-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BO+KUauPw0HipVbqSDqWpf2m9rYVLvMaZyoFVH4Q9hn2AqnUiYO5+OORuriESqRz c4u3XUBEB8tJJVWpcHqRDw== 0000950148-07-000011.txt : 20070111 0000950148-07-000011.hdr.sgml : 20070111 20070111172417 ACCESSION NUMBER: 0000950148-07-000011 CONFORMED SUBMISSION TYPE: N-CSR/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20061031 FILED AS OF DATE: 20070111 DATE AS OF CHANGE: 20070111 EFFECTIVENESS DATE: 20070111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS CENTRAL INDEX KEY: 0001011114 IRS NUMBER: 954584965 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSR/A SEC ACT: 1940 Act SEC FILE NUMBER: 811-07577 FILM NUMBER: 07526529 BUSINESS ADDRESS: STREET 1: WM GROUP OF FUNDS STREET 2: 1201 THIRD AVENUE, 22ND FLOOR CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 206-461-2413 MAIL ADDRESS: STREET 1: WM GROUP OF FUNDS STREET 2: 1201 THIRD AVENUE, 22ND FLOOR CITY: SEATTLE STATE: WA ZIP: 98101 FORMER COMPANY: FORMER CONFORMED NAME: SIERRA ASSET MANAGEMENT PORTFOLIOS DATE OF NAME CHANGE: 19960726 FORMER COMPANY: FORMER CONFORMED NAME: SIERRA ASSET MANAGEMENT TRUST DATE OF NAME CHANGE: 19960322 0001011114 S000000913 CONSERVATIVE BALANCED PORTFOLIO C000002621 CLASS A SAIPX C000002622 CLASS B SBIPX C000002623 CLASS C SCIPX C000018570 CLASS R-1 C000018571 CLASS R-2 0001011114 S000000914 STRATEGIC GROWTH PORTFOLIO C000002624 CLASS A SACAX C000002625 CLASS B SBCAX C000002626 CLASS C SWHCX C000018572 CLASS R-1 C000018573 CLASS R-2 0001011114 S000000915 FLEXIBLE INCOME PORTFOLIO C000002627 CLASS A SAUPX C000002628 CLASS B SBUPX C000002629 CLASS C SCUPX C000018574 CLASS R-1 C000018575 CLASS R-2 0001011114 S000000916 BALANCED PORTFOLIO C000002630 CLASS A SABPX C000002631 CLASS B SBBPX C000002632 CLASS C SCBPX C000018576 CLASS R-1 C000018577 CLASS R-2 0001011114 S000000917 CONSERVATIVE GROWTH PORTFOLIO C000002633 CLASS A SAGPX C000002634 CLASS B SBGPX C000002635 CLASS C SCGPX C000018578 CLASS R-1 C000018579 CLASS R-2 N-CSR/A 1 v26413nvcsrza.txt AMENDMENT TO FORM N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR/A CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07577 WM Strategic Asset Management Portfolios, LLC (Exact name of registrant as specified in charter) 1201 Third Avenue, WMT 0822, Seattle, WA 98101 (Address of principal executive offices) (Zip code) Jeffrey L. Lunzer 1201 Third Avenue, WMT 0822, Seattle, WA 98101 (Name and address of agent for service) Registrant's telephone number, including area code: (206) 913-5800 Date of fiscal year end: October 31, 2006 Date of reporting period: October 31, 2006 ITEM 1. REPORTS TO STOCKHOLDERS (WM GROUP OF FUNDS LOGO) The sophistication of a managed account with the simplicity of a mutual fund. WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS (GRAPHIC) Annual Report October 31, 2006 (SEAL) WM Group of Funds transitions to Principal Funds. See article on page 2. (PRINCIPAL(R) FUNDS LOGO) WM Strategic Asset Management Portfolios (GRAPHIC) AT THE WM GROUP OF FUNDS, OUR PASSION IS PIECING INDIVIDUAL INVESTMENTS TOGETHER INTO COMPREHENSIVE PORTFOLIOS TO MAKE YOUR FINANCIAL PLAN MORE EFFECTIVE. Table of Contents 1 Letter from the President 2 WM Group of Funds Transitions to Principal Funds 4 The SAM Process and Asset Allocation Team 6 Economy & Financial Markets: Review & Outlook WM SAM Portfolio Performance and Investment Strategy: 8 Flexible Income Portfolio 10 Conservative Balanced Portfolio 12 Balanced Portfolio 14 Conservative Growth Portfolio 16 Strategic Growth Portfolio 18 Glossary 19 Expense Information 21 Financial Statements 35 Notes to Financial Statements 41 Report of Independent Registered Public Accounting Firm 42 Supplemental Information
NOT FDIC INSURED MAY LOSE VALUE - NOT A DEPOSIT - NO BANK GUARANTEE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY Dear Shareholder, (PHOTO OF WILLIAM G. PAPESH) As we enter a new fiscal year, our fund family is moving rapidly to complete preparations for the acquisition of WM Advisors, Inc. and its subsidiaries by the Principal Financial Group(R) (The Principal(R)). We are extremely enthusiastic about the opportunity to join a company where asset management and accumulation form the core of its business and where the advisory group, Principal Global Investors, shares our expertise in asset allocation. Just as the WM Group of Funds is the 4th largest manager of target-risk asset allocation funds, The Principal is the 4th largest manager of target-date asset allocation funds.(1) Together, we will rank 4th in the overall management of asset allocation funds nationally. On the next few pages, we introduce you to our future parent company and its world-class investment management group. I'd also like to briefly explain below how the WM Group of Funds will transition through this process. EVOLUTION OF A FUND COMPLEX To summarize, the 22 existing retail WM Funds will become part of Principal Investors Fund, Inc. (Principal Investors Funds) as follows: - - 15 funds will continue to be managed by their current portfolio management teams. These funds include the SAM Portfolios. - - 7 funds will be merged into existing Principal Investors Funds and thereafter will be managed by Principal Global Investors or one of its premier boutique asset management affiliates.(2) We arrived at these decisions through careful consideration of many factors, two of which stand out with respect to their potential impact on shareholders: - - SHAREHOLDER EXPENSES: Each share class of a surviving fund will have an expense ratio equal to or lower than that of the corresponding share class of the current WM Fund. In certain instances, this will be achieved through an expense cap agreed to by The Principal.(3) - - PERFORMANCE: With respect to the 7 WM Funds that will merge into existing Principal Investors Funds, the Principal Investors Funds had better historical performance than the merged fund for the 1-, 3-, and 5-year periods ended September 30, 2006, as applicable.(4) Please note that past performance does not guarantee future results. After the fund mergers in January 2007,the combined lineup will consist of 48 retail funds spanning a broad array of asset allocation, equity, and fixed-income investments. CONTINUITY OF MANAGEMENT AND STEWARDSHIP The Principal Funds complex also will retain many of the people who have served you and your investment needs over the previous years: - - WM ADVISORS: Our investment management group will have a new name--Edge Asset Management, Inc.-- but it will remain in Seattle and employ many of WM Advisors' portfolio managers. - - WM FUNDS DISTRIBUTOR, INC. AND WM SHAREHOLDER SERVICES, INC.: These groups will form the management and staff of Principal Funds Distributor, Inc. and Principal Shareholder Services, Inc. - - WM GROUP OF FUNDS BOARD OF TRUSTEES: Four members of our current Board are proposed for election to the board of Principal Investors Fund, Inc. This group includes Dick Yancey (our Chairman and a Board member for over 30 years), Dan Pavelich (head of the Audit Committee), Kristi Blake (head of the Operations and Distribution Committee), and myself. I would also like to express my deep gratitude to Ed Davis, Carrol McGinnis, Al Osborne, Jay Rockey, and Anne Farrell for their many years of diligent service on behalf of our shareholders. The Principal has embraced our management and staff, and I think you'll find the combined fund family reflects our best qualities, plus new capabilities and resources. On behalf of everyone at the WM Group of Funds, thank you for the support and trust that you and other shareholders have honored us with for over 65 years. Sincerely, /s/ William G. Papesh - ------------------------------------- William G. Papesh President (1) Source: FRC. Based on assets as of September 30, 2006. (2) Principal Global Investors, one of the primary asset management divisions of Principal Financial Group(R), consists of Principal Global Investors, LLC; Principal Real Estate Investors, LLC; Spectrum Asset Management, Inc.; Post Advisory Group, LLC; Columbus Circle Investors; Principal Global Investors (Europe) Limited; Principal Global Investors (Singapore) Ltd; Principal Global Investors (Australia) Ltd; and Principal International, Inc., its subsidiaries and affiliates. (3) Expense caps are subject to limited time frames. (4) Excluding the WM Money Market Fund. WM Group of Funds Transitions to Principal Funds Earlier this year, we announced that the Principal Financial Group(R) (The Principal(R)) had agreed to acquire our fund family's operating companies. Now that the process is nearing completion, we'd like to introduce you to our future parent company and the mutual fund complex that will manage your investments. Many of our shareholders will recognize the Principal Financial Group as a name they associate with their workplace benefits, such as their retirement plan. As the nation's 401(k) leader, (1) The Principal derives over 90% of its assets under management from retirement operations. In the U.S., it serves 42,000 employers with 2.7 million plan participants, (2) representing a large base of investors who recognize The Principal as one of "America's Retirement Experts." To extend its services to individual investors outside of their work-place, The Principal is acquiring WM Advisors and its affiliates. When the transaction closes at the end of 2006 (see Milestones chart on the next page), we will become part of a diverse family of financial services companies--one where asset management is central to the company's business. WM ADVISORS JOINS WORLD-CLASS INVESTMENT MANAGER The heart of the company's asset management organization is Principal Global Investors, an investment manager that combines wide-ranging capabilities with a truly global reach. Like WM Advisors, Principal Global Investors is a leader within the field of asset allocation investing. While the WM Group of Funds is the 4th largest manager of target-risk asset allocation funds, The Principal is the 4th largest manager of target-date asset allocation funds. (3) The combined fund family will rank 4th in the overall management of asset allocation funds nationally. Following the acquisition, WM Advisors will be positioned within a network of investment managers affiliated with Principal Global Investors. It will join premier boutique firms such as Columbus Circle Investors and Spectrum Asset Management, which have expertise in a variety of core asset styles and niche investments. PRINCIPAL GLOBAL INVESTORS PRINCIPAL GLOBAL INVESTORS HAS ATTRACTED A LARGE BASE OF INSTITUTIONAL ASSETS FROM CLIENTS IN 25 COUNTRIES. IT IS THE: - - 42nd largest institutional asset manager out of 778 worldwide - - 23rd largest U.S. institutional tax-exempt manager out of 500 - - 5th largest real estate investment manager out of 101 - - Investment manager for 9 of the 25 largest U.S. pension funds PRINCIPAL GLOBAL INVESTORS HAS INVESTMENT EXPERTISE IN: - - Target-date asset allocation funds - - Large-cap, mid-cap, and small-cap equities - - Real estate securities - - International equities - - Taxable fixed-income securities Source: Pensions & Investments Magazine. Based on assets as of December 31,2005 or June 30,2006. (MAP) 2 (GRAPHICS) HUMBLE BEGINNINGS GIVE RISE TO GLOBAL OPERATIONS The Principal Financial Group was founded in 1879 as Bankers Life Association, a company that provided life insurance to bankers and their employees from its headquarters in Des Moines, Iowa. From this specialized focus, the firm has expanded its product offerings to include a broad range of financial products and services: retirement and investment services, life and health insurance, and online banking. And its operations are not limited to domestic markets. A member of the Fortune 500, the Principal Financial Group serves some 16.4 million customers from its offices in 11 countries throughout Asia, Australia, Europe, Latin America, and the United States. (2) TOP: The Equitable Building housed the company's offices from 1880 to 1917. It was the tallest office building in Iowa at the time. BOTTOM: Present-day headquarters of the Principal Financial Group. JANUARY FUND MERGERS LAUNCH AN EXPANDED FUND FAMILY The fund mergers scheduled for mid-January 2007 will constitute one of the final steps in the transition process. The combined fund business groups will be known as Principal Funds. With 48 mutual funds offered to retail investors, Principal Funds can provide you with: - - World-Class Investment Management - - Comprehensive Asset Allocation Solutions - - Retirement Investing Expertise On January 16,2007, join Principal Funds at our new Web site, www.principalfunds.com, to take a complete tour of the investment products and services available to you. In the meantime, if you have any questions about how this transition affects your account or your investments, please phone our Customer Service line at 800-222-5852. WM GROUP OF FUNDS TRANSITIONS TO PRINCIPAL FUNDS: MILESTONES
JULY 25, 2006 AUGUST 11, 2006 DECEMBER 15, 2006 ON OR NEAR DECEMBER 31, 2006 ON OR NEAR JANUARY 12, 2007 - ------------- --------------- ----------------- ---------------------------- --------------------------- Announcement of agreement Voting by WM Group of Funds Anticipated close of Anticipated mergers of funds between Washington WM Group of Funds shareholder meeting acquisition Mutual, Inc. and the Board of Trustees for voting on fund Principal Financial Group mergers
(1) The Principal ranks number one in plans where it provides administrative and investment services according to a 2006 Spectrem Group analysis of fully bundled 401(k) providers. (2) As of September 30,2006. (3) Source: FRC. Based on assets as of September 30,2006. 3 The SAM Process and Asset Allocation Team OUR CONTINUOUS PROCESS FOR ACTIVE ASSET ALLOCATION The SAM Process combines a simple mutual fund structure with the sophisticated management techniques typically used by high net worth investors. Where many competing asset allocation programs use passive methods--rebalancing investments back to fixed models--our innovative approach employs a continuous, dynamic discipline. INITIAL PORTFOLIO DEVELOPMENT ACTION: Conduct extensive financial research that helps position the Portfolios along a risk/return spectrum OUTCOME: The long-term asset allocation targets for each Portfolio (PIE CHART) CONTINUOUS ACTIVE MANAGEMENT ACTION: - - Develop a financial and economic outlook - - Use the outlook to assign a risk level to each Portfolio - - Adjust each Portfolio's mix of assets according to the assigned risk - - Repeat this process on a continual basis OUTCOME: Dynamic, active management that we believe is superior to passive rebalancing (PIE CHART) Allocations illustrated above may not reflect current portfolio composition. 4 ASSET ALLOCATION TEAM Our Asset Allocation Team consists of highly experienced investment professionals who are dedicated to the active management of the WM SAM Portfolios: (PHOTO OF RANDALL L. YOAKUM) RANDALL L. YOAKUM, CFA Chief Investment Strategist and Senior Co-Portfolio Manager of the SAM Portfolios Randy currently serves as chairman of the Asset Allocation Team and works closely with Mike Meighan and Gary Pokrzywinski to establish economic strategy. He was instrumental in developing the investment policies at WM Advisors from 1987 to 1994, as well as after rejoining the company in 1999. His investment management experience dates back to 1984. He holds the Chartered Financial Analyst designation and has a B.B.A. from Pacific Lutheran University and an M.B.A. from Arizona State University. (PHOTO OF CHARLES D. AVERILL) CHARLES D. AVERILL, CFA Senior Quantitative Analyst Charlie is dedicated to the Asset Allocation Team as a Senior Quantitative Analyst. His responsibilities include the ongoing analysis of both the current and potential fund holdings, as well as the structural model underlying the asset allocation process. To help examine the performance of the SAM Portfolios' holdings, he also develops performance attribution procedures. Charlie holds the Chartered Financial Analyst designation and has been with WM Advisors since 1990. Before joining the firm, he taught economics at Gonzaga University and worked as a newspaper editor. He holds a B.A. in Economics from Reed College and an M.A. in Economics from Princeton University. (PHOTO OF MICHAEL D. MEIGHAN) MICHAEL D. MEIGHAN, CFA Senior Co-Portfolio Manager of the SAM Portfolios Mike oversees the Team analysts and works collaboratively with Randy and Gary to develop the asset allocation and investment outlook for the Portfolios as well as to formulate economic strategy. Mike has been instrumental in developing the current investment policies for the Portfolios since joining WM Advisors 1999. His investment management experience dates back to 1993. He holds the Chartered Financial Analyst designation and has a B.S. from Santa Clara University and an M.B.A. from Gonzaga University. (PHOTO OF NICOLE VERBRUGGHE) NICOLE VERBRUGGHE, CFA Quantitative Analyst Nicole works with the Asset Allocation Team as a Quantitative Analyst. She gathers and analyzes economic data in order to track indicators that specifically affect the SAM Portfolios. She continually reviews holdings and performance characteristics of the underlying funds and assesses how the weighting of each fund influences the Portfolios' investment policies and goals. Nicole joined WM Advisors in 2001 and holds the Chartered Financial Analyst designation. Before joining the Asset Allocation Team, Nicole worked for 12 years in financial accounting and analysis. She holds a B.A. in Mathematics from Whitman College. (PHOTO OF GARY J. POKRZYWINSKI) GARY J. POKRZYWINSKI, CFA Chief Investment Officer and Senior Portfolio Manager Gary helps develop the outlook and policy for the fixed-income assets within the Portfolios. He is also instrumental in developing economic strategy with Randy and Mike. Gary joined WM Advisors in 1992 and currently manages the WM High Yield Fund and co-manages the WM Income Fund. He holds the Chartered Financial Analyst designation and has a B.B.A. from the University of Wisconsin, Milwaukee. (PHOTO OF BRAD N. STEWART) BRAD N. STEWART, CFA Quantitative Analyst As a Quantitative Analyst with the Asset Allocation Team, Brad is responsible for gathering and analyzing economic data. He focuses on tracking indicators that specifically affect the SAM Portfolios. Brad joined WM Advisors in 2005 and began his investment management career in 2002. He holds the Chartered Financial Analyst designation and has a B.B.A. in Finance from the University of Portland. 5 Economy & Financial Markets: Review & Outlook ECONOMY ENTERS MID-CYCLE SLOWDOWN We began the fiscal year with the view that U.S. economic growth would be moderate but weaker than consensus projections. Although corporate profits and consumer spending looked healthy, a slowdown in the housing market appeared likely. We thought when this housing pullback took hold, it would curtail consumers' ability to maintain refinancing-fueled spending. Our 2006 outlook also recognized that a variety of short-term and long-term forces had aligned to indicate that growth would slow. One cyclical measure that attracted widespread headlines during the period was crude oil prices which, through elevated fuel costs, can act as a tax on consumers. The U.S. benchmark price of oil began the period at $59.77 per barrel, reached a high closing price of $77.03 in July, and then retreated to close at $58.74 on October 31,2006. Like crude oil prices, the rate of economic growth climbed and peaked before ending the period near its starting point. Inflation-adjusted (real) growth increased 1.8% during the final three months of 2005. With strong consumer and business spending, it surged 5.6% in early 2006. Evidence of a housing sector correction became clearer in the following months, and real growth decelerated to an estimated 2.2%. (See text highlights in chart below.) Since housing is a lagging indicator, we believe that the full economic effects of its pullback have yet to play out. However, we expect solid job markets to mitigate the pain that housing causes consumers. Our 2007 outlook is for real growth to keep to the lower end of a 2-3% range as the economy works through a mid-cycle slowdown. INFLATION GIVES FED PAUSE For this kind of "soft landing" to occur, we believe that lower interest rates courtesy of the Federal Reserve (the Fed) will be a requirement. The Fed began steadily raising short-term interest rates in June 2004. Like many market participants, we entered 2006 believing that a housing-led slowdown in growth would soon spur the Fed to halt this monetary tightening campaign. However, concerns about rising inflation dominated the Fed's mindset during the year. A price index that measures core personal consumption(1) stood at 1.9% for November 2005, but inflation picked up steam and sent this gauge to 2.5% in August 2006. Inflation (1) Source: Bureau of Economic Analysis. Monthly data measures the price index for personal consumption expenditures excluding food and energy as a percent change from the same month one year ago. (2) Indices are unmanaged, and individuals cannot invest directly in an index. See page 18 for definitions of indices. A WRAP-UP OF THE YEAR NOVEMBER 1, 2005 - OCTOBER 31, 2006 (FLOW CHART) 6 fears eased somewhat as energy prices headed downward and the housing market cooled. These developments allowed the Fed to leave its target for the federal funds rate unchanged at 5.25% near the end of the fiscal year. This rate is slightly restrictive in our view. We expect the lagging effects of monetary tightening to contain inflation going forward by combining with significant deflationary forces. We also believe that the economic system has become somewhat self-regulating in recent years, alleviating the need for a highly active Fed. However, as fears of inflation continue to subside, we think the Fed will turn its sights on potential deflation and recession. We don't regard either of these conditions as likely, but we would welcome Fed actions that begin cutting interest rates early in 2007. MARKETS MAKE LATE-PERIOD CLIMB Uncertainty about inflation and interest rates often determined investor behavior during the fiscal year. As shown in the chart below, stock markets achieved muted gains within the early months of 2006 before retreating in May and June--a span that was framed by the year's final two Fed rate increases. The growing likelihood and then arrival of the Fed's pause kindled a rally in stocks and also benefited bonds, causing yields to fall. The S&P 500 advanced 16.34% for the fiscal year, and the Lehman Brothers Aggregate Bond Index ended the period with a total return of 5.18%.(2) The outlook for subdued growth and inflation described above, and the potential for monetary easing by the Fed, lead us to expect that bond yields will continue inching lower in 2007. Any incoming data that sparks recession fears could create some volatility for fixed-income securities. However, we regard corporate and mortgage issues as reasonably valued and believe that they will perform in line with this risk. Lower bond yields are also among the factors that support the prospects for moderate but positive gains by equities in 2007. Stocks continue to appear attractive relative to bonds and are likely to be assisted by fair valuations, the global flow of funds, and the generally healthy state of corporations. Cyclical economic and valuation indicators also suggest that large-cap stocks could outperform small caps and growth could outperform value. A less restrictive stance by the Fed could also accommodate the appreciation of stock prices. This economic and financial market analysis represents the opinions of WM Advisors. It should not be considered as investment advice. No forecast based on the opinions expressed can be guaranteed, and they may be subject to change without notice. (FLOW CHART) 7 Flexible Income Portfolio ANNUAL TOTAL RETURNS(1) Class A shares at net asset value(2) (Calendar Year) 2005 2.66% 2004 5.73% 2003 12.08% 2002 1.03% 2001 4.33% 2000 5.10% 1999 8.64% 1998 9.24% 1997 10.25%
INVESTMENT STRATEGY The WM Strategic Asset Management (SAM) Flexible Income Portfolio ended its 2006 fiscal year invested in 12 underlying funds that provide diversification across 14 equity and fixed-income asset classes. We began the 12-month period with an outlook for the economy and financial markets that supported the assessment that stocks appeared more attractive than bonds. In response, we built on the Portfolio's equity allocation by raising it from 26% to 27%. Despite a short-lived stock market retreat during May and June, this addition to equities proved beneficial to performance during the year. As we strengthened the Portfolio's equity allocation, we also shifted its equity style and capitalization weightings to favor large-cap growth stocks. These adjustments ultimately proved to be slightly ahead of a market rotation away from value and smaller capitalization assets. However, large-cap growth stocks enjoyed improved performance late in the period, and we believe the Portfolio is well-positioned for the upcoming year. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results which may be higher or lower than the data shown, can be obtained by calling 800-222-5852.Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%,which declines over 5 years (5-5-4-3-2-0%);Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge noted above. Equity investments involve greater risk, including heightened volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk, and their value will decline as interest rates rise. AVERAGE ANNUAL TOTAL RETURNS(1) AS OF OCTOBER 31, 2006
Since Inception 1-Year 5-Year 10-Year Inception Date ------ ------ ------- --------- --------- CLASS A SHARES Net Asset Value(2) 7.28% 5.44% 6.62% 6.89% 7/25/96 With Sales Charge 2.43% 4.48% 6.13% 6.42% CLASS B SHARES Net Asset Value(2) 6.54% 4.65% 5.99% 6.28% 7/25/96 With Sales Charge 1.54% 4.31% 5.99% 6.28% CLASS C SHARES Net Asset Value(2) 6.52% 4.65% 5.77% 4.84% 3/1/02 With Sales Charge 5.52% 4.65% 5.77% 4.84% Lehman Brothers Aggregate Bond Index(3) 5.18% 4.52% 6.26% 6.49% S&P 500(3) 16.34% 7.25% 8.64% 9.52% Capital Market Benchmark(3) 7.36% 5.23% 6.96% 7.31%
VALUE OF A $10,000 INVESTMENT(1) OCTOBER 31, 1996 - OCTOBER 31, 2006 (PERFORMANCE GRAPH)
FLEXIBLE INCOME PORTFOLIO ------------------------------------------------------------ LEHMAN BROTHERS AGGREGATE BOND CAPITAL MARKET DATE NAV MOP S&P 500 INDEX BENCHMARK - ------ ------ ------ ------- --------------- -------------- Oct-96 10,000 9,550 10,000 10,000 10,000 Nov-96 10,289 9,826 10,759 10,171 10,289 Dec-96 10,234 9,774 10,548 10,076 10,172 Jan-97 10,373 9,906 11,203 10,108 10,323 Feb-97 10,402 9,934 11,294 10,133 10,360 Mar-97 10,254 9,792 10,824 10,020 10,182 Apr-97 10,394 9,926 11,470 10,171 10,426 May-97 10,564 10,089 12,175 10,267 10,633 Jun-97 10,685 10,204 12,718 10,390 10,829 Jul-97 11,038 10,541 13,727 10,670 11,235 Aug-97 10,913 10,422 12,964 10,579 11,034 Sep-97 11,103 10,603 13,675 10,736 11,285 Oct-97 11,110 10,610 13,218 10,892 11,341 Nov-97 11,169 10,667 13,830 10,942 11,487 Dec-97 11,287 10,779 14,068 11,052 11,619 Jan-98 11,388 10,876 14,224 11,194 11,764 Feb-98 11,552 11,032 15,249 11,185 11,927 Mar-98 11,690 11,164 16,030 11,223 12,082 Apr-98 11,748 11,219 16,192 11,281 12,156 May-98 11,742 11,214 15,913 11,388 12,208 Jun-98 11,868 11,334 16,560 11,485 12,389 Jul-98 11,797 11,266 16,384 11,509 12,383 Aug-98 11,347 10,837 14,015 11,697 12,186 Sep-98 11,650 11,126 14,913 11,971 12,570 Oct-98 11,838 11,305 16,126 11,907 12,721 Nov-98 12,096 11,551 17,103 11,975 12,933 Dec-98 12,341 11,786 18,088 12,011 13,113 Jan-99 12,576 12,010 18,844 12,096 13,297 Feb-99 12,396 11,838 18,258 11,884 13,028 Mar-99 12,607 12,039 18,988 11,950 13,190 Apr-99 12,865 12,286 19,723 11,988 13,326 May-99 12,762 12,188 19,258 11,883 13,168 Jun-99 12,895 12,315 20,327 11,845 13,280 Jul-99 12,789 12,214 19,692 11,795 13,153 Aug-99 12,714 12,142 19,594 11,789 13,134 Sep-99 12,766 12,191 19,057 11,926 13,184 Oct-99 12,950 12,367 20,263 11,970 13,390 Nov-99 13,123 12,533 20,675 11,969 13,444 Dec-99 13,395 12,792 21,892 11,911 13,550 Jan-00 13,244 12,648 20,793 11,872 13,378 Feb-00 13,388 12,785 20,400 12,015 13,457 Mar-00 13,731 13,113 22,396 12,174 13,862 Apr-00 13,607 12,995 21,722 12,139 13,747 May-00 13,531 12,922 21,276 12,133 13,685 Jun-00 13,754 13,135 21,800 12,385 13,980 Jul-00 13,768 13,148 21,460 12,498 14,039 Aug-00 14,149 13,513 22,792 12,679 14,376 Sep-00 14,071 13,438 21,589 12,759 14,297 Oct-00 14,059 13,426 21,498 12,843 14,360 Nov-00 13,820 13,198 19,804 13,054 14,323 Dec-00 14,078 13,445 19,901 13,297 14,550 Jan-01 14,577 13,921 20,608 13,513 14,843 Feb-01 14,339 13,694 18,728 13,631 14,675 Mar-01 14,128 13,492 17,543 13,699 14,547 Apr-01 14,313 13,669 18,906 13,641 14,725 May-01 14,433 13,784 19,032 13,723 14,815 Jun-01 14,458 13,807 18,570 13,775 14,788 Jul-01 14,604 13,947 18,388 14,084 15,025 Aug-01 14,578 13,922 17,237 14,246 14,975 Sep-01 14,305 13,661 15,844 14,411 14,872 Oct-01 14,576 13,920 16,147 14,712 15,177 Nov-01 14,664 14,005 17,385 14,509 15,242 Dec-01 14,683 14,023 17,538 14,417 15,190 Jan-02 14,694 14,033 17,282 14,533 15,245 Feb-02 14,703 14,041 16,949 14,674 15,304 Mar-02 14,769 14,104 17,586 14,431 15,215 Apr-02 14,782 14,117 16,520 14,711 15,267 May-02 14,823 14,156 16,398 14,836 15,348 Jun-02 14,611 13,954 15,230 14,965 15,236 Jul-02 14,343 13,697 14,042 15,146 15,146 Aug-02 14,498 13,845 14,135 15,402 15,370 Sep-02 14,318 13,673 12,599 15,651 15,235 Oct-02 14,518 13,865 13,707 15,579 15,447 Nov-02 14,817 14,150 14,515 15,575 15,624 Dec-02 14,835 14,167 13,661 15,897 15,699 Jan-03 14,850 14,182 13,303 15,911 15,629 Feb-03 14,908 14,237 13,104 16,131 15,754 Mar-03 14,951 14,278 13,231 16,118 15,774 Apr-03 15,359 14,668 14,321 16,252 16,139 May-03 15,797 15,086 15,076 16,554 16,548 Jun-03 15,868 15,154 15,269 16,521 16,565 Jul-03 15,647 14,943 15,537 15,966 16,177 Aug-03 15,765 15,055 15,840 16,071 16,326 Sep-03 15,992 15,272 15,673 16,497 16,638 Oct-03 16,184 15,455 16,560 16,344 16,703 Nov-03 16,316 15,582 16,705 16,383 16,765 Dec-03 16,626 15,878 17,581 16,550 17,077 Jan-04 16,836 16,078 17,904 16,682 17,249 Feb-04 16,986 16,221 18,153 16,863 17,446 Mar-04 17,046 16,279 17,879 16,989 17,498 Apr-04 16,670 15,919 17,598 16,547 17,080 May-04 16,640 15,891 17,839 16,481 17,071 Jun-04 16,821 16,064 18,185 16,575 17,215 Jul-04 16,745 15,992 17,583 16,739 17,237 Aug-04 16,958 16,195 17,654 17,059 17,515 Sep-04 17,049 16,282 17,844 17,105 17,590 Oct-04 17,218 16,443 18,117 17,249 17,762 Nov-04 17,340 16,559 18,851 17,111 17,792 Dec-04 17,579 16,788 19,492 17,268 18,045 Jan-05 17,486 16,699 19,017 17,377 18,049 Feb-05 17,517 16,729 19,416 17,274 18,040 Mar-05 17,363 16,582 19,072 17,186 17,903 Apr-05 17,394 16,612 18,710 17,418 18,028 May-05 17,659 16,864 19,305 17,606 18,298 Jun-05 17,774 16,974 19,332 17,703 18,384 Jul-05 17,884 17,079 20,051 17,542 18,388 Aug-05 17,963 17,154 19,869 17,767 18,543 Sep-05 17,842 17,039 20,029 17,584 18,420 Oct-05 17,700 16,903 19,695 17,445 18,241 Nov-05 17,921 17,115 20,439 17,521 18,444 Dec-05 18,050 17,238 20,446 17,688 18,586 Jan-06 18,226 17,406 20,987 17,690 18,686 Feb-06 18,274 17,452 21,044 17,748 18,746 Mar-06 18,266 17,444 21,305 17,574 18,645 Apr-06 18,315 17,491 21,590 17,543 18,667 May-06 18,121 17,305 20,969 17,523 18,544 Jun-06 18,154 17,337 20,998 17,560 18,581 Jul-06 18,251 17,430 21,128 17,797 18,804 Aug-06 18,529 17,695 21,631 18,069 19,124 Sep-06 18,742 17,899 22,189 18,228 19,357 Oct-06 18,989 18,135 22,913 18,349 19,586
Performance of other share classes will differ. See glossary on page 18 for definitions of indices and terms. (1) Performance reflects ongoing expenses and assumes reinvestment of all dividends and capital gains. It also reflects ongoing fund expenses paid by the Portfolio's applicable Funds, which include the effects of expense reimbursement. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes.If it did, performance would be lower. The Portfolio's performance between 1996 and 1999 benefited from the agreement of WM Advisors and its affiliates to limit the Portfolio's expenses. (2) Net asset value is not adjusted for sales charge. (3) Returns shown for the indices assume reinvestment of all dividends and distributions, and since-inception returns shown for the indices are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index. 8 PORTFOLIO MANAGER Asset Allocation Team WM Advisors, Inc. Other equity asset classes that drove Portfolio performance included real estate investment trusts (REITs) and international equities, which realized strong absolute returns. Among fixed-income assets, high-yield bonds had a positive impact on performance, while mortgage- and asset-backed bonds provided a slight benefit. Through small adjustments in allocations, the Portfolio ended the period with neutral weightings in corporate and mortgage securities. Looking forward, we believe that the economy will continue to slow while inflation fears subside, subsequently leading the Federal Reserve to cut short-term interest rates. We anticipate that in 2007, these cuts will begin earlier and occur more often than the market expects. Lower interest rates should bring down bond yields and could support the expansion of equity price multiples. The Portfolio's asset class allocations are designed to take advantage of this soft landing scenario. However, we also feel that choppy market performance is apt to occur in reaction to mixed economic data. In the near term, we are analyzing the Portfolio's five underlying equity funds that will be changing management following our acquisition by The Principal. Given our asset allocation discipline, we are focused on proactively identifying and executing adjustments that might be necessary to keep allocations aligned with our targets and our outlook. PORTFOLIO CHARACTERISTICS AS OF OCTOBER 31, 2006 Equity/Fixed-Income Allocation:(4) 27% Equity/73% Fixed Income Weighted Average Market Capitalization (equities): $61.5 billion Weighted Average P/E (equities):(5) 16.6 Beta: 0.31 Portfolio Standard Deviation: 2.98 S&P 500 Standard Deviation: 8.14 Portfolio Turnover (for fiscal year):(6) 8% Aggregate Portfolio Turnover (for fiscal year):(6) 36% Number of Securities:(7) 1,564 Total Net Assets: $867.3 million
PORTFOLIO COMPOSITION(4)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ Mortgage- & Asset-Backed Bonds 37% 38% -1% Investment-Grade Corporate Bonds 19% 17% +2% High-Yield Corporate Bonds 10% 8% +2% U.S. Government Securities 6% 6% 0% U.S. Large-Cap Growth Stocks 8% 6% +2% U.S. Large-Cap Value Stocks 6% 7% -1% U.S. Mid-Cap Growth Stocks 4% 3% +1% U.S. Mid-Cap Value Stocks 2% 2% 0% REITs 2% 2% 0% Convertible Securities 1% 2% -1% Non-U.S. Developed Market Stocks 1% 1% 0% U.S. Small-Cap Growth Stocks 1% 2% -1% U.S. Small-Cap Value Stocks 1% 1% 0% Cash Equivalents 2% 5% -3%
Note: Pages 46 and 47 provide information about those WM Funds in which the Flexible Income Portfolio invests a significant portion of its assets. For additional information about these and other WM Funds, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. (4) May not reflect the current portfolio composition. (5) Based on estimated earnings. (6) Portfolio turnover does not reflect turnover of the underlying WM Funds. Aggregate portfolio turnover reflects turnover of the underlying WM Funds and the Portfolio itself. It assumes a constant portfolio allocation identical to the Portfolio's actual allocation as of 10/31/ 06.Current portfolio turnover and aggregate portfolio turnover may differ from data shown above. (7) Represents the sum of securities held by the underlying WM Funds. Some securities may be held by more than one WM Fund. 9 Conservative Balanced Portfolio* ANNUAL TOTAL RETURNS(1) Class A shares at net asset value(2) (Calendar Year) 2005 3.80% 2004 7.38% 2003 15.98% 2002 -2.98% 2001 2.20% 2000 3.97% 1999 1.97% 1998 5.28% 1997 8.29%
INVESTMENT STRATEGY The WM Strategic Asset Management (SAM) Conservative Balanced Portfolio ended its 2006 fiscal year invested in 13 underlying funds that provide diversification across 15 equity and fixed-income asset classes. We began the 12-month period with an outlook for the economy and financial markets that supported the assessment that stocks appeared more attractive than bonds. In response, we built on the Portfolio's equity allocation by raising it from 42% to 45%.Despite a short-lived stock market retreat during May and June, this overweighting in equities proved beneficial to performance during the year. As we strengthened the Portfolio's equity allocation, we also shifted its equity style and capitalization weightings to favor large-cap growth stocks. These adjustments ultimately proved to be slightly ahead of a market rotation away from value and smaller capitalization assets. However, large-cap growth stocks enjoyed improved performance late in the period, and we believe the Portfolio is well-positioned for the upcoming year. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results, which may be higher or lower than the data shown, can be obtained by calling 800-222-5852. Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5-5-4-3-2-0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge noted above. Equity investments involve greater risk, including heightened volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk, and their value will decline as interest rates rise. * As of 8/1/00,the Income Portfolio became the Conservative Balanced Portfolio, and the Portfolio's objectives and strategies changed. This information should be considered when reviewing past performance. Please see the prospectus for detailed information. AVERAGE ANNUAL TOTAL RETURNS(1) AS OF OCTOBER 31, 2006
Since Inception 1-Year 5-Year 10-Year Inception Date ------ ------ ------- --------- --------- CLASS A SHARES Net Asset Value(2) 9.31% 6.39% 5.23% 5.46% 7/25/96 With Sales Charge 3.31% 5.19% 4.64% 4.88% CLASS B SHARES Net Asset Value(2) 8.50% 5.58% 4.60% 4.84% 7/25/96 With Sales Charge 3.49% 5.25% 4.60% 4.84% CLASS C SHARES Net Asset Value(2) 8.57% 5.62% 4.45% 5.81% 3/1/02 With Sales Charge 7.57% 5.62% 4.45% 5.81% Lehman Brothers Aggregate Bond Index(3) 5.18% 4.52% 6.26% 6.49% S&P 500(3) 16.34% 7.25% 8.64% 9.52% Capital Market Benchmark(3) 9.57% 5.87% 7.55% 8.03%
VALUE OF A $10,000 INVESTMENT(1) OCTOBER 31, 1996 - OCTOBER 31, 2006 (PERFORMANCE GRAPH)
CONSERVATIVE BALANCED PORTFOLIO ------------------------------------------------------------ LEHMAN BROTHERS AGGREGATE BOND CAPITAL MARKET DATE NAV MOP S&P 500 INDEX BENCHMARK - ------ ------ ------ ------- --------------- -------------- Oct-96 10,000 9,450 10,000 10,000 10,000 Nov-96 10,155 9,597 10,759 10,171 10,406 Dec-96 10,090 9,535 10,548 10,076 10,267 Jan-97 10,095 9,540 11,203 10,108 10,541 Feb-97 10,146 9,588 11,294 10,133 10,590 Mar-97 10,037 9,485 10,824 10,020 10,343 Apr-97 10,149 9,591 11,470 10,171 10,684 May-97 10,240 9,677 12,175 10,267 11,007 Jun-97 10,352 9,782 12,718 10,390 11,283 Jul-97 10,618 10,034 13,727 10,670 11,824 Aug-97 10,525 9,947 12,964 10,579 11,501 Sep-97 10,659 10,073 13,675 10,736 11,856 Oct-97 10,794 10,201 13,218 10,892 11,800 Nov-97 10,826 10,230 13,830 10,942 12,051 Dec-97 10,922 10,321 14,068 11,052 12,207 Jan-98 11,036 10,429 14,224 11,194 12,354 Feb-98 11,028 10,421 15,249 11,185 12,705 Mar-98 11,054 10,446 16,030 11,223 12,991 Apr-98 11,102 10,491 16,192 11,281 13,083 May-98 11,183 10,568 15,913 11,388 13,068 Jun-98 11,253 10,635 16,560 11,485 13,346 Jul-98 11,270 10,650 16,384 11,509 13,306 Aug-98 11,302 10,680 14,015 11,697 12,666 Sep-98 11,430 10,801 14,913 11,971 13,169 Oct-98 11,361 10,736 16,126 11,907 13,556 Nov-98 11,492 10,860 17,103 11,975 13,932 Dec-98 11,499 10,866 18,088 12,011 14,277 Jan-99 11,587 10,950 18,844 12,096 14,577 Feb-99 11,461 10,830 18,258 11,884 14,243 Mar-99 11,538 10,903 18,988 11,950 14,518 Apr-99 11,646 11,006 19,723 11,988 14,771 May-99 11,597 10,959 19,258 11,883 14,553 Jun-99 11,582 10,945 20,327 11,845 14,849 Jul-99 11,569 10,933 19,692 11,795 14,626 Aug-99 11,560 10,924 19,594 11,789 14,592 Sep-99 11,672 11,030 19,057 11,926 14,534 Oct-99 11,691 11,048 20,263 11,970 14,934 Nov-99 11,724 11,079 20,675 11,969 15,055 Dec-99 11,727 11,082 21,892 11,911 15,366 Jan-00 11,714 11,070 20,793 11,872 15,027 Feb-00 11,807 11,157 20,400 12,015 15,022 Mar-00 11,912 11,257 22,396 12,174 15,730 Apr-00 11,893 11,239 21,722 12,139 15,513 May-00 11,850 11,198 21,276 12,133 15,381 Jun-00 12,053 11,390 21,800 12,385 15,724 Jul-00 12,136 11,468 21,460 12,498 15,711 Aug-00 12,551 11,861 22,792 12,679 16,238 Sep-00 12,395 11,713 21,589 12,759 15,957 Oct-00 12,338 11,660 21,498 12,843 15,993 Nov-00 11,950 11,292 19,804 13,054 15,646 Dec-00 12,194 11,524 19,901 13,297 15,851 Jan-01 12,693 11,995 20,608 13,513 16,232 Feb-01 12,323 11,645 18,728 13,631 15,724 Mar-01 12,054 11,391 17,543 13,699 15,373 Apr-01 12,342 11,663 18,906 13,641 15,813 May-01 12,465 11,780 19,032 13,723 15,912 Jun-01 12,473 11,787 18,570 13,775 15,793 Jul-01 12,520 11,832 18,388 14,084 15,943 Aug-01 12,403 11,721 17,237 14,246 15,654 Sep-01 11,974 11,315 15,844 14,411 15,258 Oct-01 12,217 11,545 16,147 14,712 15,567 Nov-01 12,417 11,734 17,385 14,509 15,915 Dec-01 12,462 11,776 17,538 14,417 15,911 Jan-02 12,404 11,722 17,282 14,533 15,895 Feb-02 12,360 11,680 16,949 14,674 15,864 Mar-02 12,519 11,831 17,586 14,431 15,945 Apr-02 12,426 11,743 16,520 14,711 15,744 May-02 12,440 11,756 16,398 14,836 15,779 Jun-02 12,147 11,478 15,230 14,965 15,411 Jul-02 11,787 11,139 14,042 15,146 15,043 Aug-02 11,893 11,239 14,135 15,402 15,236 Sep-02 11,559 10,923 12,599 15,651 14,721 Oct-02 11,841 11,190 13,707 15,579 15,198 Nov-02 12,189 11,519 14,515 15,575 15,553 Dec-02 12,089 11,424 13,661 15,897 15,381 Jan-03 12,063 11,399 13,303 15,911 15,228 Feb-03 12,063 11,399 13,104 16,131 15,263 Mar-03 12,097 11,432 13,231 16,118 15,315 Apr-03 12,521 11,832 14,321 16,252 15,896 May-03 12,984 12,270 15,076 16,554 16,408 Jun-03 13,065 12,346 15,269 16,521 16,472 Jul-03 12,968 12,255 15,537 15,966 16,256 Aug-03 13,105 12,385 15,840 16,071 16,448 Sep-03 13,267 12,537 15,673 16,497 16,640 Oct-03 13,543 12,798 16,560 16,344 16,925 Nov-03 13,681 12,928 16,705 16,383 17,009 Dec-03 14,020 13,249 17,581 16,550 17,470 Jan-04 14,215 13,433 17,904 16,682 17,683 Feb-04 14,354 13,565 18,153 16,863 17,896 Mar-04 14,390 13,599 17,879 16,989 17,869 Apr-04 14,040 13,268 17,598 16,547 17,477 May-04 14,068 13,295 17,839 16,481 17,532 Jun-04 14,257 13,473 18,185 16,575 17,728 Jul-04 14,089 13,314 17,583 16,739 17,598 Aug-04 14,244 13,460 17,654 17,059 17,829 Sep-04 14,376 13,586 17,844 17,105 17,934 Oct-04 14,532 13,733 18,117 17,249 18,135 Nov-04 14,773 13,960 18,851 17,111 18,342 Dec-04 15,058 14,230 19,492 17,268 18,692 Jan-05 14,886 14,068 19,017 17,377 18,580 Feb-05 14,986 14,162 19,416 17,274 18,671 Mar-05 14,826 14,010 19,072 17,186 18,482 Apr-05 14,798 13,984 18,710 17,418 18,492 May-05 15,070 14,241 19,305 17,606 18,847 Jun-05 15,180 14,345 19,332 17,703 18,920 Jul-05 15,382 14,536 20,051 17,542 19,098 Aug-05 15,425 14,577 19,869 17,767 19,174 Sep-05 15,376 14,530 20,029 17,584 19,119 Oct-05 15,230 14,393 19,695 17,445 18,901 Nov-05 15,506 14,653 20,439 17,521 19,237 Dec-05 15,628 14,769 20,446 17,688 19,349 Jan-06 15,907 15,032 20,987 17,690 19,556 Feb-06 15,907 15,032 21,044 17,748 19,617 Mar-06 15,989 15,110 21,305 17,574 19,599 Apr-06 16,063 15,180 21,590 17,543 19,683 May-06 15,783 14,915 20,969 17,523 19,443 Jun-06 15,796 14,928 20,998 17,560 19,478 Jul-06 15,856 14,984 21,128 17,797 19,685 Aug-06 16,139 15,251 21,631 18,069 20,053 Sep-06 16,350 15,451 22,189 18,228 20,365 Oct-06 16,649 15,733 22,913 18,349 20,712
Performance of other share classes will differ. See glossary on page 18 for definitions of indices and terms. (1) Performance reflects ongoing expenses and assumes reinvestment of all dividends and capital gains. It also reflects ongoing fund expenses paid by the Portfolio's applicable Funds, which include the effects of expense reimbursement. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio's performance between 1996 and 2003 benefited from the agreement of WM Advisors and its affiliates to limit the Portfolio's expenses. (2) Net asset value is not adjusted for sales charge. 10 PORTFOLIO MANAGER Asset Allocation Team WM Advisors, Inc. Other equity asset classes that drove Portfolio performance included real estate investment trusts (REITs) and international equities, which realized strong absolute returns. In March, we slightly expanded the Portfolio's exposure to emerging market stocks. This timing missed some of the period's impressive appreciation by emerging market equities, but the Portfolio's small core position can provide broader diversification going forward. Among fixed-income assets, high-yield bonds had a positive impact on performance, while mortgage- and asset-backed bonds provided a slight benefit. Through small adjustments in allocations, the Portfolio ended the period with neutral weightings in corporate and mortgage securities. Looking forward, we believe that the economy will continue to slow while inflation fears subside, subsequently leading the Federal Reserve to cut short-term interest rates. We anticipate that in 2007, these cuts will begin earlier and occur more often than the market expects. Lower interest rates should bring down bond yields and could support the expansion of equity price multiples. The Portfolio's asset class allocations are designed to take advantage of this soft landing scenario. However, we also feel that choppy market performance is apt to occur in reaction to mixed economic data. In the near term, we are analyzing the Portfolio's six underlying equity funds that will be changing management following our acquisition by The Principal. Given our asset allocation discipline, we are focused on proactively identifying and executing adjustments that might be necessary to keep allocations aligned with our targets and our outlook. PORTFOLIO CHARACTERISTICS AS OF OCTOBER 31, 2006 Equity/Fixed-Income Allocation:(4) 45% Equity/55% Fixed Income Weighted Average Market Capitalization (equities): $62.0 billion Weighted Average P/E (equities):(5) 16.6 Beta: 0.48 Portfolio Standard Deviation: 3.90 S&P 500 Standard Deviation: 8.14 Portfolio Turnover (for fiscal year):(6) 13% Aggregate Portfolio Turnover (for fiscal year):(6) 46% Number of Securities:(7) 2,093 Total Net Assets: $647.6 million
PORTFOLIO COMPOSITION (4)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ Mortgage- & Asset-Backed Bonds 30% 31% -1% Investment-Grade Corporate Bonds 12% 11% +1% High-Yield Corporate Bonds 8% 6% +2% U.S. Government Securities 4% 5% -1% U.S. Large-Cap Growth Stocks 13% 10% +3% U.S. Large-Cap Value Stocks 9% 11% -2% U.S. Mid-Cap Growth Stocks 6% 5% +1% Non-U.S. Developed Market Stocks 5% 5% 0% U.S. Mid-Cap Value Stocks 3% 3% 0% REITs 3% 3% 0% U.S. Small-Cap Growth Stocks 2% 2% 0% U.S. Small-Cap Value Stocks 1% 1% 0% Emerging Market Stocks 1% 1% 0% Convertible Securities 1% 2% -1% Cash Equivalents 2% 4% -2%
Note: Page 46 provides information about a WM Fund in which the Conservative Balanced Portfolio invests a significant portion of its assets. For additional information about this and other WM Funds, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. (3) Returns shown for the indices assume reinvestment of all dividends and distributions, and since-inception returns shown for the indices are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index. (4) May not reflect the current portfolio composition. (5) Based on estimated earnings. (6) Portfolio turnover does not reflect turnover of the underlying WM Funds. Aggregate portfolio turnover reflects turnover of the underlying WM Funds and the Portfolio itself. It assumes a constant portfolio allocation identical to the Portfolio's actual allocation as of 10/31/ 06. Current portfolio turnover and aggregate portfolio turnover may differ from data shown above. (7) Represents the sum of securities held by the underlying WM Funds. Some securities may be held by more than one WM Fund. 11 Balanced Portfolio ANNUAL TOTAL RETURNS(1) Class A shares at net asset value(2) (Calendar Year) 2005 5.21% 2004 9.23% 2003 21.34% 2002 -9.41% 2001 -0.51% 2000 0.13% 1999 26.97% 1998 16.27% 1997 10.22%
INVESTMENT STRATEGY The WM Strategic Asset Management (SAM) Balanced Portfolio ended its 2006 fiscal year invested in 13 underlying funds that provide diversification across 15 equity and fixed-income asset classes. We began the 12-month period with an outlook for the economy and financial markets that supported the assessment that stocks appeared more attractive than bonds. In response, we built on the Portfolio's equity allocation by raising it from 62% to 66%. Despite a short-lived stock market retreat during May and June, this overweighting in equities proved beneficial to performance during the year. As we strengthened the Portfolio's equity allocation, we also shifted its equity style and capitalization weightings to favor large-cap growth stocks. These adjustments ultimately proved to be slightly ahead of a market rotation away from value and smaller capitalization assets. However, large-cap growth stocks enjoyed improved performance late in the period, and we believe the Portfolio is well-positioned for the upcoming year. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results, which may be higher or lower than the data shown, can be obtained by calling 800-222-5852. Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5-5-4-3-2-0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge noted above. Equity investments involve greater risk, including heightened volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk, and their value will decline as interest rates rise. AVERAGE ANNUAL TOTAL RETURNS(1) AS OF OCTOBER 31, 2006
1-Year 5-Year 10-Year Since Inception Inception Date ------ ------ ------- --------------- -------------- CLASS A SHARES Net Asset Value(2) 11.26% 7.21% 8.51% 8.75% 7/25/96 With Sales Charge 5.11% 5.99% 7.89% 8.15% CLASS B SHARES Net Asset Value(2) 10.44% 6.38% 7.85% 8.11% 7/25/96 With Sales Charge 5.44% 6.06% 7.85% 8.11% CLASS C SHARES Net Asset Value(2) 10.47% 6.40% 7.66% 6.61% 3/1/02 With Sales Charge 9.47% 6.40% 7.66% 6.61% S&P 500(3) 16.34% 7.25% 8.64% 9.52% Lehman Brothers Aggregate Bond Index(3) 5.18% 4.52% 6.26% 6.49% Capital Market Benchmark(3) 11.80% 6.42% 8.03% 8.63%
(PERFORMANCE GRAPH) VALUE OF A $10,000 INVESTMENT(1) OCTOBER 31, 1996 - OCTOBER 31, 2006
BALANCED PORTFOLIO ----------------------------------------------------------------- LEHMAN BROTHERS CAPITAL MARKET DATE NAV MOP S&P 500 AGGREGATE BOND INDEX BENCHMARK - ------ ------ ------ ------- -------------------- -------------- Oct-96 10,000 9,450 10,000 10,000 10,000 Nov-96 10,335 9,767 10,759 10,171 10,524 Dec-96 10,266 9,702 10,548 10,076 10,361 Jan-97 10,430 9,857 11,203 10,108 10,760 Feb-97 10,389 9,817 11,294 10,133 10,823 Mar-97 10,118 9,561 10,824 10,020 10,505 Apr-97 10,316 9,748 11,470 10,171 10,944 May-97 10,749 10,158 12,175 10,267 11,388 Jun-97 10,993 10,388 12,718 10,390 11,747 Jul-97 11,548 10,913 13,727 10,670 12,433 Aug-97 11,180 10,565 12,964 10,579 11,976 Sep-97 11,556 10,920 13,675 10,736 12,440 Oct-97 11,217 10,600 13,218 10,892 12,264 Nov-97 11,232 10,614 13,830 10,942 12,627 Dec-97 11,309 10,687 14,068 11,052 12,809 Jan-98 11,450 10,821 14,224 11,194 12,960 Feb-98 11,989 11,329 15,249 11,185 13,517 Mar-98 12,371 11,691 16,030 11,223 13,951 Apr-98 12,511 11,823 16,192 11,281 14,064 May-98 12,349 11,670 15,913 11,388 13,972 Jun-98 12,566 11,874 16,560 11,485 14,361 Jul-98 12,436 11,752 16,384 11,509 14,282 Aug-98 11,139 10,526 14,015 11,697 13,136 Sep-98 11,502 10,870 14,913 11,971 13,764 Oct-98 11,958 11,300 16,126 11,907 14,407 Nov-98 12,465 11,779 17,103 11,975 14,963 Dec-98 13,150 12,427 18,088 12,011 15,499 Jan-99 13,630 12,880 18,844 12,096 15,931 Feb-99 13,315 12,583 18,258 11,884 15,524 Mar-99 13,856 13,094 18,988 11,950 15,930 Apr-99 14,356 13,567 19,723 11,988 16,321 May-99 14,012 13,241 19,258 11,883 16,032 Jun-99 14,572 13,771 20,327 11,845 16,545 Jul-99 14,375 13,585 19,692 11,795 16,207 Aug-99 14,345 13,556 19,594 11,789 16,155 Sep-99 14,471 13,675 19,057 11,926 15,965 Oct-99 14,966 14,143 20,263 11,970 16,594 Nov-99 15,572 14,716 20,675 11,969 16,796 Dec-99 16,697 15,778 21,892 11,911 17,357 Jan-00 16,341 15,442 20,793 11,872 16,810 Feb-00 16,916 15,986 20,400 12,015 16,701 Mar-00 17,556 16,590 22,396 12,174 17,770 Apr-00 17,064 16,126 21,722 12,139 17,429 May-00 16,788 15,864 21,276 12,133 17,211 Jun-00 17,142 16,199 21,800 12,385 17,609 Jul-00 16,955 16,023 21,460 12,498 17,508 Aug-00 17,733 16,758 22,792 12,679 18,263 Sep-00 17,340 16,386 21,589 12,759 17,730 Oct-00 17,229 16,281 21,498 12,843 17,731 Nov-00 16,343 15,444 19,804 13,054 17,010 Dec-00 16,719 15,799 19,901 13,297 17,187 Jan-01 17,558 16,593 20,608 13,513 17,664 Feb-01 16,710 15,791 18,728 13,631 16,760 Mar-01 16,119 15,232 17,543 13,699 16,157 Apr-01 16,731 15,811 18,906 13,641 16,882 May-01 16,952 16,020 19,032 13,723 16,990 Jun-01 16,981 16,047 18,570 13,775 16,767 Jul-01 16,874 15,946 18,388 14,084 16,819 Aug-01 16,521 15,613 17,237 14,246 16,264 Sep-01 15,632 14,773 15,844 14,411 15,552 Oct-01 15,976 15,098 16,147 14,712 15,860 Nov-01 16,456 15,551 17,385 14,509 16,502 Dec-01 16,635 15,720 17,538 14,417 16,547 Jan-02 16,392 15,491 17,282 14,533 16,456 Feb-02 16,194 15,303 16,949 14,674 16,329 Mar-02 16,620 15,706 17,586 14,431 16,589 Apr-02 16,262 15,368 16,520 14,711 16,114 May-02 16,220 15,328 16,398 14,836 16,098 Jun-02 15,630 14,770 15,230 14,965 15,466 Jul-02 14,868 14,051 14,042 15,146 14,818 Aug-02 14,983 14,159 14,135 15,402 14,976 Sep-02 14,256 13,472 12,599 15,651 14,097 Oct-02 14,805 13,991 13,707 15,579 14,816 Nov-02 15,397 14,551 14,515 15,575 15,337 Dec-02 15,068 14,239 13,661 15,897 14,923 Jan-03 14,936 14,115 13,303 15,911 14,694 Feb-03 14,849 14,032 13,104 16,131 14,642 Mar-03 14,867 14,050 13,231 16,118 14,723 Apr-03 15,585 14,728 14,321 16,252 15,500 May-03 16,332 15,434 15,076 16,554 16,106 Jun-03 16,489 15,582 15,269 16,521 16,217 Jul-03 16,533 15,624 15,537 15,966 16,170 Aug-03 16,798 15,874 15,840 16,071 16,401 Sep-03 16,919 15,988 15,673 16,497 16,470 Oct-03 17,480 16,519 16,560 16,344 16,968 Nov-03 17,716 16,742 16,705 16,383 17,073 Dec-03 18,285 17,279 17,581 16,550 17,679 Jan-04 18,612 17,589 17,904 16,682 17,930 Feb-04 18,806 17,772 18,153 16,863 18,158 Mar-04 18,808 17,773 17,879 16,989 18,047 Apr-04 18,330 17,322 17,598 16,547 17,690 May-04 18,435 17,421 17,839 16,481 17,806 Jun-04 18,761 17,729 18,185 16,575 18,054 Jul-04 18,343 17,334 17,583 16,739 17,767 Aug-04 18,508 17,490 17,654 17,059 17,944 Sep-04 18,730 17,700 17,844 17,105 18,081 Oct-04 18,970 17,927 18,117 17,249 18,307 Nov-04 19,495 18,423 18,851 17,111 18,693 Dec-04 19,977 18,878 19,492 17,268 19,144 Jan-05 19,629 18,550 19,017 17,377 18,912 Feb-05 19,857 18,765 19,416 17,274 19,105 Mar-05 19,619 18,540 19,072 17,186 18,862 Apr-05 19,468 18,397 18,710 17,418 18,749 May-05 19,952 18,855 19,305 17,606 19,188 Jun-05 20,108 19,002 19,332 17,703 19,247 Jul-05 20,581 19,449 20,051 17,542 19,607 Aug-05 20,581 19,449 19,869 17,767 19,599 Sep-05 20,566 19,435 20,029 17,584 19,613 Oct-05 20,337 19,219 19,695 17,445 19,354 Nov-05 20,871 19,724 20,439 17,521 19,828 Dec-05 21,019 19,863 20,446 17,688 19,908 Jan-06 21,543 20,358 20,987 17,690 20,224 Feb-06 21,481 20,300 21,044 17,748 20,283 Mar-06 21,727 20,532 21,305 17,574 20,356 Apr-06 21,866 20,663 21,590 17,543 20,505 May-06 21,293 20,122 20,969 17,523 20,142 Jun-06 21,297 20,125 20,998 17,560 20,176 Jul-06 21,296 20,125 21,128 17,797 20,359 Aug-06 21,747 20,551 21,631 18,069 20,775 Sep-06 22,081 20,866 22,189 18,228 21,169 Oct-06 22,626 21,382 22,913 18,349 21,635
Performance of other share classes will differ. See glossary on page 18 for definitions of indices and terms. (1) Performance reflects ongoing expenses and assumes reinvestment of all dividends and capital gains. It also reflects ongoing fund expenses paid by the Portfolio's applicable Funds, which include the effects of expense reimbursement. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio's performance between 1996 and 1999 benefited from the agreement of WM Advisors and its affiliates to limit the Portfolio's expenses. (2) Net asset value is not adjusted for sales charge. (3) Returns shown for the indices assume reinvestment of all dividends and distributions, and since-inception returns shown for the indices are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index. 12 PORTFOLIO MANAGER Asset Allocation Team WM Advisors, Inc. Other equity asset classes that drove Portfolio performance included real estate investment trusts (REITs) and international equities, which realized strong absolute returns. In March, we expanded the Portfolio's exposure to emerging market stocks. This timing missed some of the period's impressive appreciation by emerging market equities, but the Portfolio's core position can provide broader diversification going forward. Among fixed-income assets, high-yield bonds had a positive impact on performance, while mortgage- and asset-backed bonds provided a slight benefit. Through small adjustments in allocations, the Portfolio ended the period with neutral weightings in corporate and mortgage securities. Looking forward, we believe that the economy will continue to slow while inflation fears subside, subsequently leading the Federal Reserve to cut short-term interest rates. We anticipate that in 2007, these cuts will begin earlier and occur more often than the market expects. Lower interest rates should bring down bond yields and could support the expansion of equity price multiples. The Portfolio's asset class allocations are designed to take advantage of this soft landing scenario. However, we also feel that choppy market performance is apt to occur in reaction to mixed economic data. In the near term, we are analyzing the Portfolio's six underlying equity funds that will be changing management following our acquisition by The Principal. Given our asset allocation discipline, we are focused on proactively identifying and executing adjustments that might be necessary to keep allocations aligned with our targets and our outlook. PORTFOLIO CHARACTERISTICS AS OF OCTOBER 31, 2006 Equity/Fixed-Income Allocation:(4) 66% Equity/34% Fixed Income Weighted Average Market Capitalization (equities): $61.7 billion Weighted Average P/E (equities):(5) 16.7 Beta: 0.70 Portfolio Standard Deviation: 5.32 S&P 500 Standard Deviation: 8.14 Portfolio Turnover (for fiscal year):(6) 10% Aggregate Portfolio Turnover (for fiscal 47% year):(6) Number of Securities:(7) 2,093 Total Net Assets: $4.7 billion
PORTFOLIO COMPOSITION (4)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ U.S. Large-Cap Growth Stocks 19% 15% +4% U.S. Large-Cap Value Stocks 14% 16% -2% U.S. Mid-Cap Growth Stocks 9% 7% +2% Non-U.S. Developed Market Stocks 8% 8% 0% REITs 4% 4% 0% U.S. Mid-Cap Value Stocks 4% 5% -1% U.S. Small-Cap Growth Stocks 3% 3% 0% U.S. Small-Cap Value Stocks 2% 2% 0% Emerging Market Stocks 2% 1% +1% Convertible Securities 1% 1% 0% Mortgage- & Asset-Backed Bonds 18% 19% -1% High-Yield Corporate Bonds 6% 5% +1% Investment-Grade Corporate Bonds 5% 5% 0% U.S. Government Securities 2% 3% -1% Cash Equivalents 3% 6% -3%
Note: For information about underlying WM Funds of the SAM Portfolios, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. (4) May not reflect the current portfolio composition. (5) Based on estimated earnings. (6) Portfolio turnover does not reflect turnover of the underlying WM Funds. Aggregate portfolio turnover reflects turnover of the underlying WM Funds and the Portfolio itself. It assumes a constant portfolio allocation identical to the Portfolio's actual allocation as of 10/31/06. Current portfolio turnover and aggregate portfolio turnover may differ from data shown above. (7) Represents the sum of securities held by the underlying WM Funds. Some securities may be held by more than one WM Fund. 13 Conservative Growth Portfolio ANNUL TOTAL RETURNS(1) Class A shares at net asset value(2) (Calendar Year) 2005 6.24% 2004 10.88% 2003 26.97% 2002 -15.70% 2001 -4.20% 2000 -2.96% 1999 40.28% 1998 18.82% 1997 8.65%
INVESTMENT STRATEGY The WM Strategic Asset Management (SAM) Conservative Growth Portfolio ended its 2006 fiscal year invested in 12 underlying funds that provide diversification across 14 equity and fixed-income asset classes. We began the 12-month period with an outlook for the economy and financial markets that supported the assessment that stocks appeared more attractive than bonds. In response, we built on the Portfolio's equity allocation by raising it from 81% to 84%. Despite a short-lived stock market retreat during May and June, this overweighting in equities proved beneficial to performance during the year. As we strengthened the Portfolio's equity allocation, we also shifted its equity style and capitalization weightings to favor large-cap growth stocks. These adjustments ultimately proved to be slightly ahead of a market rotation away from value and smaller capitalization assets. However, large-cap growth stocks enjoyed improved performance late in the period, and we believe the Portfolio is well-positioned for the upcoming year. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results, which may be higher or lower than the data shown, can be obtained by calling 800-222-5852. Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5-5-4-3-2-0%); Class C s hares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge noted above. Equity investments involve greater risk, including heightened volatility, than fixed-income investments. Fixed-income investments are subject to interest rate risk, and their value will decline as interest rates rise. AVERAGE ANNUAL TOTAL RETURNS (1) AS OF OCTOBER 31, 2006
Since Inception 1-Year 5-Year 10-Year Inception Date ------ ------ ------- --------- --------- CLASS A SHARES Net Asset Value(2) 13.07% 7.81% 8.99% 9.22% 7/25/96 With Sales Charge 6.88% 6.60% 8.37% 8.62% CLASS B SHARES Net Asset Value(2) 12.19% 6.98% 8.29% 8.55% 7/25/96 With Sales Charge 7.19% 6.67% 8.29% 8.55% CLASS C SHARES Net Asset Value(2) 12.21% 7.00% 8.10% 7.19% 3/1/02 With Sales Charge 11.21% 7.00% 8.10% 7.19% S&P 500(3) 16.34% 7.25% 8.64% 9.52% Lehman Brothers Aggregate Bond Index(3) 5.18% 4.52% 6.26% 6.49% Capital Market Benchmark(3) 14.06% 6.88% 8.39% 9.13%
VALUE OF A $10,000 INVESTMENT(1) OCTOBER 31, 1996 - OCTOBER 31, 2006 (PERFORMANCE GRAPH)
CONSERVATIVE GROWTH PORTFOLIO ------------------------------------------------------------------- Lehman Brothers Capital DATE NAV MOP S&P 500 Aggregate Bond Index Market Benchmark - ------ ------ ------ ------- -------------------- ---------------- Oct-96 10,000 9,450 10,000 10,000 10,000 Nov-96 10,306 9,740 10,759 10,171 10,641 Dec-96 10,252 9,688 10,548 10,076 10,455 Jan-97 10,370 9,799 11,203 10,108 10,981 Feb-97 10,218 9,656 11,294 10,133 11,058 Mar-97 9,805 9,266 10,824 10,020 10,665 Apr-97 9,966 9,418 11,470 10,171 11,207 May-97 10,590 10,008 12,175 10,267 11,778 Jun-97 10,932 10,331 12,718 10,390 12,227 Jul-97 11,485 10,854 13,727 10,670 13,070 Aug-97 11,052 10,445 12,964 10,579 12,466 Sep-97 11,565 10,929 13,675 10,736 13,049 Oct-97 11,103 10,492 13,218 10,892 12,739 Nov-97 11,093 10,483 13,830 10,942 13,223 Dec-97 11,134 10,521 14,068 11,052 13,431 Jan-98 11,262 10,642 14,224 11,194 13,585 Feb-98 11,975 11,316 15,249 11,185 14,366 Mar-98 12,464 11,779 16,030 11,223 14,963 Apr-98 12,624 11,930 16,192 11,281 15,100 May-98 12,316 11,638 15,913 11,388 14,920 Jun-98 12,593 11,900 16,560 11,485 15,430 Jul-98 12,349 11,669 16,384 11,509 15,305 Aug-98 10,562 9,981 14,015 11,697 13,585 Sep-98 11,082 10,473 14,913 11,971 14,344 Oct-98 11,668 11,026 16,126 11,907 15,262 Nov-98 12,337 11,659 17,103 11,975 16,019 Dec-98 13,232 12,504 18,088 12,011 16,767 Jan-99 13,901 13,137 18,844 12,096 17,353 Feb-99 13,537 12,793 18,258 11,884 16,860 Mar-99 14,347 13,558 18,988 11,950 17,418 Apr-99 15,028 14,202 19,723 11,988 17,968 May-99 14,582 13,780 19,258 11,883 17,598 Jun-99 15,368 14,523 20,327 11,845 18,369 Jul-99 15,088 14,258 19,692 11,795 17,895 Aug-99 15,052 14,224 19,594 11,789 17,822 Sep-99 15,195 14,359 19,057 11,926 17,472 Oct-99 15,930 15,054 20,263 11,970 18,370 Nov-99 16,832 15,906 20,675 11,969 18,668 Dec-99 18,562 17,541 21,892 11,911 19,530 Jan-00 18,122 17,126 20,793 11,872 18,732 Feb-00 19,025 17,978 20,400 12,015 18,494 Mar-00 19,890 18,796 22,396 12,174 19,990 Apr-00 19,061 18,013 21,722 12,139 19,496 May-00 18,573 17,552 21,276 12,133 19,174 Jun-00 19,013 17,968 21,800 12,385 19,633 Jul-00 18,696 17,667 21,460 12,498 19,423 Aug-00 19,758 18,671 22,792 12,679 20,444 Sep-00 19,147 18,094 21,589 12,759 19,606 Oct-00 18,940 17,899 21,498 12,843 19,565 Nov-00 17,548 16,583 19,804 13,054 18,395 Dec-00 18,011 17,021 19,901 13,297 18,535 Jan-01 19,080 18,030 20,608 13,513 19,120 Feb-01 17,776 16,799 18,728 13,631 17,759 Mar-01 16,865 15,937 17,543 13,699 16,876 Apr-01 17,868 16,885 18,906 13,641 17,911 May-01 18,129 17,132 19,032 13,723 18,029 Jun-01 18,136 17,139 18,570 13,775 17,692 Jul-01 17,822 16,842 18,388 14,084 17,632 Aug-01 17,193 16,248 17,237 14,246 16,789 Sep-01 15,835 14,964 15,844 14,411 15,743 Oct-01 16,229 15,337 16,147 14,712 16,048 Nov-01 16,992 16,057 17,385 14,509 16,989 Dec-01 17,255 16,306 17,538 14,417 17,086 Jan-02 16,858 15,931 17,282 14,533 16,913 Feb-02 16,503 15,595 16,949 14,674 16,685 Mar-02 17,158 16,214 17,586 14,431 17,132 Apr-02 16,527 15,618 16,520 14,711 16,368 May-02 16,444 15,539 16,398 14,836 16,299 Jun-02 15,587 14,730 15,230 14,965 15,398 Jul-02 14,527 13,728 14,042 15,146 14,475 Aug-02 14,610 13,806 14,135 15,402 14,600 Sep-02 13,609 12,861 12,599 15,651 13,378 Oct-02 14,328 13,540 13,707 15,579 14,308 Nov-02 15,060 14,232 14,515 15,575 14,980 Dec-02 14,546 13,746 13,661 15,897 14,338 Jan-03 14,352 13,562 13,303 15,911 14,039 Feb-03 14,169 13,390 13,104 16,131 13,910 Mar-03 14,185 13,405 13,231 16,118 14,016 Apr-03 15,066 14,237 14,321 16,252 14,963 May-03 15,961 15,083 15,076 16,554 15,650 Jun-03 16,162 15,273 15,269 16,521 15,804 Jul-03 16,357 15,458 15,537 15,966 15,920 Aug-03 16,680 15,762 15,840 16,071 16,190 Sep-03 16,736 15,816 15,673 16,497 16,138 Oct-03 17,494 16,532 16,560 16,344 16,838 Nov-03 17,776 16,798 16,705 16,383 16,964 Dec-03 18,469 17,453 17,581 16,550 17,711 Jan-04 18,852 17,815 17,904 16,682 18,000 Feb-04 19,091 18,041 18,153 16,863 18,239 Mar-04 19,049 18,001 17,879 16,989 18,046 Apr-04 18,527 17,508 17,598 16,547 17,724 May-04 18,698 17,669 17,839 16,481 17,905 Jun-04 19,094 18,044 18,185 16,575 18,204 Jul-04 18,471 17,456 17,583 16,739 17,758 Aug-04 18,599 17,576 17,654 17,059 17,882 Sep-04 18,882 17,843 17,844 17,105 18,047 Oct-04 19,150 18,097 18,117 17,249 18,298 Nov-04 19,883 18,790 18,851 17,111 18,861 Dec-04 20,482 19,355 19,492 17,268 19,408 Jan-05 19,996 18,897 19,017 17,377 19,055 Feb-05 20,324 19,207 19,416 17,274 19,352 Mar-05 20,040 18,938 19,072 17,186 19,058 Apr-05 19,769 18,682 18,710 17,418 18,820 May-05 20,368 19,248 19,305 17,606 19,339 Jun-05 20,554 19,423 19,332 17,703 19,382 Jul-05 21,209 20,043 20,051 17,542 19,923 Aug-05 21,152 19,989 19,869 17,767 19,829 Sep-05 21,194 20,029 20,029 17,584 19,916 Oct-05 20,909 19,759 19,695 17,445 19,620 Nov-05 21,636 20,446 20,439 17,521 20,230 Dec-05 21,759 20,562 20,446 17,688 20,274 Jan-06 22,449 21,215 20,987 17,690 20,704 Feb-06 22,334 21,106 21,044 17,748 20,762 Mar-06 22,708 21,459 21,305 17,574 20,928 Apr-06 22,895 21,636 21,590 17,543 21,146 May-06 22,119 20,902 20,969 17,523 20,655 Jun-06 22,119 20,902 20,998 17,560 20,686 Jul-06 22,047 20,835 21,128 17,797 20,843 Aug-06 22,565 21,324 21,631 18,069 21,304 Sep-06 22,953 21,691 22,189 18,228 21,781 Oct-06 23,644 22,343 22,913 18,349 22,378
Performance of other share classes will differ. See glossary on page 18 for definitions of indices and terms. (1) Performance reflects ongoing expenses and assumes reinvestment of all dividends and capital gains. It also reflects ongoing fund expenses paid by the Portfolio's applicable Funds, which include the effects of expense reimbursement. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio's performance between 1996 and 1999 benefited from the agreement of WM Advisors and its affiliates to limit the Portfolio's expenses. (2) Net asset value is not adjusted for sales charge. (3) Returns shown for the indices assume reinvestment of all dividends and distributions, and since-inception returns shown for the indices are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index. 14 PORTFOLIO MANAGER Asset Allocation Team WM Advisors, Inc. Other equity asset classes that drove Portfolio performance included real estate investment trusts (REITs) and international equities, which realized strong absolute returns. In March, we expanded the Portfolio's exposure to emerging market stocks. This timing missed some of the period's impressive appreciation by emerging market equities, but the Portfolio's core position can provide broader diversification going forward. Among fixed-income assets, high-yield bonds had a positive impact on performance, while mortgage- and asset-backed bonds provided a slight benefit. Through small adjustments in allocations, the Portfolio ended the period with neutral weightings in corporate and mortgage securities. Looking forward, we believe that the economy will continue to slow while inflation fears subside, subsequently leading the Federal Reserve to cut short-term interest rates. We anticipate that in 2007, these cuts will begin earlier and occur more often than the market expects. Lower interest rates should bring down bond yields and could support the expansion of equity price multiples. The Portfolio's asset class allocations are designed to take advantage of this soft landing scenario. However, we also feel that choppy market performance is apt to occur in reaction to mixed economic data. In the near term, we are analyzing the Portfolio's six underlying equity funds that will be changing management following our acquisition by The Principal. Given our asset allocation discipline, we are focused on proactively identifying and executing adjustments that might be necessary to keep allocations aligned with our targets and our outlook. PORTFOLIO CHARACTERISTICS AS OF OCTOBER 31, 2006 Equity/Fixed-Income Allocation:(4) 84% Equity/16% Fixed Income Weighted Average Market Capitalization (equities): $61.4 billion Weighted Average P/E (equities):(5) 16.6 Beta: 0.91 Portfolio Standard Deviation: 6.80 S&P 500 Standard Deviation: 8.14 Portfolio Turnover (for fiscal year):(6) 11% Aggregate Portfolio Turnover (for fiscal year):(6) 52% Number of Securities:(7) 2,003 Total Net Assets: $3.8 billion
PORTFOLIO COMPOSITION (4)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ U.S. Large-Cap Growth Stocks 24% 20% +4% U.S. Large-Cap Value Stocks 18% 20% -2% U.S. Mid-Cap Growth Stocks 12% 10% +2% Non-U.S. Developed Market Stocks 10% 10% 0% U.S. Mid-Cap Value Stocks 5% 7% -2% REITs 5% 5% 0% U.S. Small-Cap Growth Stocks 4% 4% 0% U.S. Small-Cap Value Stocks 3% 3% 0% Emerging Market Stocks 3% 1% +2% Convertible Securities 0% 1% -1% Mortgage- & Asset-Backed Bonds 8% 9% -1% High-Yield Corporate Bonds 3% 3% 0% Investment-Grade Corporate Bonds 2% 2% 0% U.S. Government Securities 1% 1% 0% Cash Equivalents 2% 4% -2%
Note: For information about the underlying WM Funds of the SAM Portfolios, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. (4) May not reflect the current portfolio composition. (5) Based on estimated earnings. (6) Portfolio turnover does not reflect turnover of the underlying WM Funds. Aggregate portfolio turnover reflects turnover of the underlying WM Funds and the Portfolio itself. It assumes a constant portfolio allocation identical to the Portfolio's actual allocation as of 10/31/ 06. Current portfolio turnover and aggregate portfolio turnover may differ from data shown above. (7) Represents the sum of securities held by the underlying WM Funds. Some securities may be held by more than one WM Fund. 15 Strategic Growth Portfolio ANNUAL TOTAL RETURNS(1) Class A shares at net asset value(2) (Calendar Year) 2005 6.98% 2004 11.92% 2003 31.27% 2002 -20.85% 2001 -6.69% 2000 - 4.43% 1999 44.48% 1998 22.63% 1997 12.38%
INVESTMENT STRATEGY The WM Strategic Asset Management (SAM) Strategic Growth Portfolio ended its 2006 fiscal year invested in 10 underlying funds that provide diversification across 12 equity and fixed-income asset classes. We began the 12-month period with an outlook for the economy and financial markets that supported the assessment that stocks appeared more attractive than bonds. In response, we built on the Portfolio's equity allocation by raising it from 92% to 94%. Despite a short-lived stock market retreat during May and June, this addition to equities proved beneficial to performance during the year. As we strengthened the Portfolio's equity allocation, we also shifted its equity style and capitalization weightings to favor large-cap growth stocks. These adjustments ultimately proved to be slightly ahead of a market rotation away from value and smaller capitalization assets. However, large-cap growth stocks enjoyed improved performance late in the period, and we believe the Portfolio is well-positioned for the upcoming year. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results, which may be higher or lower than the data shown, can be obtained by calling 800-222-5852. Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 5.5%;Class B shares: contingent deferred sales charge of 5%, which declines over 5 years (5-5-4-3-2-0%);Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge noted above. Equity investments involve greater risk, including heightened volatility, than fixed-income investments. AVERAGE ANNUAL TOTAL RETURNS (1) AS OF OCTOBER 31, 2006
Since Inception 1-Year 5-Year 10-Year Inception Date ------ ------ ------- --------- --------- CLASS A SHARES Net Asset Value(2) 13.99% 8.01% 9.65% 9.96% 7/25/96 With Sales Charge 7.73% 6.80% 9.03% 9.36% CLASS B SHARES Net Asset Value(2) 13.16% 7.19% 8.99% 9.33% 7/25/96 With Sales Charge 8.16% 6.89% 8.99% 9.33% CLASS C SHARES Net Asset Value(2) 13.12% 7.22% 8.73% 7.38% 3/1/02 With Sales Charge 12.12% 7.22% 8.73% 7.38% S&P 500(3) 16.34% 7.25% 8.64% 9.52% Russell 3000(R) Index(3) 16.37% 8.35% 8.89% 9.74%
VALUE OF A $10,000 INVESTMENT(1) OCTOBER 31, 1996 - OCTOBER 31, 2006 (PERFORMANCE GRAPH)
STRATEGIC GROWTH PORTFOLIO ---------------------------------------------- DATE NAV MOP Russell 3000 Index S&P 500 - ------ ------ ------ ------------------ ------- Oct-96 10,000 9,450 10,000 10,000 Nov-96 10,492 9,915 10,705 10,759 Dec-96 10,417 9,844 10,577 10,548 Jan-97 10,708 10,119 11,161 11,203 Feb-97 10,557 9,976 11,174 11,294 Mar-97 10,076 9,521 10,669 10,824 Apr-97 10,276 9,711 11,195 11,470 May-97 10,948 10,346 11,959 12,175 Jun-97 11,300 10,678 12,457 12,718 Jul-97 12,042 11,380 13,433 13,727 Aug-97 11,590 10,953 12,888 12,964 Sep-97 12,142 11,474 13,619 13,675 Oct-97 11,631 10,991 13,161 13,218 Nov-97 11,672 11,030 13,665 13,830 Dec-97 11,707 11,063 13,938 14,068 Jan-98 11,846 11,194 14,011 14,224 Feb-98 12,757 12,055 15,013 15,249 Mar-98 13,358 12,623 15,757 16,030 Apr-98 13,539 12,795 15,912 16,192 May-98 13,143 12,420 15,519 15,913 Jun-98 13,571 12,825 16,043 16,560 Jul-98 13,250 12,521 15,751 16,384 Aug-98 11,148 10,535 13,338 14,015 Sep-98 11,845 11,193 14,248 14,913 Oct-98 12,509 11,821 15,329 16,126 Nov-98 13,239 12,511 16,267 17,103 Dec-98 14,355 13,565 17,302 18,088 Jan-99 15,216 14,379 17,890 18,844 Feb-99 14,767 13,955 17,257 18,258 Mar-99 15,653 14,792 17,890 18,988 Apr-99 16,444 15,539 18,697 19,723 May-99 15,901 15,027 18,342 19,258 Jun-99 16,846 15,919 19,268 20,327 Jul-99 16,418 15,515 18,684 19,692 Aug-99 16,406 15,504 18,471 19,594 Sep-99 16,562 15,651 17,998 19,057 Oct-99 17,458 16,498 19,127 20,263 Nov-99 18,581 17,559 19,663 20,675 Dec-99 20,740 19,599 20,917 21,892 Jan-00 20,308 19,191 20,097 20,793 Feb-00 21,590 20,402 20,284 20,400 Mar-00 22,540 21,300 21,872 22,396 Apr-00 21,356 20,182 21,102 21,722 May-00 20,739 19,599 20,509 21,276 Jun-00 21,355 20,181 21,116 21,800 Jul-00 20,888 19,739 20,743 21,460 Aug-00 22,256 21,032 22,282 22,792 Sep-00 21,405 20,228 21,272 21,589 Oct-00 21,097 19,937 20,970 21,498 Nov-00 19,247 18,188 19,037 19,804 Dec-00 19,821 18,730 19,357 19,901 Jan-01 21,137 19,974 20,019 20,608 Feb-01 19,363 18,298 18,189 18,728 Mar-01 18,163 17,164 17,003 17,543 Apr-01 19,570 18,494 18,367 18,906 May-01 19,897 18,803 18,514 19,032 Jun-01 19,949 18,852 18,173 18,570 Jul-01 19,374 18,309 17,873 18,388 Aug-01 18,501 17,483 16,819 17,237 Sep-01 16,610 15,696 15,335 15,844 Oct-01 17,080 16,141 15,693 16,147 Nov-01 18,084 17,090 16,901 17,385 Dec-01 18,491 17,474 17,139 17,538 Jan-02 17,905 16,920 16,925 17,282 Feb-02 17,400 16,443 16,580 16,949 Mar-02 18,314 17,306 17,306 17,586 Apr-02 17,455 16,495 16,397 16,520 May-02 17,305 16,353 16,207 16,398 Jun-02 16,200 15,309 15,040 15,230 Jul-02 14,809 13,994 13,844 14,042 Aug-02 14,864 14,046 13,910 14,135 Sep-02 13,568 12,821 12,448 12,599 Oct-02 14,440 13,646 13,438 13,707 Nov-02 15,327 14,484 14,252 14,515 Dec-02 14,635 13,830 13,446 13,661 Jan-03 14,375 13,584 13,117 13,303 Feb-03 14,100 13,325 12,900 13,104 Mar-03 14,114 13,338 13,036 13,231 Apr-03 15,118 14,286 14,101 14,321 May-03 16,163 15,274 14,953 15,076 Jun-03 16,410 15,507 15,154 15,269 Jul-03 16,753 15,831 15,502 15,537 Aug-03 17,138 16,196 15,846 15,840 Sep-03 17,124 16,183 15,673 15,673 Oct-03 18,087 17,092 16,621 16,560 Nov-03 18,403 17,391 16,851 16,705 Dec-03 19,215 18,158 17,621 17,581 Jan-04 19,668 18,587 17,989 17,904 Feb-04 19,916 18,821 18,232 18,153 Mar-04 19,834 18,743 18,015 17,879 Apr-04 19,298 18,237 17,642 17,598 May-04 19,518 18,445 17,898 17,839 Jun-04 19,987 18,887 18,254 18,185 Jul-04 19,217 18,160 17,564 17,583 Aug-04 19,300 18,238 17,636 17,654 Sep-04 19,643 18,563 17,907 17,844 Oct-04 19,918 18,823 18,201 18,117 Nov-04 20,827 19,681 19,047 18,851 Dec-04 21,508 20,325 19,726 19,492 Jan-05 20,929 19,778 19,201 19,017 Feb-05 21,329 20,156 19,623 19,416 Mar-05 21,011 19,855 19,292 19,072 Apr-05 20,639 19,504 18,873 18,710 May-05 21,343 20,169 19,588 19,305 Jun-05 21,563 20,377 19,725 19,332 Jul-05 22,348 21,119 20,534 20,051 Aug-05 22,265 21,040 20,339 19,869 Sep-05 22,334 21,106 20,516 20,029 Oct-05 22,031 20,819 20,132 19,695 Nov-05 22,871 21,613 20,916 20,439 Dec-05 23,008 21,743 20,934 20,446 Jan-06 23,826 22,515 21,634 20,987 Feb-06 23,687 22,385 21,672 21,044 Mar-06 24,159 22,830 22,047 21,305 Apr-06 24,366 23,026 22,286 21,590 May-06 23,452 22,162 21,572 20,969 Jun-06 23,438 22,149 21,611 20,998 Jul-06 23,300 22,018 21,592 21,128 Aug-06 23,881 22,568 22,121 21,631 Sep-06 24,325 22,987 22,616 22,189 Oct-06 25,115 23,733 23,430 22,913
Performance of other share classes will differ. See glossary on page 18 for definitions of indices and terms. (1) Performance reflects ongoing expenses and assumes reinvestment of all dividends and capital gains. It also reflects ongoing fund expenses paid by the Portfolio's applicable Funds, which include the effects of expense reimbursement. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The Portfolio's performance between 1996 and 1999 benefited from the agreement of WM Advisors and its affiliates to limit the Portfolio's expenses. (2) Net asset value is not adjusted for sales charge. (3) Returns shown for the indices assume reinvestment of all dividends and distributions, and since-inception returns shown for the indices are calculated from 7/31/96. Indices are unmanaged, and individuals cannot invest directly in an index. 16 PORTFOLIO MANAGER Asset Allocation Team WM Advisors, Inc. Other asset classes that drove Portfolio per-formance included real estate investment trusts (REITs) and international equities, which realized strong absolute returns. In March, we expanded the Portfolio's exposure to emerging market stocks. This timing missed some of the period's impressive appreciation by emerging market equities, but the Portfolio's core position can provide broader diversification going forward. The Portfolio's fixed-income allocation in high-yield bonds had a positive impact on performance, as the underlying fund achieved strong relative results. Looking forward, we believe that the economy will continue to slow while inflation fears subside, subsequently leading the Federal Reserve to cut short-term interest rates. We anticipate that in 2007, these cuts will begin earlier and occur more often than the market expects. Lower interest rates should bring down bond yields and could support the expansion of equity price multiples. The Portfolio's asset class allocations are designed to take advantage of this soft landing scenario. However, we also feel that choppy market performance is apt to occur in reaction to mixed economic data. In the near term, we are analyzing the Portfolio's six underlying equity funds that will be changing management following our acquisition by The Principal. Given our asset allocation discipline, we are focused on proactively identifying and executing adjustments that might be necessary to keep allocations aligned with our targets and our outlook. PORTFOLIO CHARACTERISTICS AS OF OCTOBER 31, 2006 Equity/Fixed-Income Allocation:(4) 94% Equity/6% Fixed Income Weighted Average Market Capitalization (equities): $61.1 billion Weighted Average P/E (equities):(5) 16.7 Beta: 1.02 Portfolio Standard Deviation: 7.65 S&P 500 Standard Deviation: 8.14 Portfolio Turnover (for fiscal year):(6) 12% Aggregate Portfolio Turnover (for fiscal year):(6) 56% Number of Securities:(7) 1,493 Total Net Assets: $2.3 billion
PORTFOLIO COMPOSITION (4)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ U.S. Large-Cap Growth Stocks 27% 22% +5% U.S. Large-Cap Value Stocks 19% 23% -4% U.S. Mid-Cap Growth Stocks 13% 11% +2% Non-U.S. Developed Market Stocks 12% 11% +1% U.S. Mid-Cap Value Stocks 6% 8% -2% REITs 6% 6% 0% U.S. Small-Cap Growth Stocks 4% 5% -1% U.S. Small-Cap Value Stocks 3% 4% -1% Emerging Market Stocks 3% 2% +1% Convertible Securities 1% 1% 0% High-Yield Corporate Bonds 3% 3% 0% Cash Equivalents 3% 4% -1%
Note: For information about the underlying WM Funds of the SAM Portfolios, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. (4) May not reflect the current portfolio composition. (5) Based on estimated earnings. (6) Portfolio turnover does not reflect turnover of the underlying WM Funds. Aggregate portfolio turnover reflects turnover of the underlying WM Funds and the Portfolio itself. It assumes a constant portfolio allocation identical to the Portfolio's actual allocation as of 10/31/ 06. Current portfolio turnover and aggregate portfolio turnover may differ from data shown above. (7) Represents the sum of securities held by the underlying WM Funds. Some securities may be held by more than one WM Fund. 17 Glossary DEFINITIONS OF INDICES CAPITAL MARKET BENCHMARK: A benchmark intended to represent a relevant proxy for market and Portfolio performance. It is allocated as follows: Flexible Income Portfolio:20% S&P 500 and 80% Lehman Brothers Aggregate Bond Index;Conservative Balanced Portfolio:40% S&P 500 and 60% Lehman Brothers Aggregate Bond Index;Balanced Portfolio:60% S&P 500 and 40% Lehman Brothers Aggregate Bond Index;and Conservative Growth Portfolio:80% S&P 500 and 20% Lehman Brothers Aggregate Bond Index. CITIGROUP BROAD INVESTMENT-GRADE BOND INDEX: Measures the performance of bonds, including U.S. and non-U.S. corporate securities and non-U.S. sovereign and provincial securities. It includes institutionally traded U.S. Treasury, government-sponsored, mortgage, asset-backed, and investment-grade securities. CITIGROUP MORTGAGE INDEX: Represents the mortgage-backed securities component of Citigroup's Broad Investment-Grade Bond Index. It consists of 30- and 15-year agency-issued (GNMA, FNMA, and FHLMC) pass-through securities as well as FNMA and FHLMC balloon mortgages. LEHMAN BROTHERS AGGREGATE BOND INDEX: A broad-based index intended to represent the U.S. fixed-income market. RUSSELL 3000(R) INDEX: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. S&P 500: A broad-based index intended to represent the U.S. equity market. DEFINITIONS OF TERMS BETA: A quantitative measure of a Portfolio's historical volatility relative to the overall market (S&P 500).A beta above 1 indicates more volatility than the market, and a beta below 1 indicates less volatility. Results are calculated using three-month rolling returns for Class A shares for the three-year period ended 10/31/06. Source:Lipper, Inc. STANDARD DEVIATION: Measures the historical fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation (as one measure of risk), the greater the variability of the investment returns. Results are calculated for the three-year period ended 10/31/06, and Portfolio results are for Class A shares. Sources:Ibbotson Associates and Lipper, Inc. 18 Expense Information As a shareholder of the Flexible Income Portfolio, Conservative Balanced Portfolio, Balanced Portfolio, Conservative Growth Portfolio or Strategic Growth Portfolio (collectively, "the Portfolios"), you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase of Class A shares and, if applicable, contingent deferred sales charges on redemption of share and (2) ongoing costs, including management fees, distribution and/or service fees, and other Portfolio expenses. The example below is intended to help you understand your ongoing costs (in dollars) of investing in the Portfolios and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period May 1, 2006, to October 31, 2006. ACTUAL EXPENSES: The first section of the table below provides information about 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 = $8.60), then multiply the result by the number in the third column under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES: The second section of the table below provides information about hypothetical account values and hypothetical expenses based on each Portfolio's actual expense ratio and an assumed rate of return of 5% per year before expenses (rather than each Portfolio's actual rate of return). The hypothetical account values and expenses may not be used to estimate the actual ending balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Portfolios and other mutual funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other mutual funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the hypothetical section of the table is useful in comparing ongoing costs only, and will not help you compare the relative total costs of owning different mutual funds. In addition, if these transactional costs were included, the cost shown would have been higher.
HYPOTHETICAL ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES) ---------------------------------- ---------------------------------- EXPENSES EXPENSES BEGINNING ENDING PAID DURING BEGINNING ENDING PAID DURING ACCOUNT ACCOUNT PERIOD* ACCOUNT ACCOUNT PERIOD* VALUE VALUE 5/1/06- VALUE VALUE 5/1/06- EXPENSE 5/1/06 10/31/06 10/31/06 5/1/06 10/31/06 10/31/06 RATIO --------- -------- ----------- --------- -------- ----------- ------- Flexible Income Portfolio Class A Shares ................ $1,000 $1,037 $3.44 $1,000 $1,022 $3.41 0.67% Class B Shares ................ 1,000 1,034 7.43 1,000 1,018 7.37 1.45% Class C Shares ................ 1,000 1,033 7.28 1,000 1,018 7.22 1.42% Conservative Balanced Portfolio Class A Shares ................ $1,000 $1,037 $3.44 $1,000 $1,022 $3.41 0.67% Class B Shares ................ 1,000 1,033 7.43 1,000 1,018 7.37 1.45% Class C Shares ................ 1,000 1,033 7.33 1,000 1,018 7.27 1.43% Balanced Portfolio Class A Shares ................ $1,000 $1,035 $3.33 $1,000 $1,022 $3.31 0.65% Class B Shares ................ 1,000 1,030 7.32 1,000 1,018 7.27 1.43% Class C Shares ................ 1,000 1,031 7.22 1,000 1,018 7.17 1.41% Conservative Growth Portfolio Class A Shares ................ $1,000 $1,033 $3.38 $1,000 $1,022 $3.36 0.66% Class B Shares ................ 1,000 1,029 7.36 1,000 1,018 7.32 1.44% Class C Shares ................ 1,000 1,029 7.26 1,000 1,018 7.22 1.42% Strategic Growth Portfolio Class A Shares ................ $1,000 $1,031 $3.69 $1,000 $1,022 $3.67 0.72% Class B Shares ................ 1,000 1,026 7.61 1,000 1,018 7.58 1.49% Class C Shares ................ 1,000 1,026 7.51 1,000 1,018 7.48 1.47%
* Expenses are equal to each Portfolio's annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days in the most recent fiscal half-year, divided by 365 days in the year (to reflect the one-half year period). 19 Expense Information (continued) The following table sets forth the estimated ongoing aggregate expenses of the Portfolios, including expenses of Class I shares of various funds in the WM Group of Funds (collectively, the "Underlying Funds"), based upon expenses shown in the table on the prior page for each Portfolio and corresponding expenses for each Underlying Fund's Class I shares. These estimates assume a constant allocation by each Portfolio of its assets among the Underlying Funds identical to the actual allocation of the Portfolio at October 31, 2006. A Portfolio's actual aggregate expenses may be higher as a result of changes in the allocation of the Portfolio's assets among the Underlying Funds, the expenses of the Underlying Funds and/or the Portfolio's own expenses.
HYPOTHETICAL ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES) ---------------------------------- ---------------------------------- ESTIMATED ESTIMATED AGGREGATE AGGREGATE EXPENSES EXPENSES BEGINNING ENDING PAID DURING BEGINNING ENDING PAID DURING ESTIMATED ACCOUNT ACCOUNT PERIOD* ACCOUNT ACCOUNT PERIOD* AGGREGATE VALUE VALUE 5/1/06- VALUE VALUE 5/1/06- EXPENSE 5/1/06 10/31/06 10/31/06 5/1/06 10/31/06 10/31/06 RATIO --------- -------- ----------- --------- -------- ----------- --------- Flexible Income Portfolio Class A Shares ................ $1,000 $1,037 $ 6.31 $1,000 $1,019 $ 6.26 1.23% Class B Shares ................ 1,000 1,034 10.30 1,000 1,015 10.21 2.01% Class C Shares ................ 1,000 1,033 10.15 1,000 1,015 10.06 1.98% Conservative Balanced Portfolio Class A Shares ................ $1,000 $1,037 $ 6.47 $1,000 $1,019 $ 6.41 1.26% Class B Shares ................ 1,000 1,033 10.45 1,000 1,015 10.36 2.04% Class C Shares ................ 1,000 1,033 10.35 1,000 1,015 10.26 2.02% Balanced Portfolio Class A Shares ................ $1,000 $1,035 $ 6.56 $1,000 $1,019 $ 6.51 1.28% Class B Shares ................ 1,000 1,030 10.54 1,000 1,015 10.46 2.06% Class C Shares ................ 1,000 1,031 10.44 1,000 1,015 10.36 2.04% Conservative Growth Portfolio Class A Shares ................ $1,000 $1,033 $ 6.71 $1,000 $1,019 $ 6.67 1.31% Class B Shares ................ 1,000 1,029 10.69 1,000 1,015 10.61 2.09% Class C Shares ................ 1,000 1,029 10.58 1,000 1,015 10.51 2.07% Strategic Growth Portfolio Class A Shares ................ $1,000 $1,031 $ 7.22 $1,000 $1,018 $ 7.17 1.41% Class B Shares ................ 1,000 1,026 11.13 1,000 1,014 11.07 2.18% Class C Shares ................ 1,000 1,026 11.03 1,000 1,014 10.97 2.16%
* Expenses are equal to each Portfolio's annualized expense ratio, multiplied by the average account value over the period, multiplied by the 184 days in the most recent fiscal half-year, divided by 365 days in the year (to reflect the one-half year period). 20 Financial Statements: Portfolios of Investments FLEXIBLE INCOME PORTFOLIO October 31, 2006
VALUE SHARES (000S) - ---------- -------- INVESTMENT COMPANY SECURITIES -- 100.0% EQUITY FUNDS -- 25.6% 1,774,927 WM Equity Income Fund .......................... $ 39,812 1,938,075 WM Growth & Income Fund ........................ 53,374 3,621,984 WM Growth Fund ................................. 63,711 1,181,439 WM Mid Cap Stock Fund .......................... 24,976 419,895 WM REIT Fund ................................... 9,275 611,467 WM Small Cap Growth Fund+ ...................... 9,343 765,097 WM Small Cap Value Fund ........................ 9,801 262,137 WM West Coast Equity Fund ...................... 11,419 -------- Total Equity Funds (Cost $149,393) ............................. 221,711 -------- FIXED-INCOME FUNDS -- 74.4% 6,527,510 WM High Yield Fund ............................. 57,311 23,672,049 WM Income Fund ................................. 215,652 43,913,189 WM Short Term Income Fund ...................... 101,879 25,615,933 WM U.S. Government Securities Fund ............. 270,248 -------- Total Fixed-Income Funds (Cost $643,519) ............................. 645,090 -------- Total Investment Company Securities (Cost $792,912) ............................. 866,801 --------
PRINCIPAL AMOUNT (000S) - ---------- REPURCHASE AGREEMENT -- 0.3% (Cost $2,742) $ 2,742 Agreement with Morgan Stanley, 5.270% dated 10/31/2006, to be repurchased at $2,742,000 on 11/01/2006 (collateralized by U.S Treasury Note, 2.000% due 01/15/2016, market value $2,834,000) .................... 2,742 -------- TOTAL INVESTMENTS (Cost $795,654*) .......................... 100.3% 869,543 OTHER ASSETS (LIABILITIES) (NET) ............................ (0.3) (2,229) ----- -------- NET ASSETS .................................................. 100.0% $867,314 ===== ========
- ---------- * Aggregate cost for federal tax purposes is $803,755. + Non-income producing security. CONSERVATIVE BALANCED PORTFOLIO October 31, 2006
VALUE SHARES (000S) - ---------- -------- INVESTMENT COMPANY SECURITIES -- 99.8% EQUITY FUNDS -- 44.5% 2,638,136 WM Equity Income Fund .......................... $ 59,174 1,903,681 WM Growth & Income Fund ........................ 52,427 3,652,830 WM Growth Fund ................................. 64,253 2,623,920 WM International Growth Fund ................... 34,951 1,049,968 WM Mid Cap Stock Fund .......................... 22,196 642,063 WM REIT Fund ................................... 14,183 476,428 WM Small Cap Growth Fund+ ...................... 7,280 621,416 WM Small Cap Value Fund ........................ 7,960 593,609 WM West Coast Equity Fund ...................... 25,858 -------- Total Equity Funds (Cost $213,753) ............................. 288,282 -------- FIXED-INCOME FUNDS -- 55.3% 4,266,214 WM High Yield Fund ............................. 37,457 12,647,139 WM Income Fund ................................. 115,215 15,559,806 WM Short Term Income Fund ...................... 36,099 16,048,811 WM U.S. Government Securities Fund ............. 169,315 -------- Total Fixed-Income Funds (Cost $359,652) ............................. 358,086 -------- Total Investment Company Securities (Cost $573,405) ............................. 646,368 --------
PRINCIPAL AMOUNT (000S) - ---------- REPURCHASE AGREEMENT -- 0.4% (Cost $2,222) $ 2,222 Agreement with Morgan Stanley, 5.270% dated 10/31/2006, to be repurchased at $2,222,000 on 11/01/2006 (collateralized by U.S Treasury Note, 2.000% due 01/15/2016, market value $2,296,000) .................... 2,222 -------- TOTAL INVESTMENTS (Cost $575,627*) .......................... 100.2% 648,590 OTHER ASSETS (LIABILITIES) (NET) ............................ (0.2) (998) ----- -------- NET ASSETS .................................................. 100.0% $647,592 ===== ========
- ---------- * Aggregate cost for federal tax purposes is $579,699. + Non-income producing security. See Notes to Financial Statements. 21 Portfolios of Investments BALANCED PORTFOLIO October 31, 2006
VALUE SHARES (000S) - ---------- ---------- INVESTMENT COMPANY SECURITIES -- 99.6% EQUITY FUNDS -- 66.7% 25,452,906 WM Equity Income Fund ........................ $ 570,909 20,620,000 WM Growth & Income Fund ...................... 567,875 42,293,680 WM Growth Fund ............................... 743,946 29,041,873 WM International Growth Fund ................. 386,838 11,303,897 WM Mid Cap Stock Fund ........................ 238,964 6,943,837 WM REIT Fund ................................. 153,389 5,751,117 WM Small Cap Growth Fund+ .................... 87,877 7,484,011 WM Small Cap Value Fund ...................... 95,870 6,468,699 WM West Coast Equity Fund .................... 281,776 ---------- Total Equity Funds (Cost $2,343,507) ......................... 3,127,444 ---------- FIXED-INCOME FUNDS -- 32.9% 24,487,823 WM High Yield Fund ........................... 215,003 53,059,963 WM Income Fund ............................... 483,376 18,996,851 WM Short Term Income Fund .................... 44,073 76,004,999 WM U.S. Government Securities Fund ........... 801,853 ---------- Total Fixed-Income Funds (Cost $1,538,196) ......................... 1,544,305 ---------- Total Investment Company Securities (Cost $3,881,703) ......................... 4,671,749 ----------
PRINCIPAL AMOUNT (000S) - ---------- REPURCHASE AGREEMENT -- 0.5% (Cost $22,264) $ 22,264 Agreement with Morgan Stanley, 5.270% dated 10/31/2006, to be repurchased at $22,267,000 on 11/01/2006 (collateralized by U.S Treasury Note, 2.000% due 01/15/2016, market value $23,009,000) .............................. 22,264 ---------- TOTAL INVESTMENTS (COST $3,903,967*) ...................... 100.1% 4,694,013 OTHER ASSETS (LIABILITIES) (NET) .......................... (0.1) (6,457) ----- ---------- NET ASSETS ................................................ 100.0% $4,687,556 ===== ==========
- ---------- * Aggregate cost for federal tax purposes is $3,942,141. + Non-income producing security. CONSERVATIVE GROWTH PORTFOLIO OCTOBER 31, 2006
VALUE SHARES (000S) - ---------- ---------- INVESTMENT COMPANY SECURITIES -- 100.0% EQUITY FUNDS -- 86.2% 27,504,485 WM Equity Income Fund ........................ $ 616,926 22,272,138 WM Growth & Income Fund ...................... 613,375 42,763,397 WM Growth Fund ............................... 752,208 29,310,687 WM International Growth Fund ................. 390,418 11,886,500 WM Mid Cap Stock Fund ........................ 251,281 7,497,473 WM REIT Fund ................................. 165,619 6,543,442 WM Small Cap Growth Fund+ .................... 99,984 8,433,938 WM Small Cap Value Fund ...................... 108,039 6,881,323 WM West Coast Equity Fund .................... 299,750 ---------- Total Equity Funds (Cost $2,517,321) ......................... 3,297,600 ---------- FIXED-INCOME FUNDS -- 13.8% 11,065,461 WM High Yield Fund ........................... 97,155 16,355,389 WM Income Fund ............................... 148,997 26,569,201 WM U.S. Government Securities Fund ........... 280,305 ---------- Total Fixed-Income Funds (Cost $515,411) ........................... 526,457 ---------- Total Investment Company Securities (Cost $3,032,732) ......................... 3,824,057 ----------
PRINCIPAL AMOUNT (000S) - ---------- REPURCHASE AGREEMENT -- 0.1% (Cost $3,510) $ 3,510 Agreement with Morgan Stanley, 5.270% dated 10/31/2006, to be repurchased at $3,511,000 on 11/01/2006 (collateralized by U.S Treasury Note, 2.000% due 01/15/2016, market value $3,627,000) ...... 3,510 ---------- TOTAL INVESTMENTS (Cost $3,036,242*) ...................... 100.1% 3,827,567 OTHER ASSETS (LIABILITIES) (NET) .......................... (0.1) (4,776) ----- ---------- NET ASSETS ................................................ 100.0% $3,822,791 ===== ==========
- ---------- * Aggregate cost for federal tax purposes is $3,057,132. + Non-income producing security. See Notes to Financial Statements. 22 Portfolio of Investments STRATEGIC GROWTH PORTFOLIO October 31, 2006
VALUE SHARES (000S) - ---------- ---------- INVESTMENT COMPANY SECURITIES -- 100.1% EQUITY FUNDS -- 96.0% 17,820,458 WM Equity Income Fund ........................ $ 399,713 14,473,059 WM Growth & Income Fund ...................... 398,588 30,645,273 WM Growth Fund ............................... 539,050 20,558,682 WM International Growth Fund ................. 273,842 8,896,395 WM Mid Cap Stock Fund ........................ 188,070 4,578,008 WM REIT Fund ................................. 101,128 4,302,818 WM Small Cap Growth Fund+ .................... 65,747 5,530,801 WM Small Cap Value Fund ...................... 70,849 4,770,979 WM West Coast Equity Fund .................... 207,824 ---------- Total Equity Funds (Cost $1,767,142) ......................... 2,244,811 ---------- FIXED-INCOME FUND -- 4.1% (Cost $85,271) 10,830,531 WM High Yield Fund ........................... 95,092 ---------- Total Investment Company Securities (Cost $1,852,413) ......................... 2,339,903 ----------
PRINCIPAL AMOUNT (000S) - ---------- REPURCHASE AGREEMENT -- 0.0% (Cost $976) $ 976 Agreement with Morgan Stanley, 5.270% dated 10/31/2006, to be repurchased at $976,000 on 11/01/2006 (collateralized by U.S Treasury Note, 2.000% due 01/15/2016, market value $1,009,000) ...... 976 ---------- TOTAL INVESTMENTS (Cost $1,853,389*) ...................... 100.1% 2,340,879 OTHER ASSETS (LIABILITIES) (NET) .......................... (0.1) (2,339) ----- ---------- NET ASSETS ................................................ 100.0% $2,338,540 ===== ==========
- ---------- * Aggregate cost for federal tax purposes is $1,874,405. + Non-income producing security. See Notes to Financial Statements. 23 Statements of Assets and Liabilities October 31, 2006 (In thousands)
FLEXIBLE CONSERVATIVE CONSERVATIVE STRATEGIC INCOME BALANCED BALANCED GROWTH GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- ------------ ---------- ------------ ---------- ASSETS: Investments, at cost .................................. $795,654 $575,627 $3,903,967 $3,036,242 $1,853,389 ======== ======== ========== ========== ========== Investments, at value ................................. $869,543 $648,590 $4,694,013 $3,827,567 $2,340,879 Receivable for Portfolio shares sold .................. 847 524 4,761 3,756 2,715 Receivable for investment securities sold ............. -- -- 740 490 1,020 Prepaid expenses and other assets ..................... 6 5 28 21 13 -------- -------- ---------- ---------- ---------- Total Assets ....................................... 870,396 649,119 4,699,542 3,831,834 2,344,627 -------- -------- ---------- ---------- ---------- LIABILITIES: Payable for Portfolio shares redeemed ................. 2,137 860 7,389 5,097 3,573 Investment advisory fee payable ....................... 231 172 1,237 1,009 616 Shareholder servicing and distribution fees payable ... 483 351 2,444 2,073 1,291 Transfer agent fees payable ........................... 73 31 254 252 152 Accrued legal and audit fees .......................... 29 28 43 40 34 Accrued expenses and other payables ................... 129 85 619 572 421 -------- -------- ---------- ---------- ---------- Total Liabilities .................................. 3,082 1,527 11,986 9,043 6,087 -------- -------- ---------- ---------- ---------- NET ASSETS ............................................ $867,314 $647,592 $4,687,556 $3,822,791 $2,338,540 ======== ======== ========== ========== ========== NET ASSETS CONSIST OF: Undistributed net investment income ................... $ 2,179 $ 1,089 $ 3,615 $ 4,532 $ 1,424 Accumulated net realized gain/(loss) on investment transactions ....................................... (5,351) 405 (13,547) (25,229) (24,363) Net unrealized appreciation of investments ............ 73,889 72,963 790,046 791,325 487,490 Paid-in capital ....................................... 796,597 573,135 3,907,442 3,052,163 1,873,989 -------- -------- ---------- ---------- ---------- Total Net Assets ................................... $867,314 $647,592 $4,687,556 $3,822,791 $2,338,540 ======== ======== ========== ========== ========== NET ASSETS: Class A Shares ........................................ $401,786 $309,946 $2,389,102 $1,822,661 $1,074,546 ======== ======== ========== ========== ========== Class B Shares ........................................ $317,142 $166,857 $1,414,695 $1,093,660 $ 718,841 ======== ======== ========== ========== ========== Class C Shares ........................................ $148,386 $170,789 $ 883,759 $ 906,470 $ 545,153 ======== ======== ========== ========== ========== SHARES OUTSTANDING: Class A Shares ........................................ 34,802 27,864 164,674 110,874 59,268 ======== ======== ========== ========== ========== Class B Shares ........................................ 27,508 15,027 97,752 68,958 41,842 ======== ======== ========== ========== ========== Class C Shares ........................................ 12,935 15,445 61,388 57,552 31,654 ======== ======== ========== ========== ========== CLASS A SHARES:** Net asset value per share of beneficial interest outstanding* ....................................... $ 11.54 $ 11.12 $ 14.51 $ 16.44 $ 18.13 ======== ======== ========== ========== ========== Maximum sales charge .................................. 4.50% 5.50% 5.50% 5.50% 5.50% ======== ======== ========== ========== ========== Maximum offering price per share of beneficial interest outstanding ............................... $ 12.08 $ 11.77 $ 15.35 $ 17.40 $ 19.19 ======== ======== ========== ========== ========== CLASS B SHARES:** Net asset value and offering price per share of beneficial interest outstanding* ................... $ 11.53 $ 11.10 $ 14.47 $ 15.86 $ 17.18 ======== ======== ========== ========== ========== CLASS C SHARES:** Net asset value and offering price per share of beneficial interest outstanding* ................... $ 11.47 $ 11.06 $ 14.40 $ 15.75 $ 17.22 ======== ======== ========== ========== ==========
- ---------- * Redemption price per share is equal to net asset value per share less any applicable contingent deferred sales charge. ** Net asset values and maximum offering price are not shown in thousands. See Notes to Financial Statements. 24 Statements of Operations For the Year Ended October 31, 2006 (In thousands)
FLEXIBLE CONSERVATIVE CONSERVATIVE STRATEGIC INCOME BALANCED BALANCED GROWTH GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- ------------ ---------- ------------ ---------- INVESTMENT INCOME: Dividends from investment company securities .......... $39,834 $22,845 $120,038 $ 67,344 $ 31,888 Interest .............................................. 64 65 1,520 130 101 ------- ------- -------- -------- -------- Total investment income ......................... 39,898 22,910 121,558 67,474 31,989 ------- ------- -------- -------- -------- EXPENSES: Investment advisory fee ............................... 2,937 2,021 14,339 11,566 6,957 Custodian fees ........................................ 10 3 2 4 5 Legal and audit fees .................................. 38 33 96 81 58 Trustees' fees ........................................ 19 13 89 72 43 Other ................................................. 362 283 1,351 1,266 1,157 Shareholder servicing and distribution fees: Class A Shares ..................................... 1,070 767 5,739 4,343 2,514 Class B Shares ..................................... 3,496 1,698 14,325 10,968 7,078 Class C Shares ..................................... 1,562 1,661 8,323 8,446 4,990 Transfer agent fees: Class A Shares ..................................... 267 182 1,336 1,190 898 Class B Shares ..................................... 294 142 1,163 983 745 Class C Shares ..................................... 104 104 525 636 479 ------- ------- -------- -------- -------- Total expenses .................................. 10,159 6,907 47,288 39,555 24,924 Fees reduced by custodian credits ..................... --* --* --* --* --* ------- ------- -------- -------- -------- Net expenses .................................... 10,159 6,907 47,288 39,555 24,924 ------- ------- -------- -------- -------- NET INVESTMENT INCOME ................................. 29,739 16,003 74,270 27,919 7,065 ------- ------- -------- -------- -------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain/(loss) on investment transactions ... (2,293) (177) 7,075 8,689 6,391 Capital gain distributions received ................... 4,116 4,105 45,198 45,983 32,414 Net change in unrealized appreciation/ depreciation of investments ........................................ 29,771 34,661 335,824 343,872 228,199 ------- ------- -------- -------- -------- Net realized and unrealized gain on investments ....... 31,594 38,589 388,097 398,544 267,004 ------- ------- -------- -------- -------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .. $61,333 $54,592 $462,367 $426,463 $274,069 ======= ======= ======== ======== ========
- ---------- * Amount represents less than $500. See Notes to Financial Statements. 25 Statements of Changes in Net Assets (In thousands)
FLEXIBLE CONSERVATIVE INCOME PORTFOLIO BALANCED PORTFOLIO BALANCED PORTFOLIO ---------------------- ---------------------- ---------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 10/31/06 10/31/05 10/31/06 10/31/05 10/31/06 10/31/05 ---------- ---------- ---------- ---------- ---------- ---------- Net investment income/(loss) .......................... $ 29,739 $ 25,572 $ 16,003 $ 11,225 $ 74,270 $ 50,245 Net realized gain/(loss) on investment transactions ... (2,293) (294) (177) 24 7,075 (671) Capital gain distributions received ................... 4,116 1,239 4,105 1,041 45,198 11,568 Net change in unrealized appreciation/ depreciation of investments ..................................... 29,771 (4,746) 34,661 9,351 335,824 179,183 --------- -------- -------- -------- ---------- ---------- Net increase in net assets resulting from operations .. 61,333 21,771 54,592 21,641 462,367 240,325 Distributions to shareholders from: Net investment income: Class A Shares .................................. (15,695) (12,642) (8,934) (6,169) (48,045) (31,381) Class B Shares .................................. (10,067) (9,207) (3,662) (2,814) (19,331) (13,452) Class C Shares .................................. (4,575) (3,397) (3,645) (2,133) (11,433) (5,984) Class R-1 Shares ................................ -- -- -- -- (2) -- Class R-2 Shares ................................ -- -- (1) -- (1) -- Net realized gains on investments: Class A Shares .................................. (1,189) (1,159) (454) (307) -- -- Class B Shares .................................. (1,004) (1,306) (263) (231) -- -- Class C Shares .................................. (425) (401) (243) (146) -- -- Net increase/(decrease) in net assets from Portfolio share transactions: Class A Shares .................................. (54,414) 88,792 282 79,532 70,848 511,715 Class B Shares .................................. (77,609) (33,003) (12,930) 4,826 (126,471) (7,480) Class C Shares .................................. (18,578) 35,589 8,977 52,920 79,786 223,780 --------- -------- -------- -------- ---------- ---------- Net increase/(decrease) in net assets ................. (122,223) 85,037 33,719 147,119 407,718 917,523 NET ASSETS: Beginning of year ..................................... 989,537 904,500 613,873 466,754 4,279,838 3,362,315 --------- -------- -------- -------- ---------- ---------- End of year ........................................... $ 867,314 $989,537 $647,592 $613,873 $4,687,556 $4,279,838 ========= ======== ======== ======== ========== ========== Undistributed net investment income at end of year .... $ 2,179 $ 2,173 $ 1,089 $ 799 $ 3,615 $ 2,073 ========= ======== ======== ======== ========== ========== TAX CHARACTER OF DISTRIBUTIONS PAID: Ordinary income ....................................... $ 30,693 $ 26,279 $ 16,383 $ 11,703 $ 78,812 $ 50,817 Long-term capital gains ............................... 2,262 1,833 819 97 -- -- --------- -------- -------- -------- ---------- ---------- Total ................................................. $ 32,955 $ 28,112 $ 17,202 $ 11,800 $ 78,812 $ 50,817 ========= ======== ======== ======== ========== ==========
See Notes to Financial Statements. 26
CONSERVATIVE STRATEGIC GROWTH PORTFOLIO GROWTH PORTFOLIO ---------------------- ---------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 10/31/06 10/31/05 10/31/06 10/31/05 ---------- ---------- ---------- ---------- Net investment income/(loss) .......................... $ 27,919 $ 14,329 $ 7,065 $ (937) Net realized gain/(loss) on investment transactions ... 8,689 (2,370) 6,391 (2,613) Capital gain distributions received ................... 45,983 12,156 32,414 8,964 Net change in unrealized appreciation/ depreciation of investments ..................................... 343,872 220,107 228,199 155,476 ---------- ---------- ---------- ---------- Net increase in net assets resulting from operations .. 426,463 244,222 274,069 160,890 Distributions to shareholders from: Net investment income: Class A Shares .................................. (14,884) (11,899) (5,113) (1,610) Class B Shares .................................. (8,753) (2,201) (3,135) -- Class C Shares .................................. (6,373) (2,378) (2,033) -- Class R-1 Shares ................................ -- -- -- -- Class R-2 Shares ................................ -- -- -- -- Net realized gains on investments: Class A Shares .................................. -- -- -- -- Class B Shares .................................. -- -- -- -- Class C Shares .................................. -- -- -- -- Net increase/(decrease) in net assets from Portfolio share transactions: Class A Shares .................................. 68,279 300,718 66,014 206,269 Class B Shares .................................. (81,636) (22,833) (37,097) 535 Class C Shares .................................. 90,901 203,027 69,979 110,472 ---------- ---------- ---------- ---------- Net increase/(decrease) in net assets ................. 473,997 708,656 362,684 476,556 NET ASSETS: Beginning of year ..................................... 3,348,794 2,640,138 1,975,856 1,499,300 ---------- ---------- ---------- ---------- End of year ........................................... $3,822,791 $3,348,794 $2,338,540 $1,975,856 ========== ========== ========== ========== Undistributed net investment income at end of year .... $ 4,532 $ 107 $ 1,424 $ 166 ========== ========== ========== ========== TAX CHARACTER OF DISTRIBUTIONS PAID: Ordinary income ....................................... $ 30,010 $ 16,478 $ 10,281 $ 1,610 Long-term capital gains ............................... -- -- -- -- ---------- ---------- ---------- ---------- Total ................................................. $ 30,010 $ 16,478 $ 10,281 $ 1,610 ========== ========== ========== ==========
See Notes to Financial Statements. 27 Statements of Changes in Net Assets -- Capital Stock Activity (In thousands) FLEXIBLE INCOME PORTFOLIO
ISSUED AS REINVESTMENT NET INCREASE/ SOLD OF DIVIDENDS REDEEMED (DECREASE) ----------------- ---------------- ------------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ ------- ------ --------- ------- -------- ------ YEAR ENDED 10/31/06: Class A Shares .... $111,970 9,890 $14,517 1,288 $(180,901) (16,000) $(54,414) (4,822) Class B Shares .... 25,913 2,295 9,517 845 (113,039) (10,009) (77,609) (6,869) Class C Shares .... 43,206 3,848 4,339 387 (66,123) (5,883) (18,578) (1,648) Class R-1 Shares .. 44 4 -- -- (44) (4) -- -- Class R-2 Shares .. 5 -- -- -- (5) -- -- -- YEAR ENDED 10/31/05: Class A Shares .... $209,417 18,516 $11,907 1,055 $(132,532) (11,727) $ 88,792 7,844 Class B Shares .... 60,992 5,423 9,136 810 (103,131) (9,139) (33,003) (2,906) Class C Shares .... 81,325 7,239 3,329 297 (49,065) (4,370) 35,589 3,166
CONSERVATIVE BALANCED PORTFOLIO
ISSUED AS REINVESTMENT NET INCREASE/ SOLD OF DIVIDENDS REDEEMED (DECREASE) ----------------- --------------- ------------------ ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ ------ ------ --------- ------ -------- ------ YEAR ENDED 10/31/06: Class A Shares .... $ 87,710 8,160 $8,406 783 $(95,834) (8,907) $ 282 36 Class B Shares .... 21,449 2,015 3,612 337 (37,991) (3,552) (12,930) (1,200) Class C Shares .... 44,537 4,168 3,608 338 (39,168) (3,658) 8,977 848 Class R-1 Shares .. 2 -- -- -- (2) -- -- -- Class R-2 Shares .. 103 10 1 -- (104) (10) -- -- YEAR ENDED 10/31/05: Class A Shares .... $143,665 13,693 $5,799 553 $(69,932) (6,655) $ 79,532 7,591 Class B Shares .... 34,134 3,265 2,710 258 (32,018) (3,061) 4,826 462 Class C Shares .... 73,937 7,088 2,045 196 (23,062) (2,211) 52,920 5,073
BALANCED PORTFOLIO
ISSUED AS REINVESTMENT NET INCREASE/ SOLD OF DIVIDENDS REDEEMED (DECREASE) ----------------- ---------------- ------------------- ------------------ AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ ------- ------ --------- ------- --------- ------ YEAR ENDED 10/31/06: Class A Shares .... $522,607 37,645 $44,010 3,182 $(495,769) (35,748) $ 70,848 5,079 Class B Shares .... 116,766 8,430 18,045 1,311 (261,282) (18,879) (126,471) (9,138) Class C Shares .... 225,375 16,369 10,504 767 (156,093) (11,334) 79,786 5,802 Class R-1 Shares .. 370 26 2 -- (372) (26) -- -- Class R-2 Shares .. 83 6 -- -- (83) (6) -- -- YEAR ENDED 10/31/05: Class A Shares .... $793,211 60,281 $28,968 2,194 $(310,464) (23,564) $ 511,715 38,911 Class B Shares .... 195,378 14,915 12,481 948 (215,339) (16,412) (7,480) (549) Class C Shares .... 325,240 24,889 5,544 423 (107,004) (8,188) 223,780 17,124
See Notes to Financial Statements. 28 Statements of Changes in Net Assets -- Capital Stock Activity (continued) (In thousands) CONSERVATIVE GROWTH PORTFOLIO
ISSUED AS REINVESTMENT NET INCREASE/ SOLD OF DIVIDENDS REDEEMED (DECREASE) ----------------- ---------------- ------------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ ------- ------ --------- ------- -------- ------ YEAR ENDED 10/31/06: Class A Shares .... $366,364 23,610 $14,092 927 $(312,177) (20,066) $ 68,279 4,471 Class B Shares .... 93,804 6,249 8,512 576 (183,952) (12,223) (81,636) (5,398) Class C Shares .... 228,099 15,289 5,943 406 (143,141) (9,570) 90,901 6,125 Class R-1 Shares .. 374 24 -- -- (374) (24) -- -- Class R-2 Shares .. 335 22 -- -- (335) (22) -- -- YEAR ENDED 10/31/05: Class A Shares .... $511,183 35,691 $11,340 790 $(221,805) (15,434) $300,718 21,047 Class B Shares .... 157,022 11,277 2,100 150 (181,955) (13,063) (22,833) (1,636) Class C Shares .... 295,161 21,286 2,203 158 (94,337) (6,788) 203,027 14,656
STRATEGIC GROWTH PORTFOLIO
ISSUED AS REINVESTMENT NET INCREASE/ SOLD OF DIVIDENDS REDEEMED (DECREASE) ----------------- --------------- ------------------- ----------------- AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES -------- ------ ------ ------ --------- ------- -------- ------ YEAR ENDED 10/31/06: Class A Shares .... $244,967 14,356 $4,861 291 $(183,814) (10,747) $ 66,014 3,900 Class B Shares .... 72,573 4,465 3,047 191 (112,717) (6,931) (37,097) (2,275) Class C Shares .... 150,851 9,270 1,893 119 (82,765) (5,068) 69,979 4,321 Class R-1 Shares .. 333 21 -- -- (333) (21) -- -- Class R-2 Shares .. 117 7 -- -- (117) (7) -- -- YEAR ENDED 10/31/05: Class A Shares .... $337,997 21,789 $1,537 99 $(133,265) (8,553) $206,269 13,335 Class B Shares .... 112,864 7,597 -- -- (112,329) (7,568) 535 29 Class C Shares .... 167,135 11,236 -- -- (56,663) (3,794) 110,472 7,442
See Notes to Financial Statements. 29 Financial Highlights FLEXIBLE INCOME PORTFOLIO For a Portfolio share outstanding throughout each period.
INCOME/(LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS -------------------------------------- ------------------------------------------ NET REALIZED NET AND ASSET UNREALIZED DIVIDENDS DISTRIBUTIONS VALUE NET GAIN/(LOSS) TOTAL FROM FROM NET FROM NET BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME(1) CAPITAL GAINS DISTRIBUTIONS --------- ---------- ------------ ---------- ---------- ------------- ------------- CLASS A SHARES Year Ended: 10/31/06 $11.19 $0.41 $ 0.39 $ 0.80 $(0.42) $(0.03) $(0.45) 10/31/05 11.26 0.35 (0.03) 0.32 (0.35) (0.04) (0.39) 10/31/04 10.92 0.34(6) 0.35 0.69 (0.35) -- (0.35) 10/31/03 10.17 0.38(6) 0.77 1.15 (0.38) (0.02) (0.40) 10/31/02 10.71 0.45(6) (0.48) (0.03) (0.43) (0.08) (0.51) CLASS B SHARES Year Ended: 10/31/06 $11.17 $0.33 $ 0.39 $ 0.72 $(0.33) $(0.03) $(0.36) 10/31/05 11.24 0.26 (0.03) 0.23 (0.26) (0.04) (0.30) 10/31/04 10.90 0.26(6) 0.34 0.60 (0.26) -- (0.26) 10/31/03 10.15 0.30(6) 0.77 1.07 (0.30) (0.02) (0.32) 10/31/02 10.71 0.38(6) (0.50) (0.12) (0.36) (0.08) (0.44) CLASS C SHARES Year Ended: 10/31/06 $11.12 $0.32 $ 0.39 $ 0.71 $(0.33) $(0.03) $(0.36) 10/31/05 11.19 0.26 (0.03) 0.23 (0.26) (0.04) (0.30) 10/31/04 10.86 0.26(6) 0.34 0.60 (0.27) -- (0.27) 10/31/03 10.13 0.30(6) 0.76 1.06 (0.31) (0.02) (0.33) 10/31/02(5) 10.54 0.24(6) (0.43) (0.19) (0.22) -- (0.22) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA ---------------------------------------------------------------------- RATIO OF RATIO OF EXPENSES EXPENSES RATIO OF NET NET TO AVERAGE TO AVERAGE NET ASSET ASSETS NET ASSETS NET ASSETS INVESTMENT VALUE END OF BEFORE AFTER INCOME TO PORTFOLIO END OF TOTAL PERIOD REIMBURSEMENTS/ REIMBURSEMENTS/ AVERAGE TURNOVER PERIOD RETURN(2) (IN 000S) WAIVERS(3) WAIVERS(3)(4) NET ASSETS RATE ------ --------- --------- --------------- --------------- ---------- --------- CLASS A SHARES Year Ended: 10/31/06 $11.54 7.28% $401,786 0.67% 0.67% 3.60% 8% 10/31/05 11.19 2.79 443,361 1.00 1.00 3.10 3 10/31/04 11.26 6.38 357,735 1.02 1.02 3.07 3 10/31/03 10.92 11.49 224,192 1.04 1.04 3.64 3 10/31/02 10.17 (0.37) 144,710 1.06 1.06 4.41 9 CLASS B SHARES Year Ended: 10/31/06 $11.53 6.54% $317,142 1.44% 1.44% 2.83% 8% 10/31/05 11.17 1.99 384,036 1.77 1.77 2.33 3 10/31/04 11.24 5.56 418,994 1.79 1.79 2.30 3 10/31/03 10.90 10.60 371,639 1.79 1.79 2.89 3 10/31/02 10.15 (1.08) 244,999 1.81 1.81 3.66 9 CLASS C SHARES Year Ended: 10/31/06 $11.47 6.52% $148,386 1.43% 1.43% 2.84% 8% 10/31/05 11.12 2.06 162,140 1.76 1.76 2.34 3 10/31/04 11.19 5.57 127,771 1.78 1.78 2.31 3 10/31/03 10.86 10.63 68,746 1.79 1.79 2.89 3 10/31/02(5) 10.13 (1.78) 20,677 1.81(7) 1.81(7) 3.66(7) 9
(1) Includes dividends paid from the short-term portion of capital gain distributions received from the Underlying Funds. (2) Total return is not annualized for periods of less than one year and does not reflect any applicable sales charges. The total return would have been lower if certain fees had not been waived and/or expenses reimbursed by the investment advisor or if fees had not been reduced by credits allowed by the custodian. (3) The Portfolio also will indirectly bear its prorated share of expenses of the Underlying Funds. (4) Ratio of operating expenses to average net assets includes expenses paid indirectly. (5) The Portfolio commenced selling Class C shares on March 1, 2002. (6) Per share numbers have been calculated using the average shares method. (7) Annualized. See Notes to Financial Statements. 30 Financial Highlights CONSERVATIVE BALANCED PORTFOLIO For a Portfolio share outstanding throughout each period.
INCOME/(LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS -------------------------------------- ------------------------------------------ NET REALIZED NET AND ASSET UNREALIZED DIVIDENDS DISTRIBUTIONS VALUE NET GAIN/(LOSS) TOTAL FROM FROM NET FROM NET BEGINNING INVESTMENT ON INVESTMENT INVESTMENT REALIZED TOTAL OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME(1) CAPITAL GAINS DISTRIBUTIONS --------- ---------- ------------ ---------- ---------- ------------- ------------- CLASS A SHARES Year Ended: 10/31/06 $10.49 $0.31 $ 0.65 $ 0.96 $(0.31) $(0.02) $(0.33) 10/31/05 10.27 0.26(6) 0.23 0.49 (0.26) (0.01) (0.27) 10/31/04 9.81 0.24 0.47 0.71 (0.25) -- (0.25) 10/31/03 8.83 0.28(6) 0.97 1.25 (0.27) -- (0.27) 10/31/02 9.43 0.33 (0.61) (0.28) (0.32) -- (0.32) CLASS B SHARES Year Ended: 10/31/06 $10.47 $0.23 $ 0.65 $ 0.88 $(0.23) $(0.02) $(0.25) 10/31/05 10.25 0.18(6) 0.23 0.41 (0.18) (0.01) (0.19) 10/31/04 9.79 0.17 0.46 0.63 (0.17) -- (0.17) 10/31/03 8.82 0.21(6) 0.96 1.17 (0.20) -- (0.20) 10/31/02 9.43 0.27 (0.62) (0.35) (0.26) -- (0.26) CLASS C SHARES Year Ended: 10/31/06 $10.43 $0.23 $ 0.65 $ 0.88 $(0.23) $(0.02) $(0.25) 10/31/05 10.22 0.18(6) 0.22 0.40 (0.18) (0.01) (0.19) 10/31/04 9.76 0.16 0.48 0.64 (0.18) -- (0.18) 10/31/03 8.80 0.21(6) 0.97 1.18 (0.22) -- (0.22) 10/31/02(5) 9.39 0.16 (0.60) (0.44) (0.15) -- (0.15) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA ---------------------------------------------------------------------- RATIO OF RATIO OF EXPENSES EXPENSES RATIO OF NET NET TO AVERAGE TO AVERAGE NET ASSET ASSETS NET ASSETS NET ASSETS INVESTMENT VALUE END OF BEFORE AFTER INCOME TO PORTFOLIO END OF TOTAL PERIOD REIMBURSEMENTS/ REIMBURSEMENTS/ AVERAGE TURNOVER PERIOD RETURN(2) (IN 000S) WAIVERS(3) WAIVERS(3)(4) NET ASSETS RATE ------ --------- --------- --------------- --------------- ---------- --------- CLASS A SHARES Year Ended: 10/31/06 $11.12 9.31% $309,946 0.68% 0.68% 2.89% 13% 10/31/05 10.49 4.82 291,796 1.00 1.00 2.47 2 10/31/04 10.27 7.29 207,816 1.04 1.04 2.42 2 10/31/03 9.81 14.38 94,005 1.09 1.05 2.99 4 10/31/02 8.83 (3.06) 31,070 1.17 1.05 3.67 9 CLASS B SHARES Year Ended: 10/31/06 $11.10 8.50% $166,857 1.45% 1.45% 2.12% 13% 10/31/05 10.47 4.02 169,869 1.78 1.78 1.69 2 10/31/04 10.25 6.47 161,623 1.81 1.81 1.65 2 10/31/03 9.79 13.46 116,742 1.86 1.82 2.22 4 10/31/02 8.82 (3.77) 58,054 1.92 1.80 2.92 9 CLASS C SHARES Year Ended: 10/31/06 $11.06 8.57% $170,789 1.43% 1.43% 2.14% 13% 10/31/05 10.43 4.00 152,208 1.76 1.76 1.71 2 10/31/04 10.22 6.55 97,315 1.79 1.79 1.67 2 10/31/03 9.76 13.53 51,284 1.84 1.80 2.24 4 10/31/02(5) 8.80 (4.70) 10,505 1.90(7) 1.78(7) 2.94(7) 9
(1) Includes dividends paid from the short-term portion of capital gain distributions received from the Underlying Funds. (2) Total return is not annualized for periods of less than one year and does not reflect any applicable sales charges. The total return would have been lower if certain fees had not been waived and/or expenses reimbursed by the investment advisor or if fees had not been reduced by credits allowed by the custodian. (3) The Portfolio also will indirectly bear its prorated share of expenses of the Underlying Funds. (4) Ratio of operating expenses to average net assets includes expenses paid indirectly. (5) The Portfolio commenced selling Class C shares on March 1, 2002. (6) Per share numbers have been calculated using the average shares method. (7) Annualized. See Notes to Financial Statements. 31 Financial Highlights BALANCED PORTFOLIO For a Portfolio share outstanding throughout each period.
INCOME/(LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS ---------------------------------------------- ---------------------------------------------- NET REALIZED AND DISTRIBUTIONS NET ASSET VALUE UNREALIZED TOTAL FROM DIVIDENDS FROM FROM NET BEGINNING OF NET INVESTMENT GAIN/(LOSS) ON INVESTMENT NET INVESTMENT REALIZED TOTAL PERIOD INCOME INVESTMENTS OPERATIONS INCOME(1) CAPITAL GAINS DISTRIBUTIONS --------------- -------------- ---------------- ---------- -------------- ------------- ------------- CLASS A SHARES Year Ended: 10/31/06 $13.32 $0.28 $ 1.20 $ 1.48 $(0.29) $ -- $(0.29) 10/31/05 12.64 0.23 0.68 0.91 (0.23) -- (0.23) 10/31/04 11.85 0.20 0.79 0.99 (0.20) -- (0.20) 10/31/03 10.24 0.22 1.62 1.84 (0.23) -- (0.23) 10/31/02 11.63 0.28 (1.08) (0.80) (0.33) (0.26) (0.59) CLASS B SHARES Year Ended: 10/31/06 $13.28 $0.17 $ 1.21 $ 1.38 $(0.19) $ -- $(0.19) 10/31/05 12.61 0.12 0.67 0.79 (0.12) -- (0.12) 10/31/04 11.82 0.10 0.79 0.89 (0.10) -- (0.10) 10/31/03 10.22 0.14 1.61 1.75 (0.15) -- (0.15) 10/31/02 11.62 0.20 (1.09) (0.89) (0.25) (0.26) (0.51) CLASS C SHARES Year Ended: 10/31/06 $13.22 $0.17 $ 1.20 $ 1.37 $(0.19) $ -- $(0.19) 10/31/05 12.55 0.13 0.67 0.80 (0.13) -- (0.13) 10/31/04 11.78 0.10 0.78 0.88 (0.11) -- (0.11) 10/31/03 10.20 0.14 1.60 1.74 (0.16) -- (0.16) 10/31/02(5) 11.35 0.13 (1.15) (1.02) (0.13) -- (0.13) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA ------------------------------------------------------------------------------------- RATIO OF EXPENSES RATIO OF EXPENSES TO AVERAGE NET TO AVERAGE NET RATIO OF NET NET ASSET NET ASSETS ASSETS BEFORE ASSETS AFTER INVESTMENT INCOME PORTFOLIO VALUE END TOTAL END OF PERIOD REIMBURSEMENTS/ REIMBURSEMENTS/ TO AVERAGE NET TURNOVER OF PERIOD RETURN(2) (IN 000S) WAIVERS (3) WAIVERS (3)(4) ASSETS RATE --------- --------- ------------- ----------------- ----------------- ----------------- --------- CLASS A SHARES Year Ended: 10/31/06 $14.51 11.26% $2,389,102 0.66% 0.66% 2.01% 10% 10/31/05 13.32 7.20 2,125,167 0.94 0.94 1.69 0 10/31/04 12.64 8.51 1,524,988 0.98 0.98 1.56 2 10/31/03 11.85 18.07 792,423 1.02 1.02 2.03 5 10/31/02 10.24 (7.32) 423,478 1.04 1.04 2.55 19 CLASS B SHARES Year Ended: 10/31/06 $14.47 10.44% $1,414,695 1.43% 1.43% 1.24% 10% 10/31/05 13.28 6.32 1,419,870 1.72 1.72 0.91 0 10/31/04 12.61 7.59 1,354,528 1.75 1.75 0.79 2 10/31/03 11.82 17.25 1,074,925 1.78 1.78 1.27 5 10/31/02 10.22 (8.03) 743,953 1.80 1.80 1.79 19 CLASS C SHARES Year Ended: 10/31/06 $14.40 10.47% $ 883,759 1.41% 1.41% 1.26% 10% 10/31/05 13.22 6.41 734,801 1.70 1.70 0.93 0 10/31/04 12.55 7.64 482,799 1.74 1.74 0.80 2 10/31/03 11.78 17.15 234,076 1.76 1.76 1.29 5 10/31/02(5) 10.20 (9.00) 54,745 1.80(6) 1.80(6) 1.79(6) 19
(1) Includes dividends paid from the short-term portion of capital gain distributions received from the Underlying Funds. (2) Total return is not annualized for periods of less than one year and does not reflect any applicable sales charges. The total return would have been lower if certain fees had not been waived and/or expenses reimbursed by the investment advisor or if fees had not been reduced by credits allowed by the custodian. (3) The Portfolio also will indirectly bear its prorated share of expenses of the Underlying Funds. (4) Ratio of operating expenses to average net assets includes expenses paid indirectly. (5) The Portfolio commenced selling Class C shares on March 1, 2002. (6) Annualized. See Notes to Financial Statements. 32 Financial Highlights CONSERVATIVE GROWTH PORTFOLIO For a Portfolio share outstanding throughout each period.
INCOME/(LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS ---------------------------------------------- ---------------------------------------------- NET REALIZED AND DISTRIBUTIONS NET ASSET VALUE UNREALIZED TOTAL FROM DIVIDENDS FROM FROM NET BEGINNING OF NET INVESTMENT GAIN/(LOSS) ON INVESTMENT NET INVESTMENT REALIZED TOTAL PERIOD INCOME/(LOSS) INVESTMENTS OPERATIONS INCOME(1) CAPITAL GAINS DISTRIBUTIONS --------------- -------------- ---------------- ---------- -------------- ------------- ------------- CLASS A SHARES Year Ended: 10/31/06 $14.67 $ 0.18(6) $ 1.73 $ 1.91 $(0.14) $ -- $(0.14) 10/31/05 13.56 0.13(6) 1.11 1.24 (0.13) -- (0.13) 10/31/04 12.47 0.10(6) 1.06 1.16 (0.07) -- (0.07) 10/31/03 10.37 0.14(6) 2.14 2.28 (0.14) (0.04) (0.18) 10/31/02 12.35 0.16(6) (1.52) (1.36) (0.22) (0.40) (0.62) CLASS B SHARES Year Ended: 10/31/06 $14.25 $ 0.06(6) $ 1.67 $ 1.73 $(0.12) $ -- $(0.12) 10/31/05 13.17 0.02(6) 1.09 1.11 (0.03) -- (0.03) 10/31/04 12.18 (0.00)(6)(8) 1.04 1.04 (0.05) -- (0.05) 10/31/03 10.14 0.05(6) 2.09 2.14 (0.06) (0.04) (0.10) 10/31/02 12.10 0.08(6) (1.50) (1.42) (0.14) (0.40) (0.54) CLASS C SHARES Year Ended: 10/31/06 $14.15 $ 0.06(6) $ 1.66 $ 1.72 $(0.12) $ -- $(0.12) 10/31/05 13.11 0.02(6) 1.08 1.10 (0.06) -- (0.06) 10/31/04 12.13 (0.00)(6)(8) 1.03 1.03 (0.05) -- (0.05) 10/31/03 10.10 0.06(6) 2.08 2.14 (0.07) (0.04) (0.11) 10/31/02(5) 11.79 0.05(6) (1.66) (1.61) (0.08) -- (0.08) RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------- RATIO OF EXPENSES RATIO OF EXPENSES TO AVERAGE NET TO AVERAGE NET RATIO OF NET NET ASSET NET ASSETS ASSETS BEFORE ASSETS AFTER INVESTMENT INCOME/ PORTFOLIO VALUE END TOTAL END OF PERIOD REIMBURSEMENTS/ REIMBURSEMENTS/ (LOSS) TO AVERAGE TURNOVER OF PERIOD RETURN(2) (IN 000S) WAIVERS (3) WAIVERS (3)(4) NET ASSETS RATE --------- --------- ------------- ----------------- ----------------- ------------------ --------- CLASS A SHARES Year Ended: 10/31/06 $16.44 13.07% $1,822,661 0.67% 0.67% 1.16% 11% 10/31/05 14.67 9.19 1,561,310 0.97 0.97 0.89 1 10/31/04 13.56 9.44 1,157,038 1.01 1.01 0.74 5 10/31/03 12.47 22.12 615,501 1.05 1.05 1.24 7 10/31/02 10.37 (11.72) 347,297 1.06 1.06 1.41 14 CLASS B SHARES Year Ended: 10/31/06 $15.86 12.19% $1,093,660 1.44% 1.44% 0.39% 11% 10/31/05 14.25 8.42 1,059,655 1.75 1.75 0.11 1 10/31/04 13.17 8.53 1,001,081 1.78 1.78 (0.03) 5 10/31/03 12.18 21.24 827,312 1.81 1.81 0.48 7 10/31/02 10.14 (12.46) 623,852 1.82 1.82 0.65 14 CLASS C SHARES Year Ended: 10/31/06 $15.75 12.21% $ 906,470 1.43% 1.43% 0.40% 11% 10/31/05 14.15 8.40 727,829 1.73 1.73 0.13 1 10/31/04 13.11 8.53 482,019 1.76 1.76 (0.01) 5 10/31/03 12.13 21.41 195,556 1.79 1.79 0.50 7 10/31/02(5) 10.10 (13.72) 48,424 1.82(7) 1.82(7) 0.65(7) 14
(1) Includes dividends paid from the short-term portion of capital gain distributions received from the Underlying Funds. (2) Total return is not annualized for periods of less than one year and does not reflect any applicable sales charges. The total return would have been lower if certain fees had not been waived and/or expenses reimbursed by the investment advisor or if fees had not been reduced by credits allowed by the custodian. (3) The Portfolio also will indirectly bear its prorated share of expenses of the Underlying Funds. (4) Ratio of operating expenses to average net assets includes expenses paid indirectly. (5) The Portfolio commenced selling Class C shares on March 1, 2002. (6) Per share numbers have been calculated using the average shares method. (7) Annualized. (8) Amount represents less than $0.01 per share. See Notes to Financial Statements. 33 Financial Highlights STRATEGIC GROWTH PORTFOLIO For a Portfolio share outstanding throughout each period.
INCOME/(LOSS) FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS ---------------------------------------------- ---------------------------------------------- NET REALIZED AND DISTRIBUTIONS NET ASSET VALUE UNREALIZED TOTAL FROM DIVIDENDS FROM FROM NET BEGINNING OF NET INVESTMENT GAIN/(LOSS) ON INVESTMENT NET INVESTMENT REALIZED TOTAL PERIOD INCOME/(LOSS) INVESTMENTS OPERATIONS INCOME(1) CAPITAL GAINS DISTRIBUTIONS --------------- -------------- ---------------- ---------- -------------- ------------- ------------- CLASS A SHARES Year Ended: 10/31/06 $15.99 $ 0.13(6) $ 2.10 $ 2.23 $(0.09) $ -- $(0.09) 10/31/05 14.49 0.06(6) 1.48 1.54 (0.04) -- (0.04) 10/31/04 13.16 0.01(6) 1.32 1.33 -- -- -- 10/31/03 10.59 0.03(6) 2.63 2.66 -- (0.09) (0.09) 10/31/02 13.10 0.03(6) (1.92) (1.89) (0.14) (0.48) (0.62) CLASS B SHARES Year Ended: 10/31/06 $15.25 $(0.01)(6) $ 2.01 $ 2.00 $(0.07) $ -- $(0.07) 10/31/05 13.90 (0.06)(6) 1.41 1.35 -- -- -- 10/31/04 12.73 (0.09)(6) 1.26 1.17 -- -- -- 10/31/03 10.32 (0.05)(6) 2.55 2.50 -- (0.09) (0.09) 10/31/02 12.78 (0.06)(6) (1.88) (1.94) (0.04) (0.48) (0.52) CLASS C SHARES Year Ended: 10/31/06 $15.29 $(0.00)(6)(8) $ 2.00 $ 2.00 $(0.07) $ -- $(0.07) 10/31/05 13.93 (0.06)(6) 1.42 1.36 -- -- -- 10/31/04 12.74 (0.09)(6) 1.28 1.19 -- -- -- 10/31/03 10.32 (0.05)(6) 2.56 2.51 -- (0.09) (0.09) 10/31/02(5) 12.50 (0.04)(6) (2.14) (2.18) -- -- -- RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------- RATIO OF EXPENSES RATIO OF EXPENSES TO AVERAGE NET TO AVERAGE NET RATIO OF NET NET ASSET NET ASSETS ASSETS BEFORE ASSETS AFTER INVESTMENT INCOME/ PORTFOLIO VALUE END TOTAL END OF PERIOD REIMBURSEMENTS/ REIMBURSEMENTS/ (LOSS) TO AVERAGE TURNOVER OF PERIOD RETURN(2) (IN 000S) WAIVERS (3) WAIVERS (3)(4) NET ASSETS RATE --------- --------- ------------- ----------------- ----------------- ------------------ --------- CLASS A SHARES Year Ended: 10/31/06 $18.13 13.99% $1,074,546 0.71% 0.71% 0.74% 12% 10/31/05 15.99 10.61 885,165 1.02 1.02 0.38 1 10/31/04 14.49 10.11 609,250 1.07 1.07 0.07 3 10/31/03 13.16 25.24 298,852 1.13 1.13 0.30 7 10/31/02 10.59 (15.45) 166,354 1.13 1.13 0.23 10 CLASS B SHARES Year Ended: 10/31/06 $17.18 13.16% $ 718,841 1.48% 1.48% (0.03)% 12% 10/31/05 15.25 9.71 672,826 1.79 1.79 (0.39) 1 10/31/04 13.90 9.19 612,914 1.83 1.83 (0.69) 3 10/31/03 12.73 24.35 484,656 1.88 1.88 (0.45) 7 10/31/02 10.32 (16.04) 350,982 1.87 1.87 (0.51) 10 CLASS C SHARES Year Ended: 10/31/06 $17.22 13.12% $ 545,153 1.47% 1.47% (0.02)% 12% 10/31/05 15.29 9.76 417,865 1.77 1.77 (0.37) 1 10/31/04 13.93 9.34 277,136 1.81 1.81 (0.67) 3 10/31/03 12.74 24.44 107,826 1.84 1.84 (0.41) 7 10/31/02(5) 10.32 (17.44) 26,645 1.85(7) 1.85(7) (0.49)(7) 10
(1) Includes dividends paid from the short-term portion of capital gain distributions received from the Underlying Funds. (2) Total return is not annualized for periods of less than one year and does not reflect any applicable sales charges. The total return would have been lower if certain fees had not been waived and/or expenses reimbursed by the investment advisor and/or distributor or if fees had not been reduced by credits allowed by the custodian. (3) The Portfolio also will indirectly bear its prorated share of expenses of the Underlying Funds. (4) Ratio of operating expenses to average net assets includes expenses paid indirectly. (5) The Portfolio commenced selling Class C shares on March 1, 2002. (6) Per share numbers have been calculated using the average shares method. (7) Annualized. (8) Amount represents less than $0.01 per share. See Notes to Financial Statements. 34 Notes to Financial Statements 1. ORGANIZATION AND BUSINESS WM Strategic Asset Management Portfolios, LLC (the "LLC") was organized under the laws of the Commonwealth of Massachusetts on March 12, 1999, as a limited liability company. The LLC is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company. The LLC offers five portfolios: Flexible Income, Conservative Balanced, Balanced, Conservative Growth and Strategic Growth Portfolios (each a "Portfolio" and collectively, the "Portfolios"). The LLC is authorized to issue an unlimited number of shares of beneficial interest, each without par value. Each Portfolio offers three classes of shares: Class A, Class B and Class C shares. Class A shares are generally subject to an initial sales charge at the time of purchase. Certain Class A shares purchased without an initial sales charge may be subject to a contingent deferred sales charge ("CDSC") if redeemed within eighteen months from the date of purchase. Class B shares are not subject to an initial sales charge although they are generally subject to a CDSC if redeemed within five years from the date of purchase. Class C shares are not subject to an initial sales charge although they are subject to a CDSC if redeemed within one year from the date of purchase. Effective on October 1, 2006, (i) the Rule 12b-1 plans applicable to Class R-1 and Class R-2 shares of each Portfolio were amended to reduce the amounts payable for distribution thereunder to the annual rate of 0.25% of the net assets attributable to such shares, (ii) the plan recordkeeping/administrative services agreement applicable to such shares was replaced with a transfer agency agreement identical to the transfer agency agreement applicable to Class A shares, (iii) the number of Class R-1 and Class R-2 shares was increased or decreased proportionately so that the net asset value of each Class R-1 and Class R-2 share was equal to the net asset value of each Class A share of the Portfolio, and (iv) since the economic attributes of Class R-1 and Class R-2 shares would thereafter be identical to those of Class A shares of such Portfolio, they were re-designated as Class A shares of the Portfolio. Each of the Portfolios invests, within certain percentage ranges, in Class I shares of various funds in the WM Group of Funds (collectively, the "Underlying Funds"). WM Advisors, Inc. (the "Advisor"), a wholly owned subsidiary of Washington Mutual, Inc. ("Washington Mutual"), a publicly owned financial services company, serves as investment advisor to the Portfolios and the Underlying Funds. The Advisor may alter these percentage ranges when it deems appropriate. The assets of each Portfolio will be allocated among the Underlying Funds in accordance with its investment objective based on the Advisor's outlook for the economy, the financial markets and the relative market valuations of the Underlying Funds. In addition, in order to meet liquidity needs or for temporary defensive purposes, each Portfolio may invest its assets directly in cash, stock or bond index futures, options, money market securities and certain short-term debt instruments, including repurchase agreements. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies, in conformity with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"), which are consistently followed by the Portfolios and Underlying Funds in the preparation of their financial statements. PORTFOLIO VALUATION: Investments in the Underlying Funds are valued at net asset value per Class I share of the respective Underlying Funds determined as of the close of the New York Stock Exchange on each valuation date. Short-term debt securities that mature in 60 days or less are valued at amortized cost, which approximates market value. REPURCHASE AGREEMENTS: Each Portfolio may enter into repurchase agreement transactions. A repurchase agreement is a purchase of an underlying debt obligation subject to an agreement by the seller to repurchase the obligation at an agreed upon price and time. It is each Portfolio's policy that its custodian take possession of the underlying collateral securities. The fair value of the collateral is at all times at least equal to the total amount of the repurchase obligation. In the event of counterparty default, the Portfolio would seek to use the collateral to offset losses incurred. There is potential loss to the Portfolio in the event the Portfolio is delayed or prevented from exercising its right to dispose of the collateral securities, including the risk of a possible decline in the value of the underlying securities during the period while the Portfolio seeks to assert its rights. The Advisor, acting under the supervision of the Board of Trustees of the LLC, reviews the value of the collateral and the creditworthiness of those banks and broker/dealers with whom each Portfolio enters into repurchase agreements. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded on a trade date basis. Realized gains and losses from securities sold are recorded on the identified cost basis. Interest income on debt securities is accrued daily. Dividend income is recorded on the ex-dividend date. Each Portfolio's investment income and realized and unrealized gains and losses are allocated among the classes of that Portfolio based upon the relative average net assets of each class. 35 Notes to Financial Statements (continued) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income of the Flexible Income, Conservative Balanced, Balanced and Conservative Growth Portfolios are declared and paid quarterly. Dividends from any net investment income of the Strategic Growth Portfolio are declared and paid annually. Distributions of any net capital gains earned by a Portfolio are distributed no less frequently than annually at the discretion of the Board of Trustees. Additional distributions of net investment income and capital gains for each Portfolio may be made at the discretion of the Board of Trustees in accordance with federal income tax regulations. Distributions from income and capital gains are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investments held by the Portfolios, redesignated distributions and differing characterization of distributions made by each Portfolio. At October 31, 2006, the following adjustments have been reflected in the components of net assets on the "Statements of Assets and Liabilities" to present these balances on an income tax basis, excluding certain temporary differences:
INCREASE/ INCREASE (DECREASE) INCREASE/ UNDISTRIBUTED ACCUMULATED (DECREASE) NET INVESTMENT NET REALIZED PAID-IN CAPITAL INCOME/(LOSS) LOSS (000S) (000S) (000S) --------------- -------------- ------------ Flexible Income Portfolio ........ $ (26) $ 604 $ (578) Conservative Balanced Portfolio .. -- 529 (529) Balanced Portfolio ............... -- 6,084 (6,084) Conservative Growth Portfolio .... -- 6,516 (6,516) Strategic Growth Portfolio ....... (973) 4,474 (3,501)
The above adjustments are not reflected in the calculation of net investment income per share presented in the Financial Highlights. FEDERAL INCOME TAXES: It is each Portfolio's policy to qualify as a regulated investment company by complying with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and by distributing substantially all of its earnings to its shareholders. Therefore, no federal income or excise tax provision is required. EXPENSES: General expenses of the LLC are allocated to all the Portfolios based upon the relative average net assets of each Portfolio except printing and postage expenses, which are allocated to all the Portfolios based upon the relative number of shareholder accounts of each Portfolio. In addition, the Portfolios will indirectly bear their prorated share of expenses of the Underlying Funds. Operating expenses directly attributable to a class of shares are charged to the operations of that class of shares. Expenses of each Portfolio not directly attributable to the operations of any class of shares are prorated among the classes to which the expenses relate based on the relative average net assets of each class of shares. Custodian fees for certain Portfolios have been reduced by credits allowed by the Portfolio's custodian for uninvested cash balances. The Portfolios could have invested this cash in income producing investments. Fees reduced by credits allowed by the custodian for the year ended October 31, 2006, are shown separately in the "Statements of Operations." USE OF ESTIMATES: The preparation of financial statements in accordance with 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 those estimates. 3. INVESTMENT ADVISORY AND OTHER TRANSACTIONS The Advisor provides its proprietary asset allocation services to the Portfolios, formulates the Portfolios' investment policies, analyzes economic and market trends, exercises investment discretion over the assets of the Portfolios and monitors the allocation of each Portfolio's assets and each Portfolio's performance. For its investment advisory services to the Portfolios, the Advisor is entitled to a monthly fee at an annual rate based upon aggregate average daily net assets ("aggregate net assets") of the LLC of 0.55% of aggregate net assets up to $500 million, 0.50% of the next $500 million of aggregate net assets, 0.45% of the next $1 billion of aggregate net assets, 0.40% of the next $1 billion of aggregate net assets, 0.35% of the next $1 billion of aggregate net assets, 0.30% of the next $1 billion of aggregate net assets and 0.25% of aggregate net assets over $5 billion. 36 Notes to Financial Statements (continued) WM Shareholder Services, Inc. (the "Transfer Agent"), a wholly owned subsidiary of Washington Mutual, serves as the transfer agent of the Portfolios. Fees are paid to the Transfer Agent for services related to the issuance and transfer of shares, maintaining shareholder lists, and issuing and mailing distributions and reports. For such services, the Transfer Agent receives a fee per open and closed account, in addition to reimbursement for certain out-of-pocket expenses. The Transfer Agent is entitled to a monthly fee based upon an annual rate of $20.00 per open account for all Class A, Class B and Class C shareholder accounts. 4. TRUSTEES' FEES No officer or employee of Washington Mutual or its subsidiaries receives any compensation from the LLC for serving as an officer or Trustee of the LLC. The LLC, together with other mutual funds advised by the Advisor, pays each Trustee who is not an officer or employee of Washington Mutual or its subsidiaries a per annum retainer plus attendance fees for each meeting at which they are present. The Chairman, Committee Chairs and Committee Members receive additional remuneration for these services to the LLC and Trust. Trustees are also reimbursed for travel and out-of-pocket expenses. Each Trustee serves in the same capacity for all 40 funds within the WM Group of Funds. 5. DISTRIBUTION PLANS WM Funds Distributor, Inc. (the "Distributor"), a registered broker/dealer and a wholly owned subsidiary of Washington Mutual, serves as distributor for the Portfolios. For the year ended October 31, 2006, the Distributor has received $25,186,388 representing commissions (front-end sales charges) on Class A and Class C shares and $7,251,198 representing CDSCs from Class A, Class B and Class C shares. Each of the Portfolios has adopted distribution plans, pursuant to Rule 12b-1 under the 1940 Act, applicable to Class A, Class B and Class C shares of each Portfolio (each, a "Rule 12b-1 Plan"), respectively. Under the applicable Rule 12b-1 Plans, the Distributor may receive a service fee at an annual rate of 0.25% of the average daily net assets of each class. In addition, the Distributor is paid a fee as compensation in connection with the offering and sale of Class B and Class C shares. The distribution fees for Class B and Class C shares are paid to the Distributor at an annual rate of 0.75% of the average daily net assets of such shares. These fees may be used to cover the expenses of the Distributor primarily intended to result in the sale of such shares, including payments to the Distributor's representatives or others for selling shares. The service fee is paid by the Portfolio to the Distributor, which in turn pays service fees to broker/dealers that provide services, such as accepting telephone inquiries and transaction requests and processing correspondence, new account applications and subsequent purchases for the shareholders. Under their terms, each Rule 12b-1 Plan shall remain in effect from year to year, provided such continuance is approved annually by vote of the Board of Trustees, including a majority of those Trustees who are not "interested persons" of the LLC, as defined in the 1940 Act, and who have no direct or indirect financial interest in the operation of such distribution plans, or any agreements related to such plans, respectively. 6. PURCHASES AND SALES OF INVESTMENTS The aggregate cost of purchases and proceeds from sales of Underlying Funds for the year ended October 31, 2006, are as follows :
PURCHASES SALES NAME OF PORTFOLIO (000S) (000S) - ----------------- --------- --------- Flexible Income Portfolio......... $ 72,542 $222,600 Conservative Balanced Portfolio... 83,122 83,250 Balanced Portfolio................ 567,488 452,680 Conservative Growth Portfolio..... 536,593 412,240 Strategic Growth Portfolio........ 405,374 274,890
7. CAPITAL LOSS CARRYFORWARDS At October 31, 2006, the following Portfolios have available for federal income tax purposes unused capital losses as follows:
(IN THOUSANDS) ------------------------- EXPIRING IN EXPIRING IN NAME OF PORTFOLIO 2012 2013 - ----------------- ----------- ----------- Conservative Growth Portfolio .. $ -- $4,338 Strategic Growth Portfolio ..... 1,150 2,197
37 Notes to Financial Statements (continued) 8. COMPONENTS OF DISTRIBUTABLE EARNINGS At October 31, 2006, the components of distributable earnings on a tax basis are as follows:
IN THOUSANDS --------------------------------------------------------------- FLEXIBLE CONSERVATIVE CONSERVATIVE STRATEGIC INCOME BALANCED BALANCED GROWTH GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO --------- ------------ --------- ------------ --------- Gross tax unrealized appreciation .. $73,046 $75,067 $767,764 $775,099 $466,474 Gross tax unrealized depreciation .. (7,258) (6,176) (15,892) (4,664) -- ------- ------- -------- -------- -------- Net tax unrealized appreciation .... $65,788 $68,891 $751,872 $770,435 $466,474 ======= ======= ======== ======== ======== Undistributed ordinary income ...... $ 3,124 $ 2,062 $ 3,615 $ 4,532 $ 1,424 Undistributed accumulated gains .... $ 1,805 $ 3,504 $ 24,627 $ -- $ --
9. UNDERLYING FUNDS The following is a summary of investment objectives and risk factors of the Underlying Funds, and Portfolio ownership in the Underlying Funds. The WM Group of Funds annual report, which is available online at wmgroupoffunds.com or by calling 800-222-5852, contains more information regarding the Underlying Funds. INVESTMENT OBJECTIVES OF UNDERLYING FUNDS: The investment objectives of the Underlying Funds are as follows: WM REIT Fund Seeks to provide a high level of current income and intermediate to long-term capital appreciation. WM Equity Income Fund Seeks to provide a relatively high level of current income and long-term growth of income and capital. WM Growth & Income Fund Seeks to provide long-term capital growth. Current income is a secondary consideration. WM West Coast Equity Fund Seeks to provide long-term growth of capital. WM Mid Cap Stock Fund Seeks to provide long-term capital appreciation. WM Growth Fund Seeks to provide long-term capital appreciation. WM Small Cap Value Fund Seeks to provide long-term capital appreciation. WM Small Cap Growth Fund Seeks to provide long-term capital appreciation. WM International Growth Fund Seeks to provide long-term capital appreciation. WM Short Term Income Fund Seeks to provide as high a level of current income as is consistent with prudent investment management and stability of principal. WM U.S. Government Securities Fund Seeks to provide a high level of current income consistent with safety and liquidity. WM Income Fund Seeks to provide a high level of current income consistent with preservation of capital. WM High Yield Fund Seeks to provide a high level of current income.
RISK FACTORS OF UNDERLYING FUNDS: While no individual fund is intended as a complete investment program, this is especially true for funds that concentrate their investments, such as those investing in particular industries or regions. The WM REIT Fund concentrates its investments in real estate investment trust ("REIT") securities or debt securities of issuers that are principally engaged in the U.S. real estate or related industries. The WM REIT Fund could be adversely impacted by economic trends within this industry. The WM West Coast Equity Fund concentrates its investments in companies located or doing business in Alaska, California, Oregon, and Washington. The WM West Coast Equity Fund could be adversely impacted by economic trends within this region. 38 Notes to Financial Statements (continued) The WM International Growth Fund concentrates its investments in foreign securities in both developed and emerging market countries. Additional risks may involve foreign currency exchange rate fluctuations, adverse political and economic developments, and the possible prevention of currency exchange or other foreign governmental laws or restrictions. Investments in emerging markets are subject to additional risk as less developed countries are more likely to experience high levels of inflation, deflation, or currency devaluation, which could harm their economies and securities markets. The WM High Yield Fund concentrates its investments in lower rated debt securities, which may be more susceptible to adverse economic conditions than investment grade holdings. These securities are often subordinated to the prior claims of other senior lenders, and uncertainties may exist as to an issuer's ability to meet principal and interest payments. Certain Underlying Funds may invest a portion of their assets in foreign securities of developing or emerging market countries; enter into forward foreign currency transactions; lend their portfolio securities; enter into stock index, interest rate and currency futures contracts, and options on such contracts; enter into interest rate swaps or purchase or sell interest rate caps or floors; enter into other types of options transactions; make short sales; purchase zero coupon and payment-in-kind bonds; enter into repurchase or reverse repurchase agreements; purchase and sell "when-issued" securities and engage in "delayed-delivery" transactions; and enter into various other investment practices, each with inherent risks. The risks involved in investing in a high concentration of a single sector include those resulting from future adverse political and economic developments or regulatory occurrences and the potential for adverse effects to the financial conditions of the industries within the sector due to market fluctuations. PORTFOLIO OWNERSHIP IN THE UNDERLYING FUNDS: At October 31, 2006, the LLC holds investments in a number of the Underlying Funds. The figures presented below represent the percentage of shares outstanding of each Fund owned by the Portfolios:
PORTFOLIOS ----------------------------------------------------------------------- FLEXIBLE CONSERVATIVE CONSERVATIVE STRATEGIC INCOME BALANCED BALANCED GROWTH GROWTH NAME OF FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO TOTAL - ------------ --------- ------------ --------- ------------ --------- ----- REIT Fund ......................... 1.9% 2.9% 30.9% 33.3% 20.3% 89.3% Equity Income Fund ................ 1.1% 1.6% 15.1% 16.3% 10.5% 44.6% Growth & Income Fund .............. 2.3% 2.2% 24.3% 26.3% 17.1% 72.2% West Coast Equity Fund ............ 0.6% 1.3% 14.4% 15.4% 10.7% 42.4% Mid Cap Stock Fund ................ 2.5% 2.3% 24.3% 25.5% 19.1% 73.7% Growth Fund ....................... 2.7% 2.7% 31.0% 31.3% 22.4% 90.1% Small Cap Value Fund .............. 3.2% 2.6% 31.0% 34.9% 22.9% 94.6% Small Cap Growth Fund ............. 2.4% 1.9% 22.6% 25.7% 16.9% 69.5% International Growth Fund ......... -- 2.8% 31.5% 31.8% 22.3% 88.4% Short Term Income Fund ............ 42.9% 15.2% 18.6% -- -- 76.7% U.S. Government Securities Fund ... 15.8% 9.9% 46.8% 16.4% -- 88.9% Income Fund ....................... 17.7% 9.5% 39.7% 12.2% -- 79.1% High Yield Fund* .................. 5.0% 3.3% 18.7% 8.4% 8.3% 43.7%
- ---------- * Does not include approximately 6.0% of the High Yield Fund held by the WM Variable Trust Portfolios, which are managed in a style substantially identical to that of the Portfolios. OTHER FACTORS OF UNDERLYING FUNDS: Investing in the Underlying Funds through the Portfolios involves certain additional expenses and tax results that would not be present in a direct investment in the Underlying Funds. For example, under certain circumstances, an Underlying Fund may determine to make payment of a redemption request by a Portfolio wholly or partly by a distribution in kind of securities from its portfolio, instead of cash, in accordance with the rules of the Securities and Exchange Commission. In such cases, the Portfolios may hold securities distributed by an Underlying Fund until the Advisor determines that it is appropriate to dispose of such securities. The officers and Trustees, the Advisor, the Distributor and Transfer Agent of the Portfolios serve in the same capacity for the Underlying Funds. Conflicts may arise as these persons and companies seek to fulfill their fiduciary responsibilities to both the Portfolios and the Underlying Funds. From time to time, one or more of a Portfolio's Underlying Funds used for investment may experience relatively large investments or redemptions due to reallocations or rebalancings by the Portfolios as recommended by the Advisor. These transactions will affect the Underlying Funds, since the Underlying Funds that experience redemptions as a result of the reallocations or rebalancings may have to sell portfolio securities. At the same time, the Underlying Funds that receive additional cash will have to invest such cash. This may be particularly important when one or more Portfolios owns a substantial portion of any Underlying Fund. While it is impossible to predict the overall impact of these transactions over time, there could be adverse effects on Underlying Fund performance to the extent that the Underlying Funds may be required to sell securities or invest cash at times when they would not otherwise do so. These transactions could also accelerate the realization of taxable income if sales of securities resulted in gains and could also increase transaction costs. Because the Portfolios own substantial portions of some Underlying Funds, redemptions and 39 Notes to Financial Statements (continued) reallocations by the Portfolios away from an Underlying Fund could cause the Underlying Fund's expenses to increase and may result in an Underlying Fund becoming too small to be economically viable. The Advisor is committed to minimizing such impact on the Underlying Funds to the extent it is consistent with pursuing the investment objectives of the Portfolios. The Advisor may nevertheless face conflicts in fulfilling its dual responsibilities to the Portfolios and the Underlying Funds. The Advisor will, at all times, monitor the impact on the Underlying Funds of transactions by the Portfolios. 10. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes." This pronouncement provides guidance on the recognition, measurement, classification, and disclosures related to uncertain tax positions, along with any related interest and penalties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The impact from the adoption of FIN 48 is being evaluated, but is not anticipated to have a material effect on the financial statements. In addition, in September 2006, Statement of Financial Accounting Standards No. 157 Fair Value Measurements ("SFAS 157") was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact that the adoption of SFAS 157 will have on the Portfolios' financial statement disclosures. 11. REORGANIZATION On July 25, 2006, the Principal Financial Group, Inc. ("PFG") and its subsidiary, Principal Management Corporation ("PMC") entered into an agreement with Washington Mutual, Inc. to acquire all of the outstanding stock of certain of its subsidiaries, WM Advisors, the Advisor of the Funds, WM Shareholder Services, Inc., the Transfer Agent of the Funds, and WM Funds Distributor, Inc., the Distributor (the "Transaction"). On August 11, 2006, the Board of Trustees approved proposed reorganizations (the "Reorganizations") pursuant to which each of the following Funds (each, an "Acquired Fund") will combine with and into the following corresponding separate series (each, an "Acquiring Fund") of Principal Investors Fund, Inc. ("PIF"), subject to various conditions including the approval of shareholders of each Acquired Fund. A special meeting of shareholders will be held on December 15, 2006. Under the Reorganizations (i) all the assets and the stated liabilities of each Acquired Fund will be transferred to its corresponding Acquiring Fund in exchange for Class A, Class B and Class C shares of the Acquiring Fund; (ii) holders of Class A, Class B and Class C shares of the Acquired Fund will receive, respectively, that number of Class A, Class B and Class C shares of the corresponding Acquiring Fund equal in value at the time of the exchange to the value of the holder's Acquired Fund shares at such time; and (iii) the Acquired Fund will be liquidated and dissolved. The Transaction is expected to close in December 2006, and the Reorganizations will occur shortly thereafter. As a result of the Reorganization, shareholders of the Acquired Funds will become shareholders of the Acquiring Funds as follows: WM ACQUIRED FUND: PIF ACQUIRING FUND: REIT Fund Real Estate Securities Fund Equity Income Fund Equity Income Fund I* Growth & Income Fund Disciplined LargeCap Blend Fund West Coast Equity Fund West Coast Equity Fund* Mid Cap Stock Fund MidCap Stock Fund* Growth Fund LargeCap Growth Fund Small Cap Value Fund SmallCap Value Fund Small Cap Growth Fund SmallCap Growth Fund International Growth Fund Diversified International Fund Short Term Income Fund Short-Term Income Fund* U.S. Government Securities Fund Mortgage Securities Fund* Income Fund Income Fund* Money Market Fund Money Market Fund Flexible Income Portfolio SAM Flexible Income Portfolio* Conservative Balanced Portfolio SAM Conservative Balanced Portfolio* Balanced Portfolio SAM Balanced Portfolio* Conservative Growth Portfolio SAM Conservative Growth Portfolio* Strategic Growth Portfolio SAM Strategic Growth Portfolio* * These Acquiring Funds are newly-organized funds that will commence operations in connection with the Reorganization and the Acquired Fund will be the survivor for accounting and performance reporting purposes. The other Acquiring Funds are existing PIF Funds into which the relevant WM Fund will be merged and the Acquiring Fund will be the survivor for accounting and performance reporting purposes. 40 Report of Independent Registered Public Accounting Firm TO THE TRUSTEES AND SHAREHOLDERS OF WM STRATEGIC ASSET MANAGEMENT PORTFOLIOS LLC: We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of WM Flexible Income Portfolio, WM Conservative Balanced Portfolio, WM Balanced Portfolio, WM Conservative Growth Portfolio and WM Strategic Growth Portfolio (collectively, the "Portfolios") as of October 31, 2006, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Portfolios' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Portfolios are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Portfolios' internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Portfolios as of October 31, 2006, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and their financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Boston, Massachusetts December 18, 2006 41 Supplemental Information (unaudited) CONSIDERATION BY THE BOARD OF TRUSTEES OF ADVISORY AGREEMENT The LLC's investment advisory agreement (the "Agreement") was approved in May and August, 2006. In connection with their approval in August 2006 of investment advisory agreements for the LLC substantially identical to the LLC's current Agreement, except with respect to dates and in contemplation of the acquisition of the Advisor by the Principal Financial Group, the Board of Trustees, Independent Trustees and the Investment Committee of the Board (the "Committee") relied on the information provided in connection with the approval of the Agreement in May 2006, as supplemented by expense and performance information provided by Lipper Inc., a third-party data provider ("Lipper") for period ended June 30, 2006. The material factors and conclusions that formed the basis for the Committee's recommendation and the subsequent approval by the Board and the Independent Trustees in August 2006 were the same as those in May 2006, which are discussed below, except that the Board, the Independent Trustees and the Committee also considered the supplemental expense and performance information for periods ended June 30, 2006; representations by the Principal Financial Group (see Note 11 in the Notes to Financial Statements) that, subsequent to its acquisition of the Advisor in the Transaction, there is not expected to be any reduction in the nature, quality and extent of services provided to the LLC by the Advisor; the fact that the substantive terms of the Agreement, including the advisory fees payable thereunder, were not changing; and representations by the Principal Financial Group that, except as discussed with the Board of Trustees, no changes were expected in either the Advisor's investment professionals who would be providing services to the LLC or the amount of time and attention that would be devoted by such investment professionals to the LLC. BOARD APPROVAL OF INVESTMENT ADVISORY AGREEMENT: Each year, the Board, including a majority of the Independent Trustees, is required to determine whether to continue the LLC's Agreement. The 1940 Act requires that the Board request and evaluate, and that the investment advisor furnish, such information as may reasonably be necessary to evaluate the terms of the advisory agreement. In May 2006, the Board and the Independent Trustees approved the continuation of the Agreement with the Advisor, in each case following the recommendation of the Committee, a majority of the members of which are Independent Trustees, and the recommendations of the Independent Trustees as a whole. The material factors and conclusions that formed the basis for the Committee's recommendation and the subsequent approval by the Board and the Independent Trustees are discussed below. REVIEW PROCESS: The Independent Trustees received assistance and advice, including a written memorandum, regarding the legal standards applicable to the consideration of advisory arrangements from independent counsel to the LLC and the Independent Trustees. The Independent Trustees discussed the continuation of the Agreement with representatives of the Advisor and in private session with independent legal counsel at which no representatives of the Advisor were present. The Committee, in deciding to recommend continuation of the Agreement, and the Board and the Independent Trustees, in approving such continuation, did not identify any particular information that was all-important or controlling, and each Trustee attributed different weights to the various factors. The Trustees evaluated all information available to them on a Portfolio-by-Portfolio basis, and their deliberations were made separately in respect of each Portfolio. This summary describes the most important, but not all, of the factors considered by the Board, the Independent Trustees and the Committee. The Board, the Independent Trustees and the Committee considered the fact that many of the Portfolios are managed in a style substantially identical to that of a corresponding series of WM Variable Trust (each, a "VT Portfolio") and reviewed the Portfolios simultaneously with their review of the corresponding VT Portfolios. MATERIALS REVIEWED: During the course of each year, the Board receives a wide variety of materials relating to the services provided by the Advisor and its affiliates, including reports on: each Portfolio's investment results; portfolio construction; portfolio composition; performance attribution; shareholder services; the Advisor's views on the economy and capital markets; and other information relating to the nature, extent and quality of services provided by the Advisor and its affiliates to the Portfolios. With respect to performance attribution of the Portfolios, the Board, the Independent Trustees and the Committee focused in particular on the Balanced Portfolio, as the corresponding performance attribution for the other Portfolios typically varies in proportion to the greater or lesser risk profiles of those Portfolios. In addition, in connection with its annual consideration of the Agreement, the Board requests and reviews supplementary information regarding the terms of the Agreement, performance and expense information for other investment companies derived from data compiled by Lipper, data on pre- and post-marketing profit margins for investment advisory subsidiaries of publicly traded companies prepared by Lipper, as well as additional information prepared by the Advisor, including financial and profitability information regarding the Advisor and its affiliates, descriptions of various functions undertaken by the Advisor, such as compliance monitoring practices, and information about the personnel providing investment management to the Portfolios. The Board, the Independent Trustees and the Committee also considered information regarding "revenue sharing" arrangements that the Advisor and its affiliates have entered into with various intermediaries that sell shares of the Portfolios. The Board also requested and reviewed information relating to other services provided to the Portfolios by the Advisor and its affiliates under other agreements, including information regarding so-called "fall-out" benefits to the Advisor and its affiliates due to their other relationships with the Portfolios, such as the administrative services contract with the Advisor described below. The Board and the Committee also received and reviewed comparative performance information regarding the Portfolios at each of the quarterly Board and Committee meetings. 42 Supplemental Information (unaudited) (continued) NATURE, EXTENT AND QUALITY OF SERVICES: Nature and Extent of Services -- In considering the continuation of the Agreement, the Board, the Independent Trustees and the Committee evaluated the nature and extent of the services provided by the Advisor and its affiliates. For each Portfolio, the Advisor formulates the Portfolio's investment policies (subject to the terms of the prospectus); analyzes economic trends and capital market developments (with a view to optimizing the Portfolio's asset allocations); evaluates the consistency, style and quality of the investment services provided to the Underlying Funds in which the Portfolio invests; evaluates the risk/return characteristics of each of the Underlying Funds by reference to the specific security holdings of each Underlying Fund; constructs the Portfolio (including actively managing the Portfolio's asset allocation through daily cash flows); monitors the Portfolio's investment performance; and reports to the Board and the Committee. The Board, the Independent Trustees and the Committee considered information concerning the investment philosophy and investment process used by the Advisor in managing the Portfolios. The Board, the Independent Trustees and the Committee considered the extent to which the investment style employed for the Portfolios differs from that of funds that are simply rebalanced periodically to specific static allocations, including performance attribution information showing the effect on performance of the Advisor's asset allocation decisions. In this context, the Board, the Independent Trustees and the Committee considered the in-house research capabilities of the Advisor as well as other resources available to the Advisor, including research services available to the Advisor as a result of securities transactions effected for the Underlying Funds. The Board, the Independent Trustees and the Committee considered the managerial and financial resources available to the Advisor and concluded that they would be sufficient to meet any reasonably foreseeable obligations under the Agreement. The Board, the Independent Trustees and the Committee noted that the standard of care under the Agreement was comparable to that typically found in mutual fund investment advisory agreements, and considered the record of the Advisor in resolving potential disputes arising under its investment advisory agreements with the WM Group of Funds in the best interests of shareholders. Quality of Services -- The Board, the Independent Trustees and the Committee considered the quality of the services provided by the Advisor and the quality of their resources that are available to the Portfolios. The Board, the Independent Trustees and the Committee considered the investment experience and professional qualifications of the personnel of the Advisor and its affiliates and the size and functions of their staffs, as well as the reputation of the Advisor. The Board, the Independent Trustees and the Committee considered the complexity of managing the Portfolios relative to other types of funds, including other funds that pursue their objectives through investments in mutual funds (so-called "funds-of-funds"), other funds that pursue their objectives by investing directly in portfolio securities, and mutual fund wrap accounts that offer asset allocation services. In evaluating the scope and quality of the services provided by the Advisor to the Portfolios, the Board, the Independent Trustees and the Committee members also drew on their experiences as directors or Trustees of the VT Portfolios and, for certain Trustees, other funds. The Board, the Independent Trustees and the Committee also received and reviewed information regarding the quality of non-investment advisory services provided to the Portfolios by the Advisor and its affiliates under other agreements. The Board, the Independent Trustees and the Committee concluded that the services provided by the Advisor have benefited and should continue to benefit the Portfolios and their shareholders. The Board, the Independent Trustees and the Committee concluded that the investment philosophies, processes, and research capabilities of the Advisor were well suited to the Portfolios, given their investment objectives and policies. The Board, the Independent Trustees and the Committee concluded that the scope of the services provided to the Portfolios by the Advisor under the Agreement was consistent with the Portfolios' operational requirements, including, in addition to their investment objectives, compliance with the Portfolios' investment restrictions, tax and reporting requirements and related shareholder services. The Board, the Independent Trustees and the Committee concluded that the nature, scope and quality of the services provided by the Advisor were sufficient, in light of the resources dedicated by the Advisor and their integrity, personnel, systems and financial resources, to merit approval of the continuation of the Agreement. PORTFOLIO MANAGEMENT SERVICES AND PERFORMANCE: In their evaluation of the quality of the portfolio management services provided by the Advisor, the Board, the Independent Trustees and the Committee considered the professional credentials and investment experience of the Portfolios' portfolio managers. The Board, the Independent Trustees and the Committee considered the Portfolios' record of compliance with investment restrictions. The Board, the Independent Trustees and the Committee reviewed information comparing the Portfolios' historical performance to relevant market indices or blends of market indices for the 1-, 3- and 5-year (or since inception) periods ended March 31, 2006, and to average performance information for peer groups prepared by Lipper based on the performance of other investment companies with similar investment objectives (including, separately, both funds-of-funds and funds investing directly in portfolio securities) over the 1-, 3-, 5-, and 10-year periods (to the extent applicable) ended December 31, 2005. In the case of each Portfolio that had performance that lagged that of a relevant peer group for certain (although not necessarily all) periods, the Board, the Independent Trustees and the Committee concluded that other factors relevant to performance were sufficient, in light of other considerations, to warrant continuation of the Agreement. The Board, the Independent Trustees and the Committee focused, in particular, on the performance of the Balanced Portfolio as compared to other funds categorized by Lipper as "balanced funds." The Board, the Independent Trustees and the Committee considered the difficulty in identifying peer groups for the Portfolios other than the Balanced Portfolio. The Board, the Independent Trustees and the Committee determined that the Portfolios other than the Balanced Portfolio performed consistently with their risk profiles relative to the Balanced Portfolio and that such Portfolios' performance should be and was symmetrically arrayed around the performance of the Balanced Portfolio. The Board, the Independent Trustees and the Committee noted that the Portfolios had performed well relative to their respective blended 43 Supplemental Information (unaudited) (continued) index benchmarks over the 1-, 3- and 5-year periods and that the Balanced Portfolio had outperformed its peer average (for both funds-of-funds and funds investing directly in portfolio securities) for the 1-, 3- and 5-year periods. The Board, the Independent Trustees and the Committee noted that the other Portfolios had outperformed their peer averages (for both funds-of-funds and funds investing directly in portfolio securities) for the 5-year period, although they had generally underperformed their peer averages (for both funds-of-funds and funds investing directly in portfolio securities) for the 1- and 3-year periods. The Board, the Independent Trustees and the Committee discussed with the Advisor the reasons for this recent relative underperformance, and the conditions under which the Portfolios other than the Balanced Portfolio should be expected to outperform or underperform relative to their Lipper peer averages, given the "core" allocations of such Portfolios. After reviewing the foregoing factors, the Board, the Independent Trustees and the Committee concluded that the Advisor's performance record and investment processes used in managing the Portfolios were sufficient to merit approval of the continuation of the Agreement. MANAGEMENT FEES AND EXPENSES: The Board, the Independent Trustees and the Committee reviewed information, including comparative information provided by Lipper, regarding the advisory, administrative, transfer agent, and service and distribution fees paid to the Advisor and its affiliates, and the total expenses borne by the Portfolios. The Board, the Independent Trustees and the Committee considered both the total expenses borne directly by the Portfolios and the total expenses borne on an aggregate basis, including the expenses borne indirectly through the Portfolios' investments in the Underlying Funds. They discussed trends in total expense ratios for the Portfolios. The Board, the Independent Trustees and the Committee reviewed the transfer agency fees paid by the Portfolios to the Transfer Agent and the distribution (12b-1) fees paid to the Distributor. The Board, the Independent Trustees and the Committee considered average expenses for peer groups identified by Lipper for the Portfolios, including Lipper peer groups comprised of funds that invest directly in portfolio securities and Lipper peer groups comprised exclusively of funds-of-funds. The Board, the Independent Trustees and the Committee noted that the number of funds-of-funds identified by Lipper had increased from prior years, and considered the relative merits of broader and more focused expense comparison groups. The Board, the Independent Trustees and the Committee considered the similarity of the Portfolios to mutual fund wrap accounts, and reviewed and considered a report provided by Cerulli on mutual fund wrap accounts, including data on average annual advisory fees. The Board, the Independent Trustees and the Committee considered information provided by Lipper comparing the total expenses of funds-of-funds, including and excluding underlying fund expenses, to those of the Portfolios. The Board, the Independent Trustees and the Committee concluded that the total expenses of funds-of-funds, including underlying fund expenses, represented the best comparison for the expenses of the Portfolios, because they reflected all of the expenses borne directly and indirectly by investors. The Board, the Independent Trustees and the Committee concluded that the fees to be charged under the Agreement bore a reasonable relationship to the scope and quality of the services provided. PROFITABILITY AND ECONOMIES OF SCALE: Profitability -- The Board, the Independent Trustees and the Committee reviewed information regarding the cost of services provided by the Advisor and its affiliates and the profitability (before and after distribution expenses and prior to taxes) of their relationships with the Portfolios. The Board, the Independent Trustees and the Committee considered trends in the profitability of the Advisor and its affiliates, and information provided by Lipper regarding the pre- and post-marketing profitability of other investment advisers with publicly-traded parent companies. The Board, the Independent Trustees and the Committee considered that the Advisor must be able to pay and retain experienced professional personnel at competitive rates to provide services to the Portfolios (and in connection therewith, reviewed information regarding the structure of compensation of the Advisor's investment professionals) and that maintaining the financial viability of the Advisor is important in order for it to continue to provide significant services to the Portfolios and their shareholders. In addition, the Board, the Independent Trustees and the Committee considered information regarding the direct and indirect benefits the Advisor receives as a result of its relationship with the Portfolios, including compensation paid to the Advisor and its affiliates under other agreements, such as transfer agency fees to the Transfer Agent, and 12b-1 fees and sales charges to the Distributor, as well as research provided to the Advisor in connection with portfolio transactions effected on behalf of the Underlying Funds (soft dollar arrangements) and reputational benefits. Economies of Scale -- The Board, the Independent Trustees and the Committee reviewed the extent to which the Advisor may realize economies of scale in managing and supporting the Portfolios and the current level of Portfolio assets in relation to the breakpoints in the Portfolios' advisory fees. The Board, the Independent Trustees and the Committee considered the extent to which economies of scale might be realized (if at all) by the Advisor across a variety of products and services included within the WM Group of Funds. The Board, the Independent Trustees and the Committee concluded that the Portfolios' cost structure was reasonable given the scope and quality of the services provided to the Portfolios and that the Advisor was sharing any economies of scale with the Portfolios and their shareholders. ADDITIONAL CONSIDERATIONS: The Board, the Independent Trustees and the Committee also considered possible conflicts of interest associated with the provision of investment advisory services by the Advisor to other clients. The Trustees considered the procedures of the Advisor designed to fulfill its fiduciary duties to its advisory clients with respect to possible conflicts of interest, including the codes of ethics, the integrity of the systems in place to ensure compliance with the foregoing, and the record of the Advisor in these matters. 44 Supplemental Information (unaudited) (continued) CONCLUSIONS: Based on their review, including their consideration of each of the factors referred to above, the Board, the Independent Trust and the Committee concluded that the Agreement and the fees payable to the Advisor are fair and reasonable to the Portfolios an their shareholders, given the scope and quality of the services provided to the Portfolios and such other considerations as the Trustees considered relevant in the exercise of their reasonable business judgment, and that the continuation of the Agreement was in the best interests of the Portfolios and their shareholders. The Board and the Independent Trustees unanimously approved the continuation of the Agreement. OTHER PORTFOLIO INFORMATION TAX INFORMATION: The following tax information for the fiscal year ended October 31, 2006, is provided pursuant to provisions of the Internal Revenue Code. The amounts of long-term capital gains designated are as follows (in thousands):
NAME OF PORTFOLIO - ----------------- Flexible Income Portfolio ............................................ $ 1,813 Conservative Balanced Portfolio ...................................... 3,509 Balanced Portfolio ................................................... 24,627
Of the distributions made by the following Portfolios, the corresponding percentages represent the amount of each distribution that may qualify for the dividends received deduction available to corporate shareholders.
NAME OF PORTFOLIO - ----------------- Flexible Income Portfolio ............................................ 8.54% Conservative Balanced Portfolio ...................................... 16.73% Balanced Portfolio ................................................... 34.89% Conservative Growth Portfolio ........................................ 100.00% Strategic Growth Portfolio ........................................... 100.00%
Of the distributions made by the following Portfolios, the corresponding percentages represent the amount of each distribution that will qualify for the 15% dividend income tax rate.
NAME OF PORTFOLIO - ----------------- Flexible Income Portfolio ............................................ 10.67% Conservative Balanced Portfolio ...................................... 21.30% Balanced Portfolio ................................................... 44.42% Conservative Growth Portfolio ........................................ 100.00% Strategic Growth Portfolio ........................................... 100.00%
The above percentages may differ from those cited elsewhere in this report due to differences in the calculation of income and capital gains for generally accepted accounting principles (book) purposes and federal income tax (tax) purposes. SCHEDULES OF INVESTMENTS: The LLC files its complete schedules of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The LLC's Form N-Q is available at http://www.sec.gov and also may be reviewed and copied at the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding the operation of the PRR may be obtained by calling 800-SEC-0330. PROXY VOTING INFORMATION: The policies and procedures that the LLC uses to determine how to vote proxies relating to portfolio securities held by the Portfolios are included in the LLC's Statement of Additional Information which is available, without charge and upon request, by calling 800-222-5852. Information regarding how the Portfolios voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available at http://www.wmgroupoffunds.com. This information is also available at http://www.sec.gov. 45 Supplemental Information (unaudited) (continued) PORTFOLIO MANAGER U.S. Government Securities Fund Craig V. Sosey WM Advisors, Inc. Note: Pages 46 and 47 provide information about certain WM Funds in which the SAM Portfolios invest a significant portion of their assets. For additional information about these and other WM Funds, please see the WM Group of Funds annual report, which is available online or by calling 800-222-5852. Data shown is past performance and does not guarantee future results. Current performance, including the most recent month-end results, which may be higher or lower than the data shown, can be obtained by calling 800-222-5852. Your investment's return and principal value will fluctuate, so it may be worth more or less upon redemption. A sales charge may apply as follows: Class A shares: maximum up-front sales charge of 4.5%; Class B shares: contingent deferred sales charge of 5%, which declines over 5 years AVERAGE ANNUAL TOTAL RETURNS(1) AS OF OCTOBER 31, 2006
Since Inception 1-Year 5-Year 10-Year Inception Date ------ ------ ------- --------- --------- CLASS A SHARES Net Asset Value(2) 4.74% 3.45% 5.43% 7.47% 5/4/84 With Sales Charge -0.01% 2.50% 4.95% 7.25% CLASS B SHARES Net Asset Value(2) 4.06% 2.72% 4.78% 5.27% 3/30/94 With Sales Charge -0.94% 2.36% 4.78% 5.27% CLASS C SHARES Net Asset Value(2) 4.00% 2.70% 4.75% 2.91% 3/1/02 With Sales Charge 3.00% 2.70% 4.75% 2.91% Citigroup Mortgage Index(3) 5.71% 4.46% 6.19% 9.00%
PORTFOLIO COMPOSITION(4) As of 10/31/06 (PIE CHART)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ FHLMC/FGLMC 36% 33% +3% FNMA 32% 29% +3% CMOs 20% 18% +2% GNMA 5% 7% -2% U.S. Government Agency 4% 4% 0% U.S. Treasuries 2% 5% -3% Cash Equivalents 1% 4% -3%
(1) Performance reflects ongoing fund expenses, which may have been waived, and assumes reinvestment of all dividends and capital gains. For Class C shares, performance for periods prior to inception is hypothetical, based on Class A share returns adjusted for the respective expenses of the share class. Performance does not reflect the impact of federal, state, or municipal taxes. If it did, performance would be lower. The U.S. Government Securities Fund's performance between 1998 and 2000 and the Income Fund's performance in 1999 benefited from the agreement of WM Advisors and its affiliates to limit the Funds' expenses. On 3/1/04, the investment policies of the U.S. Government Securities Fund were modified. As a result, the Fund's performance for periods prior to that date may not be representative of the performance it would have achieved had its current investment policies been in place. 46 PORTFOLIO MANAGERS John R. Friedl, CFA and Income Fund Gary J. Pokrzywinski, CFA WM Advisors, Inc. (5-5-4-3-2-0%); Class C shares: contingent deferred sales charge of 1% on redemptions made during the first 12 months. See the prospectus for details. Performance listed with sales charge reflects the maximum sales charge. Fixed-income investments are subject to interest rate risk, and their value will decline as interest rates rise. U.S. Government Securities Fund: Neither the principal of government bond funds nor their yields are guaranteed by the U.S. government. Income Fund: Lower-rated securities are subject to additional credit and default risks. AVERAGE ANNUAL TOTAL RETURNS(1) AS OF OCTOBER 31, 2006
1-Year 5-Year 10-Year Since Inception Inception Date ------ ------ ------- --------------- -------------- CLASS A SHARES Net Asset Value(2) 6.02% 5.39% 6.38% 8.33% 12/15/75 With Sales Charge 1.21% 4.42% 5.90% 8.17% CLASS B SHARES Net Asset Value(2) 5.23% 4.63% 5.76% 6.26% 3/30/94 With Sales Charge 0.23% 4.29% 5.76% 6.26% CLASS C SHARES Net Asset Value(2) 5.23% 4.63% 5.70% 4.85% 3/1/02 With Sales Charge 4.23% 4.63% 5.70% 4.85% Citigroup Broad Investment-Grade Bond Index(3) 5.24% 4.57% 6.28% --
PORTFOLIO COMPOSITION(4) As of 10/31/06 (PIE CHART)
As of As of Asset Class 10/31/06 10/31/05 Change - ----------- -------- -------- ------ Domestic Corporate Bonds 60% 57% +3% Mortgage-Backed Bonds 24% 23% +1% U.S. Treasuries 9% 7% +2% Foreign Corporate Bonds (U.S. $) 6% 6% 0% Equities 0% 1% -1% Foreign Government Bonds (U.S. $) 0% 1% -1% Cash Equivalents 1% 5% -4%
(2) Net asset value is not adjusted for sales charge. (3) See page 18 for definitions of indices. Returns shown for the indices assume reinvestment of all dividends and distributions. The since-inception return shown for the Citigroup Mortgage Index is calculated from 4/30/84. Indices are unmanaged, and individuals cannot invest directly in an index. (4) May not reflect the current portfolio composition. 47 Supplemental Information (unaudited) (continued) TRUSTEES AND OFFICERS INFORMATION
NAME, AGE, AND ADDRESS(1) LENGTH OF PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS OF NON-INTERESTED TRUSTEE(4) TIME SERVED(2) DURING PAST 5 YEARS HELD BY TRUSTEE - ---------------------------- ------------------------- ----------------------------------------- ----------------------------- Kristianne Blake Composite Funds-3 years CPA specializing in personal financial A vista Corporation; Frank Age 52 WM Group of Funds-8 years and tax planning. Russell Investment Company; Russell Investment Funds; University of Washington. Edmond R. Davis, Esq. Sierra Funds-8 years Partner at the law firm of Davis & Whalen Braille Institute of America, Age 78 WM Group of Funds-8 years LLP. Prior thereto, partner at the law Inc; Children's Bureau of firm of Brobeck, Phlegar & Harrison, LLP. Southern California, Children's Bureau Foundation; Fifield Manors, Inc. Carrol R. McGinnis Griffin Funds-3 years Private investor since 1994. Prior Baptist Foundation of Texas; Age 63 WM Group of Funds-7 years thereto, President and Chief Operating Concord Trust Company. Officer of Transamerica Fund Management Company. Alfred E. Osborne, Jr., Sierra Funds-7 years Senior Associate Dean, University of K2, Inc.; First Pacific Ph.D. WM Group of Funds-8 years California at Los Angeles Anderson Advisors' Funds; EMAK Age 62 Graduate School of Management, and Worldwide, Inc.; Investment Faculty Director of the Harold Price Company Institute; Center for Entrepreneurial Studies, Independent Directors Council University of California at Los Angeles. Daniel L. Pavelich Composite Funds-1 year Retired Chairman and CEO of BDO Catalytic, Inc.; Vaagen Bros. Age 62 WM Group of Funds-8 years Seidman. Lumber, Inc. Jay Rockey Composite Funds-3 years Founder and Senior Counsel of The Rockey Age 78 WM Group of Funds-8 years Company, now Rockey, Hill & Knowlton. Richard C. Yancey Composite Funds-23 years Retired Managing Director of Dillon Read AdMedia Partners Inc.; Czech (Chairman) WM Group of Funds-8 years & Co., an investment bank now part of and Slovak American Age 80 UBS. Enterprise Fund
NAME, AGE, AND ADDRESS(1) LENGTH OF PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS OF INTERESTED TRUSTEE(3)(4) TIME SERVED(2) DURING PAST 5 YEARS HELD BY TRUSTEE - --------------------------- ------------------------- ----------------------------------------- ----------------------------- Anne V. Farrell Composite Funds-4 years President Emeritus of the Seattle Washington Mutual, Inc.; Age 71 WM Group of Funds-8 years Foundation. Recreational Equipment, Inc. William G. Papesh Composite Funds-9 years President and Director of the Advisor; Member of Investment Company (President and CEO) WM Group of Funds-8 years Sr. Vice President and Director of the Institute Board of Governors. Age 63 Transfer Agent and Distributor.
NAME, AGE, AND ADDRESS(1) POSITION(S) HELD WITH REGISTRANT & PRINCIPAL OCCUPATION(S) OF OFFICER(4) LENGTH OF TIME SERVED DURING PAST 5 YEARS - ------------------------- ------------------------------------------------- ------------------------------------------------- Wendi B. Bernard Vice President and Assistant Secretary since Assistant Vice President of the Advisor. Age 38 2006. Prior to 2006, various other officer positions since 2003. Jeffrey L. Lunzer, CPA First Vice President, Chief Financial Officer and First Vice President of the Advisor, Transfer Age 46 Treasurer since 2003. Agent and Distributor. Prior to 2003, senior level positions at the Columbia Funds and Columbia Management Company. William G. Papesh President and CEO since 1987. Prior to 1987, President and Director of the Advisor; Sr. Vice Age 63 other officer positions since 1972. President and Director of the Transfer Agent and Distributor. Gary Pokrzywinski Senior Vice President since 2004. First Vice Senior Vice President and Director of the Age 45 President since 2001. Prior to 2001, Vice Advisor, Transfer Agent and Distributor. President since 1999. Debra Ramsey Senior Vice President since 2004. President and Director of the Transfer Agent and Age 53 Distributor; Sr. Vice President and Director of the Advisor. John T. West First Vice President, Secretary, Chief Compliance First Vice President of the Advisor, Transfer Age 51 Officer and Anti-Money Laundering Compliance Agent and Distributor. Officer since 2004. Prior to 2004, various other officer positions since 1993. Randall L. Yoakum Senior Vice President since 2001. Prior to 2001, Senior Vice President and Chief Investment Age 47 First Vice President since 1999. Strategist of the Advisor.
Note: The Statement of Additional Information includes additional information about Fund Trustees and Officers and is available, without charge, upon request by calling 800-222-5852. (1) The address for all Trustees and Officers is 1201 Third Avenue, 8th Floor, Seattle, WA, 98101. (2) The Sierra Funds merged with the Composite Funds on March 23, 1998, to form the WM Group of Funds. The Griffin Funds merged with the WM Group of Funds on March 5, 1999. (3) Trustees are considered interested due to their affiliation with Washington Mutual, Inc., WM Advisors, Inc., WM Funds Distri butor, Inc. and WM Shareholder Services, Inc. (4) The Trustees and Officers serve in these capacities for the 40 Portfolios and Funds in the Fund Complex. Each Trustee and Offi cer shall hold the indicated positions until his or her resignation, retirement or removal. 48 (GRAPHIC) (WM GROUP OF FUNDS LOGO) A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost. This annual report is published as general information for the shareholders of the WM Group of Funds. This material is not authorized for distribution unless preceded or accompanied by a current prospectus that includes more information regarding the risk factors, expenses, policies, and objectives of the funds. Investors should read the prospectus carefully before investing. To obtain an additional prospectus, please contact your Investment Representative or call 800-222-5852. The WM Group of mutual funds is advised by WM Advisors, Inc., distributed by WM Funds Distributor, Inc., and sold through WM Financial Services, Inc. (all affiliates of Washington Mutual, Inc.) and independent broker/dealers. Distributed by: WM Funds Distributor, Inc. Member NASD (WM GROUP OF FUNDS LOGO) PRESORT P.O. Box 8024 STANDARD Boston, MA 02266-8024 U.S. POSTAGE PAID DST OUTPUT ITEM 2. CODE OF ETHICS The registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer and principal accounting officer, a copy of which is attached hereto. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT The Board of Trustees of the registrant has determined that there is at least one Trustee who is an audit committee financial expert serving on its Audit Committee and has designated Daniel L. Pavelich as an "audit committee financial expert." Mr. Pavelich is "independent," as such term has been defined by the Securities and Exchange Commission (the "SEC") for purposes of implementing Section 407 of the Sarbanes Oxley Act of 2002. The SEC has stated that the designation or identification of a person as an audit committee financial expert pursuant to this Item 3 of Form N-CSR does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES (a) Audit Fees
2005 2006 - ------- -------- $103,000 $106,500
(b) Audit-Related Fees
2005 2006 - ---- ---- None None
For the last two fiscal years, no audit-related fees were required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. (c) Tax Fees
2005 2006 - ------- ------- $11,920 $13,000
The tax fees consist of fees billed in connection with reviewing the federal regulated investment company income tax returns for WM Strategic Asset Management Portfolios, LLC for the tax years ended October 31, 2004 and October 31, 2005. (d) All Other Fees For the last two fiscal years, no other fees were required to be approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X. (e) (1) Pre-approval Policies and Procedures Pursuant to the Audit Committee charter, the Audit Committee of the registrant will review and pre-approve or disapprove its principal accountant's engagement for all services with the registrant and its principal accountant's engagement for non-audit services with the registrant's investment advisor (not including a sub-advisor whose role is primarily portfolio management and is sub-contracted or overseen by another investment advisor) and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services to the funds in accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X, if the engagement relates directly to the operations and financial reporting of the registrant. (2) None of the services described in paragraphs (b) through (d) of this Item 4 were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) Not applicable. (g) For the fiscal year ended October 31, 2006, the registrant's principal accountant billed aggregate non-audit fees in the amount of $112,000 for services rendered to the registrant, WM Advisors, Inc., WM Funds Distributor, Inc., WM Shareholder Services, Inc. and WM Financial Services, Inc. For the fiscal year ended October 31, 2005, the registrant's principal accountant billed aggregate non-audit fees in the amount of $0 for services rendered to the registrant, WM Advisors, Inc., WM Funds Distributor, Inc., WM Shareholder Services, Inc. and WM Financial Services, Inc. (h) The Audit Committee has considered whether the provision of non-audit services that were rendered to the registrant's investment advisor (not including any subadvisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor), and any entity controlling, controlled by, or under common control with the investment advisor that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Not Applicable. ITEM 6. SCHEDULE OF INVESTMENTS Not Applicable. 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 COMPANIES AND AFFILIATED PURCHASERS Not Applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 11. CONTROLS AND PROCEDURES: (a) The registrant's principal executive officer and principal financial officer have concluded, based on their evaluation of the effectiveness of the design and operation of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this report on Form N-CSR, that the design and operation of such procedures are effective to provide reasonable assurance that information required to be disclosed by the registrant in the reports that it files or submits on Form N-CSR is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. (b) There have been no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant's second fiscal half-year that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS (a) Registrant's Code of Ethics. The registrant's code of ethics required to be disclosed under Item 2 of Form N-CSR attached hereto at Exhibit 99.CODE ETH. (b) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 of the Investment Company Act of 1940 attached hereto as Exhibit 99.CERT. (c) Certifications pursuant to 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. WM Strategic Asset Management Portfolios, LLC By: /s/ William G. Papesh --------------------- William G. Papesh President and Chief Executive Officer Date: January 11, 2007 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 an on the dates indicated. By: /s/ Jeffrey L. Lunzer --------------------- Jeffrey L. Lunzer Treasurer and Chief Financial Officer Date: January 11, 2007 By: /s/ William G. Papesh --------------------- William G. Papesh President and Chief Executive Officer Date: January 11, 2007 EX-99.CODE.ETH 2 v26413exv99wcodeweth.txt CODE OF ETHICS Exhibit 99.CODE ETH THE WM GROUP OF FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS This Code of Ethics ("Code") has been adopted by WM Trust I, WM Trust II, WM Strategic Asset Management Portfolios, LLC and WM Variable Trust (the "Trusts") on behalf of each constituent series of the Trusts (each a "Fund" and collectively, the "Funds") on August 12, 2003. The Funds' code of ethics under Rule 17j-1 under the Investment Company Act of 1940, as amended (the "Investment Company Act"), contains separate requirements for persons covered by this Code and other persons and is not part of this Code. I. COVERED OFFICERS/PURPOSE OF THE CODE This Code applies to the Trusts' President and Principal Financial Officer (the "Covered Officers" each of whom is set forth in Exhibit A) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - full, fair, accurate, timely and understandable disclosure in reports and documents that a Trust files with, or submits to, the Securities and Exchange Commission (the "SEC") and in other public communications made by the Trusts; - compliance with applicable laws and governmental rules and regulations; - the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ANY ACTUAL OR APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Trusts. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of the Covered Officer's position with the Trusts. Certain conflicts of interest arise out of the relationships between Covered Officers and the Trusts and already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act of 1940 (the "Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trusts because of their status as "affiliated persons" of the Trusts. The compliance programs and procedures of WM Advisors, Inc., the Trusts' sub-advisers, WM Funds Distributor, Inc. and WM Shareholder Services, Inc. (each a "Service Provider" and, collectively, the "Service Providers") and the Trusts are reasonably designed to prevent, or identify and correct, violations of many of those provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the Trusts and its Service Providers of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Trusts or for a Service Provider or for both), be involved in establishing policies and implementing decisions that will have different effects on the Service Providers and the Trusts. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Trusts and the Service Providers and is consistent with the performance by the Covered Officers of their duties as officers of the Trusts. Thus, if performed in conformity with the provisions of the Investment Company Act, the Investment Advisers Act, other applicable law and each Trust's organizational documents, such activities will be deemed to have been handled ethically. In addition, it is recognized by the Trusts' Trustees (the "Trustees") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trusts, unless the personal interest has been disclosed to and approved by the Audit Committee (the "Committee"). Each Covered Officer must: - not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Trusts whereby the Covered Officer would benefit personally to the detriment of the Trusts; - not cause the Trusts to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than benefit the Trusts; - not use material non-public knowledge of portfolio transactions made or contemplated for the Trusts to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; and - complete any Trustee and Officer Questionnaire provided by the Trusts. There are some conflict of interest situations that should always be subject to approval by the Committee if material. Examples of these include: - service as a director on the board of any company; - the receipt of any non-nominal gifts valued in excess of $100; - the receipt of any entertainment from any company with which the Trusts have current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; - any ownership interest in, or any consulting or employment relationship with, any of the Trusts' service providers, other than a Service Provider or an affiliate of a Service Provider; and - a direct or indirect financial interest in commissions, transaction charges or spreads paid by the Trusts for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. III. DISCLOSURE AND COMPLIANCE - No Covered Officer should knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Trusts, including to the Trustees and auditors, and to governmental regulators and self-regulatory organizations; - each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Trusts and the Service Providers or with counsel to the Trusts with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and - it is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Committee that he or she has received, read, and understands the Code; - not retaliate against any other Covered Officer or any employee of the Trusts or their affiliated persons for reports of potential violations that are made in good faith; and - notify the Lead Trustee promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Lead Trustee has the authority to interpret this Code in any particular situation. However, any approvals or waivers sought by a Covered Officer will be considered by the Committee. The Trusts will follow these procedures in investigating and enforcing this Code: - the Lead Trustee will take all appropriate action to investigate any potential material violations reported to him; - if, after such investigation, the Lead Trustee believes that no material violation has occurred, the Lead Trustee is not required to take any further action; - any matter that the Lead Trustee believes is a material violation will be reported to the Committee; - if the Committee concurs that a material violation has occurred, it will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of a Service Provider or its board; or a recommendation to dismiss the Covered Officer; - the Committee will be responsible for granting waivers, as appropriate; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES ANDS PROCEDURES This Code shall be the sole code of ethics adopted by the Trusts for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Trusts, Funds, or their Service Providers' govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Trusts' and the Service Providers' codes of ethics under Rule 17j-1 under the Investment Company Act and the more detailed policies and procedures set forth in the Code of Ethics of the WM Group of Funds, WM Advisors, Inc., WM Funds Distributor, Inc. and Selected Employees of WM Shareholder Services, Inc. are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the Trustees. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Board of Trustees and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Trusts and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion. Date: _______________ EXHIBIT A Persons Covered by this Code of Ethics William G. Papesh, President and Chief Executive Officer Jeffrey L. Lunzer, Chief Financial Officer and Principal Accounting Officer John T. West, Chief Compliance Officer and Secretary EX-99.CERT 3 v26413exv99wcert.txt CERTIFICATION Exhibit 99.CERT CERTIFICATIONS I, William G. Papesh, certify that: 1. I have reviewed this report on Form N-CSR of WM Strategic Asset Management Portfolios, LLC (the "Portfolios"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 11, 2007 /s/ William G. Papesh -------------------- William G. Papesh President and Chief Executive Officer CERTIFICATIONS I, Jeffrey L. Lunzer, certify that: 1. I have reviewed this report on Form N-CSR of WM Strategic Asset Management Portfolios, LLC (the "Portfolios"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 11, 2007 /s/ Jeffrey L. Lunzer --------------------- Jeffrey L. Lunzer Treasurer and Chief Financial Officer EX-99.906CERT 4 v26413exv99w906cert.txt 906 CERTIFICATION Exhibit 99.906 CERT I, William G. Papesh, principal executive officer of the WM Strategic Asset Management Portfolios, LLC (the "Portfolios"), certify that: 1. The Form N-CSR of the Funds for the period ended October 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of the Funds for the period ended October 31, 2006 fairly presents, in all material respects, the financial condition and results of operations of the Funds. By: /s/ William G. Papesh --------------------- William G. Papesh President and Chief Executive Officer Principal Executive Officer Date: January 11, 2007 I, Jeffrey L. Lunzer, principal financial officer of the WM Strategic Asset Management Portfolios, LLC (the "Portfolios"), certify that: 1. The Form N-CSR of the Funds for the period ended October 31, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR of the Funds for the period ended October 31, 2006 fairly presents, in all material respects, the financial condition and results of operations of the Funds. By: /s/ Jeffrey L. Lunzer --------------------- Jeffrey L. Lunzer Treasurer and Chief Financial Officer Principal Financial Officer Date: January 11, 2007 -----END PRIVACY-ENHANCED MESSAGE-----