reimbursements, waivers, (recoupments) and custody
credits, if applicable (based on average net assets):
10/31/09(3) 10/31/10
----------- --------
SunAmerica Alternative Strategies Fund
Class A................................ 0.24% 0.18%
SunAmerica Alternative Strategies Fund
Class C................................ 0.40 0.22
SunAmerica Alternative Strategies Fund
Class W................................ 0.68 0.24
See Notes to Financial Statements
11
SUNAMERICA SPECIALTY SERIES -- 2015 HIGH WATERMARK FUND
PORTFOLIO PROFILE -- OCTOBER 31, 2010 -- (UNAUDITED)
INDUSTRY ALLOCATION*
United States Treasury Bonds. 79.2%
Resolution Funding Corp...... 9.1
United States Treasury Bills. 8.4
Federal Home Loan Mtg. Corp.. 3.4
Repurchase Agreements........ 0.3
-----
100.4%
=====
CREDIT QUALITY+#
Government -- Treasury. 86.4%
Government -- Agency... 13.6
-----
100.0%
=====
- --------
* Calculated as a percentage of net assets.
+ Source: Standard and Poor's
# Calculated as a percentage of total debt issues, excluding short-term
securities.
12
SUNAMERICA SPECIALTY SERIES -- 2015 HIGH WATERMARK FUND
PORTFOLIO OF INVESTMENTS -- OCTOBER 31, 2010
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
----------------------------------------------------------------
U.S. GOVERNMENT AGENCIES -- 12.5%
FEDERAL HOME LOAN MTG. CORP. -- 3.4%
zero coupon due 11/24/14............ $ 2,260,000 $ 2,123,785
zero coupon due 06/01/15............ 5,000,000 4,622,550
------------
6,746,335
------------
RESOLUTION FUNDING -- 9.1%
Resolution Funding Corp. STRIPS
zero coupon due 07/15/15............ 19,054,000 17,803,239
------------
TOTAL U.S. GOVERNMENT AGENCIES
(cost $22,590,566).................. 24,549,574
------------
U.S. GOVERNMENT TREASURIES -- 79.2%
UNITED STATES TREASURY BONDS -- 79.2%
U.S. Treasury Bonds STRIPS
zero coupon due 08/15/15............ 80,413,000 76,090,882
zero coupon due 08/15/15............ 84,142,000 79,577,717
------------
TOTAL U.S. GOVERNMENT TREASURIES
(cost $140,227,626)................. 155,668,599
------------
TOTAL LONG-TERM INVESTMENT SECURITIES
(cost $162,818,192)................. 180,218,173
------------
SHORT-TERM INVESTMENT SECURITIES -- 8.4%
U.S. GOVERNMENT TREASURIES -- 8.4%
United States Treasury Bills
0.17% due 04/07/11.................. 4,000,000 3,997,383
0.18% due 01/13/11(1)............... 4,000,000 3,999,092
0.18% due 02/24/11.................. 8,000,000 7,996,752
0.19% due 01/13/11(1)............... 500,000 499,887
------------
TOTAL SHORT-TERM INVESTMENT SECURITIES
(cost $16,491,276).................. 16,493,114
------------
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
--------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.3%
Agreement with State Street Bank & Trust Co.,
bearing interest at 0.01% dated 10/29/10, to
be repurchased 11/01/10 in the amount of
$552,000 and collateralized by $555,000 of
United States Treasury Notes, bearing interest
at 1.00% due 04/30/12 and having an
approximate value of $563,270
(cost $552,000)................................. $552,000 $ 552,000
------------
TOTAL INVESTMENTS --
(cost $179,861,468)(2).......................... 100.4% 197,263,287
Liabilities in excess of other assets.............. (0.4) (749,797)
-------- ------------
NET ASSETS -- 100.0% $196,513,490
======== ============
- --------
(1)The security or a portion thereof was pledged as collateral to cover margin
requirements for open futures contracts.
(2)See Note 6 for cost of investments on a tax basis.
STRIPS -- Separate Trading of Registered Interest and Principal of Securities
OPEN FUTURES CONTRACTS
- -----------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF VALUE AT VALUE AT APPRECIATION
CONTRACTS TYPE DESCRIPTION EXPIRATION MONTH TRADE DATE OCTOBER 31, 2010 (DEPRECIATION)
- --------- ---- -------------------- ---------------- ---------- ---------------- --------------
1 Long S&P 500 E-Mini Index December 2010 $55,247 $58,985 $3,738
======
The following is a summary of the inputs used to value the Fund's net assets as
of October 31, 2010 (see Note 3):
LEVEL 1 --UNADJUSTED LEVEL 2 -- OTHER LEVEL 3 --SIGNIFICANT
QUOTED PRICES OBSERVABLE INPUTS UNOBSERVABLE INPUTS TOTAL
-------------------- ----------------- --------------------- ------------
ASSETS:
Long-Term Investment Securities:
U.S. Government Agencies............... $ -- $ 24,549,574 $-- $ 24,549,574
U.S. Government Treasuries............. -- 155,668,599 -- 155,668,599
Short-Term Investment Securities:
U.S. Government Treasuries............. -- 16,493,114 -- 16,493,114
Repurchase Agreement..................... -- 552,000 -- 552,000
Other Financial Instruments@.............
Open Futures Contracts -- Appreciation. 3,738 -- -- 3,738
------ ------------ --- ------------
TOTAL.................................... $3,738 $197,263,287 $-- $197,267,025
====== ============ === ============
- --------
@ Other financial instruments are derivative instruments not reflected in the
Portfolio of Investments, such as futures, forward and swap contracts, which
are valued at the unrealized appreciation/depreciation on the instrument.
See Notes to Financial Statements
13
SUNAMERICA SPECIALTY SERIES -- 2020 HIGH WATERMARK FUND
PORTFOLIO PROFILE -- OCTOBER 31, 2010 -- (UNAUDITED)
INDUSTRY ALLOCATION*
United States Treasury Bonds............ 80.4%
United States Treasury Bills............ 11.0
Resolution Funding Corp................. 7.6
Repurchase Agreements................... 1.1
-----
100.1%
=====
CREDIT QUALITY+#
Government -- Treasury.................. 91.4%
Government -- Agency.................... 8.6
-----
100.0%
=====
- --------
* Calculated as a percentage of net assets.
+ Source: Standard and Poor's
# Calculated as a percentage of total debt issues, excluding short-term
securities.
14
SUNAMERICA SPECIALTY SERIES -- 2020 HIGH WATERMARK FUND
PORTFOLIO OF INVESTMENTS -- OCTOBER 31, 2010
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
---------------------------------------------------------------
U.S. GOVERNMENT AGENCIES -- 7.6%
RESOLUTION FUNDING -- 7.6%
Resolution Funding Corp. STRIPS
zero coupon due 07/15/20
(cost $4,726,126)................... $ 7,000,000 $ 5,152,413
-----------
U.S. GOVERNMENT TREASURIES -- 80.4%
UNITED STATES TREASURY BONDS -- 80.4%
U.S. Treasury Bond STRIPS
zero coupon due 08/15/20
(cost $46,583,422).................. 72,890,000 54,749,647
-----------
TOTAL LONG-TERM INVESTMENT SECURITIES
(cost $51,309,548).................. 59,902,060
-----------
SHORT-TERM INVESTMENT SECURITIES -- 11.0%
U.S. GOVERNMENT TREASURIES -- 11.0%
United States Treasury Bills
0.16% due 02/24/11.................. 4,500,000 4,498,173
0.18% due 01/13/11(1)............... 2,000,000 1,999,546
0.19% due 01/13/11(1)............... 1,000,000 999,773
-----------
TOTAL SHORT-TERM INVESTMENT SECURITIES
(cost $7,496,511)................... 7,497,492
-----------
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
--------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.1%
Agreement with State Street Bank & Trust Co.,
bearing interest at 0.01% dated 10/29/10, to be
repurchased 11/01/10 in the amount of
$754,001 and collateralized by $760,000 of
United States Treasury Notes, bearing interest
at 1.00% due 04/30/12 and having approximate
value of $771,324 (cost $754,000)................ $754,000 $ 754,000
-----------
TOTAL INVESTMENTS --
(cost $59,560,059)(2)............................ 100.1% 68,153,552
Liabilities in excess of other assets............... (0.1) (77,740)
-------- -----------
NET ASSETS -- 100.0% $68,075,812
======== ===========
- --------
(1)The security or a portion thereof was pledged as collateral to cover margin
requirements for open futures contracts.
(2)See Note 6 for cost of investments on a tax basis.
STRIPS-- Separate Trading of Registered Interest and Principal of Securities
OPEN FUTURES CONTRACTS
- -----------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF VALUE AT VALUE AT APPRECIATION
CONTRACTS TYPE DESCRIPTION EXPIRATION MONTH TRADE DATE OCTOBER 31, 2010 (DEPRECIATION)
- --------- ---- -------------------- ---------------- ---------- ---------------- --------------
1 Long S&P 500 E-Mini Index December 2010 $55,247 $58,985 $3,738
======
The following is a summary of the inputs used to value the Fund's net assets as
of October 31, 2010 (see Note 3):
LEVEL 1 -- UNADJUSTED LEVEL 2 -- OTHER LEVEL 3 --SIGNIFICANT
QUOTED PRICES OBSERVABLE INPUTS UNOBSERVABLE INPUTS TOTAL
--------------------- ----------------- --------------------- -----------
ASSETS:
Long-Term Investment Securities:
U.S. Government Agencies............... $ -- $ 5,152,413 $-- $ 5,152,413
U.S. Government Treasuries............. -- 54,749,647 -- 54,749,647
Short-Term Investment Securities:
U.S. Government Treasuries............. -- 7,497,492 -- 7,497,492
Repurchase Agreement..................... -- 754,000 -- 754,000
Other Financial Instruments@.............
Open Futures Contracts -- Appreciation. 3,738 -- -- 3,738
------ ----------- --- -----------
TOTAL.................................... $3,738 $68,153,552 $-- $68,157,290
====== =========== === ===========
- --------
@ Other financial instruments are derivative instruments not reflected in the
Portfolio of Investments, such as futures, forward and swap contracts, which
are valued at the unrealized appreciation/depreciation on the instrument.
See Notes to Financial Statements
15
SUNAMERICA SPECIALTY SERIES -- SUNAMERICA ALTERNATIVE STRATEGIES FUND
CONSOLIDATED PORTFOLIO PROFILE -- OCTOBER 31, 2010** -- (UNAUDITED)
INDUSTRY ALLOCATION*
Federal Home Loan Mtg. Corp........ 24.0%
Federal National Mtg. Assoc........ 19.3
Federal Farm Credit Bank........... 15.3
United States Treasury Bills....... 9.5
Exchange Traded Funds.............. 7.8
United States Treasury Notes....... 6.4
Federal Home Loan Bank............. 5.3
Repurchase Agreements.............. 4.8
Commodity Index -- Linked Notes.... 4.5
Hedge Fund Index -- Linked Notes... 2.9
Diversified Financial Services..... 0.4
-----
100.2%
=====
CREDIT QUALITY+#
Government -- Treasury............. 8.7%
Government -- Agency............... 76.9
AAA................................ 10.4
Not Rated@......................... 4.0
-----
100.0%
=====
- --------
* Calculated as a percentage of net assets
** Consolidated; See Note 2 and Note 11.
+ Source: Standard and Poor's
# Calculated as a percentage of total debt issues, excluding short-term
securities.
@ Represents debt issues that either have no rating, or the rating is
unavailable from the data source.
16
SUNAMERICA SPECIALTY SERIES -- SUNAMERICA ALTERNATIVE STRATEGIES FUND
CONSOLIDATED PORTFOLIO OF INVESTMENTS -- OCTOBER 31, 2010**
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
--------------------------------------------------------------
U.S. CORPORATE BONDS & NOTES -- 0.4%
DIVERSIFIED FINANCIAL SERVICES -- 0.4%
General Electric Capital Corp.
FDIC Guar. Notes
0.59% due 06/08/12 VRS............. $ 1,000,000 $ 1,005,255
General Electric Capital Corp.
FDIC Guar. Notes
2.20% due 06/08/12................. 500,000 514,271
-----------
TOTAL U.S. CORPORATE BONDS & NOTES
(cost $1,499,845).................. 1,519,526
-----------
COMMODITY INDEX-LINKED NOTES -- 4.5%
Credit Suisse New York
(Indexed to the S&P GSCI Total
Return Index)
Senior Notes
0.06% due 12/13/10* VRS(2)......... 3,000,000 4,986,446
Swedish Export Credit
(Indexed to the S&P GSCI Total
Return Index)
Notes
0.02% due 04/26/11* VRS(2)......... 12,000,000 12,010,838
-----------
TOTAL COMMODITY INDEX-LINKED NOTES
(cost $15,000,000)................. 16,997,284
-----------
HEDGE FUND INDEX-LINKED NOTES -- 2.9%
Deutsche Bank AG London
(Indexed to the HFRX Global Hedge
Fund Index)
Bank Guar. Notes
zero coupon due 09/14/12(1)(2)(6)
(cost $10,000,000)................. 10,000,000 11,134,000
-----------
U.S. GOVERNMENT AGENCIES -- 63.9%
FEDERAL FARM CREDIT BANK -- 15.3%
2.20% due 03/28/16................. 23,250,000 23,301,638
2.23% due 05/19/16................. 15,233,000 15,245,125
2.23% due 05/19/16(1).............. 12,000,000 12,009,552
4.88% due 02/18/11................. 7,000,000 7,098,021
-----------
57,654,336
-----------
FEDERAL HOME LOAN BANK -- 5.3%
1.85% due 05/26/15................. 15,000,000 15,015,600
2.75% due 08/12/13................. 5,000,000 5,087,935
-----------
20,103,535
-----------
FEDERAL HOME LOAN MTG. CORP. -- 24.0%
1.30% due 07/26/13(1).............. 10,000,000 10,016,200
1.50% due 01/07/11................. 5,000,000 5,012,735
2.00% due 08/25/15................. 10,000,000 10,043,340
2.00% due 04/21/16................. 15,000,000 14,975,175
2.13% due 10/07/13(1).............. 7,000,000 7,038,031
2.25% due 08/12/15................. 30,629,000 31,032,721
2.88% due 04/01/15................. 12,000,000 12,289,560
-----------
90,407,762
-----------
PRINCIPAL
AMOUNT/ VALUE
SECURITY DESCRIPTION SHARES (NOTE 3)
---------------------------------------------------------------------
FEDERAL NATIONAL MTG. ASSOC. -- 19.3%
0.94% due 04/30/15 FRS................... $ 7,000,000 $ 7,055,472
1.20% due 09/27/13(1).................... 15,000,000 15,079,725
1.75% due 08/18/14....................... 15,000,000 15,175,275
1.85% due 09/09/15....................... 10,000,000 10,060,840
2.00% due 01/09/12....................... 5,000,000 5,099,975
2.00% due 08/24/15....................... 10,000,000 10,105,020
2.25% due 07/22/15(1).................... 10,000,000 10,100,690
------------
72,676,997
------------
TOTAL U.S. GOVERNMENT AGENCIES
(cost $239,474,908)...................... 240,842,630
------------
U.S. GOVERNMENT TREASURIES -- 6.4%
UNITED STATES TREASURY NOTES -- 6.4%
0.63% due 04/15/13 TIPS(4)............... 1,549,230 1,600,790
1.13% due 06/30/11....................... 1,000,000 1,006,133
1.50% due 07/15/12....................... 1,000,000 1,020,703
1.63% due 01/15/15 TIPS(4)............... 1,486,251 1,609,564
1.88% due 07/15/13 TIPS(4)............... 1,664,026 1,779,857
1.88% due 07/15/15 TIPS(4)............... 1,459,016 1,609,591
2.00% due 01/15/14 TIPS(4)............... 1,535,885 1,661,875
2.00% due 07/15/14 TIPS(4)............... 1,505,556 1,645,644
2.38% due 04/15/11 TIPS(4)............... 10,998,300 11,118,599
2.63% due 06/30/14....................... 1,000,000 1,068,516
------------
TOTAL U.S. GOVERNMENT TREASURIES
(cost $22,939,267)....................... 24,121,272
------------
EXCHANGE TRADED FUNDS -- 7.8%
iShares Barclays MBS Bond Fund............ 44,800 4,915,904
iShares iBoxx $ High Yield Corporate
Bond Fund................................ 117,600 10,671,024
iShares iBoxx Investment Grade Corporate
Bond Fund................................ 28,500 3,202,260
iShares MSCI EAFE Index Fund.............. 89,000 5,073,890
SPDR Barclays Capital High Yield Bond ETF. 131,700 5,383,896
------------
TOTAL EXCHANGE TRADED FUNDS
(cost $27,414,480)....................... 29,246,974
------------
TOTAL LONG-TERM INVESTMENT SECURITIES
(cost $316,328,500)....................... 323,861,686
------------
SHORT-TERM INVESTMENT SECURITIES -- 9.5%
U.S. GOVERNMENT TREASURIES -- 9.5%
United States Treasury Bills
0.21% due 09/22/11(1)(5)................. 5,000,000 4,990,970
0.22% due 10/20/11(5).................... 10,000,000 9,979,700
0.25% due 09/22/11(1)(5)................. 10,000,000 9,981,940
0.26% due 06/02/11(5).................... 5,000,000 4,994,970
0.41% due 12/16/10(1)(5)................. 5,000,000 4,997,437
0.54% due 12/16/10(1)(5)................. 1,000,000 999,575
------------
TOTAL SHORT-TERM INVESTMENT SECURITIES
(cost $35,935,745)....................... 35,944,592
------------
17
SUNAMERICA SPECIALTY SERIES -- SUNAMERICA ALTERNATIVE STRATEGIES FUND
CONSOLIDATED PORTFOLIO OF INVESTMENTS -- OCTOBER 31, 2010** --
(CONTINUED)
PRINCIPAL VALUE
SECURITY DESCRIPTION AMOUNT (NOTE 3)
---------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 4.8%
Agreement with State Street Bank & Trust Co.,
bearing interest at 0.01% dated 10/29/10 to
be repurchased 11/01/10 in the amount of
$6,528,463 and collateralized by
$6,175,000 of United States Treasury
Notes, bearing interest at 2.50%, due
04/30/15 and having an approximate value
of $6,655,138(1).............................. $ 6,528,457 $ 6,528,457
Agreement with State Street Bank & Trust Co.,
bearing interest at 0.01% dated 10/29/10 to
be repurchased 11/01/10 in the amount of
$11,502,010 and collateralized by
$11,560,000 of United States Treasury
Notes, bearing interest at 1.00%, due
04/30/12 and having an approximate value
of $11,732,244................................ 11,502,000 11,502,000
------------
TOTAL REPURCHASE AGREEMENTS
(cost $18,030,457)............................ 18,030,457
------------
TOTAL INVESTMENTS
(cost $370,294,702)(3)........................ 100.2% 377,836,735
Liabilities in excess of other assets............ (0.2) (927,545)
----------- ------------
NET ASSETS 100.0% $376,909,190
=========== ============
- --------
* Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. The Fund has no right to demand
registration of these securities. At October 31, 2010, the aggregate value
of these securities was $16,997,284 representing 4.5% of net assets. Unless
otherwise indicated these securities are not considered to be illiquid.
** Consolidated; See Note 2 and Note 11
(1)All or a portion of this security is owned by the SunAmerica Alternative
Strategies Cayman Fund, Ltd., which is a wholly-owned subsidiary of the
SunAmerica Alternative Strategies Fund.
(2)Fair valued security. Securities are classified as Level 2 based on the
securities valuation inputs; see Note 3.
(3)See Note 6 for cost of investments on a tax basis.
(4)Principal amount of security is adjusted for inflation.
(5)The security or a portion thereof was pledged as collateral to cover margin
requirements for open futures contracts.
(6)Illiquid security. At October 31, 2010, the aggregate value of these
securities was $11,134,000 representing 2.9% of net assets.
FDIC -- Federal Deposit Insurance Corporation
GSCI -- Goldman Sachs Commodity Index
HFRX -- Hedge Fund Research Index
TIPS -- Treasury Inflation Protected Securities
FRS -- Floating Rate Security
VRS -- Variable Rate Security
The rates shown on FRS and VRS are the current interest rates at October 31,
2010. The dates shown on debt obligations are the original maturity dates.
OPEN CALL OPTION CONTRACTS WRITTEN AT OCTOBER 31, 2010 WERE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------
UNREALIZED
STRIKE NUMBER OF PREMIUMS VALUE AT APPRECIATION
ISSUE(1) EXPIRATION MONTH PRICE CONTRACTS RECEIVED OCTOBER 31, 2010 (DEPRECIATION)
- --------------------- ---------------- ------ --------- ---------- ---------------- --------------
Gasoline RBOB Futures
December 2010 November 2010 $ 2.14 29 $ 54,810 $ 41,290 $ 13,520
Heating Oil Futures
December 2010 November 2010 2.30 20 136,500 33,936 102,564
Wheat Futures
December 2010 November 2010 7.20 271 215,550 384,481 (168,931)
WTI Crude Futures
March 2011 February 2011 82.50 90 486,000 555,300 (69,300)
WTI Crude Futures
March 2011 February 2011 85.00 100 435,000 493,000 (58,000)
WTI Crude Futures
June 2011 May 2011 90.00 41 236,980 216,890 20,090
--- ---------- ---------- ---------
551 $1,564,840 $1,724,897 $(160,057)
=== ========== ========== =========
OPEN PUT OPTION CONTRACTS WRITTEN AT OCTOBER 31, 2010 WERE AS FOLLOWS:
- --------------------------------------------------------------------------------------------------
UNREALIZED
STRIKE NUMBER OF PREMIUMS VALUE AT APPRECIATION
ISSUE(1) EXPIRATION MONTH PRICE CONTRACTS RECEIVED OCTOBER 31, 2010 (DEPRECIATION)
- --------------------- ---------------- ------ --------- ---------- ---------------- --------------
Natural Gas Futures
December 2010 November 2010 $ 3.50 156 $ 156,000 $ 48,360 $ 107,640
=== ========== ========== =========
18
SUNAMERICA SPECIALTY SERIES -- SUNAMERICA ALTERNATIVE STRATEGIES FUND
CONSOLIDATED PORTFOLIO OF INVESTMENTS -- OCTOBER 31, 2010** --
(CONTINUED)
OPEN FUTURES CONTRACTS
- --------------------------------------------------------------------------------------------------------
UNREALIZED
NUMBER OF VALUE AT VALUE AT APPRECIATION
CONTRACTS TYPE DESCRIPTION EXPIRATION MONTH TRADE DATE OCTOBER 31, 2010 (DEPRECIATION)
- --------- ----- ------------------------ ---------------- ----------- ---------------- --------------
81 Long Australian $ Currency December 2010 $ 7,803,064 $ 7,891,020 $ 87,956
24 Long Brent Crude(1) November 2010 1,839,910 1,995,600 155,690
79 Long British Pound Currency December 2010 7,810,102 7,906,419 96,317
97 Long Copper HG(1) December 2010 8,341,338 9,053,738 712,400
44 Long Corn(1) December 2010 901,050 1,280,400 379,350
4 Long Cotton #2(1) December 2010 157,220 250,520 93,300
30 Long DAX Index December 2010 6,540,176 6,909,765 369,589
163 Long E-Mini MSCI EAFE Index December 2010 12,456,650 13,163,880 707,230
45 Long EURO FX Currency December 2010 7,730,182 7,812,000 81,818
2 Long Feeder Cattle(1) January 2011 111,700 110,800 (900)
49 Long Gas Oil(1) December 2010 3,417,675 3,449,600 31,925
29 Long Gasoline RBOB(1) December 2010 2,514,838 2,508,349 (6,489)
7 Long Gold 100 OZ(1) December 2010 814,790 950,320 135,530
28 Long Heating Oil(1) November 2010 2,608,670 2,631,535 22,865
52 Long Japanese Yen Currency December 2010 7,775,807 8,078,850 303,043
13 Long Lean Hogs(1) December 2010 380,380 344,240 (36,140)
19 Long Live Cattle(1) December 2010 756,770 751,070 (5,700)
156 Short Natural Gas(1) December 2010 6,095,760 6,299,280 (203,520)
168 Short NIKKEI 225 Index December 2010 7,710,311 7,715,400 (5,089)
8 Long Russell 2000 Mini Index December 2010 516,336 561,760 45,424
308 Long S&P 500 E-Mini Index December 2010 17,443,750 18,167,380 723,630
110 Long S&P MidCap 400 E-Mini Index December 2010 8,795,496 9,102,500 307,004
73 Long Silver(1) December 2010 7,004,950 8,965,860 1,960,910
13 Long Soybean(1) November 2010 757,163 762,450 5,287
58 Long U.S. Treasury Long Bond December 2010 7,719,799 7,594,375 (125,424)
271 Long Wheat(1) December 2010 9,585,488 9,718,738 133,250
190 Long WTI Crude(1) February 2011 15,214,340 15,809,900 595,560
41 Long WTI Crude(1) May 2011 3,290,930 3,456,710 165,780
----------
$6,730,596
==========
The following is a summary of the inputs used to value the Fund's net assets as
of October 31, 2010 (see Note 3):
LEVEL 1 --UNADJUSTED LEVEL 2 -- OTHER LEVEL 3 --SIGNIFICANT
QUOTED PRICES OBSERVABLE INPUTS UNOBSERVABLE INPUTS TOTAL
-------------------- ----------------- --------------------- ------------
ASSETS:
Long-Term Investment Securities:
U.S. Corporate Bonds & Notes........... $ -- $ 1,519,526 $-- $ 1,519,526
Commodity Index-Linked Notes........... -- 16,997,284 -- 16,997,284
Hedge Fund Index-Linked Notes.......... -- 11,134,000 -- 11,134,000
U.S Government Agencies................ -- 240,842,630 -- 240,842,630
U.S. Government Treasuries............. -- 24,121,272 -- 24,121,272
Exchange Traded Funds.................. 29,246,974 -- -- 29,246,974
Short-Term Investment Securities:
U.S. Government Treasuries............. -- 35,944,592 -- 35,944,592
Repurchase Agreements.................... -- 18,030,457 -- 18,030,457
Other Financial Instruments@
Written Call Options -- Appreciation... 136,174 -- -- 136,174
Written Put Options -- Appreciation.... 107,640 -- -- 107,640
Open Futures Contracts -- Appreciation. 7,113,858 -- -- 7,113,858
----------- ------------ --- ------------
TOTAL.................................... $36,604,646 $348,589,761 $-- $385,194,407
=========== ============ === ============
LIABILITIES:
Other Financial Instruments@
Written Call Options -- Depreciation... 296,231 -- -- 296,231
Open Futures Contracts -- Depreciation. 383,262 -- -- 383,262
----------- ------------ --- ------------
TOTAL.................................... $ 679,493 $ -- $-- $ 679,493
=========== ============ === ============
- --------
@ Other financial instruments are derivative instruments not reflected in the
Portfolio of Investments, such as futures, forward and swap contracts, which
are valued at the unrealized appreciation/depreciation on the instrument.
See Notes to Financial Statements
19
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010
Note 1. Organization
SunAmerica Specialty Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended, (the "1940 Act") as an open-end management
investment company and is organized as a Delaware Statutory Trust. The Trust
consists of three different investment funds (each, a "Fund" and
collectively, the "Funds") as of October 31, 2010. Each Fund is managed by
SunAmerica Asset Management Corp. (the "Adviser" or "SunAmerica"). An
investor may invest in one or more of the following Funds: 2020 High
Watermark Fund and SunAmerica Alternative Strategies Fund (the "Alternative
Strategies Fund"). The 2015 High Watermark Fund (together with the 2020 High
Watermark Fund, the "High Watermark Funds") was voluntarily closed to new
investments effective as of the close of business on February 12, 2010. The
High Watermark Funds have the same investment goals and investment strategy,
but have a different protected maturity date ("Protected Maturity Date").
The Protected Maturity Date for each of these Funds is: 2015 High Watermark
Fund -- August 31, 2015; 2020 High Watermark Fund -- August 31, 2020.
The Funds are considered to be separate entities for financial and tax
reporting purposes. The investment objective and principal investment
techniques for each Fund are as follows:
Each High Watermark Fund seeks capital appreciation to the extent consistent
with the preservation of capital investment gains in order to have a net
asset value ("NAV") on its Protected Maturity Date at least equal to the
protected high watermark value ("Protected High Watermark Value"). Each Fund
seeks high total return as a secondary objective. The Protected High
Watermark Value for a High Watermark Fund is the highest NAV per share
attained, (i) reduced by an amount that is proportionate to the sum of all
dividends and distributions paid by the High Watermark Fund subsequent to
the time that the highest NAV was achieved, (ii) reduced by extraordinary
expenses, if any, and (iii) increased by appreciation in share value to the
extent such appreciation exceeds this adjusted share value subsequent to the
last paid dividend or distribution. Each High Watermark Fund's undertaking
(the "Payment Undertaking") that shareholders in the High Watermark Fund
will be entitled to redeem their shares on the Protected Maturity Date for
the Protected High Watermark Value is backed by a master agreement between
the Trust, on behalf of the High Watermark Funds, and Prudential Global
Funding, LLC ("PGF"), under which PGF will pay to each High Watermark Fund
any shortfall between its Protected High Watermark Value and the actual NAV
per share on the High Watermark Fund's Protected Maturity Date, provided
certain conditions are met.
If the NAV of a High Watermark Fund at its Protected Maturity Date is
insufficient to satisfy the Payment Undertaking, a shareholder's ability to
receive the Protected High Watermark Value will depend on the High Watermark
Fund's ability to collect the difference under the Master Agreement with
PGF. A shareholder's ability to rely on the Master Agreement is subject to
certain conditions and restrictions that may reduce, or eliminate, the High
Watermark Funds' ability to meet the Payment Undertaking.
The High Watermark Funds are subject to conditions of the Master Agreement
that require Trajectory Asset Management LLC ("Trajectory"), the High
Watermark Funds' subadviser, to provide certain information to PGF on a
daily basis and to follow certain parameters and proprietary mathematical
formulae in making investment allocation decisions. These limitations are
designed to reduce, but do not eliminate, the risk that the High Watermark
Funds' assets will be insufficient to allow a High Watermark Fund to redeem
shares at not less than the Protected High Watermark Value on its Protected
Maturity Date.
While Trajectory intends to meet all obligations under the Master Agreement,
a failure to meet the commercially negotiated terms could permit PGF to
cancel the Master Agreement and thus terminate its obligations to make any
payment to the High Watermark Fund if a shortfall exists to the Payment
Undertaking on the Protected Maturity Date. In this event, shareholders will
not receive the Protected High Watermark Value but instead will receive the
High Watermark Fund's then-current net asset value when they redeem their
shares, which may be lower than the Protected High Watermark Value and lower
than the shareholder's initial investment.
If a High Watermark Fund has irrevocably allocated its assets to the fixed
income portfolio, it will close to new share issuances. As described under
Note 4, SunAmerica has contractually agreed to reduce its fees in the event
that a High Watermark Fund becomes completely invested in fixed income
securities. However, if this reduction in fees is not sufficient to reduce
total annual operating expenses to an extent that they are covered by the
current yield on the High Watermark Fund's fixed income
20
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
securities, and the High Watermark Fund is within three years of its
Protected Maturity Date, that date will be accelerated and the Trust's Board
of Trustees will consider appropriate action under all of the circumstances
as described below. PGF may, however, permit the High Watermark Fund to hold
a higher proportion of its assets in obligations of U.S. government agencies
and instrumentalities (which generally pay higher rates of interest than
direct obligations of the U.S. Treasury) in order to avoid this circumstance.
Under the Master Agreement, if certain low interest rate conditions occur
and a High Watermark Fund is within three years of its initial Protected
Maturity Date, the High Watermark Fund can terminate early. If a High
Watermark Fund terminates early under these circumstances, the High
Watermark Fund's Protected High Watermark Value will be accelerated and
shareholders will receive the benefit of the Protected High Watermark Value.
Thereafter, the Trust's Board of Trustees will consider appropriate action
under all of the circumstances. These actions could include liquidating the
High Watermark Fund or continuing to operate the High Watermark Fund and
pursuing a strategy other than the High Watermark Strategy. Shareholders
will receive 30 days' written notice of any shareholder distribution of
liquidation proceeds or other action following a Protected Maturity Date or
Early High Watermark Fund Termination.
Please refer to the High Watermark Funds' prospectus for additional details
concerning the calculation of the Protected High Watermark Value, the
Payment Undertaking, Master Agreement and the early closure and termination
conditions.
The Alternative Strategies Fund seeks to provide long-term total return by
utilizing an actively managed quantitative investment process to provide
exposure to a diversified portfolio of alternative, or non-traditional,
investment strategies and asset classes, and by investing in U.S. Government
Securities and other fixed income securities.
Each Fund is a "diversified" Fund within the meaning of the 1940 Act.
Each Fund offers multiple classes of shares of beneficial interest. The
classes within each Fund are presented in the Statement of Assets and
Liabilities. The cost structure for each class is as follows:
Class A shares are offered at net asset value per share plus an initial
sales charge. Additionally, any purchases of Class A shares in excess of
$1,000,000 will be purchased at net asset value but will be subject to a
contingent deferred sales charge on redemptions made within two years of
purchase.
Class C shares are offered at net asset value and may be subject to a
contingent deferred sales charge on redemptions made within 12 months of
purchase. Class C shares of the High Watermark Funds will convert
automatically to Class A shares approximately eight years after purchase and
at such time will be subject to the lower distribution fee applicable to
Class A shares.
Class I shares are offered at net asset value per share. The class is
offered exclusively to participants in certain employee retirement plans and
other programs.
Class W shares are offered at net asset value per share. The class is
offered exclusively through advisory fee-based programs sponsored by certain
financial intermediaries and other programs.
Each class of shares bears the same voting, dividend, liquidation and other
rights and conditions, except as may otherwise be provided in the Funds'
registration statement. Class A and Class C shares make distribution and
account maintenance fee payments under a distribution plan pursuant to Rule
12b-1 under the 1940 Act except that Class C shares are subject to higher
distribution fee rates. Class I shares and Class W shares have not adopted
12b-1 Plans and make no payments there under, however, Class I shares and
Class W shares pay a service fee to the Funds' distributor for
administrative and shareholder services (see Note 4).
INDEMNIFICATIONS: The Trust's organizational documents provide current and
former officers and trustees with a limited indemnification against
liabilities arising out of the performance of their duties to the Trust. In
addition, pursuant to
21
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Indemnification Agreements between the Trust and each of the current
trustees who is not an "interested person," as defined in Section 2(a)(19)
of the 1940 Act, of the Trust (collectively, the "Disinterested Trustees"),
the Trust provides the Disinterested Trustees with a limited indemnification
against liabilities arising out of the performance of their duties to the
Trust, whether such liabilities are asserted during or after their service
as trustees. In addition, in the normal course of business the Trust enters
into contracts that contain the obligation to indemnify others. The Trust's
maximum exposure under these arrangements is unknown. Currently, however,
the Trust expects the risk of loss to be remote.
Note 2. Basis for consolidation for the SunAmerica Alternative Strategies
Cayman Fund, Ltd.
The SunAmerica Alternative Strategies Cayman Fund, Ltd. (the "Subsidiary"),
a Cayman Islands exempted company, was incorporated on October 20, 2008, and
is a wholly-owned subsidiary of the Alternative Strategies Fund. The
Subsidiary was organized as a wholly-owned subsidiary of the Alternative
Strategies Fund in order to effect certain investments on behalf of the
Alternative Strategies Fund consistent with the investment objectives and
policies in the Alternative Strategies Fund's prospectus and statement of
additional information. With respect to its investments, the Subsidiary will
generally be subject to the same fundamental, non-fundamental and certain
other investment restrictions as the Alternative Strategies Fund; however,
the Subsidiary (unlike the Alternative Strategies Fund) may invest without
limitation in commodity-linked swap agreements and other commodity-linked
and hedge fund-linked derivative instruments that may otherwise be limited
if purchased by the Alternative Strategies Fund due to federal tax
requirements relating to qualifying income. The Alternative Strategies Fund
and Subsidiary may test for compliance with certain investment restrictions
on a consolidated basis, except that with respect to its investment in
certain securities that may involve leverage, the Subsidiary will comply
with asset segregation or "earmarking" requirements to the same extent as
the Alternative Strategies Fund. The Alternative Strategies Fund may invest
up to 25% of its assets in the Subsidiary. As of October 31, 2010, net
assets of the Alternative Strategies Fund were $376,909,190 of which
approximately $90,778,713, or approximately 24.1%, represented the
Alternative Strategies Fund's ownership of all issued shares and voting
rights of the Subsidiary.
Note 3. Significant Accounting Policies
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from these estimates and
those differences could be significant. The following is a summary of the
significant accounting policies consistently followed by the Funds in the
preparation of their financial statements:
SECURITY VALUATIONS: Stocks are generally valued based upon closing sales
prices reported on recognized securities exchanges for which the securities
are principally traded. Stocks listed on the NASDAQ are valued using the
NASDAQ Official Closing Price ("NOCP"). Generally, the NOCP will be the last
sale price unless the reported trade for the stock is outside the range of
the bid/ask price. In such cases, the NOCP will be normalized to the nearer
of the bid or ask price. For listed securities having no sales reported and
for unlisted securities, such securities will be valued based upon the last
reported bid price.
Non-convertible bonds and debentures, other long-term debt securities, and
short term debt securities with maturities in excess of 60 days, are valued
at bid prices obtained for the day of valuation from a bond pricing service,
when such prices are available. The pricing services may use valuation
models or matrix pricing which considers information with respect to
comparable bond and note transactions, quotations from bond dealers, or by
reference to other securities that are considered comparable in such
characteristics as rating, interest rate, and maturity date, option adjusted
spreads models, prepayments projections, interest rate spreads, and yield
curves to determine current value. If a vendor quote is unavailable the
securities may be priced at the mean of two independent quotes obtained from
brokers.
Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost to the Fund if acquired within 60 days of
maturity or, if already held by the Fund on the 60th day, are amortized to
maturity based on the value determined on the 61st day.
Future contracts and options traded on national securities exchanges are
valued as of the close of the exchange upon which they trade. Other
securities are valued on the basis of last sale or bid price (if a last sale
price is not available) in what is, in the opinion of the Adviser or
subadviser, the broadest and most representative market, that may be either
a securities exchange or over-the-counter market.
22
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Investments in open-end and closed-end registered investment companies that
do not trade on an exchange are valued at the end of day net asset value per
share. Investments in open-end and closed-end registered investment
companies that trade on an exchange are valued at the last sales price or
official closing price as of the close of the customary trading session on
the exchange where the security is principally traded.
Securities for which market quotations are not readily available or if a
development/significant event occurs that may significantly impact the value
of the security, then these securities are valued, as determined pursuant to
procedures adopted in good faith by the Board of Trustees. There is no
single standard for making fair value determinations, which may result in
prices that vary from those of other funds.
Various inputs are used in determining the value of the Funds' investments.
These inputs are summarized in the three broad levels listed below:
Level 1 -- Unadjusted quoted prices in active markets for identical
securities
Level 2 -- Other significant observable inputs (includes quoted prices for
similar securities, interest rates, prepayment speeds, credit risk,
referenced indicies, quoted prices in inactive markets, adjusted quoted
prices in active markets, adjusted quoted prices on foreign equity
securities that were adjusted in accordance with pricing procedures approved
by the Board, etc.)
Level 3 -- Significant unobservable inputs (including inputs that reflect
the Funds' own assumptions about the assumptions market participants would
use in pricing the security, developed based on the best information
available under the circumstances.)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
The summary of the inputs used to value the Funds' net assets as of October
31, 2010 are reported on a schedule following the Portfolio of Investments.
DERIVATIVE INSTRUMENTS:
The following tables represent the value of derivatives held as of October
31, 2010, by their primary underlying risk exposure and respective location
on the Statement of Assets and Liabilities and the effect of derivatives on
the Statement of Operations for the period ended October 31, 2010:
2015 HIGH WATERMARK FUND
-----------------------------------------------------------------------------------------
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- --------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES STATEMENTS OF ASSETS AND LIABILITIES
DERIVATIVE CONTRACTS(1) LOCATION VALUE LOCATION VALUE
- ----------------------- -------------------------------------- ----- -------------------------------------- -----
Equity Contracts(2)(3).. Variation margin on futures contracts $20 Variation margin on futures contracts $--
=== ===
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION) ON
LOCATION OF GAIN (LOSS) ON REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
DERIVATIVES RECOGNIZED IN DERIVATIVES RECOGNIZED IN IN STATEMENT OF
DERIVATIVE CONTRACTS(1) STATEMENT OF OPERATIONS STATEMENT OF OPERATIONS OPERATIONS
- ----------------------- -------------------------------------------------- ------------------------- ----------------------
Equity contracts(2).... Net realized gain (loss) on futures contracts and
written options contracts/Change in unrealized
appreciation (depreciation) on futures contracts
and written options contracts $5,073 $3,170
====== ======
- --------
(1)The Fund's derivative contracts held during the period ended October 31,
2010 are not accounted for as hedging instruments under accounting
principles generally accepted in the United States of America.
(2)The average notional amount outstanding for equity futures contracts was $50.
(3)The variation margin on futures contracts is included in the cumulative
unrealized appreciation of $3,738 as reported in the Portfolio of
Investments.
23
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
2020 HIGH WATERMARK FUND
-----------------------------------------------------------------------------------------
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------------- --------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES STATEMENTS OF ASSETS AND LIABILITIES
DERIVATIVE CONTRACTS(1) LOCATION VALUE LOCATION VALUE
- ----------------------- -------------------------------------- ----- -------------------------------------- -----
Equity Contracts(2)(3).. Variation margin on futures contracts $20 Variation margin on futures contracts $--
=== ===
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION) ON
LOCATION OF GAIN (LOSS) ON REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
DERIVATIVES RECOGNIZED IN DERIVATIVES RECOGNIZED IN IN STATEMENT OF
DERIVATIVE CONTRACTS(1) STATEMENT OF OPERATIONS STATEMENT OF OPERATIONS OPERATIONS
- ----------------------- -------------------------------------------------- ------------------------- ----------------------
Equity contracts(2).... Net realized gain (loss) on futures contracts and
written options contracts/Change in unrealized
appreciation (depreciation) on futures contracts
and written options contracts $5,073 $3,170
====== ======
- --------
(1)The Fund's derivative contracts held during the period ended October 31,
2010 are not accounted for as hedging instruments under accounting
principles generally accepted in the United States of America.
(2)The average notional amount outstanding for equity futures contracts was $50.
(3)The variation margin on futures contracts is included in the cumulative
unrealized appreciation of $3,738 as reported in the Portfolio of
Investments.
SUNAMERICA ALTERNATIVE STRATEGIES FUND
------------------------------------------------------------------------------------------------
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------------- --------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES STATEMENTS OF ASSETS AND LIABILITIES
DERIVATIVE CONTRACTS(1) LOCATION VALUE LOCATION VALUE
- ----------------------- --------------------------------------- ----- --------------------------------------- ----------
Equity Contracts(2)(3).. Variation margin on futures contracts $-- Variation margin on futures contracts $ (204,433)
Interest Rate
Contracts(2)(3)........ Variation margin on futures contracts -- Variation margin on futures contracts (137,380)
Commodity
Contracts(2)(3)........ Variation margin on futures contracts -- Variation margin on futures contracts 409,756
Call and put options written, at value -- Call and put options written, at value 1,773,257
--- ----------
$-- $1,841,200
=== ==========
CHANGE IN UNREALIZED
APPRECIATION
(DEPRECIATION) ON
LOCATION OF GAIN (LOSS) ON REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
DERIVATIVES RECOGNIZED IN DERIVATIVES RECOGNIZED IN IN STATEMENT OF
DERIVATIVE CONTRACTS(1) STATEMENT OF OPERATIONS STATEMENT OF OPERATIONS OPERATIONS
- ----------------------- -------------------------------------------------- ------------------------- ----------------------
Equity contracts(2).... Net realized gain (loss) on futures contracts and
written options contracts/Change in unrealized
appreciation (depreciation) on futures contracts
and written options contracts $ (223,963) $2,923,425
Interest Rate
Contracts(2).......... Net realized gain (loss) on futures contracts and
written options contracts/Change in unrealized
appreciation (depreciation) on futures contracts
and written options contracts (1,801,180) 376,793
Commodity
Contracts(2).......... Net realized gain (loss) on futures contracts and
written options contracts/Change in unrealized
appreciation (depreciation) on futures contracts
and written options contracts (1,585,106) 3,859,678
----------- ----------
$(3,610,249) $7,159,896
=========== ==========
- --------
(1)The Fund's derivative contracts held during the period ended October 31,
2010 are not accounted for as hedging instruments under accounting
principles generally accepted in the United States of America.
(2)The average notional amount outstanding for equity futures, interest rate
futures, commodity futures and written options contracts were $327,905,
$11,179,271, $6,403,131 and $2,804,083, respectively.
(3)The variation margin on futures contracts is included in the cumulative
unrealized appreciation of $6,730,596 as reported in the Portfolio of
Investments.
24
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
FUTURES CONTRACTS. The 2015 High Watermark Fund and the 2020 High
Watermark Fund (each, a "High Watermark Fund" and collectively, the "High
Watermark Funds") may invest in exchange traded S&P 500 Index futures to
generate equity market exposures. During the period ended October 31, 2010,
the High Watermark Funds invested in exchange traded S&P 500 Index futures
to generate equity market exposures. The Alternative Strategies Fund expects
to enter into futures transactions for investment purposes in commodities
futures, currency/interest rate futures and equity index futures, and may
take either a long or short position in a futures transaction. The
Alternative Strategies Fund may also enter into futures transactions for
hedging purposes. During the year ended October 31, 2010, the Alternative
Strategies Fund entered into futures transactions for investment purposes in
commodities futures, currency and interest rate futures and equity index
futures, and took long and short positions in futures transactions. During
this same period, the Alternative Strategies Fund also entered into futures
transactions for hedging purposes.
Futures contracts are reported on a schedule following the Portfolio of
Investments. As of October 31, 2010, the following Funds had open futures
contracts: 2015 High Watermark Fund, 2020 High Watermark Fund and
Alternative Strategies Fund.
A futures contract is generally a standardized, transferable,
exchange-traded contract that requires delivery of a commodity, bond,
currency, stock index, or other underlying reference asset at a set price on
a future date. Upon entering into a futures transaction, a Fund will be
required to segregate an initial margin payment of cash or other liquid
securities with the Futures Commission Merchant (the "broker"). Pursuant to
a Futures contract, the Funds agree to receive from or pay to the broker an
amount of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as "variation margin" and are recorded by the
Funds as unrealized appreciation or depreciation. When a contract is closed,
the Funds record a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time it
was closed.
The primary risk to the High Watermark Funds of entering into futures
contracts is market risk. The risks associated with the Alternative
Strategies Fund's use of futures include the risk that the changes in the
price of a futures contract may not always track the changes in market value
of the underlying reference asset and that losses caused by sudden,
unanticipated market movements may be potentially unlimited. Futures
contracts involve, to varying degrees, risk of loss in excess of the
variation margin. There may also be trading restrictions or limitations
imposed by an exchange, and government regulations may restrict trading in
futures contracts. While the Funds will generally only purchase
exchange-traded futures, due to market conditions, there may not always be a
liquid secondary market for a futures contract and, as a result, a Fund may
be unable to close out its futures contracts at a time which is
advantageous. There is generally minimal counterparty credit risk to the
Funds since the futures are exchange traded.
OPTIONS. Certain Funds may enter into option contracts for various
purposes, including to facilitate trading, increase or decrease a Fund's
market exposure, to seek higher investment returns, to seek protection
against a decline in the value of a Fund's securities or an increase in
prices of securities that may be purchased, or to generate income. During
the year ended October 31, 2010, the SunAmerica Alternative Strategies Fund
used option contracts to decrease the Fund's market exposure, to seek higher
investment returns, and to seek protection against a decline in the value of
the Fund's securities or an increase in prices of securities that may be
purchased. As of October 31, 2010, the SunAmerica Alternative Strategies
Fund had open options contracts.
An option is a contract conveying a right to buy or sell a financial
instrument at a specified price during a stipulated period. When a Fund
writes a call or a put option, it receives a premium which is equal to the
current market value of the option written. The premiums on written options
are recorded as a liability on the Statement of Assets and Liabilities. If a
Fund purchases a call or a put option, it pays a premium which reflects the
current market value of the option and which is included on the Fund's
Statement of Assets and Liabilities as an investment. The option position is
marked to market daily and its value fluctuates based upon the value of the
underlying financial instrument, time to expiration, cost of borrowing
funds, and volatility of the value of the underlying financial instrument.
If an option which the Fund has written either expires on its stipulated
expiration date, or if the Fund enters into a closing purchase transaction,
the Fund realizes a gain (or loss if the cost of a closing purchase
transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security,
and the liability related to such options is extinguished. If a call option
which the Fund has written is exercised, the Fund realizes a gain or loss
from the sale of the underlying security and the proceeds from such sale are
increased by the premium originally received. If a put option which the Fund
has written is exercised, the amount of the premium originally received
reduces the cost of the security which the Fund purchased upon exercise of
the option. Options may be traded on a national securities exchange or in
the over-the-counter (OTC) market.
25
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Risks to the Funds of entering into option contracts include credit risk,
market risk and, with respect to OTC options, illiquidity risk. Credit risk
arises from the potential inability of counterparties to meet the terms of
their contracts. If the counterparty defaults, the Fund's loss will consist
of the net amount of contractual payments that the Fund has not yet
received. Market risk is the risk that there will be an unfavorable change
in the value of the underlying securities. There is also the risk the Fund
may not be able to enter into a closing transaction because of an illiquid
market. In addition, unlisted options are not traded on an exchange and may
not be as actively traded as listed options, making the valuation of such
securities more difficult. An unlisted option also entails a greater risk
that the party on the other side of the option transaction may default,
which would make it impossible to close out an unlisted option position in
some cases, and profits related to the transaction lost thereby.
Transactions in options written during the year ended October 31, 2010 are
summarized as follows:
ALTERNATIVE STRATEGIES FUND
---------------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
--------- ----------
Options outstanding at October 31, 2009............. -- $ --
Options written..................................... 1,895 4,362,055
Options terminated in closing purchase transactions. 988 2,452,981
Options expired..................................... 69 90,984
Options exercised................................... 131 97,250
----- ----------
Options outstanding at October 31, 2010............. 707 $1,720,840
===== ==========
COMMODITY-LINKED AND HEDGE FUND-LINKED NOTES. The Alternative Strategies
Fund may invest in commodity-linked derivative instruments, including
commodity-linked notes linked to broad-based commodity indexes, in order to
gain exposure to the commodities markets. By investing in these derivative
instruments, the Alternative Strategies Fund seeks to gain exposure to the
returns of real assets that trade in the commodities markets without direct
investment in physical commodities. The Alternative Strategies Fund will not
invest directly in commodities. During the period ended October 31, 2010,
the Alternative Strategies Fund invested in commodity-linked notes in order
to gain exposure to the commodities markets.
Commodity-linked derivatives are derivative instruments, the value of which
is primarily linked to the price movement of a commodity, commodity index or
commodity futures or option contract. A commodity-linked note is a
derivative instrument that has characteristics of a debt security and of a
commodity-linked derivative. It typically provides for interest payments and
a principal payment at maturity linked to the price movement of a commodity,
commodity index or commodity futures or option contract.
The Alternative Strategies Fund may also invest in hedge fund-linked
derivative instruments, including hedge fund-linked notes linked to a hedge
fund index, in order to gain a broad-based exposure to hedge funds. The
Alternative Strategies Fund will not invest directly in hedge funds. During
the period ended October 31, 2010, the Alternative Strategies Fund invested
in hedge fund-linked notes in order to gain exposure to hedge funds.
Hedge fund linked derivatives are derivative instruments, of which, the
value, principal payment and interest payments are primarily linked to the
price movement of a hedge fund, hedge fund index or hedge fund futures or
option contract.
The commodity and hedge fund-linked derivative instruments in which the
Alternative Strategies Fund may invest have substantial risks, including
risk of loss of a significant portion of their principal value. Commodity
and hedge fund-linked derivative instruments may be more volatile and less
liquid than the underlying instruments and their value will be affected by
the performance of the commodity markets or underlying hedge funds, as the
case may be, as well as economic and other regulatory or political
developments, overall market movements and other factors, including
potential defaults by counterparties on their obligations to perform under
these instruments. Typically, the return of the commodity-linked and hedge
fund-linked notes will be based on some multiple of the performance of an
index. The multiple (or leverage) will magnify the positive and negative
return the Alternative Strategies Fund earns from these notes as compared to
the index. Commodity and hedge fund-linked derivative instruments are also
subject to credit risk and counterparty risk. Credit risk is the risk that
the issuer might not pay interest when due or repay principal at maturity of
the obligation. Counterparty risk is the risk that the Fund will be exposed
to the credit of the counterparties to derivative contracts and its ability
to satisfy the terms of the agreements, which exposes the Fund to the risk
that the counterparties may default on their obligations to perform under
the terms of the agreements.
26
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
REPURCHASE AGREEMENTS: For repurchase agreements, the Funds' custodian takes
possession of the collateral pledged for investments in such repurchase
agreements. The underlying collateral is valued daily on a mark to market
basis, plus accrued interest, to ensure that the value, at the time the
agreement is entered into, is equal to at least 102% of the repurchase
price, including accrued interest. In the event of default of the obligation
to repurchase, a Fund has the right to liquidate the collateral and apply
the proceeds in satisfaction of the obligation. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are
commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
SECURITIES TRANSACTIONS, INVESTMENT INCOME, EXPENSES, DIVIDENDS AND
DISTRIBUTIONS TO SHAREHOLDERS: Securities transactions are recorded on a
trade date basis. Realized gains and losses on sales of investments are
calculated on the identified cost basis. Interest income, is accrued daily
except when collection is not expected. For financial statement purposes,
the Funds amortize all premiums and accrete all discounts on fixed income
securities.
Expenses common to all Funds, not directly related to individual Funds are
allocated among the Funds based on relative net assets or other appropriate
methods. In all other respects, expenses are charged to each Fund as
incurred on a specific identification basis. Interest earned on cash
balances held at the custodian are shown as custody credits on the Statement
of Operations.
Net investment income, other than class specific expenses, and realized and
unrealized gains and losses are allocated daily to each class of shares
based upon the relative net asset value of outstanding shares (or the value
of dividend-eligible shares, as appropriate) of each class of shares at the
beginning of the day (after adjusting for the current capital share activity
of the respective class).
Dividends from net investment income and capital gain distributions, if any,
are paid annually. The Funds record dividends and distributions to their
shareholders on the ex-dividend date. The amount of dividends and
distributions from net investment income and net realized capital gains are
determined in accordance with federal income tax regulations, which may
differ from U.S. generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts at fiscal year end based on their
federal tax-basis treatment; temporary differences do not require
reclassification. Net investment income/loss, net realized gain/loss and net
assets are not affected by these reclassifications.
Each Fund intends to comply with the requirements of the Internal Revenue
Code, as amended, applicable to regulated investment companies and to
distribute all of their net income (taxable) and capital gains to their
shareholders. Therefore, no federal tax provision is required. Each Fund is
considered a separate entity for tax purposes.
The Funds file U.S. federal and certain state income tax returns. With few
exceptions, the Funds are no longer subject to U.S. federal and state tax
examinations by tax authorities for tax returns ending before 2006.
Note 4. Investment Advisory and Management Agreements, Distribution and Service
Agreements
The Trust, on behalf of the High Watermark Funds and Alternative Strategies
Fund, has entered into Investment Advisory and Management Agreements (the
"Agreements") with SunAmerica. Under the Agreements, SunAmerica provides
continuous supervision of each Fund's portfolio and administrative affairs,
subject to general review by the Board. In connection therewith, SunAmerica
furnishes the Funds with office facilities, maintains certain of the Funds'
books and records, pays the salaries and expenses of all personnel,
including officers of the Funds who are employees of SunAmerica and its
affiliates and oversees the performance of services provided to the Funds by
third parties. The investment advisory and management fee paid to SunAmerica
with respect to High Watermark Funds and Alternative Strategies Fund are
computed daily and payable monthly and are as follows: 0.65% of the average
daily net assets of the High Watermark Funds and 1.00% of the average daily
net assets of the Alternative Strategies Fund. If a High Watermark Fund's
portfolio becomes completely and irreversibly invested in fixed income
securities, the management fees for the Fund will be reduced to 0.40% for
the remainder of the investment period.
The Subsidiary has entered into a separate contract with SunAmerica whereby
SunAmerica provides investment advisory and other services to the
Subsidiary. In consideration of these services, the Subsidiary pays
SunAmerica a management fee at the annual rate of 1.00% of average daily net
assets of the Subsidiary. SunAmerica has contractually agreed to waive the
management fee it receives from the Alternative Strategies Fund in an amount
equal to the management fee paid by the
27
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Subsidiary to SunAmerica (the "Subsidiary management fee waiver"). This
waiver may not be terminated by SunAmerica, and will remain in effect for as
long as SunAmerica's contract with the Subsidiary is in place. For the
period ended October 31, 2010, the amount of advisory fees waived was
$582,697.
Pursuant to the Subadvisory Agreement between SunAmerica, Trajectory and the
Trust (the "High Watermark Subadvisory Agreement"), SunAmerica has delegated
portfolio management responsibilities to Trajectory. Trajectory's fee will
be 43% of the net management fee. The term "net management fee" means the
gross management fee less any fund waivers and/or reimbursement made by
SunAmerica. SunAmerica has agreed to pay Trajectory a minimum annual fee
equal to 0.25% and 0.20%, respectively, of the 2015 and 2020 High Watermark
Fund's average daily net assets, accrued daily and payable monthly (the
"Minimum Fee"). The Minimum Fee will continue in effect for successive
annual periods ending October 31, upon mutual agreement of SunAmerica and
Trajectory, and subject to approval by the Board, including a majority of
Trustees who are not parties to the High Watermark Subadvisory Agreement or
interested persons of any such party. Payments to Trajectory for its
services are made by SunAmerica, not by the Funds. The continuation of the
Minimum Fee was most recently approved at the August 24, 2010 board meeting
to continue in effect until October 31, 2011.
Pursuant to the Subadvisory Agreement between SunAmerica and Pelagos Capital
Management, LLC ("Pelagos") (the "Alternative Strategies Subadvisory
Agreement"), SunAmerica has delegated portfolio management responsibilities
of Alternative Strategies Fund to Pelagos. Pelagos' fee will be 0.40% of the
average daily net assets of the Fund. Payments to Pelagos for its services
are made by SunAmerica, not by the Fund. Pelagos has contractually agreed to
waive the subadvisory fee it receives with respect to the Alternative
Strategies Fund in an amount equal to the subadvisory fee paid by SunAmerica
to Pelagos with respect to the Subsidiary. This waiver may not be terminated
by Pelagos and will remain in effect for as long as Pelagos' contract with
the Subsidiary is in place.
SunAmerica has contractually agreed to waive fees and/or reimburse expenses
to the extent necessary to cap the Funds' annual Fund operating expense at
the following percentages of each Fund's average daily net assets. Annual
Fund operating expenses do not include extraordinary expenses as determined
under generally accepted accounting principals, or acquired fund fees and
expenses. The contractual expense waivers and fee reimbursements will
continue indefinitely, subject to termination by the Trustees, including a
majority of the Disinterested Trustees.
FUND PERCENTAGE
- ---- ----------
2015 High Watermark Class A............. 1.65%
2015 High Watermark Class C............. 2.30
2015 High Watermark Class I............. 1.18
2020 High Watermark Class A............. 1.65
2020 High Watermark Class C............. 2.30
2020 High Watermark Class I............. 1.18
SunAmerica Alternative Strategies Class
A...................................... 1.72
SunAmerica Alternative Strategies Class
C...................................... 2.37
SunAmerica Alternative Strategies Class
W...................................... 1.52
SunAmerica may also voluntarily waive fees and/or reimburse expenses,
including to increase the investment return to the Fund's investors or, with
respect to the High Watermark Funds, to prevent an early closure condition
from occurring, however, it is under no obligation to do so and may
discontinue such voluntary waivers at any time. The exact amount of such
waivers and/or reimbursements may change on a day-to-day basis. For the
period ended October 31, 2010, SunAmerica voluntarily waived and/or
reimbursed expenses in the amount of $750,861, and $81,558 for 2015 High
Watermark Fund and 2020 High Watermark Fund, respectively.
Further, any voluntary or contractual waivers and/or reimbursements made by
SunAmerica with respect to a Fund, with the exception of the Subsidiary
management fee waiver, are subject to recoupment from that Fund within the
following two years, provided that the Fund is able to effect such payment
to SunAmerica and remain in compliance with the foregoing expense
limitations.
28
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
For the period ended October 31, 2010, SunAmerica has contractually and
voluntarily waived and/or reimbursed expenses as follows:
OTHER
EXPENSES
FUND REIMBURSED
- ---- ----------
2015 High Watermark..................... $599,343
2020 High Watermark..................... 88,191
SunAmerica Alternative Strategies....... --
CLASS SPECIFIC
EXPENSES
FUND REIMBURSED
- ---- --------------
2015 High Watermark Class A............. $127,283
2015 High Watermark Class C............. 104,334
2015 High Watermark Class I............. 134,956
2020 High Watermark Class A............. 62,040
2020 High Watermark Class C............. 32,339
2020 High Watermark Class I............. 76,354
SunAmerica Alternative Strategies Class
A...................................... 46,704
SunAmerica Alternative Strategies Class
C...................................... 10,961
SunAmerica Alternative Strategies Class
W...................................... 9,303
For the period ended October 31, 2010, the amounts recouped by the Adviser
are as follows:
FUND
- ----
SunAmerica Alternative Strategies Class
A...................................... $55,612
SunAmerica Alternative Strategies Class
C...................................... 366
SunAmerica Alternative Strategies Class
W...................................... --
As of October 31, 2010, the amount of expenses previously waived and/or
reimbursed by SunAmerica during the prior two years that remain subject to
recoupment are as follows:
OTHER
EXPENSES
FUND REIMBURSED
- ---- --------------
2015 High Watermark..................... $891,079
2020 High Watermark..................... 130,171
SunAmerica Alternative Strategies....... 266,606
CLASS SPECIFIC
EXPENSES
FUND REIMBURSED
- ---- --------------
2015 High Watermark Class A............. $278,535
2015 High Watermark Class C............. 230,200
2015 High Watermark Class I............. 294,587
2020 High Watermark Class A............. 128,342
2020 High Watermark Class C............. 64,727
2020 High Watermark Class I............. 147,047
SunAmerica Alternative Strategies Class
A...................................... 85,833
SunAmerica Alternative Strategies Class
C...................................... 29,426
SunAmerica Alternative Strategies Class
W...................................... 26,695
The Trust, on behalf of each Fund, has a Distribution Agreement with
SunAmerica Capital Services, Inc. ("SACS" or the "Distributor"), an
affiliate of the Adviser. Each Fund has adopted a Distribution Plan on
behalf of its Class A shares and Class C shares (each a "Plan" and
collectively, the "Plans") in accordance with the provisions of Rule 12b-1
under the 1940 Act, hereinafter referred to as the "Class A Plan" and the
"Class C Plan." In adopting the Plans, the Trustees determined that there
was a reasonable likelihood that each such Plan would benefit the Fund and
the shareholders of the respective class. The sales charge and distribution
fees of a particular class will not be used to subsidize the sale of shares
of any other class.
29
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Under the Class A Plan and Class C Plan, the Distributor receives payments
from a Fund at an annual rate of 0.10% and 0.75%, respectively, of average
daily net assets of such Fund's Class to compensate the Distributor and
certain securities firms for providing sales and promotional activities for
distributing that class of shares. The distribution costs for which the
Distributor may be compensated for include fees paid to broker-dealers that
have sold Fund shares, commissions and other expenses such as those incurred
for sales literature, prospectus printing and distribution and compensation
to wholesalers. It is possible that in any given year the amount paid to the
Distributor under each Plan may exceed the Distributor's distribution costs
as described above. The Plans further provide that the Class A and Class C
shares of each Fund shall pay the Distributor an account maintenance fee up
to an annual rate of 0.25% of the average daily net assets of such class of
shares for payments to broker-dealers for providing account maintenance
activities. Accordingly, for the period ended October 31, 2010, SACS
received fees (see Statement of Operations) based upon the aforementioned
rates.
The Trust, on behalf of each High Watermark Fund, has entered into an
Administrative and Shareholder Services Agreement with SACS, pursuant to
which SACS is paid an annual fee of 0.25% of average daily net assets of
Class I shares as compensation for providing administrative and shareholder
services to Class I shareholders. For the period ended October 31, 2010,
SACS earned fees (see Statement of Operations) based upon the aforementioned
rates.
The Trust, on behalf of the Alternative Strategies Fund, has entered into an
Administrative and Shareholder Services Agreement with SACS, pursuant to
which SACS is paid an annual fee of 0.15% of average daily net assets of
Class W shares as compensation for providing administrative and shareholder
services to Class W shareholders. For the period ended October 31, 2010,
SACS earned fees (see Statement of Operations) based upon the aforementioned
rates.
SACS receives sales charges on each Fund's Class A shares, portions of which
are reallocated to affiliated broker-dealers and non-affiliated
broker-dealers. SACS also receives the proceeds of contingent deferred sales
charges paid by investors in connection with certain redemptions of each
Fund's Class A and Class C shares. SACS has advised the Funds that for the
period ended October 31, 2010, the proceeds received from sales (and paid
out to affiliated and non-affiliated broker-dealers) and redemptions are as
follows:
CLASS A CLASS A CLASS C
-------------------------------------- ------------- -------------
CONTINGENT CONTINGENT
SALES AFFILIATED NON-AFFILIATED DEFERRED DEFERRED
FUND CHARGES BROKER-DEALERS BROKER-DEALERS SALES CHARGES SALES CHARGES
- ---- -------- -------------- -------------- ------------- -------------
2015 High Watermark...... $ 57,745 $20,244 $ 29,124 $4,268 $ 3,454
2020 High Watermark...... 110,006 35,251 57,662 215 622
SunAmerica Alternative
Strategies.............. 576,652 42,524 449,770 -- 16,543
The Trust has entered into a Service Agreement with SunAmerica Fund
Services, Inc. ("SAFS"), an affiliate of the Adviser. Under the Service
Agreement SAFS performs certain shareholder account functions by assisting
the Funds' transfer agent in connection with the services that it offers to
the shareholders of the Funds. The Service Agreement, which permits the
Funds to compensate SAFS for services rendered based upon an annual rate of
0.22% of average daily net assets, is approved annually by the Trustees. For
the period ended October 31, 2010, the Funds incurred the following expenses
which are included in transfer agent fees and expenses in the Statement of
Operations to compensate SAFS pursuant to the terms of the Service Agreement.
PAYABLE AT
FUND EXPENSES OCTOBER 31, 2010
- ---- -------- ----------------
2015 High Watermark Class A............. $220,844 $17,745
2015 High Watermark Class C............. 179,851 14,468
2015 High Watermark Class I............. 58,920 4,834
2020 High Watermark Class A............. 82,506 7,222
2020 High Watermark Class C............. 34,778 3,046
2020 High Watermark Class I............. 29,642 3,003
SunAmerica Alternative Strategies Class
A...................................... 602,075 57,797
SunAmerica Alternative Strategies Class
C...................................... 61,074 5,790
SunAmerica Alternative Strategies Class
W...................................... 36,597 4,414
30
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
At October 31, 2010, The Variable Annuity Life Insurance Company, an
affiliate of SunAmerica, owned 99.9% and 98.7% of the outstanding shares of
the 2015 High Watermark Fund Class I and the 2020 High Watermark Fund
Class I, respectively.
At October 31, 2010, the following affiliates owned a percentage of the
outstanding shares of the Alternative Strategies Fund: Focused Balanced
Strategy Portfolio and Focused Multi-Asset Strategy Portfolio, each a series
of SunAmerica Focused Series, Inc., owned 12.5% and 37.9% of the Class A
shares, respectively.
On March 4, 2009, American International Group, Inc. ("AIG"), the ultimate
parent of SunAmerica, SACS, and SAFS, issued and sold to the AIG Credit
Facility Trust, a trust established for the sole benefit of the United
States Treasury (the "Trust"), 100,000 shares of AIG's Series C Perpetual,
Convertible, Participating Preferred Stock (the "Stock") for an aggregate
purchase price of $500,000, with an understanding that additional and
independently sufficient consideration was also furnished to AIG by the
Federal Reserve Bank of New York (the "FRBNY") in the form of its lending
commitment (the "Credit Facility") under the Credit Agreement, dated as of
September 22, 2008, between AIG and the FRBNY. The Stock has preferential
liquidation rights over AIG common stock, and, to the extent permitted by
law, votes with AIG's common stock on all matters submitted to AIG's
shareholders.
As of September 30, 2010, the Trust has approximately 79.8% of the aggregate
voting power of AIG's common stock and is entitled to approximately 79.8% of
all dividends paid on AIG's common stock, in each case treating the Stock as
if converted.
Note 5. Purchases and Sales of Investment Securities
The cost of purchases and proceeds from sales and maturities of long-term
investments during the period ended October 31, 2010 were as follows:
PURCHASES SALES
OF PORTFOLIO OF PORTFOLIO
SECURITIES SECURITIES PURCHASES OF SALES
(EXCLUDING U.S. (EXCLUDING U.S. U.S. OF U.S.
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
FUND SECURITIES) SECURITIES) SECURITIES SECURITIES
- ---- --------------- --------------- ------------ ------------
2015 High Watermark............... $ -- $ -- $ -- $ 25,182,440
2020 High Watermark............... -- -- -- --
SunAmerica Alternative Strategies. 34,036,842 47,374,902 462,930,570 349,702,969
Note 6. Federal Income Taxes
At October 31, 2010, the amounts of aggregate unrealized gain (loss) and the
cost of investment securities for federal tax purposes, including short-term
securities and repurchase agreements, were as follows:
2015 2020 SUNAMERICA
HIGH WATERMARK HIGH WATERMARK ALTERNATIVE STRATEGIES
FUND FUND FUND
-------------- -------------- ----------------------
Cost.......................................... $179,861,468 $59,706,245 $368,196,838
============ =========== ============
Appreciation.................................. 17,401,819 8,593,493 7,643,063
Depreciation.................................. -- (146,186) (101,030)
------------ ----------- ------------
Unrealized appreciation (depreciation) -- net. $ 17,401,819 $ 8,447,307 $ 7,542,033
============ =========== ============
The following details the tax basis distributions as well as the components
of distributable earnings. The tax basis components of distributable
earnings differ from the amounts reflected in the Statement of Assets and
Liabilities by temporary book/tax differences primarily due to taxable
income from wholly owned foreign subsidiary, wash sales and derivative
transactions.
DISTRIBUTABLE EARNINGS TAX DISTRIBUTIONS
---------------------------------------- ------------------------
FOR THE YEAR ENDED OCTOBER 31, 2010
-----------------------------------------------------------------
LONG-TERM UNREALIZED
ORDINARY GAINS/CAPITAL APPRECIATION ORDINARY LONG-TERM
FUND INCOME LOSS CARRYOVER (DEPRECIATION) INCOME CAPITAL GAINS
- ---- ---------- -------------- -------------- ---------- -------------
2015 High Watermark........... $2,321,618 $(25,062,415) $17,401,819 $2,948,846 $--
2020 High Watermark........... 1,037,080 (23,291,430) 8,447,307 1,086,823 --
SunAmerica Alternative
Strategies................... 6,510,343 4,458,931 5,605,608 961,722 --
31
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
TAX DISTRIBUTIONS
FOR THE YEAR ENDED
OCTOBER 31, 2009
------------------------
ORDINARY LONG-TERM
FUND INCOME CAPITAL GAINS
- ---- ---------- -------------
2015 High Watermark............... $3,208,131 $--
2020 High Watermark............... 1,310,623 --
SunAmerica Alternative Strategies. -- --
For the period ended October 31, 2010, the reclassifications arising from
book/tax differences resulted in increases (decreases) that were due to
realized book income from wholly owned foreign subsidiary to the components
of net assets as follows:
ACCUMULATED ACCUMULATED
UNDISTRIBUTED UNDISTRIBUTED NET
NET INVESTMENT REALIZED GAIN
FUND INCOME (LOSS) (LOSS) CAPITAL PAID-IN
- ---- -------------- ----------------- ---------------
2015 High Watermark............... $ -- $ -- $ --
2020 High Watermark............... -- -- --
SunAmerica Alternative Strategies. 121,810 (2,421,863) 2,300,053
For Federal income tax purposes, the Funds indicated below have capital loss
carryforwards, which expire in the year indicated, as of October 31, 2010,
which are available to offset future capital gains, if any:
CAPITAL LOSS CARRYFORWARD
----------------------------------------------------
FUND 2011 2012 2013 2014 2015 2016 2017 2018
- ---- ---- ---- ---- ---- ---- ----------- ---------- ----
2015 High Watermark............... $-- $-- $-- $-- $-- $25,062,415 $ -- $--
2020 High Watermark............... -- -- -- -- -- 21,977,005 1,314,425 --
SunAmerica Alternative Strategies. -- -- -- -- -- -- -- --
The Funds indicated below utilized capital loss carryforwards, which offset
net taxable gains realized in the current period ended October 31, 2010.
CAPITAL LOSS CAPITAL LOSS
FUND CARRYFORWARD UTILIZED CARRYFORWARD EXPIRED
- ---- --------------------- --------------------
2015 High Watermark............... $1,976,022 $--
2020 High Watermark............... 9,506 --
SunAmerica Alternative Strategies. 6,807,691 --
32
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
Note 7. Capital Share Transactions
Transactions in capital shares of each class of each fund were as follows:
2015 HIGH WATERMARK FUND
------------------------------------------------------------------------------------------------------
CLASS A CLASS A CLASS C CLASS C
------------------------ ------------------------ ------------------------ ------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2010 OCTOBER 31, 2009 OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ ------------------------ ------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Shares
sold.................. 144,177 $ 1,401,154 1,519,555 $ 14,689,711 104,319 $ 1,022,702 1,132,251 $ 10,906,292
Reinvested
shares................ 160,460 1,545,231 165,085 1,594,721 69,775 670,534 83,420 803,337
Shares
redeemed.............. (2,388,437) (23,634,612) (2,592,629) (25,048,998) (1,908,489) (18,723,005) (1,443,921) (13,866,534)
---------- ------------ ---------- ------------ ---------- ------------ ---------- ------------
Net increase (decrease) (2,083,800) $(20,688,227) (907,989) $ (8,764,566) (1,734,395) $(17,029,769) (228,250) $ (2,156,905)
========== ============ ========== ============ ========== ============ ========== ============
2015 HIGH WATERMARK FUND
--------------------------------------------------
CLASS I CLASS I
------------------------ ------------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
Shares
sold.................. 66,758 $ 651,635 264,637 $ 2,567,970
Reinvested
shares................ 54,767 529,049 57,495 556,548
Shares
redeemed.............. (557,128) (5,489,843) (368,916) (3,585,851)
---------- ------------ ---------- ------------
Net increase (decrease) (435,603) $ (4,309,159) (46,784) $ (461,333)
========== ============ ========== ============
2020 HIGH WATERMARK FUND
-----------------------------------------------------------------------------------------------
CLASS A CLASS A CLASS C CLASS C
------------------------ ----------------------- --------------------- ---------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 2010 OCTOBER 31, 2009 OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ ----------------------- --------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ----------- -------- ----------- -------- -----------
Shares
sold.................. 821,041 $ 7,014,490 807,925 $ 6,561,314 132,063 $ 1,127,390 431,592 $ 3,470,522
Reinvested
shares................ 72,147 $ 576,451 83,067 685,308 19,856 158,449 24,228 199,402
Shares
redeemed.............. (1,571,647) (13,378,165) (1,087,930) (8,822,235) (389,489) (3,204,181) (255,208) (2,060,931)
---------- ------------ ---------- ----------- -------- ----------- -------- -----------
Net increase (decrease) (678,460) $ (5,787,224) (196,938) $(1,575,613) (237,570) $(1,918,342) 200,612 $ 1,608,993
========== ============ ========== =========== ======== =========== ======== ===========
2020 HIGH WATERMARK FUND
-------------------------------------------------
CLASS I CLASS I
------------------------ -----------------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED
OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- -----------
Shares
sold.................. 421,805 $ 3,574,335 321,379 $ 2,612,988
Reinvested
shares................ 32,975 $ 263,803 33,640 277,527
Shares
redeemed.............. (187,618) $ (1,540,248) (185,902) (1,510,183)
---------- ------------ ---------- -----------
Net increase (decrease) 267,162 $ 2,297,890 169,117 $ 1,380,332
========== ============ ========== ===========
33
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
SUNAMERICA ALTERNATIVE STRATEGIES FUND
--------------------------------------------------------------------------------------------------
CLASS A CLASS A CLASS C CLASS C
------------------------ ------------------------ ---------------------- ----------------------
FOR THE PERIOD FOR THE PERIOD
FOR THE NOVEMBER 4, 2008@ FOR THE NOVEMBER 4, 2008@
YEAR ENDED THROUGH YEAR ENDED THROUGH
OCTOBER 31, 2010 OCTOBER 31, 2009 OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ ------------------------ ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ --------- ----------- --------- -----------
Shares
sold.................. 13,342,647 $137,281,065 26,389,221 $259,068,225 1,765,497 $18,046,657 2,223,416 $21,614,198
Reinvested
shares................ 82,505 842,380 -- -- -- -- -- --
Shares
redeemed.............. (6,028,408) (62,054,690) (3,316,910) (31,269,588) (722,341) (7,331,667) (282,122) (2,767,462)
---------- ------------ ---------- ------------ --------- ----------- --------- -----------
Net increase (decrease) 7,396,744 $ 76,068,755 23,072,311 $227,798,637 1,043,156 $10,714,990 1,941,294 $18,846,736
========== ============ ========== ============ ========= =========== ========= ===========
SUNAMERICA ALTERNATIVE STRATEGIES FUND
--------------------------------------------------
CLASS W CLASS W
------------------------ ------------------------
FOR THE PERIOD
FOR THE NOVEMBER 4, 2008@
YEAR ENDED THROUGH
OCTOBER 31, 2010 OCTOBER 31, 2009
------------------------ ------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
Shares
sold.................. 1,986,657 $ 20,424,006 1,231,692 $ 12,206,154
Reinvested
shares................ 3,018 30,842 -- --
Shares
redeemed.............. (708,319) (7,248,848) (72,614) (722,805)
---------- ------------ ---------- ------------
Net increase (decrease) 1,281,356 $ 13,206,000 1,159,078 $ 11,483,349
========== ============ ========== ============
- --------
@ Commencement of operations.
Note 8. Line of Credit
The Trust has established a $10 million committed secured line of credit
with State Street Bank and Trust Company, the Funds' custodian. Interest is
currently payable at the higher of the Federal funds Rate or London
Interbank Offered Rate plus 125 basis points on the committed line and State
Street Bank and Trust Company's discretionary bid rate on the uncommitted
line of credit. There is also a commitment fee of 12.5 basis points per
annum on the daily unused portion of the committed line of credit which is
included in other expenses on the Statement of Operations. Prior to October
15, 2010 the commitment fee was 10 basis points per annum on the daily
unused portion of the committed line of credit. Borrowings under the line of
credit will commence when the respective Fund's cash shortfall exceeds
$100,000. This committed secured line of credit was not used during the
period ended October 31, 2010.
Note 9. Interfund Lending Agreement
Pursuant to exemptive relief granted by the Securities and Exchange
Commission ("SEC"), the Funds are permitted to participate in an interfund
lending program among investment companies advised by SunAmerica or an
affiliate. The interfund lending program allows the participating Funds to
borrow money from and loan money to each other for temporary or emergency
purposes. An interfund loan will be made under this facility only if the
participating Funds receive a more favorable interest rate than would
otherwise be available from a typical bank for a comparable transaction. For
the period ended October 31, 2010, none of the Funds participated in this
program.
Note 10. Trustees Retirement Plan
The Trustees have adopted the SunAmerica Disinterested Trustees' and
Directors' Retirement Plan (the "Retirement Plan") effective January 1,
1993, as amended, for the Disinterested Trustees. The Retirement Plan
provides generally that a Trustee may become a participant ("Participant")
in the Retirement Plan if he or she has at least 10 years of consecutive
service as a Disinterested Trustee of any of the adopting SunAmerica mutual
funds (the "Adopting Funds"), or has attained the age of 60 while a Trustee
and completed five (5) consecutive years of service as a Trustee of any
Adopting Fund (an "Eligible Trustee"). Pursuant to the Retirement Plan, an
Eligible Trustee may receive benefits upon (i) his or her death or
disability while a Trustee or (ii) the termination of his or her tenure as a
Trustee, other than removal for cause from each of the Adopting Funds with
respect to which he or she is an Eligible Trustee.
34
SUNAMERICA SPECIALTY SERIES
NOTES TO FINANCIAL STATEMENTS -- OCTOBER 31, 2010 -- (CONTINUED)
As of each of the first 10 birthdays after becoming a Participant and on
which he or she is both a Trustee and a Participant, each Eligible Trustee
will be credited with an amount equal to 50% of his or her regular fees
(excluding committee fees) for services as a Disinterested Trustee of each
Adopting Fund for the calendar year in which such birthday occurs. In
addition, an amount equal to 8.50% of any amounts credited under the
preceding statement during prior years is added to each Eligible Trustee's
account. The rights of any Participant to benefits under the Retirement Plan
shall not be an unsecured claim against the assets of the Adopting Funds. An
Eligible Trustee may receive any benefits payable under the Retirement Plan,
at his or her election, either in one lump sum or in up to 15 annual
installments. Any undistributed amounts shall continue to accrue interest at
8.50%.
Effective December 3, 2008, the Retirement Plan was amended to, among other
things, (1) freeze the Retirement Plan as to future accruals for active
Participants as of December 31, 2008, (2) prohibit Disinterested Trustees
from first becoming participants in the Retirement Plan after December 31,
2008 and (3) permit active Participants to elect to receive a distribution
of their entire Retirement Plan account balance in 2009. The freeze on
future accruals does not apply to participants that have commenced receiving
benefits under the Retirement Plan on or before December 31, 2008.
Note 11. Transactions with Affiliates
As discussed in Note 2, the Alternative Strategies Fund owned 100% of the
Subsidiary. During the period ended October 31, 2010, the Alternative
Strategies Fund recorded unrealized gain/(loss) on the investment in the
Subsidiary as follows:
NET ASSETS
NET ASSETS AT REALIZED SALES DIVIDEND UNREALIZED AS OF
CONSOLIDATED SUBSIDIARY OCTOBER 31, 2009 PURCHASES GAIN/(LOSS) PROCEEDS INCOME GAIN/(LOSS) OCTOBER 31, 2010
- ----------------------- ---------------- ----------- ----------- -------- -------- ----------- ----------------
SunAmerica Alternative Strategies
Cayman Fund, Ltd................. $38,908,320 $48,000,000 $-- $-- $-- $3,870,393 $90,778,713
=========== =========== === === === ========== ===========
Note 12. Investment Concentration
The Funds may invest in U.S. Treasury securities, including bills, notes,
bonds and other debt securities issued by the U.S. Treasury. These
instruments are direct obligations of the U.S. government and, as such, are
backed by the "full faith and credit" of the U.S. government. The Funds may
also invest in obligations issued by agencies and instrumentalities of the
U.S. government that may vary in the level of support they receive from the
government. These obligations may not be backed by the full faith and credit
of the U.S. government. With respect to those instruments that are not
backed by the full faith and credit of the U.S. government, the U.S.
government may choose not to provide financial support to such government
sponsored agencies or instrumentalities since it is not legally obligated to
do so. In this case, if the issuer defaulted, the fund holding securities of
such issuer might not be able to recover its investment from the U.S.
government. As a result of the SunAmerica Alternative Strategies Funds'
concentration in U.S. government agencies or instrumentalities, it may be
subject to risks associated with the U.S. government. At the end of the
period, the Alternative Strategies Fund had 63.9% of its total net assets
invested in such securities.
35
SUNAMERICA SPECIALTY SERIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
SunAmerica Specialty Series:
In our opinion, the accompanying statements of assets and liabilities
(consolidated statement of assets and liabilities for SunAmerica Alternative
Strategies Fund), including the portfolios of investments (consolidated
portfolio of investments for SunAmerica Alternative Strategies Fund), and the
related statements of operations (consolidated statement of operations for
SunAmerica Alternative Strategies Fund) and of changes in net assets
(consolidated statements of changes in net assets for SunAmerica Alternative
Strategies Fund) and the financial highlights (consolidated financial
highlights for SunAmerica Alternative Strategies Fund) present fairly, in all
material respects, the financial position of each of the three funds
constituting SunAmerica Specialty Series (formerly, AIG Series Trust)
(hereafter referred to as the "Funds") at October 31, 2010, the results of each
of their operations for the year then ended, and the changes in each of their
net assets for each of the periods indicated in the two years then ended and
the financial highlights for each of the periods indicated in the three years
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2010 by correspondence with the custodian and
brokers and application of alternative auditing procedures where securities
purchased had not been received, provide a reasonable basis for our opinion.
The financial highlights for each of the periods ended on or before October 31,
2007 were audited by another independent registered public accounting firm
whose report, dated December 19, 2007, expressed an unqualified opinion on
those financial highlights.
PricewaterhouseCoopers LLP
Houston, Texas
December 23, 2010
36
SUNAMERICA SPECIALTY SERIES
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY AGREEMENTS -- OCTOBER
31, 2010 -- (UNAUDITED)
APPROVAL OF THE INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT AND SUBADVISORY
AGREEMENTS
The Board of the Trust, including the Trustees who are not "interested
persons," as defined in Section 2(a)(19) of the 1940 Act, of the Trust or its
separate series (each a "Fund" and collectively, the "Funds"), SunAmerica,
Pelagos or Trajectory (together with Pelagos, the "Subadvisers") (the
"Disinterested Trustees"), approved the continuation of the Investment Advisory
and Management Agreement between the Trust, on behalf of the 2015 High
Watermark Fund (the "2015 Fund") and the 2020 High Watermark Fund (the "2020
Fund") and SunAmerica, and the Investment Advisory and Management Agreement
between the Trust, on behalf of the Alternative Strategies Fund, and SunAmerica
(each an "Advisory Agreement," and collectively, the "Advisory Agreements") for
a one-year period ending August 31, 2011 at an in-person meeting held on
August 24, 2010 (the "Meeting"). At the Meeting, the Board also approved the
continuation of the Subadvisory Agreements among SunAmerica, Trajectory and the
Trust with respect to the 2015 Fund and 2020 Fund, and the Subadvisory
Agreements among SunAmerica, Pelagos and the Trust with respect to the
Alternative Strategies Fund (each a "Subadvisory Agreements," and collectively,
the "Subadvisory Agreements"), each for a one-year period ending August 31,
2011.
In accordance with Section 15(c) of the 1940 Act, the Board requested and
SunAmerica and the Subadvisers provided materials relating to the Board's
consideration of whether to approve the continuation of the Advisory Agreements
and Subadvisory Agreements. These materials included (a) a summary of the
services provided to the Funds by SunAmerica and its affiliates, and by the
Subadvisers; (b) information independently compiled and prepared by Lipper,
Inc. ("Lipper") on fees and expenses of the Funds, and the investment
performance of the Funds as compared with a peer group and/or peer universe of
funds, as applicable; (c) information on the profitability of SunAmerica and
its affiliates, and a discussion relating to indirect benefits; (d) a report on
economies of scale; (e) information on SunAmerica's and the Subadvisers' risk
management process; (f) a discussion on general compliance policies and
procedures; (g) a summary of brokerage and soft dollar practices; and (h) a
discussion of the key personnel of SunAmerica and its affiliates, and the
Subadvisers, that are involved in the investment management, administration,
compliance and risk management activities with respect to the Funds, as well as
current and projected staffing levels and compensation practices.
In determining whether to approve the continuation of the Advisory Agreements
and Subadvisory Agreements, the Board, including the Disinterested Trustees,
considered the following information:
Nature, Extent and Quality of Services Provided by SunAmerica, Pelagos and
Trajectory. The Board, including the Disinterested Trustees, considered the
nature, quality and extent of services to be provided by SunAmerica and the
Subadvisers. The Board noted that the services include acting as investment
manager and adviser to the Funds, managing the daily business affairs of the
Funds, and obtaining and evaluating economic, statistical and financial
information to formulate and implement investment policies. Additionally, the
Board observed that SunAmerica would provide office space, bookkeeping,
accounting, legal, and compliance, clerical and administrative services and has
authorized any of its officers and employees, if elected, to serve as officers
or trustees of the Funds without compensation. Finally, the Board noted that
SunAmerica is responsible for monitoring and reviewing the activities of
affiliated and unaffiliated third-party service providers, including the
Subadvisers. In addition to the quality of the advisory services, the Board
considered the quality of the administrative and non-investment advisory
services provided to the Funds pursuant to the Advisory Agreements and noted
that such services include (i) preparing disclosure documents, such as the
prospectus, the statement of additional information and shareholder reports;
(ii) assisting with daily accounting and pricing; (iii) organizing Board
meetings and preparing the materials for such Board meetings; (iv) providing
legal and compliance support; and (v) performing other administrative functions
necessary for the operation of the Funds, such as tax reporting and fulfilling
regulatory filing requirements.
In connection with the services provided by SunAmerica, the Board analyzed the
structure and duties of SunAmerica's fund administration, accounting, legal and
compliance departments and concluded that they were adequate to meet the needs
of the Funds. The Board also reviewed the personnel responsible for providing
advisory services to the Funds and other key personnel of SunAmerica, in
addition to current and projected staffing levels and compensation practices.
The Board concluded, based on their experience and interaction with SunAmerica,
that: (i) SunAmerica is able to retain quality portfolio managers, analysts and
other personnel; (ii) SunAmerica exhibited a high level of diligence and
attention to detail in carrying out its advisory and other responsibilities
under the Advisory Agreements; (iii) SunAmerica had been responsive to requests
of the Board; and (iv) SunAmerica had kept the Board apprised of developments
relating to the Funds and the industry in general. The Board concluded that the
nature and extent of services provided under the Advisory Agreements were
reasonable and appropriate in relation to the management fee and that the
quality of services continues to be high.
37
SUNAMERICA SPECIALTY SERIES
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY AGREEMENTS -- OCTOBER
31, 2010 -- (UNAUDITED) (CONTINUED)
The Board also considered SunAmerica's reputation and relationship with the
Funds and considered the benefit to shareholders of investing in funds that are
part of a family of funds offering a variety of types of mutual funds and
shareholder services. The Board considered SunAmerica's experience in providing
management and investment advisory and administrative services to advisory
clients and noted that as of June 30, 2010, SunAmerica managed, advised and/or
administered approximately $37.5 billion in assets. The Board also considered
SunAmerica's code of ethics and its risk management process, and that it has
developed internal procedures, adopted by the Board, for monitoring compliance
with the investment objectives, policies and restrictions of the Funds as set
forth in the Fund's prospectus. Additionally, the Board considered SunAmerica's
compliance and regulatory history.
The Board also considered the nature, quality and extent of subadvisory
services provided by the Subadvisers. The Board observed that the Subadvisers
are responsible for providing investment management services, including
investment research, advice and supervision, and determining which securities
will be purchased or sold by the Fund that each Subadviser manages, subject to
the oversight and review of SunAmerica. The Board reviewed each Subadviser's
history, structure, size, visibility and resources, which are needed to attract
and retain highly qualified investment professionals. The Board reviewed the
personnel that are responsible for providing subadvisory services to the Funds,
in addition to current and projected staffing levels and compensation practices
and concluded, based on their experience with each Subadviser, that each
Subadviser: (i) is able to retain high quality portfolio managers and other
investment personnel; (ii) exhibited a high level of diligence and attention to
detail in carrying out its responsibilities under the Subadvisory Agreements;
and (iii) had been responsive to requests of the Board and of SunAmerica. The
Board considered that each Subadviser has developed internal policies and
procedures for monitoring compliance with the investment objectives, policies
and restrictions of the Funds as set forth in the Funds' prospectuses. The
Board also considered each Subadviser's code of ethics, compliance, regulatory
history and risk management process. The Board noted that each Subadviser has
not experienced any material regulatory or compliance problems nor have they
been involved in any material litigation or administrative proceedings that
would potentially impact their ability to effectively serve as subadvisers to
the Funds. The Board concluded that the nature and extent of services to be
provided by the Subadvisers under the Subadvisory Agreements were reasonable
and appropriate in relation to the subadvisory fees and that the quality of
services continues to be high.
Investment Performance. The Board, including the Disinterested Trustees, also
considered the investment performance of SunAmerica and the Subadvisers with
respect to the Funds. In connection with its review, the Board received and
reviewed information regarding the investment performance of the Funds as
compared to each Fund's peer universe ("Peer Universe") and/or peer group
("Peer Group") as independently determined by Lipper and to an appropriate
index or combination of indices. The Board noted that the Lipper report did not
include performance comparisons for the Trajectory Subadvised Funds' Peer
Groups because of the limited number of funds in these Peer Groups. The Board
was provided with a description of the methodology used by Lipper to select the
funds in the Peer Groups and Peer Universes. The Board also noted that it
regularly reviews the performance of the Funds throughout the year. The Board
noted that, while it monitors performance of the Funds closely, it generally
attaches more importance to performance over relatively long periods of time,
typically three to five years.
In preparation for the Meeting, the Board was provided with reports
independently prepared by Lipper. Based on the Lipper reports, the Board
reviewed each Fund's annualized total returns for the prior one-, two-, three-,
four- and five-year periods ended May 31, 2010 and since inception, as
applicable. The Board noted that it was also provided with a supplemental
Lipper performance report for the periods ended June 30, 2010. In addition, the
Board received a report prepared by SunAmerica that detailed the Funds'
performance for the three-, and six-month periods ended June 30, 2010.
For the 2015 High Watermark Fund, the Board considered that the Fund ranked in
the first quintile of its Peer Universe, which consists of all funds within the
applicable classification (i.e., mixed-asset target 2015 funds) for the two-,
three-, four-year and since inception periods ended March 31, 2010, ranked in
the third quintile for the one-year period and ranked in the fifth quintile for
the one year-period 2010. For the 2020 High Watermark Fund, the Board
considered that the Fund ranked in the fourth quintile of its Peer Universe
(i.e., mixed-asset target 2020 funds) for the two- and three-year periods ended
May 31, 2010, ranked in the third quintile for the four-year period and ranked
in the fifth quintile for the one-, five-, and since inception periods.
However, the Board also considered that the performance of the High Watermark
Funds year-to-date placed them near the top of their applicable Lipper
classifications.
The Board further considered that the High Watermark Funds have certain
restrictions on their investment techniques in the master agreement that backs
the payment undertaking on these Funds and that, due to these restrictions, the
Funds' fixed income exposures were significantly higher than those of the funds
in the respective Peer Universes, which can cause the Funds' relative rankings
within
38
SUNAMERICA SPECIALTY SERIES
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY AGREEMENTS -- OCTOBER
31, 2010 -- (UNAUDITED) (CONTINUED)
the Peer Universes to change significantly from period to period. The Board
therefore acknowledged the inherent limitations in comparing the High Watermark
Funds to their respective Peer Universes, noting that while the Funds generally
tailor their portfolios' risk level over time in a manner similar to ordinary
target date funds, the Funds also seek to preserve principal and investment
gains at the Funds' protected maturity dates and are therefore subject to
restrictions in the master agreement that backs the payment undertaking.
For the Alternative Strategies Fund, the Board considered that the Fund ranked
in the fifth quintile of its Peer Group for the one-year and since inception
periods ended May 31, 2010. The Board noted, however, that the Fund had a
relatively short performance history and acknowledged the inherent limitations
in comparing the Fund to its respective Peer Group. In particular, the Board
noted that, according to Lipper, the Peer Group for the Fund was a general
"flexible portfolio" category that is merely a "best-fit" given the lack of
funds that share the Fund's unique investment strategies. The Board further
considered that the Fund had outperformed its blended commodity and hedge fund
benchmark for the year-to-date and since inception periods ended June 30, 2010.
Consideration of the Management Fee and Subadvisory Fees and the Cost of the
Services and Profits to be Realized by SunAmerica and the Subadvisers and their
Affiliates from the Relationship with the Funds. The Board, including the
Disinterested Trustees, received and reviewed information regarding the fees to
be paid by the Funds to SunAmerica pursuant to the Advisory Agreements and the
fees paid by SunAmerica to the Subadvisers pursuant to the Subadvisory
Agreements. The Board examined this information in order to determine the
reasonableness of the fees in light of the nature and quality of services to be
provided and any potential additional benefits to be received by SunAmerica,
the Subadvisers or their affiliates in connection with providing such services
to the Funds.
To assist in analyzing the reasonableness of the management fee for each of the
Funds, the Board received reports independently prepared by Lipper. The reports
showed comparative fee information for each Fund's Peer Group and/or Peer
Universe as determined by Lipper, including rankings within each category. In
considering the reasonableness of the management fee to be paid by each Fund to
SunAmerica, the Board reviewed a number of expense comparisons, including:
(i) contractual and actual management fees; and (ii) actual total operating
expenses. In considering each Fund's total operating expenses, the Board
analyzed the level of fee waivers and expense reimbursements and the net
expense caps contractually agreed upon by SunAmerica with respect to the Funds.
The Board also considered the voluntary fee waivers and/or expense
reimbursements being made by SunAmerica with respect to the High Watermark
Funds in order to prevent an Early Closure Condition, as defined in the Funds'
prospectus, from occurring. The Board compared each Fund's net expense ratio to
those of other funds within its Peer Group and/or Peer Universe as a guide to
help assess the reasonableness of the management fee for the Funds. The Board
acknowledged that it was difficult to make precise comparisons with other funds
in the Peer Groups and Peer Universes since the exact nature of services
provided under the various fund agreements is often not apparent. The Board
noted, however, that the comparative fee information provided by Lipper as a
whole was useful in assessing whether SunAmerica was providing services at a
cost that was competitive with other, similar funds. The Board did not consider
services and fees paid under investment advisory contracts that SunAmerica has
with other registered investment companies or other types of clients with
similar investment strategies to the Funds since SunAmerica informed the Board
that there were no such funds or accounts.
The Board also received and reviewed information regarding the fees paid by
SunAmerica to the Subadvisers pursuant to the Subadvisory Agreements. To assist
in analyzing the reasonableness of the subadvisory fees, the Board received a
report prepared independently by Lipper. The report showed comparative fee
information of each Fund's Peer Group and/or Peer Universe that the Trustees
used as a guide to help assess the reasonableness of the subadvisory fees. The
Trustees noted that Peer Group and/or Peer Universe information as a whole was
useful in assessing whether the Subadvisers were providing services at a cost
that was competitive with other similar funds. The Trustees also considered
that the subadvisory fees are paid by SunAmerica out of its management fee and
not by the Funds, and that subadvisory fees may vary widely within a Peer Group
for various reasons, including market pricing demands, existing relationships,
experience and success, and individual client needs. The Board further
considered the amount of subadvisory fees paid out by SunAmerica and the amount
of the management fees which it retained. The Board did not consider services
and fees paid under investment advisory contracts that the Subadvisers have
with other registered investment companies or other types of clients with
similar investment strategies to the Funds since the Subadvisers informed the
Board that there were no such funds or accounts.
In connection with its renewal of the Subadvisory Agreements with respect to
the High Watermark Funds, the Board was also asked to approve the continuation
of an arrangement whereby SunAmerica agrees to pay a minimum annual fee to
Trajectory (the
39
SUNAMERICA SPECIALTY SERIES
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY AGREEMENTS -- OCTOBER
31, 2010 -- (UNAUDITED) (CONTINUED)
"Minimum Fee Arrangement"). The Minimum Fee Arrangement was initially approved
by the Board at its August 29, 2006 meeting, and continues in effect for
successive annual periods ending October 31, upon mutual agreement of
SunAmerica and Trajectory, and subject to approval by the Board, including a
majority of the Disinterested Trustees. The Minimum Fee Arrangement, which is
reflected in the Subadvisory Agreements, provides that SunAmerica pay
Trajectory a minimum fee equal to the percentage of each of the High Watermark
Fund's average daily net assets, accrued daily and payable monthly, at the
following rates: 0.25% for the 2015 Fund; and 0.20% for the 2020 Fund. The
Board noted that the Minimum Fee Arrangement provides for a reasonable
allocation of fees among SunAmerica and Trajectory and would result in
SunAmerica retaining less of the management fees. The Board further noted that
the Minimum Fee Arrangement did not modify the services provided under the
Subadvisory Agreements nor did it impact the fee payable by the Funds pursuant
to the Advisory Agreement. The Board, including a majority of the Disinterested
Trustees, approved the continuation of the Minimum Fee Arrangement for a
one-year period ending October 31, 2011.
The Board also considered SunAmerica's profitability and the benefits
SunAmerica and its affiliates received from its relationship with the Funds.
The Board received and reviewed financial statements relating to SunAmerica's
financial condition and profitability with respect to the services it provided
the Funds and considered how profit margins could affect SunAmerica's ability
to attract and retain high quality investment professionals and other key
personnel. The Board was also provided with a profitability analysis that
detailed the revenues earned and the expenses incurred by SunAmerica and its
affiliates that provide services to the Funds on a Fund by Fund basis. In
particular, the Board considered the contractual fee waivers and/or expense
reimbursements agreed to by SunAmerica, and also considered the voluntary
waivers and/or expense reimbursements being made by SunAmerica in connection
with the High Watermark Funds.
The Board considered the profitability of SunAmerica under the Advisory
Agreement, and considered the profitability of SunAmerica's affiliates under
the Service Agreement, Rule 12b-1 Plans and Administrative and Shareholder
Service Agreements. Additionally, the Board considered whether SunAmerica, the
Subadvisers and their affiliates received any indirect benefits from the
relationship with the Funds. Specifically, the Board observed that AIG Federal
Savings Bank, an affiliate of SunAmerica, serves as custodian with respect to
certain shareholder retirement accounts that are administered by SunAmerica and
receives a fee payable by the qualifying shareholders. The Board further
considered whether there were any collateral or "fall-out" benefits that
SunAmerica and its affiliates may derive as a result of their relationship with
the Funds. The Board noted that SunAmerica believes that any such benefits are
de minimis and do not impact the reasonableness of the management fees.
The Board also considered whether the Subadvisers had the financial resources
necessary to attract and retain high quality investment management personnel
and to continue to provide the high quality of services that it had provided to
the Funds to date.
The Board concluded that SunAmerica and the Subadvisers had the financial
resources necessary to perform their obligations under the Advisory Agreements
and Subadvisory Agreements and to continue to provide the Funds with the high
quality services that they had provided in the past. The Board also concluded
that the management fee and subadvisory fees were reasonable in light of the
factors discussed above.
Economies of Scale. The Board, including the Disinterested Trustees, considered
whether the shareholders would benefit from economies of scale and whether
there was potential for future realization of economies with respect to the
Funds. The Board considered that as a result of being part of the SunAmerica
fund complex, the Funds share common resources and may share certain expenses,
and if the size of the complex increases, each Fund could incur lower expenses
than they otherwise would achieve as stand-alone entities. The Board also
considered the anticipated efficiencies in the processes of SunAmerica as it
adds labor and capital to expand the scale of operations. The Board further
noted that SunAmerica has agreed to contractually cap the total annual
operating expenses of each class of the Funds, at certain levels. The Board
observed that those expense caps benefited shareholders by keeping total fees
down even in the absence of breakpoints or economies of scale. The Board
concluded that the Funds' management fee structure was reasonable and that it
would continue to review fees in connection with the renewal of the Advisory
Agreements, including whether the implementation of additional breakpoints
would be appropriate in the future due to an increase in asset size or
otherwise.
The Board did not review specific information regarding whether there have been
economies of scale with respect to the Subadvisers' management of the Funds
because it regards that information as less relevant at the subadviser level.
Rather, the Board considered information regarding economies of scale in the
context of the renewal of the Advisory Agreements.
Other Factors. In consideration of the Advisory Agreements and Subadvisory
Agreements, the Board also received information regarding SunAmerica's and the
Subadvisers brokerage and soft dollar practices. The Board considered that
SunAmerica and the
40
SUNAMERICA SPECIALTY SERIES
APPROVAL OF ADVISORY AGREEMENT AND SUBADVISORY AGREEMENTS -- OCTOBER
31, 2010 -- (UNAUDITED) (CONTINUED)
Subadvisers are responsible for decisions to buy and sell securities for the
portfolios they manage, selection of broker-dealers and negotiation of
commission rates. The Board also considered the benefits the Subadvisers derive
from their soft dollar arrangements, including arrangements under which brokers
provide brokerage and/or research services to the Subadvisers in return for
allocating brokerage, and noted that the Subadvisers have informed the Board
that they do not presently pay commissions to soft dollar brokers.
Conclusion. After a full and complete discussion, the Board approved the
Advisory Agreements and the Subadvisory Agreements, each for a one-year period
ending August 31, 2011. Based upon their evaluation of all these factors in
their totality, the Board, including the Disinterested Trustees, was satisfied
that the terms of the Advisory Agreements and Subadvisory Agreements were fair
and reasonable and in the best interests of the Funds and the Funds'
shareholders. In arriving at a decision to approve the Advisory Agreements and
Subadvisory Agreements, the Board did not identify any single factor or group
of factors as all-important or controlling, but considered all factors
together. The Disinterested Trustees were also assisted by the advice of
independent counsel in making this determination.
41
SUNAMERICA SPECIALTY SERIES
TRUSTEE AND OFFICER INFORMATION -- (UNAUDITED)
The following table contains basic information regarding the Trustees who
oversee operations of the Funds and other investment companies within the Fund
complex.
NUMBER OF
POSITION TERM OF FUNDS IN
NAME, HELD WITH OFFICE AND FUND COMPLEX
ADDRESS AND SUNAMERICA LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH* COMPLEX TIME SERVED(4) DURING PAST 5 YEARS TRUSTEE(1) HELD BY TRUSTEE(2)
- ----------------------- ---------- -------------- ------------------------------- ------------ ------------------------------
DISINTERESTED TRUSTEES
Jeffrey S. Burum Trustee 2004-present Founder and Chairman of 29 Director, Diversified Pacific
DOB: February 27, 1963 National Community Renaissance Opportunity Fund I, LLC (2008
(non-profit affordable housing to present); Director,
services) (1992 to present); Vandalia Heritage Foundation
Founder, Owner and Partner of (1998 to present)
Colonies Crossroads, Inc.
(real estate) (2000 to
present); Owner and Managing
Member of Diversified Pacific
Development Group, LLC (real
estate) (June 1998 to present).
Dr. Judith L. Craven Trustee 2004-present Retired. 78 Director, Belo Corp. (1992 to
DOB: October 6, 1945 present); Director, Sysco
Corp. (1996 to present);
Director, Luby's, Inc. (1998
to present).
William F. Devin Trustee 2004-present Retired. 78 Director, Boston Options
DOB: December 30, 1938 Exchange (2001 to present).
Samuel M. Eisenstat Chairman 2004-present Attorney, solo practitioner. 39 Director, North European Oil
DOB: March 7, 1940 of the Royal Trust (1996 to present).
Board
Stephen J. Gutman Trustee 2004-present Vice President and Associate 39 None
DOB: May 10, 1943 Broker, Corcoran Group (real
estate) (2003 to present);
President and Member of
Managing Directors, Beau
Brummell Soho, LLC (licensing
of menswear specialty
retailing and other
activities) (1988 to present).
William J. Shea Trustee 2004-present Executive Chairman, Lucid, 39 Chairman of the Board, Royal
DOB: February 9, 1948 Inc. (medical technology and and SunAlliance U.S.A., Inc.
information); Managing (2004 to 2006); Director,
Partner, DLB Capital, LLC Boston Private Financial
(private equity) (2006 to Holdings (2004 to present).
present). Chairman, Demoulas
Supermarkets (1999 to
present); NASDAQ OMX BX (2008
to present).
INTERESTED TRUSTEE
Peter A. Harbeck(3) Trustee 2004-present President, CEO and Director, 87 None
DOB: January 23, 1954 SunAmerica (1995 to present);
Director, SunAmerica Capital
Services, Inc. ("SACS") (1993
to present); Chairman, Advisor
Group, Inc. (2004 to present).
42
SUNAMERICA SPECIALTY SERIES
TRUSTEE AND OFFICER INFORMATION -- (UNAUDITED) (CONTINUED)
NUMBER OF
POSITION TERM OF FUNDS IN
NAME, HELD WITH OFFICE AND FUND COMPLEX
ADDRESS AND SUNAMERICA LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY OTHER DIRECTORSHIPS
DATE OF BIRTH* COMPLEX TIME SERVED(4) DURING PAST 5 YEARS TRUSTEE(1) HELD BY TRUSTEE(2)
- ----------------------- ----------- -------------- ------------------------------------------ ------------ -------------------
OFFICERS
John T. Genoy President 2007-present Chief Financial Officer, SunAmerica N/A N/A
DOB: November 8, 1968 (2002 to present); Senior Vice President,
SunAmerica (2003 to present); Chief
Operating Officer, SunAmerica (2006 to
present).
Donna M. Handel Treasurer 2004-present Senior Vice President, SunAmerica N/A N/A
DOB: June 25, 1966 (2004 to present); Vice President,
SunAmerica (1997 to 2004).
Gregory N. Bressler Secretary 2005-present Senior Vice President and General N/A N/A
DOB: November 17, 1966 and Chief Counsel, SunAmerica (2005 to Present);
Legal Vice President and Director of U.S.
Officer Asset Management Compliance,
Goldman Sachs Asset Management, L.P.
(2004 to 2005).
James Nichols Vice 2006-present Director, President and CEO, SACS N/A N/A
DOB: April 7, 1966 President (2006 to present); Senior Vice President,
SACS (2002 to 2006); Senior Vice
President SunAmerica (2002 to present).
Cynthia A. Gibbons Vice 2004-present Vice President, SunAmerica (2002 to N/A N/A
DOB: December 6, 1967 President present); Chief Compliance Officer,
and Chief SunAmerica (2002-2006).
Compliance
Officer
Gregory R. Kingston Vice 2004-present Vice President, SunAmerica (2001 to N/A N/A
DOB: January 18, 1966 President present)
and
Assistant
Treasurer
Nori L. Gabert Vice 2004-present Vice President and Deputy General N/A N/A
DOB: August 15, 1953 President Counsel, SunAmerica (2005-present);
and Vice President and Associate General
Assistant Counsel, SunAmerica (2002-2005).
Secretary
Matthew J. Hackethal Anti-Money 2006-present Chief Compliance Officer, SunAmerica N/A N/A
DOB: December 31, 1971 Laundering (2006 to present); Vice President, Credit
Compliance Suisse Asset Management (2001 to
Officer 2006); Chief Compliance Officer, Credit
Suisse Alternative Funds (2005 to 2006);
Chief Compliance Officer Credit Suisse
Asset Management Securities, Inc. (2004
to 2005).
- --------
* The business address for each Trustee is the Harborside Financial Center,
3200 Plaza 5, Jersey City, NJ 07311-4992.
(1) The "Fund Complex" means two or more registered investment companies that
hold themselves out to investors as related companies for purposes of
investment services or have a common investment adviser or an investment
adviser that is an affiliated person of the Adviser. The "Fund Complex"
includes the SunAmerica Money Market Funds (2 funds), SunAmerica Equity
Funds (3 funds), SunAmerica Income Funds (5 funds), SunAmerica Focused
Series, Inc. (14 portfolios), Anchor Series Trust, Inc. (9 portfolios),
SunAmerica Senior Floating Rate Fund, Inc. (1 fund), SunAmerica Series
Trust (35 portfolios), VALIC Company I (33 portfolios), VALIC Company II
(15 funds), Seasons Series Trust (21 portfolios), the Trust (3 funds),
SunAmerica Focused Alpha Growth Fund, Inc. (1 fund), and SunAmerica Focused
Alpha Large-Cap Fund, Inc. (1 fund).
(2) Directorships of companies required to report to the SEC under the
Securities Exchange Act of 1934 (i.e. "public companies") or other
investment companies registered under the Investment Company Act of 1940.
(3) Interested Trustee, as defined within the Investment Company Act of 1940,
because he or she is an officer and a director of the Adviser and a
director of the principal underwriter of the Trust.
(4) Trustees serve until their successors are duly elected and qualified,
subject to the Trustee's retirement plan as discussed in Note 10 of the
financial statements. Each officer will hold office for an indefinite term
until the date he or she resigns or retires or until his/her successor is
duly elected and qualifies.
Additional information concerning the Trustees is contained in the Statement of
Additional Information which is available without charge by calling (800)
858-8850.
43
SUNAMERICA SPECIALTY SERIES
SHAREHOLDER TAX INFORMATION -- OCTOBER 31, 2010 -- (UNAUDITED)
Certain tax information regarding SunAmerica Specialty Series is required to be
provided to shareholders based upon each Fund's income and distributions for
the taxable period ended October 31, 2010. The information and distributions
reported herein may differ from the information and distributions taxable to
the shareholders for the calendar year end December 31, 2010. The information
necessary to complete your income tax returns will be included with your Form
1099-DIV to be received under separate cover in early 2011.
During the period ended October 31, 2010, the Funds paid the following
long-term capital gain dividends per share along with the percentage of
ordinary income dividends that qualified for the 70% dividends received
deductions for corporations.
NET LONG- QUALIFYING % FOR THE
TERM 70% DIVIDENDS
CAPITAL GAINS RECEIVED DEDUCTION
------------- --------------------
2015 High Watermark Class A............... $-- -- %
2015 High Watermark Class C............... -- --
2015 High Watermark Class I............... -- --
2020 High Watermark Class A............... -- --
2020 High Watermark Class C............... -- --
2020 High Watermark Class I............... -- --
SunAmerica Alternative Strategies Class A. -- --
SunAmerica Alternative Strategies Class C. -- --
SunAmerica Alternative Strategies Class W. -- --
For the period ended October 31, 2010, none of the dividends paid by the Funds
are subject to a maximum tax rate of 15%, as provided by the Jobs and Growth
Tax Relief Reconciliation Act of 2003.
44
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED)
As required by the Securities and Exchange Commission, the following graphs
compare the performance of a $10,000 investment in the Funds' portfolios to a
similar investment in an index or indices. Please note that "inception," as
used herein, reflects the date on which a specific class of shares commenced
operations. It is important to note that the Funds are professionally managed
mutual funds, while the indices are not available for investment and are
unmanaged. The comparison is shown for illustrative purposes only. The graphs
present the performance of the largest class of that particular Fund. The
performance of the other classes will vary based upon the difference in sales
charges and fees assessed to shareholders of that class.
45
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
2015 HIGH WATERMARK FUND
For the annual period ended October 31, 2010, Class A shares of the 2015 High
Watermark Fund returned 8.46% (before maximum sales charge), underperforming
the Fund's benchmark, the Dow Jones Target Maturity 2015 Index,* which returned
13.32% for the same period.
Over the annual period, the Federal Reserve and U.S. Treasury continued to take
a series of actions aimed at stimulating an economy that is emerging from its
worst recession since the second World War, and which continues to exhibit
persistently high unemployment.
During most of the second half of the reporting period, U.S. Treasury markets
rallied strongly in response to a global flight to safety on the part of
investors. 10-year Treasuries posted a 10.08% total return over the annual
period, as measured by the Citigroup 10-Year Treasury Benchmark.+
Equity markets posted strong gains for the year ended October 31, 2010, with a
total return to the S&P 500 Index** of 16.52% for the annual period. This
strong annual performance was accompanied by high volatility; the S&P 500 Index
experienced a steep decline during the late spring and early summer, and
subsequent recovery in September and October 2010.
The proprietary methodology used by Trajectory Asset Management, LLC
("Trajectory"), the Fund's subadviser, continued to result in a very low level
of equity exposure for the Fund during the annual period. Equity exposure was
gained through the use of S&P 500 Index futures. This minimal equity exposure
benefited the Fund during the declining equity markets in the middle of the
annual period. As the equity markets rallied in the earlier and later portion
of the period, however, this minimal equity exposure detracted from Fund
performance. A continued low interest rate environment precluded the Fund's
methodology from increasing equity exposure during the annual period.
As a result of the Fund's considerable exposure to U.S. government securities,
its performance was more sensitive to performance of the U.S. Treasury market
and was only minimally affected by performance of the equity market. In
particular, the Fund set a new Protected High Watermark Value as its government
securities-heavy portfolio benefited from the U.S. Treasury rally throughout
the second half of the annual period.
The performance of the Fund's benchmark was influenced by performance of both
the equity and fixed income markets. Thus, despite its significant exposure to
U.S. government securities, the Fund's minimal equity exposure led the Fund to
underperform its benchmark as equities outperformed fixed income during the
annual period.
- --------
Past performance is no guarantee of future results.
* The Dow Jones Target Maturity 2015 Index is part of a series of balanced
indexes with risk profiles that become more conservative over time. The index
allocates among stocks, bonds and cash on a monthly basis to hit predefined
risk levels. The U.S. Target index series consists of six Dow Jones equity
indexes, three/AMBAC bond indexes and the one-to-three months T-bill index. You
may not invest directly in the Dow Jones Target Maturity 2015 Index and, unlike
the Fund, benchmarks do not incur fees and expenses.
+ The Citigroup 10-Year Treasury Benchmark is an unmanaged index that computes
returns for the current Treasury Notes with a maturity of 10 years or less.
Treasury Notes are fixed income securities whose interest and principal
payments are backed by the full faith and credit of the U.S. government.
Indices are not managed and an investor cannot invest directly into an index.
** The S&P 500 Index is Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices. Indices are not
managed and an investor cannot invest directly into an index.
46
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
Since inception, $10,000 invested in 2015 High Watermark Fund Class A shares
would have increased to $12,588. The same amount invested in securities
mirroring the performance of the Dow Jones Target Maturity 2015 Index would be
valued at $14,114.
[CHART]
2015 High Watermark Dow Jones Target
Fund Class A/#/ Maturity 2015 Index
------------------- --------------------
6/04 $ 9,425 $10,000.00
6/04 9,453 10,057.01
7/04 9,293 9,855.90
8/04 9,482 9,941.39
9/04 9,585 10,101.15
10/04 9,736 10,243.60
11/04 9,877 10,511.74
12/04 10,236 10,771.10
1/05 10,121 10,624.25
2/05 10,179 10,727.13
3/05 9,950 10,601.13
4/05 9,978 10,487.83
5/05 10,350 10,800.05
6/05 10,407 10,927.69
7/05 10,522 11,170.87
8/05 10,608 11,190.32
9/05 10,503 11,185.30
10/05 10,198 11,005.12
11/05 10,503 11,268.71
12/05 10,583 11,343.46
1/06 10,748 11,591.73
2/06 10,748 11,601.25
3/06 10,700 11,666.84
4/06 10,739 11,680.20
5/06 10,436 11,481.72
6/06 10,417 11,504.85
7/06 10,544 11,520.21
8/06 10,875 11,741.37
9/06 11,139 11,883.34
10/06 11,382 12,115.47
11/06 11,646 12,334.62
12/06 11,619 12,318.03
1/07 11,705 12,439.93
2/07 11,652 12,513.97
3/07 11,673 12,562.20
4/07 12,005 12,779.24
5/07 12,155 12,967.64
6/07 11,887 12,840.12
7/07 11,770 12,647.53
8/07 11,952 12,784.66
9/07 12,284 13,003.01
10/07 12,552 13,181.16
11/07 12,316 12,997.85
12/07 12,243 12,974.81
1/08 11,891 12,744.57
2/08 11,774 12,584.43
3/08 11,809 12,543.45
4/08 11,751 12,849.10
5/08 11,645 12,984.65
6/08 11,317 12,470.40
7/08 11,282 12,447.91
8/08 11,446 12,651.33
9/08 11,259 11,945.92
10/08 10,825 10,761.32
11/08 11,247 10,646.70
12/08 11,606 11,025.38
1/09 11,464 10,649.98
2/09 11,416 10,196.47
3/09 11,761 10,582.38
4/09 11,618 11,187.61
5/09 11,475 11,450.33
6/09 11,392 11,528.21
7/09 11,404 12,020.16
8/09 11,499 12,291.41
9/09 11,571 12,597.69
10/09 11,606 12,455.54
11/09 11,820 12,773.01
12/09 11,501 12,871.70
1/10 11,682 12,838.61
2/10 11,742 13,043.08
3/10 11,622 13,338.83
4/10 11,730 13,581.20
5/10 11,911 13,285.84
6/10 12,117 13,149.38
7/10 12,274 13,555.54
8/10 12,455 13,451.77
9/10 12,516 13,912.76
10/10 12,588 14,114.05
Class A Class C Class I
------------------ ------------------ ------------------
Average Average Average
2015 High Annual Cumulative Annual Cumulative Annual Cumulative
Watermark Fund# Return Return+ Return Return+ Return Return+
- ----------------- ------- ---------- ------- ---------- ------- ----------
1 Year Return 2.18% 8.46% 6.75% 7.75% 8.95% 8.95%
- --------------------------------------------------------------------------
5 Year Return 3.08% 23.44% 3.66% 19.68% 4.81% 26.49%
- --------------------------------------------------------------------------
10 Year Return N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------
Since Inception* 3.69% 33.56% 4.02% 28.48% 4.16% 26.13%
- --------------------------------------------------------------------------
+ Cumulative returns do not include sales load. If sales load had been
included, the return would be lower.
* Inception Date - Class A: 06/25/04; Class C: 06/25/04; Class I: 02/18/05
# For the purposes of the graph, it has been assumed that the maximum sales
charge of 5.75% of offering price was deducted from the initial $10,000
investment in the Fund. For purposes of the table, it has been assumed that
the maximum sales charge with respect to the Class A shares was deducted from
the initial investment in the Fund and that the CDSC with respect to the
Class C shares has been deducted as applicable.
For the 12 month period ending October 31, 2010, the 2015 High Watermark
Class A returned 2.18%, compared to 13.32% for the Dow Jones Target Maturity
2015 Index. (The performance data and graph do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares.)
- --------
Performance data quoted represents past performance and is no guarantee of
future results. Maximum Sales Charge: Class A: 5.75%, Class C: 1.00% CDSC. The
fund's daily net asset values are not guaranteed and shares are not insured by
the FDIC, the Federal Reserve Board or any other agency. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be higher or lower than the original cost. Current
performance may be higher or lower than that shown. Performance as of the most
recent month end is available at www.sunamericafunds.com.
47
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
2020 HIGH WATERMARK FUND
For the annual period ended October 31, 2010, Class A shares of the 2020 High
Watermark Fund returned 10.90% (before maximum sales charge), underperforming
the Fund's benchmark, the Dow Jones Target Maturity 2020 Index*, which returned
15.20% for the same period.
Over the annual period, the Federal Reserve and U.S. Treasury continued to take
a series of actions aimed at stimulating an economy that is emerging from its
worst recession since the second World War, and which continues to exhibit
persistently high unemployment.
For most of the second half of the reporting period, U.S. Treasury markets
rallied strongly in response to a global flight to safety on the part of
investors. 10-year Treasuries posted a 10.08% total return over the annual
period, as measured by the Citigroup 10-Year Treasury Benchmark.+
Equity markets posted strong gains for the annual period ended October 31,
2010, with the S&P 500 Index** returning 16.52%. This strong annual performance
was accompanied by high volatility; the S&P 500 experienced a steep decline
during the late spring and early summer, and subsequent recovery in September
and October 2010.
The proprietary methodology used by Trajectory Asset Management, LLC
("Trajectory"), the Fund's subadviser, continued to result in a very low level
of equity exposure for the Fund during the annual period. Equity exposure was
gained through the use of S&P 500 Index futures. This minimal equity exposure
benefited the Fund during the declining equity markets in the middle of the
annual period. As the equity markets rallied in the earlier and later portion
of the period, however, this minimal equity exposure detracted from Fund
performance. A continued low interest rate environment precluded the Fund's
methodology from increasing equity exposure during the annual period.
As a result of the Fund's considerable exposure to U.S. government securities,
the Fund's performance was more sensitive to performance of the U.S. Treasury
market and was only minimally affected by performance of the equity market.
The benchmark's performance was influenced by performance of both equity and
fixed income markets. Thus, despite its significant exposure to U.S. government
securities, the Fund's minimal equity exposure led the Fund to underperform its
benchmark as equities outperformed fixed income during the annual period.
- --------
Past performance is no guarantee of future results.
* The Dow Jones Target Maturity 2020 Index is part of a series of balanced
indexes with risk profiles that become more conservative over time. The index
allocates among stocks, bonds and cash on a monthly basis to hit predefined
risk levels. The U.S. Target index series consists of six Dow Jones equity
indexes, three/AMBAC bond indexes and the one-to-three months T-bill index. You
may not invest directly in the Dow Jones Target Maturity 2020 Index and, unlike
the Fund, benchmarks do not incur fees and expenses.
+ The Citigroup 10-Year Treasury Benchmark is an unmanaged index that computes
returns for the current Treasury Notes with a maturity of 10 years or less.
Treasury Notes are fixed income securities whose interest and principal
payments are backed by the full faith and credit of the U.S. government.
Indices are not managed and an investor cannot invest directly into an index.
** The S&P 500 Index is Standard & Poor's 500 Composite Stock Price Index, a
widely recognized, unmanaged index of common stock prices. Indices are not
managed and an investor cannot invest directly into an index.
48
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
Since inception, $10,000 invested in 2020 High Watermark Fund Class A shares
would be valued at $11,100. The same amount invested in securities mirroring
the performance of the Dow Jones Target Maturity 2020 Index would be valued at
$14,015.
[CHART]
2020 High Watermark Dow Jones Target
Fund Class A/#/ Maturity 2020 Index
------------------- --------------------
6/04 $ 9,425 $10,000.00
6/04 9,444 10,063.76
7/04 9,246 9,799.36
8/04 9,425 9,863.40
9/04 9,529 10,049.22
10/04 9,698 10,203.40
11/04 9,896 10,544.17
12/04 10,274 10,838.41
1/05 10,217 10,643.50
2/05 10,283 10,782.18
3/05 10,055 10,641.54
4/05 10,084 10,471.26
5/05 10,521 10,828.44
6/05 10,607 10,971.78
7/05 10,711 11,294.66
8/05 10,806 11,285.58
9/05 10,645 11,307.06
10/05 10,321 11,101.99
11/05 10,654 11,427.72
12/05 10,802 11,494.16
1/06 10,938 11,833.45
2/06 10,986 11,831.86
3/06 10,821 11,966.53
4/06 10,772 11,993.14
5/06 10,442 11,717.84
6/06 10,471 11,741.20
7/06 10,607 11,706.04
8/06 10,977 11,947.29
9/06 11,317 12,105.98
10/06 11,638 12,399.63
11/06 11,949 12,654.94
12/06 11,893 12,661.20
1/07 11,957 12,838.57
2/07 11,914 12,864.18
3/07 11,904 12,938.32
4/07 12,356 13,223.97
5/07 12,549 13,503.83
6/07 12,226 13,343.70
7/07 12,022 13,052.50
8/07 12,248 13,193.09
9/07 12,646 13,458.11
10/07 12,905 13,659.60
11/07 12,700 13,341.79
12/07 12,524 13,302.97
1/08 11,950 12,936.50
2/08 11,676 12,719.82
3/08 11,616 12,667.55
4/08 11,831 13,060.83
5/08 11,831 13,264.16
6/08 11,174 12,603.77
7/08 11,031 12,579.54
8/08 11,318 12,808.76
9/08 10,578 11,969.19
10/08 9,240 10,534.38
11/08 9,778 10,245.23
12/08 10,435 10,601.23
1/09 9,826 10,135.55
2/09 9,778 9,576.05
3/09 10,240 10,030.66
4/09 9,851 10,768.32
5/09 9,631 11,066.40
6/09 9,680 11,134.47
7/09 9,717 11,702.30
8/09 9,863 12,014.33
9/09 10,058 12,372.71
10/09 10,009 12,165.17
11/09 10,191 12,528.54
12/09 9,737 12,720.61
1/10 9,935 12,612.98
2/10 9,972 12,870.63
3/10 9,811 13,273.05
4/10 9,985 13,549.70
5/10 10,270 13,116.01
6/10 10,641 12,858.95
7/10 10,728 13,347.68
8/10 11,199 13,147.37
9/10 11,174 13,757.90
10/10 11,100 14,014.64
Class A Class C Class I
------------------ ------------------ ------------------
Average Average Average
2020 High Annual Cumulative Annual Cumulative Annual Cumulative
Watermark Fund# Return Return+ Return Return+ Return Return+
- ----------------- ------- ---------- ------- ---------- ------- ----------
1 Year Return 4.54% 10.90% 9.14% 10.14% 11.34% 11.34%
- --------------------------------------------------------------------------
5 Year Return 0.27% 7.54% 0.80% 4.08% 1.91% 9.95%
- --------------------------------------------------------------------------
10 Year Return N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------
Since Inception* 1.66% 17.77% 1.98% 13.24% 1.69% 10.05%
- --------------------------------------------------------------------------
+ Cumulative returns do not include sales load. If sales load had been
included, the return would be lower.
* Inception Date - Class A: 06/25/04; Class C: 06/25/04; Class I: 02/18/05
# For the purposes of the graph, it has been assumed that the maximum sales
charge of 5.75% of offering price was deducted from the initial $10,000
investment in the Fund. For purposes of the table, it has been assumed that
the maximum sales charge with respect to the Class A shares was deducted from
the initial investment in the Fund and that the CDSC with respect to the
Class C shares has been deducted as applicable.
For the 12 month period ending October 31, 2010, the 2020 High Watermark
Class A returned 4.54%, compared to 15.20% for the Dow Jones Target Maturity
2020 Index. (The performance data and graph do not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares.)
- --------
Performance data quoted represents past performance and is no guarantee of
future results. Maximum Sales Charge: Class A: 5.75%, Class C: 1.00% CDSC. The
fund's daily net asset values are not guaranteed and shares are not insured by
the FDIC, the Federal Reserve Board or any other agency. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be higher or lower than the original cost. Current
performance may be higher or lower than that shown. Performance as of the most
recent month end is available at www.sunamericafunds.com.
49
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
SUNAMERICA ALTERNATIVE STRATEGIES FUND
For the year ended October 31, 2010, Class A shares of the Alternative
Strategies Fund returned 3.21% (before maximum sales charge), underperforming a
blended benchmark composed of 50% S&P GSCI Light Energy Total Return (TR) Index
and 50% Hedge Fund Research (HFRX) Equal Weighted Strategies Index (the "50/50
benchmark"). This blended benchmark returned 8.93% for the annual period. The
Fund also underperformed the S&P 500 Index, a broad-based equity market index,
which returned 16.52% for the same period.*
With the introduction of the managed futures strategy during the period, the
Fund's blended benchmark was changed to more accurately represent the Fund's
underlying investments. The new blended benchmark is composed of approximately
33% of each of the S&P GSCI Light Energy TR Index, HFRX Equal Weighted
Strategies Index and S&P Diversified Trends Indicator (DTI).+ This new blended
benchmark returned 3.65% for the annual period.
The Fund provides investors with exposure to commodities, hedge funds and
managed futures. In pursuing these strategies, the Fund makes extensive use of
derivatives, including commodity linked-notes, hedge fund-linked notes, futures
and options. With respect to the Fund's use of futures, the Fund may invest in
futures as part of its strategy to gain commodity or hedge fund exposure, and
also employs futures extensively as part of its managed futures strategy. In
connection with the Fund's managed futures strategy, the Fund may take long or
short positions in futures. A long position will benefit from an increase in
price of the underlying managed futures instruments, while a short position
will benefit from a decrease in price of the underlying futures instruments.
During the annual period, returns in the commodities market as a whole were
fairly volatile and returns among the various commodity sectors were mixed.
Commodity prices were under pressure from October 2009 to early June 2010 as
the economy grew slowly and the Greek credit crisis surfaced. The S&P GSCI
Light Energy TR Index fell 10.42% from October 30, 2009 to June 7, 2010. With
U.S. economic numbers stabilizing, Chinese demand for commodities strong, and
the Greek crisis abating, this index increased 24.75% from its low on June 7,
2010 to October 31, 2010; and for the entire annual period, it returned 11.75%.
Within commodities there was a disparity of returns. From the low in June,
energy commodities, as measured by the S&P GSCI Energy TR Index, rose 6.12%;
but non-energy commodities, as measured by the S&P GSCI Non-Energy TR Index,
surged 36.24%. In particular, precious metals benefited from the Greek crisis
and potential contagion effects. In addition, agricultural products were strong
in response to severe weather conditions in Russia and elsewhere, reducing
supply in what had already been a tightening environment for many grains. The
Fund's overweight to energy commodities relative to the S&P GSCI Light Energy
TR Index, obtained through commodity linked notes, commodity futures, and
options on futures, detracted from the Fund's relative performance against both
blended benchmarks.
Hedge fund returns as measured by the HFRX Equal Weighted Strategies Index had
steady appreciation through early spring 2010, but succumbed to the same
sovereign debt issues that affected equities and commodities. By July 2010, the
broad hedge fund index resumed its upward trajectory. The Fund obtained hedge
fund exposure utilizing both traditional securities and derivatives, including
a hedge fund-linked note and futures. The Fund's hedge fund exposure lagged
both the HFRX Equal Weighted Strategies Index and the 50/50 benchmark, but
contributed positively versus the new blended benchmark which incorporated
managed futures. Of interest is that the HFRX Equal Weighted Strategies Index
began the annual period at its low for the year and ended the period at its
high. This index returned 5.49% for the Fund's annual period.
On July 7, 2010, the Fund added its managed futures strategy, a proprietary
strategy designed to identify trends in four asset classes: commodities,
currencies, fixed income and equity index futures. Implementation is through
the futures markets across these four asset classes. With the volatility of the
sovereign debt crisis creating residual uncertainty, few lasting trends were in
place during the July/August 2010 period. U.S. economic readings appeared to
stabilize in the final two months of the Fund's fiscal year. From July 7th to
October 31st, the performance of managed futures, as measured by the S&P DTI,
increased 1.03%. The performance of the Fund's managed futures exposure,
however, lagged the new blended benchmark since the managed futures strategy
was added to the Fund.
50
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
Long futures positions in the U.S. dollar and a short futures position against
the S&P 500 Index detracted from performance in September. Conversely, a long
futures position in wheat and a short futures position in natural gas
contributed positively in October.
The Fund's holdings in high quality, short-term fixed income securities also
contributed to the Fund's overall performance. The Barclays Capital U.S. 1-3
Year Government Bond Index,** which is representative of the Fund's fixed
income positions, delivered a positive return of 2.64% for the twelve months
ended October 31, 2010. The Fund's fixed income holdings helped augment
returns, particularly during the sovereign debt crisis and the associated
flight to quality.
The Fund's underperformance versus the S&P 500 is due to the lower correlation
between the Fund's investments and the broad equity markets. That is, the Fund
and broad-based equity markets perform differently.
Overall, the Fund's underweight to commodities and allocation to the S&P GSCI
Index* versus the S&P GSCI Light Energy TR Index, which is a benchmark
component, contributed to the Fund's underperformance versus both blended
benchmarks. In addition, the hedge fund exposure gained through hedge
fund-linked notes and the manager's hedge fund replication strategy also
contributed to the Fund's underperformance versus the 50/50 benchmark, but
contributed positively versus the new blended benchmark. Finally, the
implementation of the managed futures strategy in July, which encompassed both
long and short exposures, also detracted from performance versus the new
blended benchmark.
- --------
Past performance is no guarantee of future results. Diversification does not
guarantee a profit or protect against a loss.
* The S&P GOLDMAN SACHS COMMODITY INDEX (GSCI) LIGHT ENERGY TOTAL RETURN (TR)
INDEX is a sub-index of the S&P GOLDMAN SACHS COMMODITY INDEX (GSCI) and tracks
the performance of commodity futures using the same conventions as the S&P
GSCI. The S&P GSCI Light Energy TR Index uses 1/4 of the S&P GSCI contract
production weights for the energy components. The S&P GSCI is a composite index
of commodity sector returns representing an unleveraged, long-only investment
in commodity futures that is broadly diversified across the spectrum of
commodities including, but not limited to, Agriculture, ENERGY, NON-ENERGY,
Industrial Metals, Precious Metals, Softs, and Livestock. The returns are
calculated on a fully collateralized basis with full reinvestment. The
combination of these attributes provides investors with a representative and
realistic picture of realizable returns attainable in the commodities markets.
Individual components qualify for inclusion in the S&P GSCI on the basis of
liquidity and are weighted by their respective world production quantities. The
principles behind the construction of the index are public and designed to
allow easy and cost-efficient investment implementation. The HEDGE FUND
RESEARCH EQUAL WEIGHTED STRATEGIES INDEX is calculated by equally weighting
these eight hedge strategies with fixed weights for each strategy; convertible
arbitrage, distressed securities, equity hedge, equity market neutral, event
driven, macro, merger arbitrage, and relative value arbitrage. The S&P 500
INDEX is Standard & Poor's 500 Composite Stock Price Index, a
widely-recognized, unmanaged index of common stock prices. Indices are not
managed and an investor cannot invest directly in an index.
+ The S&P'S DIVERSIFIED TRENDS INDICATOR ("S&P DTI") is a diversified composite
of commodity and financial futures designed to provide exposure to major global
market trends. The S&P DTI is a composite of 24 highly liquid futures grouped
into 14 sectors, evenly weighted between financials and physical commodities.
Indices are not managed and an investor cannot invest directly in an index.
** The BARCLAYS CAPITAL U.S. 1-3 YEAR GOVERNMENT BOND INDEX consists of
securities in the U.S. Government Index with a maturity from 1 up to (but not
including) 3 years. Securities issued by the U.S. Government (i.e., securities
in the Treasury and Agency Indices). Inclusions: Public obligations of the U.S.
Treasury with a remaining maturity of one year or more. Publicly issued debt of
U.S. Government agencies, quasi-federal corporations, and corporate or foreign
debt guaranteed by the U.S. Government. Indices are not managed and an investor
cannot invest directly in an index.
51
SUNAMERICA SPECIALTY SERIES
COMPARISONS: FUNDS VS. INDICES -- (UNAUDITED) (CONTINUED)
Since inception, $10,000 invested in SunAmerica Alternative Strategies Fund
Class A shares would be valued at $9,942. The same amount invested in
securities mirroring the performance of the (i) Blended S&P GSCI Light Energy
TR Index (50%) and Hedge Fund Research Equal Weighted Strategies Index (50%),
(ii) Blended S&P GSCI Light Energy TR Index (33%), Hedge Fund Research Equal
Weighted Strategies Index (33%) and S&P Diversified Trends Indicator (33%) and
the (iii) S&P 500 Index would be valued at $10,844, $10,097 and $12,827,
respectively.
[CHART]
Blended S&P GSCI
Blended S&P GSCI Light Energy
Light Energy TR Index (33%)
TR Index (50%) and Hedge Fund Research
SunAmerica Hedge Fund Research Equal Weighted
Alternative Equal Weighted Strategies Index (33%)
Strategies Strategies S&P 500 and S&P Diversified
Fund Class A/#/ Index (50%) Index Trends Indicator (33%)
-------------- ------------------- --------- ---------------------
11/08 $9,425 $10,000.00 $10,000.00 $10,000.00
11/08 9,133 9,412.81 9,305.95 9,632.33
12/08 8,935 9,044.67 9,404.97 9,285.71
1/09 8,586 8,839.77 8,612.26 9,137.94
2/09 8,294 8,615.29 7,695.23 8,990.99
3/09 8,558 8,788.07 8,369.29 8,981.73
4/09 8,718 8,864.50 9,170.31 8,943.02
5/09 9,293 9,589.14 9,683.21 9,531.23
6/09 9,284 9,470.38 9,702.38 9,398.26
7/09 9,406 9,625.94 10,436.27 9,486.95
8/09 9,425 9,646.06 10,813.02 9,517.77
9/09 9,510 9,712.96 11,216.56 9,619.74
10/09 9,632 9,955.50 11,008.19 9,741.64
11/09 9,802 10,188.03 11,668.46 9,950.05
12/09 9,771 10,288.00 11,893.90 9,929.24
1/10 9,544 9,930.85 11,466.07 9,573.82
2/10 9,705 10,155.59 11,821.29 9,731.20
3/10 9,828 10,222.12 12,534.59 9,775.93
4/10 9,942 10,374.84 12,732.51 9,828.91
5/10 9,488 9,761.64 11,715.82 9,426.24
6/10 9,478 9,719.18 11,102.50 9,402.40
7/10 9,601 10,160.26 11,880.34 9,550.48
8/10 9,478 10,042.79 11,344.06 9,431.16
9/10 9,733 10,524.96 12,356.40 9,804.56
10/10 9,942 10,844.10 12,826.56 10,097.40
Class A Class C Class W
------------------ ------------------ ------------------
Average Average Average
SunAmerica Alternative Annual Cumulative Annual Cumulative Annual Cumulative
Strategies Fund# Return Return+ Return Return+ Return Return+
- ---------------------- ------- ---------- ------- ---------- ------- ----------
1 Year Return -2.69% 3.21% 1.46% 2.46% 3.29% 3.29%
- --------------------------------------------------------------------------------
5 Year Return N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------
10 Year Return N/A N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------
Since Inception* -0.29% 5.48% 2.04% 4.10% 2.91% 5.88%
- --------------------------------------------------------------------------------
+ Cumulative returns do not include sales load. If sales load had been
included, the return would be lower.
* Inception Date - Class A: 11/04/08; Class C: 11/04/08; Class W: 11/04/08
# For the purposes of the graph, it has been assumed that the maximum sales
charge of 5.75% of offering price was deducted from the initial $10,000
investment in the Fund. For purposes of the table, it has been assumed that
the maximum sales charge with respect to the Class A shares was deducted from
the initial investment in the Fund and that the CDSC with respect to the
Class C shares has been deducted as applicable.
For the 12 month period ending October 31, 2010, the SunAmerica Alternative
Strategies Fund Class A returned -2.69%, compared to 8.93% for the Blended S&P
GSCI Light Energy TR Index (50%) and Hedge Fund Research Equal Weighted
Strategies Index (50%) and 3.65% for the Blended S&P GSCI Light Energy TR Index
(33%), Hedge Fund Research Equal Weighted Strategies Index (33%) and S&P
Diversified Trends Indicator (33%). (The performance data and graph do not
reflect the deduction of taxes that a shareholder would pay on fund
distributions or the redemption of fund shares.)
The Fund has added the S&P Diversified Trends Indicator to the blended
benchmark used in the Line Graph for the prior fiscal year and therefore, the
new blended benchmark is composed of approximately 33% weighting in each of S&P
GSCI Light Energy TR Index, Hedge Fund Research Equal Weighted Strategies Index
and S&P Diversified Trends Indicator. Management believes that, in light of the
addition to a managed futures strategy to the Fund's principal investment
strategies, this change in the blended benchmark is better representative of
the sectors and instruments in which the Fund may invest and therefore will
provide a better comparison of performance.
- --------
Performance data quoted represents past performance and is no guarantee of
future results. Maximum Sales Charge: Class A: 5.75%, Class C: 1.00% CDSC. The
fund's daily net asset values are not guaranteed and shares are not insured by
the FDIC, the Federal Reserve Board or any other agency. The investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be higher or lower than the original cost. Current
performance may be higher or lower than that shown. Performance as of the most
recent month end is available at www.sunamericafunds.com.
52
[LOGO] SunAmerica
Mutual Funds
HARBORSIDE FINANCIAL CENTER
3200 PLAZA 5
JERSEY CITY, NJ 07311-4992
DIRECTORS/TRUSTEES OTHER INFORMATION This report is submitted solely for the
Jeffrey S. Burum The most recent annual and/or quar- general information of shareholders of
Dr. Judith L. Craven terly report of Prudential Financial, the Funds. Distribution of this report
William F. Devin Inc. and Prudential Global Funding, to persons other than shareholders of
Samuel M. Eisenstat Inc. is available without charge by call- the Funds is authorized only in con-
Stephen J. Gutman ing (800) 858-8850. nection with a currently effective pro-
Peter A. Harbeck spectus, setting forth details of the
William J. Shea VOTING PROXIES ON FUND PORTFOLIO Funds, which must precede or accom-
SECURITIES pany this report.
OFFICERS A description of the policies and proce-
John T. Genoy, President and Chief dures that the Trust uses to determine DELIVERY OF SHAREHOLDER DOCUMENTS
Executive Officer how to vote proxies related to securities The Funds have adopted a policy that
Donna M. Handel, Treasurer held in a Fund's portfolio, which is allows them to send only one copy of a
James Nichols, Vice President available in the Trust's Statement of Fund's prospectus, proxy material,
Gregory N. Bressler, Chief Legal Additional Information, may be ob- annual report and semi-annual report
Officer and Secretary tained without charge upon request, by (the "shareholder documents") to
Nori L. Gabert, Vice President and calling (800) 858-8850. The in- shareholders with multiple accounts
Assistant Secretary formation is also available from the residing at the same "household." This
Cynthia A. Gibbons, Vice President and EDGAR database on the U.S. Secu- practice is called householding and
Chief Compliance Officer rities and Exchange Commission's reduces Fund expenses, which benefits
Gregory R. Kingston, Vice President website at http://www.sec.gov. you and other shareholders. Unless the
and Assistant Treasurer Funds receive instructions to the con-
Kathleen Fuentes, Assistant Secretary PROXY VOTING RECORD ON FUND trary, you will only receive one copy of
John E. McLean, Assistant Secretary PORTFOLIO SECURITIES the shareholder documents. The Funds
Shawn Parry, Assistant Treasurer Information regarding how the Trust will continue to household the share-
Matthew J. Hackethal, Anti-Money voted proxies related to securities held holder documents indefinitely, until we
Laundering Compliance Officer in the Funds during the most recent are instructed otherwise. If you do not
twelve month period ended June 30 is wish to participate in householding
INVESTMENT ADVISER available, once filed with the U.S. please contact Shareholder Services at
SunAmerica Asset Management Corp. Securities and Exchange Commission, (800) 858-8850 ext. 6010 or send a
Harborside Financial Center without charge, upon request, by call- written request with your name, the
3200 Plaza 5 ing (800) 858-8850 or on the U.S. name of your fund(s) and your account
Jersey City, NJ 07311-4992 Securities and Exchange Commission number(s) to SunAmerica Mutual
website at http://www.sec.gov. Funds c/o BFDS, P.O. Box 219186,
DISTRIBUTOR Kansas City MO, 64121-9186. We
SunAmerica Capital Services, Inc. DISCLOSURE OF QUARTERLY PORTFOLIO will resume individual mailings for
Harborside Financial Center HOLDINGS your account within thirty (30) days of
3200 Plaza 5 The Trust is required to file its com- receipt of your request.
Jersey City, NJ 07311-4992 plete schedule of portfolio holdings
with the U.S. Securities and Exchange
SHAREHOLDER SERVICING AGENT Commission for its first and third fiscal
SunAmerica Fund Services, Inc. quarters on Form N-Q. The Trust's
Harborside Financial Center Forms N-Q are available on the U.S.
3200 Plaza 5 Securities and Exchange Commission
Jersey City, NJ 07311-4992 website at www.sec.gov. You can also
review and obtain copies of the Forms
CUSTODIAN AND TRANSFER AGENT N-Q at the U.S. Securities and Ex-
State Street Bank and Trust Company change Commission Public Reference
P.O. Box 5607 Room in Washington DC (informa
Boston, MA 02110 tion on the operation of the Public
Reference Room may be obtained by
calling 1-800-SEC-0330).
53
[GRAPHIC]
GO PAPERLESS!!
DID YOU KNOW THAT YOU HAVE THE OPTION TO
RECEIVE YOUR SHAREHOLDER REPORTS ONLINE?
By choosing this convenient service, you will no longer receive paper copies of
Fund documents such as annual reports, semi-annual reports, prospectuses and
proxy statements in the mail. Instead, you are provided with quick and easy
access to this information via the Internet.
Why Choose Electronic Delivery?
IT'S QUICK -- Fund documents will be received faster than via traditional mail.
IT'S CONVENIENT -- Elimination of bulky documents from personal files.
IT'S COST EFFECTIVE -- Reduction of your Fund's printing and mailing costs.
TO SIGN UP FOR ELECTRONIC DELIVERY, FOLLOW
THESE SIMPLE STEPS:
1 GO TO
WWW.SUNAMERICAFUNDS.COM
2
CLICK ON THE LINK TO "GO PAPERLESS!!"
The email address you provide will be kept strictly confidential. Once your
enrollment has been processed, you will begin receiving email notifications
when anything you receive electronically is available online.
You can return to www.sunamericafunds.com at any time to change your email
address, edit your preferences or to cancel this service if you choose to
resume physical delivery of your Fund documents.
Please note - this option is only available to accounts opened through the
Funds.
[LOGO]
FOR INFORMATION ON RECEIVING THIS REPORT ONLINE, SEE INSIDE BACK COVER.
Distributed by:
SunAmerica Capital Services, Inc.
Investors should carefully consider a Fund's investment objectives, risks,
charges and expenses before investing. The prospectus, containing this and
other important information, can be obtained from your financial adviser, the
SunAmerica Sales Desk at 800-858-8850, ext. 6003, or at
www.sunamericafunds.com. Read the prospectus carefully before investing.
HWANN-10/10
Item 2. Code of Ethics
SunAmerica Specialty Series ("the registrant") has adopted a Code of
Ethics applicable to its Principal Executive and Principal Accounting
Officers pursuant to Section 406 of the Sarbanes-Oxley Act of 2002.
During the fiscal year ended 2010, there were no reportable
amendments, waivers or implicit waivers to a provision of the code of
ethics that applies to the registrant's Principal Executive and
Principal Accounting Officers.
Item 3. Audit Committee Financial Expert.
The registrant's Board of Trustees has determined that William J.
Shea, the Chairman of the registrant's Audit Committee, qualifies as
an audit committee financial expert, as defined in the instructions to
Item 3(b) of Form N-CSR. Mr. Shea is considered to be "independent"
for purposes of Item 3(a)(2) of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a)--(d) Aggregate fees billed to the registrant for the last two
fiscal years for professional services rendered by the registrant's
principal accountants were as follows:
2009 2010
(a) Audit Fees............................. $86,400 $86,765
(b) Audit-Related Fees..................... $ 0 $ 0
(c) Tax Fees............................... $ 0 $ 0
(d) All Other Fees......................... $ 0 $ 0
Audit Fees include amounts related to the audit of the registrant's
annual financial statements and services normally provided by the
principal accountant in connection with statutory and regulatory
filings.
Aggregate fees billed to the investment adviser and Adviser Affiliates
(as defined below in Item 4(e)) that are required to be pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X for
the last two fiscal years for services rendered by the registrant's
principal accountant were as follows:
2009 2010
(b) Audit-Related Fees.................... $ 0 $ 0
(c) Tax Fees.............................. $ 0 $ 0
(d) All Other Fees........................ $ 0 $ 0
(e) (1) The registrant's audit committee pre-approves all audit services
provided by the registrant's principal accountant for the registrant
and all non-audit services provided by the registrant's principal
accountant for the registrant, its investment adviser and any entity
controlling, controlled by, or under common control with the
investment adviser ("Adviser Affiliates") that provides ongoing
services to the registrant, if the engagement by the investment
adviser or Adviser Affiliate relates directly to the operations and
financial reporting of the registrant. The audit committee has not
presently established any pre-approval policies and procedures that
permit the pre-approval of the above services other than by the full
audit committee. Certain de minimis exceptions are allowed for
non-audit services in accordance with Rule 2-01(c)(7)(i)(C) of
Regulation S-X as set forth in the registrant's audit committee
charter.
(2) No services included in (b)-(d) above in connection with fees
billed to the registrant or the investment adviser or Adviser
Affiliates were approved pursuant to paragraph (c)(7)(i)(C) of Rule
2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate fees billed for the most recent fiscal year and the
preceding fiscal year by the registrant's principal accountant for
non-audit services rendered to the registrant, its investment adviser,
and Adviser Affiliates that provide ongoing services to the registrant
for 2010 and 2009 were $91,425 and $11,500, respectively.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
Included in Item 1 to the Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders
may recommend nominees to the registrant's Board of Trustees that were
implemented after the registrant last provided disclosure in response
to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15)) of Schedule 14A (17 CFR
240.14a - 101), or this Item 10.
Item 11. Controls and Procedures.
(a) An evaluation was performed within 90 days of the filing of this
report, under the supervision and with the participation of the
registrant's management, including the President and Treasurer, of the
effectiveness of the design and operation of the registrant's
disclosure controls and procedures as defined under Rule 30a-3(c)
under the Investment Company Act of 1940 (17 CFR 270.30a-3(c)). Based
on that evaluation, the registrant's management, including the
President and Treasurer, concluded that the registrant's disclosure
controls and procedures are effective.
(b) There was no change in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company Act of 1940 (17 CFR 270.30a-3(d))) that occurred during the
registrant's last fiscal quarter of the period covered by this report
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Code of Ethics applicable to its Principal Executive and Principle
Accounting Officers pursuant to Section 406 of the Sarbanes-Oxley Act
of 2002 attached hereto as Exhibit 99.406. Code of Ethics.
(2) Certifications pursuant to Rule 30a-2(a) under the Investment
Company Act of 1940 (17 CFR 270.30a-2(a)) attached hereto as Exhibit
99.CERT.
(3) Not applicable.
(b) Certification pursuant to Rule 30a-2(b) under the Investment Company
Act of 1940 (17 CFR 270.30a-2(a)) and Section 906 of the
Sarbanes-Oxley Act of 2002 attached hereto as Exhibit 99.906.CERT.
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.
SunAmerica Specialty Series
By: /s/ John T. Genoy
--------------------------
John T. Genoy
President
Date: January 7, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John T. Genoy
--------------------------
John T. Genoy
President
Date: January 7, 2011
By: /s/ Donna M. Handel
--------------------------
Donna M. Handel
Treasurer
Date: January 7, 2011