N-CSR 1 combined.txt CERTIFIED SHAREHOLDER REPORT As filed with the Securities and Exchange Commission on August 22, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07763 MASTERS' SELECT FUNDS --------------------- (Exact name of registrant as specified in charter) 4 Orinda Way, Suite 230-D, Orinda, California 94563 (Address of principal executive offices) (Zip code) Kenneth E. Gregory 4 Orinda Way, Suite 230-D Orinda, CA 94563 (Name and address of agent for service) Copies to: Julie Allecta, Esq. Paul, Hastings, Janofsky & Walker, LLP 55 Second Street, 24th Floor San Francisco, California 94105 (925) 254-8999 Registrant's telephone number, including area code Date of fiscal year end: December 31, 2003 ----------------- Date of reporting period: June 30, 2003 Item 1. Report to Stockholders. The Masters' Select Funds [LOGO] Semi-Annual Report The Masters' Select Equity Fund The Masters' Select International Fund The Masters' Select Value Fund June 30, 2003 [LOGO] LITMAN/GREGORY FUND ADVISORS, LLC www.mastersselectfunds.com The Masters' Select Concept In constructing the Masters' Select Funds, our goal was to design funds that would isolate the stock-picking skills of a group of highly regarded portfolio managers. To meet this objective, we designed the funds with both risk and return in mind, placing particular emphasis on the following factors: 1. First, only stock-pickers we believe to be exceptionally skilled were chosen to manage each fund's portfolio. 2. Second, and of equal importance, each stock-picker runs a very focused portfolio of not more than 15 of his or her favorite stocks. We believe that most stock-pickers have an unusually high level of conviction in only a small number of stocks and that portfolio limited to these stocks will, on average, outperform (a more diversified portfolio) over a market cycle. 3. Third, even though each manager's portfolio is focused, we seek ways to diversify each of our funds. With the Equity and International Funds, we have done this by including managers with differing investment styles and market cap orientations. With the Value Fund, we have selected managers who each take unique approaches to assessing companies and defining value. With the Smaller Companies Fund, we have selected managers with varying investment approaches who each focus on the securities of small companies. 4. Finally, we believe that excessive asset growth results in diminished performance. We have committed to close each of the Masters' Select Funds to new investors at levels that we believe will preserve the managers' ability to effectively implement the "select" concept. Portfolio Fit -------------------------------------------------------------------------------- As with all equity funds, Masters' Select Funds are appropriate for investors with a long-term time horizon, who are willing to ride out occasional periods when the funds' net asset values decline. Within that context, we created the Masters' Select Equity and Masters' Select International Funds to be used as core equity and international fund holdings. Masters' Select Smaller Companies Fund has been created to provide a core domestic small cap investment opportunity. We created Masters' Select Value Fund for investors who seek additional, dedicated value exposure in their portfolios. Although performance in each specific down market will vary, we purposely set the allocations to each manager with the objective of keeping risk about equal to the funds' overall benchmarks. In the end, the focus on the highest conviction stocks of a group of very distinguished managers with superior track records is what we believe makes the funds ideal portfolio holdings. Contents Contents -------- Our Commitment to Shareholders 2 -------------------------------------------------------------------------------- Letter to Shareholders 4 -------------------------------------------------------------------------------- Masters' Select Equity Fund Equity Fund Review 9 Equity Fund Managers 15 Equity Fund Stock Highlights 16 Equity Fund Schedule of Investments 20 -------------------------------------------------------------------------------- Masters' Select International Fund International Fund Review 22 International Fund Managers 28 International Fund Stock Highlights 29 International Fund Schedule of Investments 32 -------------------------------------------------------------------------------- Masters' Select Value Fund Value Fund Review 34 Value Fund Managers 39 Value Fund Stock Highlights 40 Value Fund Schedule of Investments 44 -------------------------------------------------------------------------------- Statements of Assets and Liabilities 46 -------------------------------------------------------------------------------- Statements of Operations 47 -------------------------------------------------------------------------------- Statements of Changes in Net Assets Equity Fund 48 International Fund 49 Value Fund 50 -------------------------------------------------------------------------------- Financial Highlights Equity Fund 51 International Fund 52 Value Fund 53 -------------------------------------------------------------------------------- Notes to Financial Statements 54 -------------------------------------------------------------------------------- Trustee and Officer Information 61 -------------------------------------------------------------------------------- This report is intended for shareholders of the Funds and may not be used as sales literature unless preceded or accompanied by a current prospectus for the Masters' Select Funds. Past performance is not a guarantee of future results. Due to market volatility, fund performance may fluctuate substantially over the short-term and current performance may differ from that shown. Share price and returns will fluctuate, and investors may have a gain or loss when they redeem shares. Statements and other information in this report are dated and are subject to change. Litman/Gregory Fund Advisors, LLC has ultimate responsibility for the Funds' performance due to its responsibility to oversee its investment managers and recommend their hiring, termination and replacement. Our Philosophy and Commitment to Shareholders At Litman/Gregory Fund Advisors we remain committed to doing all we can to make each Masters' Select Fund a highly satisfying long-term investment for shareholders. In following through on this commitment we are guided by our core values, which influence four specific areas of service: First, is our commitment to the Masters' Select concept. o We are committed to only hiring managers who we strongly believe can deliver superior returns going forward. We base this belief on extremely thorough due diligence research. This not only requires us to assess their stock picking skills but also to evaluate their ability to perform well within a concentrated portfolio format. o Our commitment also includes our ongoing monitoring of our managers to ensure that they are staying true to their Masters' Select mandate. This requires us to focus on long-term performance so that our stock pickers will not be distracted by short-term performance pressure. Second, is our commitment to doing all we can to ensure that the framework within which our stock pickers do their work offers them the best chance for them to excel. o This includes our commitment to close each Fund at an asset level that locks in lots of flexibility for our stock pickers. The Masters' Select Equity Fund will close at approximately $750 million and the Masters' Select International Fund and Masters' Select Value Fund will each close at approximately $1 billion. The Masters' Select Smaller Companies fund will close at approximately $300 to $450 million. These are extremely low closing levels in the mutual fund world today. o The framework also includes the diversified multi-manager structure that makes it possible for each manager to invest in a concentrated manner knowing that the potential volatility within his portfolio is not likely to be felt directly by the Fund's shareholders. The multi-manager structure seeks to provide the diversification necessary to temper the volatility of each managers' sub-portfolio. o We also work hard to discourage short-term speculators so that cash flows into the Fund are not volatile. Lower volatility helps prevent our managers from being forced to sell stocks at inopportune times. This is the sole reason for the six-month redemption fee that is paid to the Fund for the benefit of shareholders. Third, is our commitment to do all we can from an operational standpoint to maximize shareholder returns. o We've remained attentive to fund overhead and whenever we have achieved savings we have passed them through to shareholders. For example, we have had several manager changes that resulted in lower sub-advisory fees to our funds. In every case we have passed through the full savings to shareholders in the form of fee waivers. o We also work closely with our sub-advisors to make sure they are aware of tax-loss selling opportunities (only to be taken if there are equally attractive stocks swap into). We account for partial sales on a specific tax lot basis so that shareholders will benefit from the most favorable tax treatment. Fourth, is our commitment to communicate honestly about all relevant developments. o We will continue to do this by providing thorough and educational shareholder reports. o We will continue to provide what we believe are realistic assessments of the investment environment. Our commitment to Masters' Select is also evidenced by our own investment. Our employees have, collectively, substantial investments in the Funds, as does our company retirement plan. In addition, we use the Funds extensively in our client accounts in our investment advisor practice. We have no financial incentive to do so because the fees we receive on those client assets are fully offset against the advisory fees paid by our clients. fact, we have a disincentive to use the funds in our client accounts because each Masters Select Fund is capacity constrained (they will be closed at pre-determined asset levels) and by using them in client accounts we are using up capacity for which we are not paid. But we believe these Funds offer value that we can't get elsewhere and this is why we enthusiastically invest in them ourselves and on behalf of clients. July 2003 Dear Fellow Shareholder, In the 2002 Masters' Select Funds Annual Report we wrote "for the first time in many years we believe stocks are comfortably undervalued and we believe this bodes well for patient investors." After a rough first quarter for the global stock markets we reiterated this view in our quarterly shareholder letter with the caveat that "it is not easy to know when the short-term performance bursts will come...so we continue to focus on the longer-term." As it turned out, a "performance burst" had already started and it continued throughout most of the second quarter. The powerful rally that started on March 11th has been strong enough and broad enough to suggest that the three year old bear market is now over. We're happy to report that after a very rough first quarter for all three Masters' Select Funds, each experienced a powerful second quarter rebound. While we are pleased with the second quarter rebound, as we've always stated, the primary objective of each Masters' Select Fund is oriented toward longer-term performance. In that regard we believe each fund has been extremely successful: -------------------------------------------------------------------------------- Annualized Lipper Return in Peer Excess of Group Benchmark Ranking # of Years (Since (Since Since Inception)(1) Inception)(2) Inception(3) -------------------------------------------------------------------------------- Masters' Select Equity 3.04% Top 17.2% 6 years and 6 months -------------------------------------------------------------------------------- Masters' Select International 7.01% Top 3.3% 5 years and 7 months -------------------------------------------------------------------------------- Masters' Select Value 3.30% Top 28.2% 3 years -------------------------------------------------------------------------------- (1) Please refer to pages 10, 23 and 35 for 12 month, three year, five year and since inception average annual total returns for Masters' Select Equity, International and Value Funds and their respective benchmarks. (2) Masters' Select Equity Fund ranked 102nd of 504 Multi-cap Core Equity Funds for twelve months, 43rd of 228 Multi-Cap Core Equity Funds for five years, and 28th of 165 Multi-cap Core Funds since inception, all for the respective periods ended 6/30/03. Masters' Select International Fund ranked 355th of 818 International Equity Funds for twelve months, 12th of 461 International Equity Funds for five years, and 12th of 359 International Equity Funds since inception, all for the respective periods ended 6/30/03. Masters' Select Value Fund ranked 31st of 492 Multi-cap Value Funds for twelve months and 94th of 333 Multi-cap Value Funds since inception, respectively for the periods ended 6/30/03. All ranking data according to Lipper, Inc. (3) The inception dates of Masters' Select Equity, International and Value Funds are 12/31/96, 12/1/97 and 6/30/00, respectively. -------------------------------------------------------------------------------- Over the years this performance has been a team effort. All fourteen"Masters" have outperformed their index benchmarks during their Masters' Select tenure. For more detailed discussion on each individual fund, please see the reports on the pages that follow. What's to be Learned from the Last Five Years? The last five years have been painful for many investors as stocks, on average, actually lost money over the entire period. But in between, stocks also experienced periods of huge gains and huge losses. Now, after this five-year roller coaster, perhaps it's time for some reflection. Regardless of how bruised and battered investors may be, this period presents an opportunity to internalize valuable lessons that have the potential to positively influence individual investment decisions for years to come. It's even possible that over the long-term, the value of these lessons may more than offset the actual losses sustained during the bear market. So, with that said the following constitute what Litman/Gregory believes are the three most important lessons from the bubble/bear market period we've just experienced. (Note: some of the following was published in 2001 in our research publication The No-Load Fund Analyst.) Stock prices should reflect underlying economic value. In the long run there is a rock solid linkage between companies' earnings and asset values and their stock prices. A company's stock has value based on its profitability and the potential to grow those profits. Over short time periods this linkage is sometimes stretched so that the stock price may be based on excessive optimism rather than cold, hard reason. At other times stock prices may be temporarily depressed because of excessive pessimism. Occasionally these short periods my not seem so short--lasting a year or two. But in the end reason wins out. Over the past five years we've seen massive optimism that drove the prices of many stocks far beyond rational levels. And we've experienced pessimism that drove stock prices well below our estimate of fair value. In both instances, stock prices eventually moved back towards fair value as the factors that fueled both the optimism and the pessimism declined in importance. Good investors focus on economic value and its relationship to share prices. Don't be influenced by recent investment experiences. A mistake made repeatedly over the years is extrapolating a recent trend far into the future. It happened with growth stocks in the early 1970s, small-cap stocks in the early 1980s, gold in the late 1970s and early 1980s, foreign stocks in the late 1980s, and most recently with growth and technology stocks in the late 1990s. In each of these cases there were compelling reasons to believe that the popular asset would continue to rise. But in each case the asset had already had a huge upward move and an objective view would have raised many red flags. This phenomenon can also work in reverse as was the case with value stocks during the technology bubble. Sometimes assets are out-of-favor for good reason, but not always. Often the reason has more to do with temporary concerns that are not material to the enterprise's long run value. Good investors stay intellectually honest and ask the tough questions about an investment's value and future growth potential, and, most important of all, whether they really understand what makes it a good investment. This type of ongoing analysis reduces the risk of buying into a hyped story or missing a great opportunity simply because it is under a temporary cloud. Patience is a virtue not just in life, but also in investing. The late 1990s tested the patience of many value investors. Their analysis told them the stocks of many companies were undervalued but prices went lower instead of higher while the NASDAQ rocketed into "the final frontier." Value investors were ridiculed as "just not getting it" often by people with little real investing experience. Patient investors avoided technology stocks and took advantage of bargains in other areas and then waited until they were proven right. In the end they were, and many value managers actually made money for their clients from the market peak of March 2000 through the market trough of July of 2002 (almost reached again in March of 2003). Difficult as it may be, investors who are skilled at fundamental analysis and patient in waiting for their analysis to be proven right, tend to travel on the high probability road to investment success. The experience of Masters' Select over the past 61/2 years reinforces these lessons. Litman/Gregory's decision to hire a stock picker for a Masters' Select fund is based on very in-depth due diligence. A big part of that due diligence is focused on assessing the skill, independence and discipline of the stock picker. We seek managers who have great expertise in fundamental analysis and valuation so that they can make good assessments that will keep them from blindly extrapolating recent trends, and so that they have a basis for the confidence needed to be patient in waiting for their analysis to be rewarded by the market. This emphasis on fundamental analysis and patience has sometimes resulted in periods during which each Masters' Select Fund has underperformed. These have often coincided with times when the stock markets were not particularly rational. A good example was this year's first quarter when financial markets were driven by economic and geopolitical fears. All three of the Masters' Select Funds performed very poorly relative to their benchmarks during this period. However, as investors became less concerned about these big picture issues and the market moved back towards fair value, all three Masters' Select funds experienced powerful second quarter rebounds and outperformed their benchmarks. Over the long haul we believe patient investors will continue to be rewarded as our experienced and (we believe) highly skilled stock pickers take advantage of the structural advantages offered by the Masters' Select format. Developments Launch of Masters' Select Smaller Companies Fund: This fund was registered over three years ago as Litman/Gregory Fund Advisors (LGFA) expected to find and hire a group of stock pickers worthy of managing a Masters' Select fund. As it turned out, finding the right managers was much tougher than expected. Many skilled small-cap managers who were capable of running a concentrated portfolio were either closed for new business or were charging higher fees than we were willing to pay. We embarked on a frustrating three-year due diligence effort, researching many small-cap stock pickers. Unfortunately, most didn't meet our standard for a Masters' Select stock picker. Finally, as of early 2003, we identified the last of four small-cap stock pickers. Masters' Select Smaller Companies Fund was finally launched on June 30th. The line-up of four managers includes Masters' Select Equity veterans Bill D'Alonzo and Dick Weiss. Both were included because they have proven their ability to deliver outstanding returns via a concentrated small-cap portfolio by virtue of their work over the past six years for Masters' Select Equity. Over the full life of Masters' Select Equity, Weiss and D'Alonzo have outreturned their benchmarks by the highest margins of any of the fund's six managers. In addition we are very excited that we've been able to include Bob Rodriguez of First Pacific Advisors, Inc. and John Rogers of Ariel Capital Management, Inc. Both have decades of experience and have realized great success as small-cap stock pickers and both are big believers in the benefits of running a concentrated portfolio. We will probably be adding a fifth manager to the line-up in the not too distant future. Media: Litman/Gregory Fund Advisors was flattered to learn that Kiplinger's Personal Finance magazine named the Masters Select Funds as one of the top ten fund families in their article "Who Runs The Best Funds?"4 The article appeared in the August 2003 issue which was on the newsstands in late June. Tax Update: Each of the Masters' Select Funds continues to have substantial net realized losses. These losses were mostly incurred during the recently ended bear market. The existence of these losses means that the funds will not distribute taxable capital gains until they have generated total realized gains in excess of the net realized losses. In plain English this suggests that Masters' Select Equity and International are unlikely to distribute any capital gains in 2003 and will probably not have sizable distributions in 2004. Masters' Select Value is also unlikely to distribute gains in 2003. Realized losses as a percent of net assets: Masters' Select Equity 14.9% Masters' Select International 18.0% Masters' Select Value 8.3% Looking Forward Based on our analysis we believe that the powerful second quarter rebound brought stock prices back up into a fair value range though foreign stocks and small caps may still be somewhat undervalued. Many of our stock pickers seem to agree that it is harder to find bargains than it was a few months ago. The good news is that stocks are generally not overvalued. The global economy remains a wildcard but has shown some improvement at the margin, especially in the U.S. This is encouraging and along with very low interest rates that continue to allow for favorable refinancing of corporate and consumer debt as well as stimulus from lower taxes, there is somewhat more reason for optimism. Longer-term structural problems (high debt levels, intense competition, and U.S. reliance on foreign capital) and geopolitical risks remain. However, the world has always been a scary place and we are also conscious of the tendency for "today's" risks to seem scarier than yesterday's. At the end of the day we are generally more confident looking to valuation as an indicator of probable long-term equity returns. Given our belief that stocks are in a fair value range, returns over the next three to five years are likely to be a function mostly of earnings growth and dividends. The math suggests mid single-digit returns or maybe a bit more though there are numerous scenarios that could result in higher or lower returns. Small-caps and foreign stocks could do somewhat better. Though these returns may not seem exciting we believe they are very likely to be higher than returns from bonds or cash given today's very low interest rate levels. If the Masters' Select Funds can come close to matching its long-term return premium to stock market benchmarks, then absolute returns for Masters' Select shareholders would be significantly more compelling. Of course past performance is no -------------------------------------------------------------------------------- (4) The selection of the Masters' Select Funds as one of the ten best run no-load fund families as determined by Kiplinger's Personal Finance Magazine is based on the following criteria: 1) availability at no cost to investors, 2) consistently superior performance over the long term, and 3) reasonable operating expenses. Guarantee of future performance. In fact, there is not a strong correlation between past performance and future performance (within appropriate peer groups) in the mutual fund industry. We've tried to address this in the Masters' Select structure by controlling the factors that we believe make it tough to maintain a performance record. Each stock picker's focus on his highest conviction stocks and our promise to keep their asset base small and flexible are two of the reasons why we believe performance will be maintained. Many successful funds get too big, forcing excessive diversification and reducing flexibility that together dilute the impact of the stock picker's best ideas. The Masters' Select structure will not allow that to happen. These factors and our commitment to do all we can to make sure that each "Master" is highly skilled, disciplined and capable of executing their Masters' Select mandate are behind the success of each fund and the reason why we are optimistic that each will continue to have long-term success relative to their benchmarks and peer groups. As always, we'd like to express our gratitude for your confidence in Masters' Select. We and each Masters' Select manager will continue to do all we can to make each fund a rewarding experience. Sincerely, /s/ Ken Gregory Ken Gregory President Litman/Gregory Fund Advisors Masters' Select Equity Fund Review -------------------------------------------------------------------------------- The first half of 2003 was a roller coaster for both Masters' Select Equity and the stock markets. During the first quarter the fund's benchmarks declined between 3% and 4% but this was followed by a powerful second quarter rebound of between 16.5% and 17.5%. Masters' Select Equity experienced more extreme performance with a first quarter decline of 5.50% and a second quarter rebound of 18.38%. Although Masters' Select Equity trailed its benchmarks by about 1% during the first half of 2003 it has demonstrated clear outperformance over the trailing one, three and five year time periods. Since the fund's inception six and one half years ago it has outperformed its best performing benchmark (Wilshire 5000 Index) by a sizable 3.04% on an annualized basis and it ranks in the top 17% of its Lipper Multi-Cap Core Category peer group.(1) Comparison Chart -------------------------------------------------------------------------------- The value of a hypothetical $10,000 investment in the Masters' Select Equity Fund from its inception (12/31/96) to present as compared with the Wilshire 5000 Index, the Lipper Multi-Cap Core Index and the Custom Equity Index. [LINE CHART] Masters' Select Equity Fund As Of 06/30/03 Masters' Select Wilshire Lipper Custom Equity 5000 Multi-Cap Equity Fund Index Core Index Index $17,078 $14,200 $13,831 $13,932 31-Dec-96 $10,000 $10,000.00 $10,000.00 $10,000.00 31-Jan-97 $10,290 $10,535.30 $10,473.86 $10,442.50 28-Feb-97 $10,320 $10,530.45 $10,442.84 $10,466.10 31-Mar-97 $9,860 $10,064.69 $10,056.94 $10,069.96 30-Apr-97 $10,210 $10,503.61 $10,404.95 $10,501.76 31-May-97 $10,920 $11,247.79 $11,107.09 $11,251.37 30-Jun-97 $11,530 $11,764.52 $11,526.16 $11,763.54 31-Jul-97 $12,790 $12,668.97 $12,402.04 $12,547.46 31-Aug-97 $12,500 $12,192.75 $12,061.26 $12,019.34 30-Sep-97 $13,560 $12,912.24 $12,724.48 $12,723.67 31-Oct-97 $12,850 $12,482.13 $12,245.76 $12,216.63 30-Nov-97 $12,740 $12,890.80 $12,453.82 $12,584.23 31-Dec-97 $12,911 $13,129.02 $12,627.48 $12,790.74 31-Jan-98 $12,845 $13,200.31 $12,698.14 $12,908.15 28-Feb-98 $13,925 $14,161.29 $13,604.80 $13,833.54 31-Mar-98 $14,415 $14,870.07 $14,243.14 $14,485.93 30-Apr-98 $15,081 $15,046.58 $14,397.49 $14,615.72 31-May-98 $14,557 $14,646.19 $14,002.37 $14,275.03 30-Jun-98 $14,732 $15,159.68 $14,395.31 $14,696.57 31-Jul-98 $14,579 $14,827.53 $14,101.69 $14,364.28 31-Aug-98 $11,850 $12,518.44 $11,906.40 $12,176.46 30-Sep-98 $12,210 $13,336.15 $12,470.81 $12,873.42 31-Oct-98 $13,140 $14,328.35 $13,321.76 $13,843.43 30-Nov-98 $13,883 $15,230.61 $14,035.79 $14,646.91 31-Dec-98 $14,834 $16,205.22 $14,987.53 $15,481.64 31-Jan-99 $15,304 $16,800.92 $15,484.68 $15,971.17 28-Feb-99 $14,572 $16,191.89 $14,888.17 $15,326.73 31-Mar-99 $15,413 $16,816.73 $15,358.25 $15,867.62 30-Apr-99 $16,955 $17,622.76 $15,984.78 $16,646.08 30-May-99 $16,736 $17,237.00 $15,806.18 $16,339.56 30-Jun-99 $18,059 $18,129.36 $16,580.91 $17,185.79 31-Jul-99 $17,589 $17,548.13 $16,215.79 $16,767.31 31-Aug-99 $17,304 $17,384.58 $15,932.69 $16,590.75 30-Sep-99 $16,898 $16,930.32 $15,535.96 $16,289.96 31-Oct-99 $17,365 $18,006.92 $16,324.50 $17,085.89 30-Nov-99 $17,728 $18,609.97 $16,850.02 $17,592.33 31-Dec-99 $18,758 $20,023.03 $18,102.81 $18,873.93 31-Jan-00 $18,471 $19,191.87 $17,588.54 $18,029.55 29-Feb-00 $18,354 $19,621.77 $18,266.17 $18,434.84 31-Mar-00 $20,115 $20,787.30 $19,436.94 $19,525.81 30-Apr-00 $19,880 $19,704.28 $18,715.38 $18,777.00 31-May-00 $19,254 $19,016.60 $18,064.94 $18,242.53 30-Jun-00 $19,867 $19,855.24 $18,826.73 $18,947.15 31-Jul-00 $19,658 $19,450.19 $18,533.03 $18,535.99 31-Aug-00 $21,067 $20,862.27 $19,839.61 $19,640.74 30-Sep-00 $19,684 $19,888.01 $18,928.97 $18,703.87 31-Oct-00 $19,632 $19,466.38 $18,714.75 $18,438.28 30-Nov-00 $18,210 $17,529.48 $17,121.31 $16,972.44 31-Dec-00 $19,353 $17,841.50 $17,496.01 $17,383.17 31-Jan-01 $19,935 $18,524.83 $18,099.97 $17,996.79 28-Feb-01 $18,787 $16,768.68 $16,470.59 $16,477.87 31-Mar-01 $18,026 $15,640.14 $15,493.66 $15,474.36 30-Apr-01 $19,338 $16,927.33 $16,748.81 $16,664.34 31-May-01 $20,054 $17,096.60 $16,889.93 $16,762.66 30-Jun-01 $20,024 $16,809.38 $16,599.29 $16,524.63 31-Jul-01 $19,666 $16,532.02 $16,265.55 $16,204.05 31-Aug-01 $18,817 $15,531.84 $15,343.99 $15,348.48 30-Sep-01 $16,267 $14,137 $13,771 $13,912 31-Oct-01 $16,625 $14,496 $14,145 $14,297 30-Nov-01 $18,276 $15,605 $15,256 $15,338 31-Dec-01 $18,860 $15,886 $15,613 $15,633 31-Jan-02 $18,561 $15,689 $15,268 $15,353 28-Feb-02 $17,722 $15,366 $14,992 $15,073 31-Mar-02 $18,696 $16,039 $15,599 $15,801 30-Apr-02 $18,141 $15,256 $14,936 $15,165 31-May-02 $17,976 $15,076 $14,814 $15,080 30-Jun-02 $16,583 $14,016 $13,653 $14,047 31-Jul-02 $15,250 $12,885 $12,576 $12,934 31-Aug-02 $15,669 $12,961 $12,656 $13,004 30-Sep-02 $14,261 $11,661 $11,492 $11,596 31-Oct-02 $15,175 $12,553 $12,220 $12,565 30-Nov-02 $16,314 $13,310 $12,964 $13,288 31-Dec-02 $15,265 $12,573 $12,219 $12,546 31-Jan-03 $14,801 $12,256 $12,013 $12,202 28-Feb-03 $14,366 $12,049 $11,805 $12,008 31-Mar-03 $14,426 $12,185 $11,843 $12,092 30-Apr-03 $15,819 $13,184 $12,764 $13,105 31-May-03 $17,123 $13,990 $13,628 $13,817 30-Jun-03 $17,078 $14,200 $13,831 $13,932 The hypothetical $10,000 investment at Fund inception includes changes in share price and reinvestment of dividends and capital gains. Indices are unmanaged, do not incur fees, expenses or taxes, and cannot be invested in directly. ------------------------------------------------------------------------------- (1) At June 30, 2003, the Masters' Select Equity Fund's ranking in Lipper's Multi-cap Core Equity Fund category was 102nd of 504 funds for the twelve months, 43rd of 228 funds for the five years, and 28th of 165 funds since inception (12/31/96).
-------------------------------------------------------------------------------- Investment Performance Three Year Five Year As of June 30, 2003 Year Average Average Average to Annual Annual Annual Total Date 12 Month Total Total Return Since Return Return Return Return Inception(1) -------------------------------------------------------------------------------- Masters' Select Equity Fund 11.87% 2.98% -4.92% 3.00% 8.58% -------------------------------------------------------------------------------- Custom Equity Index(2) 12.80% -0.64% -9.74% -1.06% 5.23% -------------------------------------------------------------------------------- Wilshire 5000 Index(3) 12.92% 1.29% -10.57% -1.30% 5.54% -------------------------------------------------------------------------------- Lipper Multi Cap Core Fund Index(4) 13.18% 1.28% -9.77% -0.80% 5.12% --------------------------------------------------------------------------------
Past Performance is no guarantee of future results, and investors may have a gain or loss when they sell shares. The returns shown do not reflect the deduction for taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Indices are unmanaged, do not incur fees, expenses or taxes, and cannot be invested in directly. (1) The inception date of the Masters' Select Equity Fund is December 31, 1996. (2) The Custom Equity Index is composed of a 70% weighting in the S&P 500 Index, a 20% weighting in the Russell 2000 Index, and a 10% weighting in the MSCI EAFE index. (3) The Wilshire 5000 Index measures the performance of all U.S. headquartered equity securities with readily available pricing data. (4) The Lipper Multi-cap Core Fund Index measures the performance of the 30 largest mutual funds that invest in a variety of capitalization ranges, without concentrating 75% or more of their equity assets in any one market capitalization range over an extended period of time. -------------------------------------------------------------------------------- Long-Term Performance Analysis ................................................................................ The volatility that Masters' Select Equity experienced in the first half of the year has not been typical in that the fund is not always more volatile than the stock market. Over the years there have been relatively short periods when the fund has been more volatile than its benchmarks and other periods when it has been less volatile than its benchmarks. On a more specific basis, and as noted in the Masters' Select First Quarter Shareholder Letter we have noticed that the fund has tended to underperform during periods when the stock market is driven by fear or greed rather than fundamentals. Such periods have included the Asian currency crisis/Russian default, the Long-Term Credit hedge fund blow-up period of 1998, the technology bubble of late 1999 and 2000, the September 11th aftermath, the corporate governance scandals that peaked in mid-2002 and the pre-Iraq war period of early 2003. In each of these periods Masters' Select Equity underperformed. However, patient investors were rewarded when the fund significantly outperformed in each of the periods that followed as depicted in the following chart. [BAR CHART] Masters' Select Equity Fund Under/Out Performance vs. Wilshire 5000 Under Performance 08/98-2/99 -7.11% 10/99-02/00 -7.18% 09/01-10/01 -4.87% 07/02 -0.71% 12/02-2/03 -3.37% Out Performance 03/99-7/99 9.40% 02/00-05/00 8.21% 11/01-12/01 3.72% 08/02-09/02 3.30% 4/03-6/03 3.59% As we've stated many times, one of the main objectives of the Masters' Select Funds is to deliver superior performance relative to their benchmarks and their peer groups over the long run. For this reason we are most concerned about performance over three year periods and longer. Though we are pleased that Masters' Select Equity has performed well over many shorter periods, and has beaten its benchmarks in each of the last four calendar years, we are particularly encouraged that the fund has outperformed its primary benchmark by a sizable margin over the long-term and has shown consistency by outperforming in 41 out of 43 "rolling" three-year periods (we measure three year return periods as of the end of the fund's first three-year period and then add additional "rolling" three year periods with each subsequent month). We are more confident in the ability of each Masters' Select Fund (including Equity) to outperform over these longer periods (compared to shorter periods) because most of the time these periods are sufficiently long to allow the stock pickers' skill and fundamental research focus to outweigh temporary non-fundamental market factors. And we view the consistency of this performance as important because we hope that Masters' Select shareholders will develop confidence in the fund's ability to consistently outperform over the long-term, despite occasional short periods of underperformance which all funds experience. [BAR CHART] MASTERS' SELECT EQUITY ROLLING 3-YEAR PERFORMANCE VS. CUSTOM EQUITY INDEX By Month 3-year out/under performance of Masters' Select Equity ------------ ------------------------------------------------------ Dec-99 -0.26% Jan-00 1.42% Feb-00 0.39% Mar-00 2.13% Apr-00 3.50% May-00 3.33% Jun-00 2.66% Jul-00 1.51% Aug-00 1.21% Sep-00 -0.48% Oct-00 0.46% Nov-00 2.03% Dec-00 3.67% Jan-01 4.05% Feb-01 4.49% Mar-01 5.50% Apr-01 4.16% May-01 5.76% Jun-01 6.78% Jul-01 6.38% Aug-01 8.63% Sep-01 7.40% Oct-01 7.07% Nov-01 8.04% Dec-01 8.00% Jan-02 7.93% Feb-02 6.99% Mar-02 6.78% Apr-02 5.32% May-02 5.27% Jun-02 3.75% Jul-02 4.21% Aug-02 5.16% Sep-02 5.57% Oct-02 5.99% Nov-02 6.67% Dec-02 6.54% Jan-03 5.67% Feb-03 6.03% Mar-03 4.80% Apr-03 4.44% May-03 5.21% Jun-03 4.82% As we drill down to measure the success of not just the overall fund but also each of the fund's stock pickers we look at how each has done relative to their own benchmarks. We're happy to report that all six managers have outperformed their benchmarks during their tenure with Masters' Select. -------------------------------------------------------------------------------- CURRENT MASTERS' SELECT MANAGERS' PERFORMANCE versus BENCHMARKS* -------------------------------------------------------------------------------- Masters' Select Equity Annualized Performance Margin (Net of allocated expenses) -------------------------------------------------------------------------------- Manager 1 19.51% -------------------------------------------------------------------------------- Manager 2 7.93% -------------------------------------------------------------------------------- Manager 3 7.41% -------------------------------------------------------------------------------- Manager 4 3.32% -------------------------------------------------------------------------------- Manager 5 1.59% -------------------------------------------------------------------------------- Manager 6 0.86% -------------------------------------------------------------------------------- * This table does not include the two managers that preceded Bill Miller prior to March 2000. Both of those managers underperformed their benchmarks. Benchmarks: Chris Davis and Bill Miller: S&P 500 Bill D'Alonzo: Russell 2500 Growth Dick Weiss: Russell 2000 Sig Segalas: Russell 1000 Growth Mason Hawkins: Russell 3000 Value -------------------------------------------------------------------------------- It is worth noting that each manager's long-term relative performance advantage has not come without volatility. At any point in time one or more managers is usually underperforming and because of the concentration, this underperformance is sometimes quite material. Even the Masters occasionally make mistakes and with a concentrated portfolio these mistakes can be very costly. However, the manager diversification built into the fund has been very effective in mitigating the fund level impact of these occasional mistakes and blow-ups. More often than not one or more of the other managers are outperforming which has helped to offset the temporary struggles of any other Masters. In the end the skill of each manager has contributed to the long-term results of the fund. Portfolio Comments ................................................................................ Asset allocation and sector exposure: The fund's diversification mix did not change much during the first half of 2003. The fund remains well diversified between small-, mid- and large-cap stocks, with 5% of the fund in foreign stocks. Over the years the mid-cap exposure has grown and is now a third of the fund's total. During the period the most significant sector shifts were in the finance sector which grew from 26% of assets to 30% of assets with the addition of four new names, and the consumer discretionary sector which grew from 20% to just over 22% with the addition of four new names. Industrial exposure declined from 21% to 18% as several stocks were sold and consumer staples declined from just over 6% to just under 3%, primarily because of the removal of Fleming. The fund's largest sector overweights relative to its Wilshire 5000 benchmark are finance, consumer discretionary and industrials. Its largest underweights are health care, technology and telecom/utilities. Please see page 15 for data on the sector and market cap allocations. Several factors impacted performance during the first half of 2003. Manager performance: The managers' performance was mixed with the small cap managers adding significant value relative to their benchmarks while the larger-cap managers as a group trailed their benchmarks. Individual stock performance: The fund had a number of significant winners in the first half and each manager had at least one stock on the list of the fund's ten biggest contributors. Capital One up 66% (financial products), Comcast up 30% (cable), and Mentor Graphics up 90% (software for semiconductor electronics systems designers) were the three largest contributors to the fund's positive first half, collectively producing almost $11 million of profit. Capital One (Miller) and Mentor Graphics (Weiss) were both profiled in the 2002 Annual Report. Each stock comes from a different sector and was contributed by a different stock picker. Other big winners came from a variety of industries and included Home Depot, Aon, Amgen and Coventry Health. On the losing side, the fund took a significant hit in the first quarter when Fleming filed for bankruptcy. This stock was held by Mason Hawkins. Hawkins and his team at Southeastern Asset Management, in this instance, erred in their assessment of Fleming's management team who ultimately allowed the firm to run out of cash. The Fleming position resulted in a loss in excess of $10 million during the first half and was one of the primary reasons for the fund's poor performance in the first quarter. As we've noted in the past no investor is perfect and the Masters will make mistakes at times. But we must also note that despite the Fleming experience, Hawkins has soundly beaten his benchmarks during his tenure as manager for Masters' Select Equity and has contributed greatly to the fund's success. He also contributed two of the fund's eight biggest winners during the current period. Sector exposure and performance: The overweight to the consumer discretionary sector helped the fund so far in 2003 as this was one of the best performing sectors. The fund's underweight to consumer staples, one of the worst performing sectors, also helped. On the other hand, the fund's small weighting to technology stocks, another strong sector, offset some of these benefits. Overall, the variation in sector exposure between the fund and the Wilshire benchmark was not a big factor in relative performance during the first six months of 2003. In Closing ................................................................................ As mentioned in the general discussion that started on page 4, we believe that the strong stock market returns delivered during the last three months have, on average, brought stocks back up to a fair value range. Though there are many factors that can't be anticipated that could materially influence returns in coming years, valuations are one factor that we are confident in our ability to assess. As we write this our broad-based analysis of market-level stock values suggests that long-term equity returns are likely to fall in a mid-single digit range or a bit higher. Though there are obviously no guarantees, we continue to believe that the quality of the Masters' Select Equity stock pickers coupled with their focus on their highest conviction stocks will continue to result in better than benchmark performance. We also believe that the mix of stock picking styles, the long-term investment horizon and the ongoing evaluation and monitoring by Litman/Gregory will contribute to the success of Masters' Select Equity. We thank you for your continued trust and confidence. Masters' Select Equity Fund Managers ................................................................................ MARKET TARGET CAPITALIZATION INVESTMENT ASSET OF COMPANIES STOCK-PICKING MANAGER FIRM ALLOCATION IN PORTFOLIO STYLE ................................................................................ Christopher Davis Selected Davis/Kenneth Advisors 20% Mostly large Growth at a Feinberg companies reasonable price -------------------------------------------------------------------------------- Bill D'Alonzo Friess 10% Small and mid- High earnings and team Associates sized companies growth -------------------------------------------------------------------------------- Mason Southeastern 20% All sizes, may Value and global, Hawkins Asset have up to 50% may invest up to Management foreign stocks 50% in foreign securities -------------------------------------------------------------------------------- Bill Miller Legg Mason 20% All sizes, but Eclectic, may invest Funds mostly large in traditional value Management and mid-sized stocks or growth companies stocks -------------------------------------------------------------------------------- Sig Segalas Jennison 20% Mostly large High earnings Associates companies growth -------------------------------------------------------------------------------- Dick Weiss Strong Capital 10% Small and mid- Growth at a Management sized companies reasonable price -------------------------------------------------------------------------------- Portfolio Composition ................................................................................ As reflected in this chart, your fund is well diversified in terms of market capitalization. The fund holds 73 securities, exclusive of cash equivalents. [CHART] Sector Weights -------------------- By Asset Class Fund S&P 500 Index -------------- ---- ------------- Cash Equivalents & Other 5.1% Finance 29.7% 21.7% Foreign Equities 5.3% Consumer Discretionary 22.3% 16.4% Small-Cap Domestic 9.7% Industrials 18.1% 11.6% Mid-Cap Domestic 33.8% Technology 9.6% 14.3% Large-Cap Domestic 46.1% Healthcare & Pharmaceuticals 6.1% 14.7% Energy 4.3% 5.9% Consumer Staples 2.9% 7.9% Telecommunications & Utilities 1.9% 7.5% Cash Equivalents & Other 5.1% 0.0% ----- ------ Net Assets 100.0% 100.0% ===== ====== Market Capitalization: Small-Cap Domestic < $1.3 billion Mid-Cap Domestic $1.3 - $10.8 billion Large-Cap Domestic > $10.8 billion Masters` Select Equity Fund Stock Highlights ................................................................................ HSBC Holdings Plc - Christopher Davis ..................................... On the face of it, the performance of our investment in Household International (which was acquired in March of this year by HSBC) has produced a satisfactory, if not spectacular, return. Converting our cost in Household Shares to the HSBC shares we now own, our return (excluding dividends) was 4%, from our average cost of $31.35 to today's equivalent price of $32.60 per share. (Converting these numbers from Household Shares to HSBC shares results in an average cost of $11.72 versus today's price of $12.20 (as of 7/15/03). This seemingly dull performance masks wild gyrations between the time of our first purchase in May of 1999 and today - culminating in a 66% decline from a high of 62 in April of last year to a low of $21 in November before a modest recovery to $28 at the time of the takeover. The rapid decline late last year reflected mistakes in our analysis and the lessons learned bear repeating. Beginning in the Spring of 2002, concerns about the consumer finance business in general and Household in particular led to a sharp sell-off in the shares. Although the company continued to post excellent results, these concerns had an adverse impact on market psychology that threatened the company in a very real way. This threat resulted from the fact that an independent finance company must fund its lending business by borrowing money in the capital markets. Pessimistic markets demand higher rates, which reduce profits. Worse, in extreme cases, markets may refuse to fund controversial businesses at any price. Although such an outcome was unlikely in Household's case it was possible and we were mistaken in not anticipating this risk. Facing this threat, CEO Bill Aldinger made the decision to sell the company at a depressed price to HSBC Holdings, an enormously strong and well-run global bank. Having followed HSBC over the years, we have always been impressed with their conservative culture and global franchise, although their shares always seemed slightly too expensive for us to build a position. We believe that their acquisition of Household has given us the opportunity we have been waiting for, as investors have underestimated the earnings accretion that should result from funding Households loans with HSBC's low cost deposits. Our conviction is strengthened by our experience of the dramatic improvement in Citigroups earnings that followed their purchase of Household rival, Associates, several years ago. It is interesting that the consumer finance industry, which included companies like The Money Store, Beneficial, Associates, and Green Tree, has consolidated to only four major companies: HSBC, Citigroup, Wells Fargo and AIG. We expect that this consolidation will result in rational competition and improved sales practices. These companies do remain exposed to two risks: higher unemployment (which increases non-performing assets) and lower residential real-estate prices (which hurts the value of collateral). These risks must be watched closely. Trading at 14X our estimate of next year's earnings, with a tier one capital ratio over 9%, tremendous liquidity (unlike Household) and a dividend of over 4.5%, we think HSBC represents good quality, reasonable growth at an attractive valuation. Advance Auto Parts, Inc. - Bill D'Alonzo ........................................ Do-it-yourself mechanics get more than car parts when they step up to an Advance Auto Parts cashier these days. They also receive information on the tools that they'll need to complete the repair project and where to find them in the store. New initiatives, including a computer system that bolsters in-store marketing opportunities and better manages inventory, are revving up results at Advance Auto Parts. NYSE-listed Advance Auto Parts is the nation's second largest retailer of auto parts and accessories. The company sells replacement parts, maintenance items and accessories to professional repair shops and do-it-yourselfers. Its more than 2,400 retail outlets in the eastern, mid-western and southeastern regions of the United States give it a strong foundation from which to continue building market share in the highly fragmented auto-parts industry. The company's initiatives include new store layouts that prominently display its higher-margin, private-label products such as its own brand of synthetic motor oil, which occupies a stand-alone display separate from store shelves. March-quarter earnings grew 78 percent to $0.98 per share, marking the sixth consecutive quarter Advance Auto Parts topped expectations. Gross profit margins improved by 2 percentage points. The company also retired high-interest debt during the quarter, which will save it roughly $14 million this year and $20 million next. Members of our team spoke with Chief Executive Officer Larry Castellani about how the company benefits from an aging population of SUVs on the roadways. SUV models launched in the mid-to-late 1990s are entering the "sweet spot" for repairs. On average, an SUV replacement part is 40 percent more expensive than the same part for a passenger car, while also carrying higher profit margins. Your Friess team bought Advance Auto Parts at less than 12 times 2003 estimates. Earnings estimates for 2003 are now 18 percent higher than they were in February. Analysts predict the company will grow earnings 47 percent this year. Tyco International Ltd. - Bill Miller ..................................... Tyco International Ltd. is held in both the Equity Fund and the Value Fund. Please refer to the discussion appearing on page 40. Amgen, Inc. - Sig Segalas ......................... Amgen is the world's largest biopharmaceutical company and a leader in the use of recombinant DNA technology and molecular biology to develop therapeutic products in the areas of oncology and inflammation. The Company's fundamentals have never been stronger, with second-generation products such as Aranesp (estimated sales of $1.3bn in 2003), a long-acting red blood cell growth factor that treats anemia, and Neulasta (estimated sales of $1.3bn in 2003), a white blood cell growth factor used to boost chemotherapy-weakened immune systems, posting impressive launches. Anti-inflammation drug Enbrel (estimated sales of $1.3bn in 2003), acquired as part of the Company's Immunex acquisition, is also building momentum after a recent relaunch with improved manufacturing capabilities. All three products are well-positioned for significant near-term growth. Aranesp has multiple drivers of growth in the coming months, including the potential for less frequent dosing than its competitor, Procrit, in the chemotherapy setting, a high capture rate of switches from a troubled competing therapeutic in Europe, and the relative underpenetration of the U.S. chemotherapy-induced anemia market. Amgen estimates that 50 percent of U.S. patients with anemia due to chemotherapy are not being treated with an erythropoietin. Neulasta stands to benefit from an increasing awareness among physicians of the dangers of chemotherapy-induced low white blood cell counts. A low white blood cell count, also known as neutropenia, is a dangerous condition that can make a patient more susceptible to infections. Enbrel also provides the opportunity for significant growth, with additional therapeutic uses currently at various stages of the regulatory process and a positive legislative environment that may result in Medicare reimbursement. Each new Enbrel indication represents incremental sales potential in the hundreds of millions of dollars. Amgen's pipeline is among the most diverse in biotech, with numerous novel biologics in late-stage clinical trials. The Company has maintained a disciplined development approach, working within its therapeutic competencies. Amgen is in the process of further fleshing out its position in the oncology space with an antibody that prevents the proliferation of blood vessels necessary to supply nutrients to tumors. The therapeutic, which has so far shown comparable efficacy and improved safety versus other such treatments, is in phase II clinical trials for kidney, colorectal, prostate and lung cancer. In the adjuvant cancer therapy setting, Amgen has a compound in phase III trials that treats oral mucositis, a painful inflammation of the mucous membranes that results from the intense chemotherapy and radiation protocols used to treat head and neck cancer. In the dialysis space, Amgen is co-developing a late-stage pipeline therapeutic, Cinacalcet, that promises to complement the Company's erythropoietin franchise, providing a much-needed therapy for hyperparathyroidism. As a result of its strong suite of commercial and pipeline products, marketing prowess and experienced management team, we believe Amgen will drive top-line and bottom-line growth in excess of 20% over the next 2-3 years, growing off a projected 2003 revenue base of almost $8.0bn and net earnings of $2.5bn. Importantly, we believe Amgen should continue to be a productive investment. Modem Media, Inc. - Dick Weiss .............................. Modem Media was the first interactive marketing firm, started in 1987. The company has helped to mold online and e-commerce industries. Modem Media designs websites and marketing programs for consumer products giants, diversified business-to-business companies, and government entities. It adds value to clients by using its planning tools and processes to identify opportunities, and then through internal analysis it can set expectations and roll out initiatives established to allow long term and continuous improvement. Modem Media has built a roster of clients listed among the top Fortune 500 companies, including Delta, Marriott, Sprint, IBM, GE, Kodak, Kraft, among others. Strategically, this is very important because Modem Media can count on blue chip companies to continue to spend, even during challenging economic times. For example, Delta, one of their largest clients, continued to invest in projects that Modem Media developed for them, such as enabling passengers to purchase tickets with Delta-online. Modem Media also developed Delta's new web site, for their low cost alternative airline, "Song". Additionally, their clients are diverse and spread across multiple industries. This company has been put in the unfortunate position of being labeled an Internet company, and was pulled down when the bubble burst. During the economic downturn, most corporations, even blue chip companies, experienced dramatic budget cuts and had to pull back on extraordinary marketing and advertising campaigns. Now that the economy is starting to show signs of life, companies are finding the environment to be completely different than two years ago. Modem Media during that time frame, was enhancing its products, services and skill set in order to be ready for the turn in the economy. It was the first to place Internet ads as well as introduce an Internet admeasurement model. In areas where Modem Media can be measured, their clients have witnessed the importance of interactive marketing. This aided their clients in finding cost reductions, attaining new customers and/or prospects, and retaining their current client base. Because of Modem's expertise and long standing position, the barriers to entry have become more significant. We think Modem Media is an attractive small-cap company selling at a discount to both interactive and traditional advertising companies. We believe that it possesses many unique assets that a larger marketing company may find attractive. In keeping with Southeastern Asset Management's disclosure policies, Mason Hawkins has not contributed commentary on his holdings for this report. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. The views herein are those of the portfolio managers at the time the commentaries are written and may not be reflective of current conditions. Masters' Select Equity Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited)
Shares Value Shares Value ---------------------------------------- ----------------------------------------------- COMMON STOCKS: 94.9% Consumer Discretionary: 22.3% Finance: 29.7% 70,000 Advance Auto Parts, 4,263,000 92,700 Ambac Financial Inc.* Group, Inc. $ 6,141,375 130,000 American Eagle 430,300 American Express Co. 17,990,843 Outfitters, Inc.* 2,384,200 136,900 American International 173,900 Bed Bath & Beyond, 6,753,407 Group, Inc. 7,554,142 Inc.* 613,000 Aon Corp. 14,761,040 75,000 CDW Corp.* 3,435,000 455,000 Bank One Corp. 16,916,900 675,200 CKE Restaurants, 3,774,368 141 Berkshire Hathaway, Inc.* Inc. - Class A* 10,222,500 33,967 Comcast Corp. - 1,024,105 225,000 Capital One Financial Class A* Corp. 11,065,500 333,000 Comcast Corp. - 190,400 Citigroup 8,149,120 Special Class A* 9,612,045 65,000 Delphi Financial Group, 504,000 Disney (Walt) Co. 9,954,000 Inc. - Class A 3,042,000 400,000 Eastman Kodak Co. 10,940,000 59,500 Goldman Sachs Group, 133,000 Emmis Communications Inc. (The) 4,983,125 Corp. - Class A* 3,052,350 450,737 HSBC Holdings Plc* 5,334,368 123,000 Fox Entertainment 21,100 Julius Baer Holding AG 5,182,894 Group, Inc. - Class 3,539,940 215,000 MGIC Investment Corp. 10,027,600 A* 52,500 StanCorp Financial 30,600 Harman International Group, Inc. 2,741,550 Industries, Inc. 2,421,684 120,000 Transatlantic 8,298,000 600,000 Hilton Hotels Corp. 7,674,000 Holdings, Inc. 300,000 Home Depot, Inc. 9,936,000 70,000 W.R. Berkely Corp. 3,689,000 (The) 250,000 Washington Mutual, Inc. 10,325,000 ------------ 67,000 InterActiveCorp* 2,650,520 146,424,957 102,400 Kohl's Corp.* 5,261,312 ------------ 206,000 Marriott Healthcare & Pharmaceuticals: 6.1% International, 50,700 Allergan, Inc. 3,908,970 Inc. - Class A 7,914,520 122,700 Amgen, Inc.* 8,219,060 90,000 Regis Corp. 2,614,500 147,000 Celgene Corp.* 4,487,910 254,300 Starbucks Corp.* 6,235,436 70,000 Pharmaceutical 143,200 Viacom, Inc. Resources, Inc.* 3,406,200 - Class B* 6,252,112 150,000 Priority Healthcare ----------- Corp. - Class B* 2,782,500 109,692,499 300,000 Tenet Healthcare ----------- Corp.* 3,495,000 150,000 Triad Hospitals, Inc.* 3,723,000 ---------- 30,022,640 Consumer Staples: 2.9% ---------- 206,000 Altria Group, Inc.* 9,360,640 135,000 Costco Wholesale Corp.* 4,940,325 ---------- 14,300,965 ---------- Energy: 4.3% 214,800 BJ Services Co.* 8,024,928 47,000 ConocoPhillips 2,575,600 134,000 GlobalSantaFe Corp. 3,127,560 75,000 Houston Exploration Co. (The)* 2,602,500 800,000 Mirant Corp.*# 2,320,000 100,000 Spinnaker Exploration Co.* 2,620,000 ---------- 21,270,588 ----------
Masters' Select Equity Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited) - (Continued)
Principal Shares Value Shares Value ---------------------------------------- ----------------------------------------------- Industrials: 18.1% SHORT-TERM INVESTMENTS: 5.1% 159,000 FedEx Corp. $ 9,862,770 Corporate Note: 1.0% 120,000 FTI Consulting, Inc.* 2,996,400 $4,700,000 General Electric Capital 145,000 Kroll, Inc.* 3,923,700 Corp., 1.20%, 07/01/03 680,000 Modem Media, Inc.* 2,662,200 (cost $4,700,000) $ 4,700,000 440,000 Republic Services, Repurchase Agreements: 4.1% ----------- Inc. - Class A* 9,974,800 17,918,000 State Street Bank & 100,000 Sealed Air Corp.* 4,766,000 Trust Co., 0.30%, 06/30/03, 1,430,000 Tyco International due07/01/03 [collateral: Ltd. 27,141,400 $12,495,000, US Treasury 838,000 Vivendi Universal SA 15,452,720 Bonds, 8.13%, due 05/15/21, 514,000 Waste Management, value $18,299,315] Inc. 12,382,260 (proceeds $17,918,149) 17,918,000 ---------- 2,194,000 State Street Bank & 89,162,250 Trust Co., 1.12%, 06/30/03, ---------- due 07/01/03 [collateral: Technology: 9.6% $2,230,000, FHLMC, 3.50%, 372,200 Altera Corp.* 6,104,080 due 09/15/03, value $2,263,675] 315,500 Applied Materials, (proceeds $2,194,068) 2,194,000 Inc.* 5,003,830 Total Repurchase Agreements ------------ 95,000 Benchmark Electronics, (cost $20,112,000) 20,112,000 Inc.* 2,922,200 ------------ 308,100 Cisco Systems, Inc.* 5,102,136 TOTAL SHORT-TERM INVESTMENTS 110,000 Integrated Circuit (cost $24,812,000) 24,812,000 Systems, Inc.* 3,457,300 ------------ TOTAL INVESTMENTS IN SECURITIES 342,100 Intel Corp. 7,110,206 (cost $429,540,398):100.0% 492,535,171 70,000 L-3 Communications Other Assets less Liabilities: 0.0% 190,064 Holdings, Inc.* 3,044,300 ------------ 462,000 Mentor Graphics NET ASSETS: 100.0% $492,725,235 Corp.* 6,687,450 ============ 318,000 Microsoft Corp. 8,145,570 ---------- 47,577,072 ---------- Telecommunications: 1.9% 300,000 Cincinnati Bell, Inc.* 2,010,000 190,000 Nextel Communications, Inc. - Class A* 3,435,200 100,000 NII Holdings, Inc. - Class B* 3,827,000 ---------- 9,272,200 ---------- TOTAL COMMON STOCKS (cost $404,728,398) 467,723,171 ----------- * Non-income producing security. # See Note 8 of "Notes to Financial Statements."
See accompanying Notes to Financial Statements. Masters' Select International Fund Review ................................................................................ Foreign stock markets were even more volatile in the first half of 2003 than their domestic market counterparts. But similar to the U.S. market, a rough first quarter was followed by a very strong second quarter, resulting in strong overall return for the first half of 2003. During the first quarter Masters' Select International's benchmarks declined between 7.3% and 8.8% but this was followed by a second quarter rebound of just under 20%. Masters' Select International experienced more extreme performance with a first quarter decline of 10.28% and a second quarter rebound of 23.65%. Although Masters' Select International barely trailed its benchmark (by about two tenths of one percent) during the first half of 2003 it has demonstrated clear outperformance over the trailing one, three and five year time periods (see the table that follows). Since the fund's inception five years and seven months ago it has outperformed its MSCI All-Countries World Free (ex-US) Index by 7.01% on an annualized basis and it ranks in the top 4% of its Lipper International Fund Category peer group.(1) Comparison Chart ................................................................................ The value of a hypothetical $10,000 investment in the Masters' Select International Fund from its inception (12/1/97) to present as compared with the MSCI All Countries World Free (ex US) Index and the Lipper International Fund Index. [LINE CHART] Masters' Select International Fund As Of 6/30/03 Masters' Lipper MSCI All Select International Countries International Fund World Free Fund Index (ex US) Index $14,313 $10,132 $9,796 -------------------------------------------------------------------------------- 1-Dec-97 $10,000 $10,000 $10,000 31-Dec-97 $9,880 $10,079 $10,115 31-Jan-98 $9,910 $10,323 $10,417 28-Feb-98 $10,990 $10,984 $11,112 31-Mar-98 $11,680 $11,580 $11,497 30-Apr-98 $11,930 $11,758 $11,580 31-May-98 $11,770 $11,782 $11,370 30-Jun-98 $11,360 $11,679 $11,327 31-Jul-98 $11,440 $11,858 $11,434 31-Aug-98 $9,400 $10,152 $9,822 30-Sep-98 $9,140 $9,836 $9,615 31-Oct-98 $9,870 $10,559 $10,622 30-Nov-98 $10,580 $11,088 $11,192 31-Dec-98 $11,040 $11,361 $11,578 31-Jan-99 $11,665 $11,430 $11,565 28-Feb-99 $11,534 $11,136 $11,306 31-Mar-99 $12,129 $11,507 $11,852 30-Apr-99 $13,107 $12,043 $12,445 30-May-99 $12,562 $11,595 $11,860 30-Jun-99 $13,369 $12,145 $12,406 31-Jul-99 $13,591 $12,416 $12,697 31-Aug-99 $13,520 $12,514 $12,742 30-Sep-99 $13,702 $12,554 $12,828 31-Oct-99 $14,488 $12,992 $13,305 30-Nov-99 $16,537 $13,944 $13,838 31-Dec-99 $19,321 $15,659 $15,158 31-Jan-00 $19,373 $14,742 $14,335 29-Feb-00 $21,857 $15,715 $14,722 31-Mar-00 $21,991 $15,756 $15,275 30-Apr-00 $20,170 $14,757 $14,423 31-May-00 $19,518 $14,351 $14,054 30-Jun-00 $20,273 $15,016 $14,652 31-Jul-00 $19,673 $14,529 $14,074 31-Aug-00 $19,890 $14,775 $14,248 30-Sep-00 $19,342 $13,913 $13,457 31-Oct-00 $18,545 $13,440 $13,029 30-Nov-00 $17,831 $12,873 $12,444 31-Dec-00 $18,354 $13,353 $12,870 31-Jan-01 $18,174 $13,432 $13,075 28-Feb-01 $17,155 $12,489 $12,046 31-Mar-01 $15,872 $11,611 $11,178 30-Apr-01 $17,083 $12,317 $11,926 31-May-01 $16,532 $12,019 $11,573 30-Jun-01 $15,872 $11,680 $11,125 31-Jul-01 $15,417 $11,376 $10,887 31-Aug-01 $14,853 $11,148 $10,617 30-Sep-01 $13,319 $9,933 $9,491 31-Oct-01 $13,930 $10,202 $9,756 30-Nov-01 $14,797 $10,582 $10,202 31-Dec-01 $15,061 $10,771 $10,334 31-Jan-02 $14,893 $10,336 $9,892 28-Feb-02 $15,109 $10,480 $9,963 31-Mar-02 $15,963 $11,035 $10,504 30-Apr-02 $16,083 $11,112 $10,572 31-May-02 $16,324 $11,271 $10,687 30-Jun-02 $15,542 $10,826 $10,226 31-Jul-02 $14,028 $9,745 $9,229 31-Aug-02 $13,907 $9,753 $9,230 30-Sep-02 $12,309 $8,703 $8,251 31-Oct-02 $12,826 $9,154 $8,694 30-Nov-02 $13,595 $9,587 $9,112 31-Dec-02 $12,902 $9,280 $8,817 31-Jan-03 $12,299 $8,941 $8,508 28-Feb-03 $11,600 $8,676 $8,335 31-Mar-03 $11,576 $8,464 $8,173 30-Apr-03 $13,095 $9,301 $8,961 31-May-03 $13,818 $9,899 $9,532 30-Jun-03 $14,313 $10,132 $9,796 The hypothetical $10,000 investment at Fund inception includes charges in share price and reinvestment of dividends and capital gains. Indices are unmanaged, do not incur fees, expenses or taxes and cannot be invested in directly. (1) At June 30, 2003, the Masters' Select International Fund's ranking in Lipper's International Fund category was 355th of 818 funds for the twelve months, 12th of 461 funds for the five years, and 12th of 359 funds since inception (12/1/97). --------------------------------------------------------------------------------
-------------------------------------------------------------------------------- Investment Performance As of June 30, 2003 Year 12 Three Year Five Year Average to Month Average Average Annual Total Date Total Annual Total Annual Return Since Return Return Return Return Inception(1) -------------------------------------------------------------------------------- Masters' Select International Fund 10.93% -7.91% -10.96% 4.73% 6.64% -------------------------------------------------------------------------------- MSCI All Countries World Free (Ex US) Index(2) 11.10% -4.20% -12.48% -2.69% -0.37% -------------------------------------------------------------------------------- Lipper International Fund Index(3) 9.18% -6.40% -12.28% -2.79% 0.24% --------------------------------------------------------------------------------
Past performance is no guarantee of future results, and investors may have a gain or loss when they sell shares. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Indices are unmanaged, do not incur fees, expenses, or taxes and cannot be invested in directly. Investing in foreign equities subjects investors to economic, political, and market risks and fluctuations in currency rates (1) The inception date of the Masters' Select International Fund is December 1, 1997. (2) The MSCI All Countries World Free (ex US) Index is a broad-based index that measures the performance of common equities in 48 developed and emerging market countries. (3) The Lipper International Fund Index measures the performance of the 30 largest mutual funds in the international equity fund objective, as determined by Lipper, Inc. -------------------------------------------------------------------------------- Long-Term Performance Analysis ................................................................................ As has been the case with Masters' Select Equity over the years, Masters' Select International's volatility has varied relative to its benchmark and peer group. Sometimes it has been more volatile (on the upside and downside) and sometimes it has been less volatile. And very similar to the experience of Masters' Select Equity, this fund has tended to significantly outperform after temporary periods of underperformance. This relationship is depicted in the following chart. [BAR CHART] Masters' Select International Fund Under/Out Performance vs. MSCI AW Free (Ex US) Under Performance 12/97-1/98 -4.77% 5/98-8/98 -8.36% 10/00-1/01 -3.53% 5/01-8/01 -3.89% 8/02 -02/03 -6.42% Out Performance 2/98-4/98 5.93% 9/98-6/99 17.98% 2/01-4/01 3.07% 9/01-3/02 8.27% 3/03-6/03 5.18% As we've stated many times, one of the main objectives of the Masters' Select Funds is to deliver superior performance relative to each fund's benchmarks and peer group over the long run. For this reason we are most concerned about performance over three year periods and longer. Though we are pleased that Masters' Select International has performed well compared to its benchmarks over many shorter periods, and has beaten its benchmark in each of the last four calendar years, we are particularly encouraged that the fund has outperformed its primary benchmark by a sizable margin over the long-term and has shown consistency by outperforming in 30 out of 32 three-year "rolling" periods (we measure three-year return periods as of the end of the fund's first three-year period and then add additional "rolling" three year periods with each subsequent month). We are more confident in the ability of each Masters' Select Fund (including International) to outperform over these longer periods (compared to shorter periods) because more often than not these periods are sufficiently long to allow the stock pickers' skill and fundamental research focus to outweigh temporary non-fundamental market factors. And we view the consistency of this performance as important because we hope that Masters' Select shareholders will develop confidence in the fund's ability to consistently outperform over the long-term, despite occasional short periods of underperformance which all funds experience. [BAR CHART] MASTERS' SELECT INTERNATIONAL ROLLING THREE-YEAR ANNUALIZED RETURN LESS MSCI ALL-COUNTRIES EX-USA INDEX RETURN Masters' Select Int'l percentage 3-year outperformance By Month vs. its benchmark ------------------ -------------------------------------------------------- Nov-00 13.60% Dec-00 14.44% Jan-01 14.40% Feb-01 13.19% Mar-01 11.58% Apr-01 11.58% May-01 11.20% Jun-01 12.18% Jul-01 11.87% Aug-01 13.53% Sep-01 13.52% Oct-01 14.68% Nov-01 14.59% Dec-01 14.33% Jan-02 13.27% Feb-02 13.07% Mar-02 13.31% Apr-02 12.16% May-02 12.40% Jun-02 11.33% Jul-02 11.03% Aug-02 11.08% Sep-02 10.07% Oct-02 9.16% Nov-02 6.58% Dec-02 3.86% Jan-03 1.83% Feb-03 -1.84% Mar-03 -0.51% Apr-03 1.18% May-03 1.19% Jun-03 1.53% As we drill down to measure the success of not just the overall fund but also each of the fund's stock pickers we look at how each has done relative to their own benchmarks. We're happy to report that all four managers have outperformed their benchmarks during their tenure with Masters' Select International. -------------------------------------------------------------------------------- CURRENT MASTERS' SELECT MANAGERS' PERFORMANCE versus BENCHMARKS* -------------------------------------------------------------------------------- Masters' Select International Annualized Performance Margin (Net of Allocated Expenses) -------------------------------------------------------------------------------- Manager 1 12.90% -------------------------------------------------------------------------------- Manager 2 6.07% -------------------------------------------------------------------------------- Manager 3 5.71% -------------------------------------------------------------------------------- Manager 4 3.28% -------------------------------------------------------------------------------- * This table does not include the manager that Ted Tyson replaced in September 1999 or the manager that was removed in September 2001. Both of those managers beat their benchmarks. Benchmarks: All current managers are benchmarked against the MSCI All Countries World Free (ex US) Index. -------------------------------------------------------------------------------- It is worth noting that each manager's long-term relative performance advantage has been volatile. At any point in time one or more managers is usually underperforming, and because of the concentration within their individual portfolios, this underperformance is sometimes material. Even the Masters occasionally make mistakes and with a concentrated portfolio these mistakes can be very costly. However, the manager diversification built into the fund has been fairly effective in mitigating the fund level impact of these occasional mistakes and blow-ups. More often than not one or more of the other managers are outperforming, which has helped to offset the temporary struggles of any of the other Masters. However, there have been a couple of short-term periods when the fund has had one or two underperforming managers without the offsetting benefit of a manager experiencing significant outperformance. In recent months we have given quite a bit of thought to the level of manager diversification that is optimal. We view the diversification in Masters' Select International across four managers as quite acceptable but believe there are benefits to be gained from further diversification. For this reason we are open to adding a fifth manager to increase the level of portfolio diversification and we would possibly consider going as high as six managers. However, we are sensitive to the risks of "diworsification" and therefore no manager will be added unless we have a high degree of confidence in their ability to deliver strong long-term returns and if we believe there will be an added diversification benefit for the overall fund. We are in the midst of due diligence on several candidates. Portfolio Comments ................................................................................ Asset allocation and sector exposure: The fund's market cap weightings did not change much during the first half of 2003 other than an increase in large-cap exposure from just over 71% of assets to just under79% of assets. Historically the fund has had a lower allocation to large-cap stocks but over the past year most of the fund's stock pickers are finding that the bear market created unusually good values in high quality, large companies. Given the value in larger companies, the managers believe there is less reason to take on the higher level risk that is inherent in the stocks of smaller companies. Much of the most recent increase in exposure to larger companies was the result of a reduction in the fund's cash position which had been temporarily high at the end of 2002 due to several stock sales. During the period there were several significant sector shifts. Technology exposure increased from 6% to 17%, mostly as the result of positions established by Dan Jaworski. Exposure to the industrial sector dropped from 15% to 11%. The high cash position mentioned earlier declined from over 13% to 6.6% by the end of June. There were also shifts in geographical exposure. The allocation to Japanese stocks increased from less than 2% to almost 11%. Australian stocks were 7% of assets at the end of June compared to less than 3% at the beginning of the year. And European stocks declined from 74% of assets to 62% of assets. Asian exposure in total, including Australia, was over 25% of the fund at the end of the period. The fund's largest sector overweights relative to its MSCI benchmark are consumer discretionary and technology. The largest underweights are industrials, finance and energy. From a geographical standpoint, Masters' Select International is more closely aligned with the benchmark's regional exposure than it has been over most of its life. The primary difference is an underweight to Japanese stocks. Over the years the fund has been characterized by a bottom-up driven tendency to go where the opportunities are. At times the fund's geographic, sector and/or market-cap exposure has been substantially different than its benchmarks. This willingness to go where the best opportunities are and not be constrained by the allocation structure of the index is, we believe, one of the reasons why Masters' Select International has performed significantly better than the index over the long run. At present the fund's sector exposure looks quite different than the MSCI index but the regional weightings look more index-like than usual. See page 28 for sector and regional allocations. Several factors impacted performance during the first half of 2003. Manager performance: The managers' performance was mixed. In the second quarter three of four managers beat their benchmark but for the full six months three of four trailed their benchmark--an unusual occurrence. However, the fund's overall performance was competitive because the one manager who did beat his benchmark beat it by a wide margin. Individual stock performance: The fund had a number of significant winners in the first half but Yahoo Japan (up 113%) was by far the biggest, contributing over $17 million to the fund's performance. Each stock picker had at least one name among the fund's five biggest profit contributors. These included Golar up 70% (liquid natural gas tankers--see page 30 for a profile), Ericcson up 53% (mobile telecommunication systems), Granada up 46% (broadcasting and channel management) and Molson up 27% (beer) which was profiled in the 2002 Annual Report. There were no disasters during the first half of the year but there were several losers that each cost the fund about one half of one percent of net asset value. These included Fortis, Samsung, Adecco and Rexam. Sector exposure and performance: Though none of the fund's stock pickers make decisions based on top-down sector analysis, it is interesting to observe the impact of sector exposure on the fund's performance. Overall, during this particular period the differences in sector allocations relative to the fund's benchmarks did not add value. The fund was overweight to the consumer sectors which generally underperformed and it was underweight to the financial sector which performed quite well. On the plus side it was overweight to technology stocks, a very strong performing sector. Over the years sector exposure has at times helped and hurt performance relative to the fund's benchmark, but it has generally been clear that this has been a derivative of bottom-up stock picking--the real driver behind Masters' Select International's performance. In Closing ................................................................................ As mentioned in the general discussion that started on page 4, we believe that the strong stock market returns delivered during the last three months have, on average, brought stocks back up to a fair value range. Within the foreign stock markets we believe values are slightly more attractive than in the U.S. and that it is more likely than not that the U.S. dollar will continue to decline in value relative to the euro and some other currencies. Further dollar depreciation, could, at the margin, also aid returns to U.S. investors in foreign stocks. Over the next five years we believe the most likely outcome for U.S. investors from foreign stocks is a return range in the mid to high single-digits. Of course there is a much broader range of possible returns. Though there are obviously no guarantees, we believe that the quality of the Masters' Select International stock pickers coupled with their focus on their highest conviction stocks will continue to result in better than benchmark performance. We also believe that the mix of stock picking styles, the long-term investment horizon and the ongoing evaluation and monitoring by Litman/Gregory will contribute to the success of Masters' Select International. We thank you for your continued trust and confidence. Masters' Select International Fund Managers ................................................................................ MARKET TARGET CAPITALIZATION INVESTMENT ASSET OF COMPANIES STOCK-PICKING MANAGER FIRM ALLOCATION IN PORTFOLIO STYLE ................................................................................ David Herro Harris 25% All sizes, but Value Associates mostly large and mid-sized companies -------------------------------------------------------------------------------- Dan Jaworski BPI Global 25% Mostly large Eclectic, may Asset companies invest in traditional Management value stocks or growth stocks -------------------------------------------------------------------------------- Ted Tyson Mastholm 25% All sizes High earnings Asset growth Management -------------------------------------------------------------------------------- Mark Yockey Artisan 25% All sizes but Growth at a Partners mostly large reasonable price companies -------------------------------------------------------------------------------- Portfolio Composition ................................................................................ The fund holds 57 securities, exclusive of cash equivalents.
Regional Weights Sector Weights ------------------------- ------------------------- MSCI All MSCI All Countries World Countries World Fund Free (Ex US) Index Fund Free (Ex US) Index ---- ------------------ ---- ------------------ Europe 62.0% 62.3% Consumer Discretionary 21.9% 11.8% Japan 10.7% 17.5% Technology 17.0% 7.4% Asia (Ex Japan) 8.1% 6.8% Finance 16.5% 25.5% Australia/ Consumer Staples 11.0% 8.5% New Zealand 7.0% 4.6% Industrials 10.9% 15.6% Canada 3.7% 5.5% Healthcare & Latin America 1.9% 1.7% Pharmaceuticals 7.3% 8.7% Africa 0.0% 1.2% Telecommunications & Middle East 0.0% 0.4% Utilities 5.6% 12.9% Cash Equivalents & Energy 3.2% 9.6% Other 6.6% 0.0% Cash Equivalents & ---- ---- Other 6.6% 0.0% Net Assets 100.0% 100.0% ---- ---- ====== ====== Net Assets 100.0% 100.0% ====== ====== Market Capitalization: Developed Markets Small-Cap < $1.0 billion Developed Markets Large-Cap > $1.0 billion By Asset Class -------------- Cash Equivalents & Other: 6.6% Emerging Markets: 7.2% Developed Markets Small-Cap: 7.6% Developed Markets Large-Cap: 78.6%
Masters' Select International Fund Stock Highlights ................................................................................ Baycorp Advantage Ltd. - David Herro .................................... BCA is Australasia's largest credit bureau and is also involved in debt collections, both in terms of purchasing bad debt ledgers as well as acting as a debt collector for a fee. BCA also has operations in emerging Asia along with their partner Trans Union. This company was formed last year when Baycorp of New Zealand merged with Advantage of Australia. The core business, the credit bureau, is very profitable earning high double digit returns on both sales and capital. It is also a growth business because the demand for credit in general is something that constantly increases....especially in an economically fertile location like Australia/New Zealand. Baycorp/Advantage is in an extremely strong position (near monopoly), and given the relatively small size of the market and their commercial dominance, it would make little sense for the large multinationals to try to compete with them. The stock price cracked last year when it was revealed that there were a few hiccups with the merger integration of the two companies. Though the base business remains strong, there were systems and people integration expenses that the market didn't seem to expect. We have been a follower of Baycorp in New Zealand for years. We always have admired the business, but it was always too expensive until recently, as price has reacted to these merger problems. The stock currently trades at under 10x's cashflow while the company earns 20% plus margins and we believe, has great growth potential. It fits with our value criteria of a high quality business selling at a low price. PT Telekomunikasi Indonesia (PT Telekom) - Dan Jaworski ....................................................... PT Telekom's principal business activity is the provision of local, domestic and long distance telecommunication services in Indonesia. The company provides both fixed line and cellular services, as well as a wide range of telecommunication network services including data and Internet, telex, telegram, satellite, leased lines and other telecommunication resources for businesses and individuals. Compared to the other telecommunication service providers in Indonesia, PT Telekom is by far the largest. With 7.3 million fixed lines and 3.7 million cellular subscribers through its wireless division Telkomsel, the company boasts market share positions of 95% and 51% in fixed line and cellular services respectively. PT Telekoms's fixed line business delivers positive free cash flow of approximately $450-500 million per annum, which contributes to its substantial dividend yield of 6%. The cellular business, on the other hand, presents a tremendous growth opportunity for the company. With total wireless penetration in Indonesia at only 5.3% and growing at a current rate of 78% per year, we believe PT Telekom is uniquely positioned to capture a significant portion of this rapidly growing market. In the recent past PT Telekom's valuation had been negatively affected by a perceived greater risk of terrorism in Indonesia. The company's sovereign risk has now subsided, and investors have sharpened their focus on PT Telekom's impressive average growth rate in revenues: 31% from 1999 to 2002. Already the commanding force in the Indonesian telecommunications sector, PT Telekom is proactively seeking to strengthen its market leadership position by increasing capital expenditures for its wireless network. The company already completed an overhaul five years ago to update its aged network. Now, as competitors remain distracted with restructuring exercises and in search of access to funding for capacity expansion, PT Telekom is expanding its wireless capacity by 50% in 2003. Currently trading at a price to earnings multiple of only 6.6 times forward earnings, and with a return on invested capital higher than its global peers, we believe that significant multiple expansion is possible given PT Telekom's market position and industry growth prospects. Golar LNG Ltd. - Ted Tyson .......................... Golar LNG is a shipping company based in Norway that specializes in the ownership and operation of Liquid Natural Gas (LNG) tankers. It currently operates seven vessels on long-term contracts and is scheduled to take delivery of three additional vessels from now until October 2004. Both the demand for and production of LNG is rising world-wide, with an enormous amount of production scheduled to come on line in 2007-2008. A number of countries are likely to become major importers of LNG, particularly the United States. Demand for natural gas continues to rise in the U.S., where production has been declining for some time. The shortfall has historically been made up by imports from Canada, but production there is stagnant and not expected to rise dramatically at any point in the near future. The U.S. currently imports only 1% of the natural gas it uses in the form of LNG, but the International Energy Agency expects that to rise to 12% by 2008. Golar will benefit from this trend in several ways. First, as it controls three of the six LNG tankers scheduled to be built between now and the end of 2004, it will be increasing capacity by almost 50% while selling into a market that is likely to be critically short of capacity. Prices for long-term charters of vessels could easily double from current levels. Golar is also seeking to use the current shortage to increase the scope and profitability of those charters it does enter into by using its vessels as "floating platforms" for offshore LNG import facilities. This allows it to participate in the infrastructure of large LNG import facilities as opposed to being a simple operator of ships. It has entered into one such project in Mexico (in Baja California) and we expect another such project to materialize in Livorno, Italy over the next several months. These types of contracts not only have additional revenues and higher margins than traditional shipping charters, but they also have implications for future demand for additional ships beyond those already under construction. The project in Mexico, for example, will eventually require an additional six LNG tankers, all of which are likely to be supplied over the next decade by Golar. We believe that Golar LNG should earn pre-tax profits of 57-60 million Norwegian Kroner in 2003, up from 25 million Kroner in 2002, a rise of over 100%. We believe that it should grow pre-tax profits at least 50% per year in each of the next two years. It currently trades on a P/E (price/earnings multiple) of 6.7 times 2004 earnings. Sogecable SA - Mark Yockey .......................... We look for companies, of all sizes, that we believe are positioned for strong, sustainable growth in industries or themes that we think are compelling. We also look for strong management teams that have a U.S. approach to increasing shareholder value. This stock selection process led us to Sogecable. Sogecable is the leader in Spain's pay television market, third in all of Europe, and has been a pioneer in digital television programming. The company's primary business, the provision of pay television network services, is less cyclical than other media businesses because of its minimal dependency on the advertising market and the nature of the pay TV product which is driven by top sport events and film hits. We believe that Sogecable's recent merger with its main competitor, Via Digital, will strengthen the company's leadership position in the growing and underdeveloped digital TV market. In addition, we believe that there are some real synergies to be gained from this acquisition, including streamlined programming, strong bargaining power, and cost cutting potential in areas such as content, subscriber acquisition costs, and marketing/commercial expenses. Overall, we believe Sogecable is a market leader in an under penetrated market and the company has strong growth prospects. The current management team is strong and we have confidence in its abilities to achieve solid results over the long-term. Moreover, at EUR 16.42 on June 30, 2003, we think the stock price is attractive. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. The views herein are those of the portfolio managers at the time the commentaries are written and may not be reflective of current conditions. Masters' Select International Fund
Maters' Select Internation Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited) Shares Value Shares Value ------------------------------------------- --------------------------------------------- COMMON STOCKS: 90.9% Australia: 7.0% Italy: 5.1% 1,858,500 Ansell Ltd.* $ 7,300,156 432,600 Banco Popolare di 9,032,400 Baycorp Advantage 8,612,024 Verona e Novara Ltd. 1,038,200 Scrl $ 5,921,419 News Corp. Ltd. 1,656,900 Bulgari SpA 9,243,371 (The)-Sponsored ADR 7,807,514 739,300 San Paolo-IMI SpA 6,879,575 1,067,200 QBE Insurance ----------- Group Ltd. 6,678,447 22,044,365 ----------- ----------- 30,398,141 ----------- Japan: 10.7% 1,339,000 Daiwa Securities 7,708,564 Belgium: 1.4% Co. Ltd. 266,200 Interbrew 5,924,905 2,801 NTT DoCoMo, Inc. 6,076,175 ----------- 2,014 Yahoo Japan Corp.* 32,767,094 ----------- Brazil: 0.8% 46,551,833 850,500 Telesp Celular ----------- Participacoes SA* 3,316,950 ----------- Mexico: 1.1% 1,600,000 Wal-mart de Mexico Canada: 3.7% SA de CV 4,717,546 328,500 Molson, Inc. - ----------- Class A 8,841,575 156,700 Talisman Energy, Netherlands: 1.5% Inc. 7,108,279 117,800 Unilever NV 6,330,536 ----------- 4,150 VNU NV 128,074 15,949,854 ----------- ----------- 6,458,610 ----------- Finland: 1.1% 552,100 Metso OYJ 4,921,662 Norway: 1.8% 777,100 Golar LNG Ltd.* 8,079,474 France: 7.0% ----------- 125,900 Aventis SA 6,938,159 389,200 Euronext NV 9,665,355 Singapore: 1.2% 403,400 Vivendi Universal 563,000 Venture Corp. Ltd. 5,147,977 SA 7,354,574 ----------- 939,000 Wanadoo* 6,296,896 ----------- South Korea: 3.6% 30,254,984 28,400 Samsung Electronics ----------- Co., Ltd. 8,440,352 385,000 SK Telecom Co., Germany: 5.7% Ltd. 7,261,100 633,000 Infineon ----------- Technologies AG* 6,130,673 15,701,452 554,800 Jenoptik AG 7,147,379 ----------- 70,850 Muenchener Rueckversicherungs- Spain: 1.5% Gesellschaft AG 7,235,147 351,400 Sogecable SA* 6,636,930 65,700 Stada Arzneimittel ----------- AG 4,186,658 ----------- Sweden: 3.5% 24,699,857 900,100 Eniro AB 7,711,733 ----------- 7,086,100 Telefonaktibolaget LM Erricsson Hong Kong: 1.5% AB - Class B 7,622,131 4,504,100 CNOOC Ltd. 6,584,477 ----------- ----------- 15,333,864 Indonesia: 1.8% ----------- 13,650,000 PT Telekomunikasi Indonesia* 7,652,273 Switzerland: 5.8% ----------- 68,550 Ciba Specialty Chemicals AG 4,158,849 Ireland: 1.2% 38,730 Nestle SA 8,009,052 437,000 Bank of Ireland 5,282,950 5,390 Serono SA - Class ----------- B* 3,174,341 176,000 UBS AG 9,811,779 ----------- 25,154,021 -----------
Masters' Select International Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited) - (Continued) Principal Shares Value Amount Value ------------------------------------------- ---------------------------------------------- United Kingdom: 23.9% SHORT-TERM INVESTMENT: 6.4% 5,439,400 Aegis Group Plc $ 7,125,200 1,326,500 BAE Systems Plc 3,124,416 Repurchase Agreement: 6.4% 948,700 Cadbury Schweppes 5,613,823 $27,575,000 State Street Bank Plc & Trust Co., 0.30%, 272,769 Carnival Plc 8,300,334 06/30/03, due 07/01/03 1,587,821 Compass Group Plc 8,575,588 [collateral: $19,220,000, 1,198,000 Diageo Plc 12,811,733 US Treasury Bonds, 3,114,600 EMI Group Plc 6,280,712 8.13%, due 05/15/21, 327,700 GlaxoSmithKline Plc 6,624,448 value $28,148,286] 5,906,121 Granada Plc 8,883,631 (proceeds $27,575,230) $27,575,000 933,400 Lloyds TSB Group 6,637,973 ----------- Plc 858,000 Nycomed Amersham 6,449,214 TOTAL SHORT-TERM INVESTMENT Plc (Cost $27,575,000) 27,575,000 31,754,000 Royal Doulton Plc* 1,695,305 ----------- 718,481 Smith & Nephew Plc 4,135,740 3,199,300 Tesco Plc 11,594,215 TOTAL INVESTMENTS IN SECURITIES 185,500 Willis Group (cost $405,067,585): 99.8% 432,640,902 Holdings Ltd.* 5,704,125 ----------- ----------- 103,556,457 Other Assets less Liabilities: 1,080,931 ----------- 0.2% TOTAL COMMON STOCKS NET ASSETS: 100.0% $433,721,833 (cost $368,671,652) 394,368,582 ----------- ----------- PREFERRED STOCKS: 2.5% Germany: 2.5% 43,144 Henkel KGaA 2,675,359 18,900 Porsche AG* 8,021,961 ----------- 10,697,320 ----------- TOTAL PREFERRED STOCKS (cost $8,820,933) 10,697,320 -----------
*Non-income producing security. See accompanying Notes to Financial Statements. Masters' Select Value Fund Review ................................................................................ After a rocky first quarter Masters' Select Value rebounded very strongly in the second quarter and ended the first half of the year with a 13.85% return. This return was ahead of all the fund's benchmarks. The fund also reached a milestone on June 30th when it hit its three-year anniversary. Over its three year life, most of which was in an equity bear market, the fund returned 3.87% on an annualized basis, 3.3% higher than its Russell 3000 Value benchmark. Comparison Chart ................................................................................ The value of a hypothetical $10,000 investment in the Masters' Select Value Fund from its inception (6/30/00) to present as compared with the Russell 3000 Value Index and the Lipper Multi-Cap Value Index. [LINE CHART] Masters' Select Value Fund As Of 6/30/03 Masters' Russell Lipper Select Value 3000 Value Multi-Cap Fund Index Value Index $11,207 $10,171 $10,478 ------------------------------------------------------------------------------- 30-Jun-00 $10,000.00 $10,000.00 $10,000.00 31-Jul-00 $10,040.00 $10,139.00 $10,085.00 31-Aug-00 $10,680.00 $10,695.63 $10,725.40 30-Sep-00 $10,480.00 $10,783.34 $10,576.31 31-Oct-00 $10,590.00 $11,028.12 $10,828.03 30-Nov-00 $10,100.00 $10,630.00 $10,428.48 31-Dec-00 $10,450.00 $11,200.83 $11,048.81 31-Jan-01 $11,540.00 $11,261.32 $11,466.45 28-Feb-01 $11,320.00 $10,968.52 $11,152.27 31-Mar-01 $11,240.00 $10,595.59 $10,760.83 30-Apr-01 $11,810.00 $11,112.66 $11,458.13 31-May-01 $12,240.00 $11,364.92 $11,711.35 30-Jun-01 $12,460.00 $11,162.62 $11,513.43 31-Jul-01 $12,410.00 $11,123.55 $11,498.46 31-Aug-01 $11,890.00 $10,705.31 $11,071.87 30-Sep-01 $10,290.00 $9,921.68 $9,937.36 31-Oct-01 $10,320.00 $9,859.17 $10,142.07 30-Nov-01 $11,196.60 $10,441.85 $10,876.35 31-Dec-01 $11,457.22 $10,715.42 $11,191.77 31-Jan-02 $11,527.39 $10,648.99 $11,046.27 28-Feb-02 $11,186.58 $10,669.22 $10,901.57 31-Mar-02 $11,818.08 $11,196.28 $11,457.55 30-Apr-02 $11,717.84 $10,871.59 $11,120.70 31-May-02 $11,607.58 $10,892.24 $11,109.57 30-Jun-02 $10,525.01 $10,297.53 $10,259.69 31-Jul-02 $9,893.51 $9,297.64 $9,408.14 31-Aug-02 $10,184.20 $9,359.93 $9,557.73 30-Sep-02 $9,201.86 $8,345.32 $8,521.67 31-Oct-02 $9,602.82 $8,927.82 $8,977.58 30-Nov-02 $10,244.34 $9,500.09 $9,646.41 31-Dec-02 $9,843.39 $9,087.79 $9,221.00 31-Jan-03 $9,492.55 $8,865.14 $9,031.05 28-Feb-03 $9,141.72 $8,624.89 $8,798.95 31-Mar-03 $9,111.65 $8,644.73 $8,832.39 30-Apr-03 $10,114.03 $9,409.79 $9,599.92 31-May-03 $11,076.32 $10,042.13 $10,402.47 30-Jun-03 $11,206.63 $10,170.66 $10,478.41 The hypothetical $10,000 investment at Fund inception includes changes in share price and reinvestment of dividends and capital gains. Indices are unmanaged, do not incur fees, expenses or taxes, and cannot be invested in directly. -------------------------------------------------------------------------------- Investment Performance Three Year Average As of June 30, 2003 Year to 12 Month Average Annual Total Date Total Annual Total Return Since Return Return Return Inception(1) -------------------------------------------------------------------------------- Masters' Select Value Fund 13.85% 6.48% 3.87% 3.87% -------------------------------------------------------------------------------- Russell 3000 Value Index(2) 11.92% -1.23% 0.57% 0.57% -------------------------------------------------------------------------------- Lipper Multi-Cap Value Fund Index(3) 13.64% 2.14% 1.57% 1.57% -------------------------------------------------------------------------------- Past performance is no guarantee of future results, and investors may have a gain or loss when they sell shares. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Indices are unmanaged, do not incur fees, expense, or taxes and cannot be invested in directly. Investing in foreign equities subjects investors to economic, political, and market risks and fluctuations in currency rates. (1) The inception date of the Masters' Select Value Fund is June 30, 2000. (2) The Russell 3000 Value Index is a broad based index that measures the performance of those companies within the 3,000 largest U.S. companies, based on total market capitalization, that have lower price-to-book ratios and lower forecasted growth rates. (3) The Lipper Multi-Cap Value Fund Index measures the performance of mutual funds that invest in a variety of market capitalization ranges without concentrating 75% or more of their assets in any one market capitalization range over an extended period of time. Value Funds seek long-term growth of capital by investing in companies that are considered to be undervalued relative to a major unmanaged stock index based on a price-to-earnings, price-to-book value, asset value or other factors. -------------------------------------------------------------------------------- Long-Term Performance Analysis ................................................................................ Now that Masters' Select Value has hit its three-year anniversary we believe it's fair to begin to evaluate the fund's long-term performance. Still, with only three years of history there is a limited amount of analysis to share but there are a few points we would like to make. o As depicted in the earlier table, the fund beat its benchmarks by a very comfortable margin. o The fund had a strong peer group showing, falling in the top 28.2% of its Lipper category over the full three years.1 o Each of Masters' Select Value's stock pickers have outperformed their benchmarks. In measuring manager performance we use the Russell 3000 Value Index for Mason Hawkins, Bill Nygren and David Winters. We use the S&P 500 for Bill Miller. The reason for using the S&P for Miller is that though he has a value oriented discipline, he applies his value assessments to a much broader universe than most value investors. And as a result, at times he buys stocks that are not found in typical value indexes. For this reason we believe a core equity index is more appropriate. o Like the other Masters' Select funds, Value Fund's performance has come in bursts and it has also tended to follow periods of underperformance (compared to its benchmarks) with periods of outperformance. (1) At June 30, 2003, the Masters' Select Value Fund's ranking in Lipper's Multi-cap Value Fund category was 31st of 492 funds for the twelve months and 94th of 333 funds since inception (6/30/00). -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- CURRENT MASTERS' SELECT MANAGERS' PERFORMANCE versus BENCHMARKS -------------------------------------------------------------------------------- Masters' Select Value Annualized Performance Margin (Net of Allocated Expenses) -------------------------------------------------------------------------------- Manager 1 12.87% -------------------------------------------------------------------------------- Manager 2 5.69% -------------------------------------------------------------------------------- Manager 3 5.39% -------------------------------------------------------------------------------- Manager 4 0.64% -------------------------------------------------------------------------------- Benchmarks: Bill Miller : S&P 500 Mason Hawkins, Bill Nygren and David Winters: Russell 3000 Value -------------------------------------------------------------------------------- Volatility and Manager Diversification ................................................................................ It is worth noting that each manager's long-term relative performance advantage has been volatile. At any point in time one or more managers is usually underperforming and because of the concentration within their individual portfolios, this underperformance is sometimes material. Even the Masters occasionally make mistakes and with a concentrated portfolio these mistakes can be very costly. However, the manager diversification built into the fund has been fairly effective in mitigating the fund level impact of these occasional mistakes and blow-ups. More often than not one or more of the other managers are outperforming which has helped to offset the temporary struggles of any other Masters. However, there have been a few short-term periods when the fund has had one or two underperforming managers without the offsetting benefit of a manager experiencing significant outperformance. In recent months we have given quite a bit of thought to the level of manager diversification that is optimal. We view the diversification in Masters' Select Value across four managers as quite acceptable but believe there are benefits to be gained from further diversification. For this reason we are open to adding a fifth manager to increase the level of portfolio diversification and we would possibly consider going as high as six managers. However, we are sensitive to the risks of "diworsification" and therefore no manager will be added unless we have a high degree of confidence in their ability to deliver strong long-term returns and if we believe there will be an added diversification benefit for the overall fund. We are in the midst of due diligence on several candidates. Portfolio Comments ................................................................................ Asset allocation and sector exposure: The fund's diversification mix is not materially different from six months ago though there have been changes at the margin. The biggest changes are: o Foreign exposure is now over 16% compared to 13.6% at the beginning of the year. o With respect to sectors, exposure to consumer staples has declined from almost 13% to just over 6%. The finance sector now makes up almost 34% of assets, up from 29% and companies in the consumer discretionary sector are now 25% of assets up from 22%. The fund continues to be quite eclectic with interesting diversification. From a market cap standpoint, the U.S. equity portion is 75.4% of the fund with almost half equally split between stocks of large companies and middle sized companies. There is a tiny (less than 3%) allocation to stocks of small companies. Notes and bonds are 3.7% (down from just over 5%). These are all "distressed" securities, an area that David Winters' team specializes in. (Distressed securities are usually corporate bonds or notes that are in default and are bought at a deep discount to their intrinsic value based on an assessment of the assets backing the notes.) The rest of the portfolio is in foreign stocks and cash. The biggest sector overweights (as opposed to the largest weighted sectors) are in consumer discretionary stocks, industrials and telecommunications. The biggest underweights are in consumer staples, energy and utilities. Please see page 39 for data on the sector and market cap allocations. Given the flexibility of the fund's stock pickers, we wouldn't be surprised if these allocations look quite different at other points in time, depending on where the opportunities lie. Several factors impacted performance during the first half of 2003. Manager performance: During the period, the managers' performance was mixed with two beating their benchmarks and two trailing. As mentioned earlier, over the fund's life all four have outreturned their benchmarks. Individual stock performance: The fund had a number of significant winners in the first half. Of these, Fairfax Financial up 97% (financial services) was the biggest contributor to the fund's profit, adding $3.3 million to the bottom line. In addition, Home Depot up 44% and 56% (two managers held this stock during the period and experienced different returns because they bought and sold at different times during the period), Capital One up 66% (financial products) and Providian up 43% (consumer lending) were the next three largest contributors to the fund's positive first half, collectively producing over $6 million of profit. Capital One was profiled in the 2002 Annual Report. On the losing side, the fund's worst loss was in Fleming Companies which filed for bankruptcy. This stock was held by Mason Hawkins. Hawkins and his team at Southeastern Asset Management, in this instance, erred in their assessment of Fleming's management team who ultimately allowed the firm to run out of cash. The Fleming position resulted in a loss in excess of $3.3 million during the first half. As we've noted in the past no investor is perfect and the Masters will make mistakes at times. But we must also note that despite the Fleming experience, Hawkins has soundly beaten his benchmarks during his tenure as manager for Masters' Select Value (and his longer tenure on Masters' Select Equity) and has contributed greatly to the fund's success. He also contributed two of the fund's seven biggest winners during the period. Sector exposure and performance: None of the fund's stock pickers make decisions based on top-down sector analysis but it is interesting to observe the impact of sector exposure on the fund's performance. In this period the value of bottom-up stock picking as opposed to sector allocations was quite apparent. The fund benefited from its heavy weighting in the consumer discretionary sector as the sector performed well and the managers' picks within the sector outperformed the sector's benchmark (e.g., the performance of consumer discretionary stocks within the Russell 3000 Value Index). The fund was underweight to three strong sectors, finanicals, energy and health care. However, in the case of health care and financials the stocks the fund did own performed extremely well--far better than the benchmark performance for their respective sectors. These two sectors made a substantial contribution to the fund's performance. David Winters' distressed bond and note holdings also performed well during the quarter, returning 13.2%. Despite our discussion of sector performance, we want to re-emphasize that tactical sector moves don't factor in to the stock picking of this fund. Sector exposure is purely a derivative of stock picking. In Closing ................................................................................ As mentioned in the general discussion that started on page 4, we believe that the strong stock market returns delivered during the last three months have, on average, brought stocks back up to a fair value range. Though there are many factors that can't be anticipated that could materially influence returns in coming years, valuations are one factor that we are confident in our ability to assess. As we write this our broad-based analysis of market-level stock values suggests that long-term equity returns are likely to fall in a mid-single digit range or a bit higher. Though there are obviously no guarantees, we continue to believe that the quality of the Masters' Select Value stock pickers coupled with their focus on their highest conviction stocks will continue to result in better than benchmark performance. We also believe that the mix of stock picking styles, the long-term investment horizon and the ongoing evaluation and monitoring by Litman/Gregory will contribute to the success of Masters' Select Value. We thank you for your continued trust and confidence. Masters' Select Value Fund Managers ................................................................................ MARKET TARGET CAPITALIZATION INVESTMENT ASSET OF COMPANIES STOCK-PICKING MANAGER FIRM ALLOCATION IN PORTFOLIO STYLE ................................................................................ Mason Southeastern 25% All sizes Value Hawkins Asset Management -------------------------------------------------------------------------------- Bill Miller Legg Mason 25% All sizes but Eclectic, may Funds mostly large invest in Management and mid-sized traditional value companies stocks or growth stocks -------------------------------------------------------------------------------- Bill Nygren Harris 25% Mostly large Value Associates and mid-sized companies -------------------------------------------------------------------------------- David Winters Franklin Mutual 25% All sizes Value Advisers -------------------------------------------------------------------------------- Portfolio Composition ................................................................................ The fund holds 44 securities, exclusive of cash equivalents. By Asset Class Cash Equivalents & Other 4.5% Bonds & Notes 3.7% Small-Cap Domestic 2.0% Foreign Equities 16.3% Large-Cap Domestic 37.4% Mid-Cap Domestic 36.1% Sector Weights ----------------------------- Russell 3000 Value Fund Index ------ ------------ Finance 33.7% 34.0% Consumer Discretionary 25.3% 13.9% Industrials 17.8% 12.4% Consumer Staples 6.3% 5.1% Telecommunications & 5.4% 14.0% Utilities Technology 1.7% 6.2% Healthcare & 1.6% 4.0% Pharmaceuticals Energy 0.0% 10.4% Bonds & Notes 3.7% 0.0% Cash Equivalents & Other 4.5% 0.0% ---- ---- Net Assets 100.0% 100.0% ====== ====== Market Capitalization: Small-Cap Domestic < $1.3 billion Mid-Cap Domestic $1.3-$10.8 billion Large-Cap Domestic > $10.8 billion Masters' Select Value Fund Stock Highlights ................................................................................ Tyco International Ltd. - Bill Miller ..................................... Tyco International Ltd. is a diversified manufacturing and service company. Tyco is the world's largest manufacturer and servicer of electrical and electronic components; the world's largest designer, manufacturer, installer and servicer of undersea telecommunications systems; the world's largest manufacturer, installer and provider of fire protection systems and electronic security services and the world's largest manufacturer of specialty valves. Tyco also holds strong leadership positions in medical device products, and plastics and adhesives. Tyco operates in more than 100 countries and had fiscal (Sept. year end) 2002 revenues from continuing operations of approximately $36 billion. One year ago Tyco was trading at $13.51 or 41% below its current price. At that time, there was a cloud of uncertainty surrounding the company relating to an accounting investigation and management turmoil. We believe this unusual situation created a unique buying opportunity to buy a leading company in a recovering sector of the economy at a very attractive valuation level. During the past twelve months, the following events have transpired at the company: o On July 25, 2002, the stock reached a new 52-week intra-day low of $7.00. The company announced the hiring of Motorola COO and former General Instruments CEO Ed Breen. The stock price bottomed at 4.6x 2003 EBITDA (earnings before interest, taxes, depreciation and amortization), less than half sales with a 14.9% EBIT (pre-tax) margin, and 5.6x the most bearish EPS (earnings per share) estimate in our range of $1.50 to $2.00 and 3.5x our then-current EPS estimate of $2.04. The free cash flow (FCF) yield on our estimate surpassed 15%. o Under Breen's guidance, the new management team has stressed their commitment to a cultural change at Tyco characterized by stable operations, reliable fundamentals and most important, strong corporate governance. o Tyco accomplished the sale of CIT in the largest-ever IPO. Proceeds of $4.6 billion helped alleviate near-term liquidity concerns. o We consulted with leading investment firms and accounting experts to assess the possibility of large-scale fraud and believed the probability of such an event was low. o In mid-August 2002, CFO Mark Swartz left the company as the accounting investigation continued. In early September, Tyco hired United Technologies' well-respected CFO David Fitzpatrick as the company's new CFO. o When the company pre-announced fiscal fourth quarter results in early October, Tyco's fourth quarter free cash flow nearly tripled from third quarter levels. Capital expenditures were reigned in, ADT customer acquisition costs slowed, and cash outflows from past acquisitions had begun to dissipate. o A new compensation plan of the senior management team consists of a significant portion of deferred share units, which vest over several years and are tied to earnings before interest and taxes and free cash flow generation. o Free cash flow, which we originally estimated to be close to $4bln, is now expected to be close to $2bln primarily because of a definitional change relating to customer acquisition costs and the run-off of purchase accounting liabilities. We believe operating cash flow will still be well above $5bln and rising from that level. o The company's fundamentals have stabilized and returned to what we believe are normalized for an economically sensitive company at this point in the economic cycle. One year ago we believed Tyco was significantly mis-priced because of the ongoing questions surrounding Tyco's accounting and management team. After rising over 40%, Tyco is trading today at under 12x fiscal year 2004's estimates, pays a modest dividend, and has stable fundamentals in an improving economic environment. Based on a variety of valuation measures, including comparable trading multiples for the separate businesses and multiples for similarly situated conglomerates, we believe the company continues to be attractively priced at the current level. We believe fair value for the company is in the range of $22-30 per share. Most portfolio managers don't focus on the critical investment question, which is: "What is the stock price discounting?" We try to buy companies whose shares trade at large discounts to our assessment of their intrinsic value. Bargain prices do not occur when the consensus is cheery, the news is good, and investors are optimistic. Our research efforts are usually directed at precisely the area of the market that the news media claims has the least promising outlook. Every purchase and sale we make is made with the ultimate goal of improving the risk-adjusted return potential of the portfolio. The stocks we are buying are usually controversial, and those we are selling are usually considered to have the greatest opportunity for near-term gain. While our investment approach does not always link up well with results of the major indices over short time periods, it has over the long term, and we are confident, will continue to do so. YUM! Brands, Inc. - Bill Nygren ............................... YUM Brands (formerly Tricon Global Restaurants) owns and operates KFC, Pizza Hut, and Taco Bell - chains that each hold the leading market share in their respective fast food categories. In 2002, YUM broadened its distribution by acquiring Long John Silver's and A&W, an acquisition that allows the company to pursue its goal of accelerating sales growth through multi-branding (i.e., selling A&W hamburgers at Taco Bell). Outside the United States, YUM is rapidly expanding its store base and has become the second largest quick-service restaurant company. Since being spun-off from PepsiCo in 1997, YUM has achieved 10% compound annual EPS (earnings per share) growth, cut its debt in half, and reduced the number of shares outstanding. How does a company with such strong fundamentals become a value stock? We would argue that YUM's diversification is a positive. When one division is weak, another with stronger results often offsets that weakness. The market, however, seems to treat each divisional shortfall as a new issue to worry about. Recent results have been somewhat weak at KFC, and SARS has caused sales in China to decrease. However, this management team gives earnings guidance that can be achieved despite such weakness. As stated at a recent analyst conference, they project low double-digit EPS growth rather than the possible mid-teens growth because "surprises happen and they're never good!" YUM is expecting to earn about $2.00 per share this year, so at $30, it sells at fifteen times earnings, or about 75% of the S&P 500 multiple. The percentage of meals eaten away from home keeps increasing and YUM has maintained market share leadership in the chicken, pizza, and Mexican categories for years. We see no reason for that to change. We believe YUM will continue achieving above-average sales and earnings growth. We also expect earnings to be less cyclical than they are at most companies. With its strong brands and superior outlook, we believe YUM deserves to sell at an above-average PE multiple. White Mountains Insurance Group Ltd. - David Winters .................................................... Among our insurance holdings, White Mountains (WTM) continues to be one of the top performers. This well-capitalized, Bermuda-based property and casualty (P&C) insurer has benefited from a number of factors, including: o the strong pricing environment for both primary and reinsurance risks o solid returns from its investment portfolio, which is primarily invested in government securities and high-grade corporate bonds o a well-executed turnaround at its OneBeacon Insurance Group operating subsidiary, which was acquired in mid-2001. White Mountains is led by one of the industry's strongest management teams, whose decisions are driven by four key operating principles: 1) underwriting comes first - don't insure unprofitable risks; 2) maintain a disciplined balance sheet; 3) invest for total return; and 4) think like owners. Management's adherence to these principles has generated and, we believe, should continue to generate solid returns for shareholders over time. In keeping with Southeastern Asset Management's disclosure policies, Mason Hawkins has not contributed commentary on his holdings for this report. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any securities mentioned herein. The views herein are those of the portfolio managers at the time the commentaries are written and may not be reflective of current conditions. This page was left blank intentionally.
Masters' Select Value Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited) Shares Value Shares Value --------------------------------------------------------------------------------------------- COMMON STOCKS: 91.8% Consumer Discretionary: 25.3% Industrials: 17.8% 200,000 AOL Time Warner, 61,000 Dun & Bradstreet Inc.* $ 3,218,000 Corp.* $ 2,507,100 125,000 Comcast Corp. - 44,000 FedEx Corp. 2,729,320 Special Class A* 3,608,125 120,000 Republic Services, 130,000 Disney (Walt) Co. 2,567,500 Inc.* 2,720,400 135,000 Eastman Kodak Co. 3,692,250 11,060 Total SA* 1,674,185 250,000 Hilton Hotels Corp. 3,197,500 360,000 Tyco International 245,000 Home Depot, Inc. 8,114,400 Ltd. 6,832,800 (The) 303,000 Vivendi Universal 37,000 Knight Ridder, Inc. 2,550,410 SA 5,587,320 252,000 KT&G Corp. 144A GDR 2,079,000 187,000 Waste Management, 246,000 Toys R US, Inc.* 2,981,520 Inc. 4,504,830 3,770 Washington Post Co.- ----------- Class B 2,763,033 26,555,955 96,000 YUM! Brands, Inc.* 2,837,760 ----------- ----------- 37,609,498 Technology: 1.7% ----------- 3,650,000 Comdisco, Inc. Contingent Equity Consumer Staples: 6.3% Distribution* 13,505 18,900 Groupe Danone 2,619,637 60,000 First Data Corp. 2,486,400 114,600 Imperial Tobacco ----------- Group Plc* 2,051,445 2,499,905 143,000 Kroger Co. (The)* 2,385,240 ----------- 11,000 Nestle SA 2,274,711 ----------- Telecommunications: 5.4% 9,331,033 35,476 NTL, Inc.* 1,215,053 ----------- 185,000 Sprint Corp. 2,664,000 84,000 Telephone & Data Finance: 33.7% Systems, Inc. 4,174,800 170,000 Aon Corp. 4,093,600 ----------- 80,000 Bank One Corp. 2,974,400 8,053,853 1,661 Berkshire Hathaway, ----------- Inc. - Class B* 4,036,230 TOTAL COMMON STOCKS 110,000 Capital One 5,409,800 (cost $123,816,532) 136,550,760 Financial Corp. ----------- 45,000 Fairfax Financial Holdings Ltd. 6,804,352 PREFERRED STOCK: 0.0% 59,900 Hudson City Bancorp, 1,531,643 Inc. Telecommunications: 0.0% 49,220 Leucadia National 1,731,486 59 NTL Europe, Inc.* 177 Corp.^ ----------- 111,500 Mony Group, Inc. 3,004,925 TOTAL PREFERRED STOCK 675,000 Providian Financial (cost $0) 177 Corp.* 6,250,500 ----------- 200,000 UnumProvident Corp. 2,682,000 231,000 Washington Mutual, 9,540,300 Inc. 5,400 White Mountains Insurance Group Ltd. 2,133,000 ----------- 50,192,236 ----------- Healthcare & Pharmaceuticals: 1.6% 52,000 Guidant Corp. 2,308,280 -----------
Masters' Select Value Fund SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2003 (Unaudited) - (Continued) Principal Amount Value --------------------------------------------- BONDS AND NOTES: 3.7% $ 1,000,000 Level 3 Communications, 6.26%, 01/30/08++ $ 945,000 2,750,000 Pacific Gas & Electric Co., 1.00%, 10/31/49 + 2,791,250 1,586,000 Qwest Services Corp., 13.50%, 12/15/10 1,800,110 ------------ TOTAL BONDS AND NOTES (cost $5,039,088) 5,536,360 ------------ SHORT-TERM INVESTMENT: 4.0% Repurchase Agreement: 4.0% 5,988,000 State Street Bank & Trust Co., 0.30%, 06/30/03, due 07/01/03 [collateral: $4,180,000, US Treasury Bonds, 8.13%, due 05/15/21, value $6,121,740] (proceeds $5,988,050) 5,988,000 ------------ TOTAL SHORT-TERM INVESTMENT (cost $5,988,000) 5,988,000 ------------ TOTAL INVESTMENTS IN SECURITIES (cost $134,843,620): 99.5% 148,075,297 ------------ Other Assets less Liabilities: 0.5% 748,055 ------------ NET ASSETS: 100.0% $148,823,352 ============ + Bond is in default and non-income producing. ++ Security is restricted. On June 30, 2003, this security was valued at $945,000 or 0.6% of net assets. * Non-income producing security. ^ Board valued security and illiquid. See accompanying Notes to Financial Statements. Masters' Select Funds Trust STATEMENTS OF ASSETS AND LIABILITIES at June 30, 2003 (Unaudited) Equity Fund International Value Fund
Equity International Value Fund Fund Fund --------------------------------------------------------------------------------- ASSETS Investments in securities, at cost $409,428,398 $377,492,585 $128,855,620 Repurchase agreements, at cost 20,112,000 27,575,000 5,988,000 ------------ ------------ ------------ Total investments at cost $429,540,398 $405,067,585 $134,843,620 ============ ============ ============ Investments in securities, at value $472,423,171 $405,065,902 $142,087,297 Repurchase agreements, at value 20,112,000 27,575,000 5,988,000 Cash 5,111 3,467,087 559,861 Receivables: Securities sold 2,776,650 2,262,121 - Dividends and interest 641,064 318,515 217,795 Fund shares sold 281,750 671,185 69,265 Foreign taxes withheld 33,259 428,137 43,563 Unrealized gain on forward exchange contracts - - 68,140 Prepaid expenses 18,355 12,126 13,169 ------------ ------------ ------------ Total assets 496,291,360 439,800,073 149,047,090 ------------ ------------ ------------ LIABILITIES Payables: Advisory fees 444,120 318,286 133,811 Securities purchased 2,948,893 5,436,247 - Fund shares redeemed 1,400 176,326 10,750 Unrealized loss on forward exchange contracts - 6,196 - Accrued expenses 171,712 141,185 79,177 Total liabilities 3,566,125 6,078,240 223,738 ------------ ------------ ------------ NET ASSETS $492,725,235 $433,721,833 $148,823,352 ============ ============ ============ Number of shares issued and outstanding (unlimited number of shares authorized, $0.01 par value) 43,229,464 36,551,836 13,309,306 ============ ============ ============ Net asset value, offering and redemption price per share $11.40 $11.87 $11.18 ============ ============ ============ COMPONENTS OF NET ASSETS Paid-in capital $508,355,456 $483,434,269 $149,598,693 Accumulated net investment income (loss) (725,838) 3,391,392 103,068 Accumulated net realized loss on investments (77,900,420) (80,661,205) (14,180,322) Net unrealized appreciation (depreciation) on: Investments 62,994,773 27,573,317 13,231,677 Foreign currency 1,264 (15,940) 70,236 ------------ ------------ ------------- Net assets $492,725,235 $433,721,833 $148,823,352 ============ ============ ============= See accompanying Notes to Financial Statements. Masters' Select Funds Trust
STATEMENTS OF OPERATIONS For the Six Months Ended June 30, 2003 (Unaudited) Equity nternational Value Fund Fund Fund ------------------------------------------------------------------------------- INVESTMENT INCOME Income Dividends (net of foreign taxes withheld of $14,670, $706,741 and $30,905, respectively) $ 1,941,583 $ 5,376,271 $ 802,431 Interest 79,573 53,635 407,458 --------- --------- --------- Total income 2,021,156 5,429,906 1,209,889 --------- --------- --------- Expenses Advisory fees 2,422,828 1,957,203 738,388 Transfer agent fees 92,692 60,984 26,373 Administration fees 69,751 56,314 21,121 Reports to shareholders 54,548 24,795 12,397 Professional fees 36,748 33,167 24,831 Fund accounting fees 34,712 28,761 29,655 Custody fees 33,026 113,774 19,279 Trustee fees 15,661 12,893 10,827 Registration expense 11,901 19,305 7,587 Insurance expense 9,112 6,163 2,605 Miscellaneous 13,260 9,144 4,665 --------- --------- --------- Total expenses 2,794,239 2,322,503 897,728 Less: fees waived (47,046) (344,310) (16,254) Less: expenses paid indirectly (199) (238) (403) Net expenses 2,746,994 1,977,955 881,071 --------- --------- --------- Net investment income (loss) (725,838) 3,451,951 328,818 --------- --------- --------- REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS AND FOREIGN CURRENCY: Net realized gain (loss) on: Investments (11,292,359) (8,551,487) (101,019) Foreign currency transactions 379 (515,683) (1,129,567) ----------- ---------- ----------- Net realized loss (11,291,980) (9,067,170) (1,230,586) ----------- ---------- ----------- Net unrealized appreciation (depreciation) on: Investments 63,311,790 48,011,746 18,093,975 Foreign currency translations (1,040) (40,975) 420,196 ----------- ---------- ----------- Net unrealized appreciation 63,310,750 47,970,771 18,514,171 ----------- ---------- ----------- Net realized and unrealized gain on investments and foreign currency 52,018,770 38,903,601 17,283,585 ----------- ---------- ----------- Net increase in net assets resulting from operations $ 51,292,932 $42,355,552 $17,612,403 =========== ========== =========== See accompanying Notes to Financial Statements. Masters' Select Equity Fund STATEMENTS OF CHANGES IN NET ASSETS Six Months Year Ended Ended June 30, December 31, 2003# 2002 ------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment loss $ (725,838) $ (1,383,039) Net realized loss on investments and foreign currency (11,291,980) (43,024,807) Net unrealized appreciation (depreciation) on investments and foreign currency 63,310,750 (55,910,097) ----------- ----------- Net increase (decrease) in net assets resulting from operations 51,292,932 (100,317,943) ----------- ----------- CAPITAL SHARE TRANSACTIONS Net increase in net assets from capital share transactions (a) 10,249,880 22,622,921 ----------- ----------- Total increase in net assets 61,542,812 (77,695,022) NET ASSETS Beginning of period 431,182,423 508,877,445 ----------- ----------- End of period $ 492,725,235 $ 431,182,423 =========== =========== Accumulated net investment loss $ (725,838) $ - =========== =========== (a) A summary of capital share transactions is as follows: Six Months Ended Year Ended June 30, 2003# December 31, 2002 ------------------------- ----------------------------- Shares Value Shares Value --------- ---------- ---------- ----------- Shares sold 4,217,870 $ 44,231,390 10,339,644 $ 114,037,793 Shares redeemed* (3,296,491) (33,981,510) (8,436,333) (91,414,872) ----------- ------------ ----------- ------------ Net increase 921,379 $ 10,249,880 1,903,311 $ 22,622,921 =========== ============ =========== ============ # Unaudited. * Net of redemption fee proceeds of $27,419 and $95,821, respectively. See accompanying Notes to Financial Statements. Masters' Select International Fund STATEMENTS OF CHANGES IN NET ASSETS
Six Months Year Ended Ended June 30, 2003# December 31, 2002 ---------------- ----------------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income $ 3,451,951 $ 1,524,573 Net realized loss on investments and foreign currency (9,067,170) (39,627,085) Net unrealized appreciation (depreciation) on investments and foreign currency 47,970,771 (14,981,552) ----------- ----------- Net increase (decrease) in net assets resulting from operations 42,355,552 (53,084,064) ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income - (997,517) Return of capital - (35,994) ----------- ----------- Total distributions - (1,033,511) ----------- ----------- CAPITAL SHARE TRANSACTIONS Net increase in net assets from capital share transactions (a) 55,399,657 111,219,577 ----------- ----------- Total increase in net assets 97,755,209 57,102,002 NET ASSETS Beginning of period 335,966,624 278,864,622 ----------- ----------- End of period $ 433,721,833 $335,966,624 =========== =========== Accumulated net investment income (loss) $ 3,391,392 $ (60,559) =========== ===========
(a)A summary of capital share transactions is as follows: Six Months Ended Year Ended June 30, 2003# December 31, 2002 --------------------------------------------- Shares Value Shares Value ------ ----- ------ ----- Shares sold 7,763,504 $82,662,438 16,262,383 $194,223,191 Shares issued in reinvestment of distribution - - 90,714 951,779 Shares redeemed* (2,611,694)(27,262,781) (7,216,595) (83,955,393) ---------- ------------ ----------- ------------ Net increase 5,151,810 $55,399,657 9,136,502 $111,219,577 ========== ============ =========== ============= # Unaudited. * Net of redemption fee proceeds of $105,647 and $163,985, respectively. See accompanying Notes to Financial Statements. Masters' Select Value Fund STATEMENTS OF CHANGES IN NET ASSETS Six Months Year Ended Ended June 30, December 31, 2003# 2002 -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income $ 328,818 $ 828,230 Net realized loss on investments and foreign currency (1,230,586) (13,163,081) Net unrealized appreciation (depreciation) on investments and foreign currency 18,514,171 (11,292,235) ---------- ------------- Net increase (decrease) in net assets resulting from operations 17,612,403 (23,627,086) ---------- ------------- CAPITAL SHARE TRANSACTIONS Net increase (decrease) in net assets from capital share transactions (a) (6,723,652) 1,014,088 ---------- ------------- Total increase (decrease) in net assets 10,888,751 (22,612,998) NET ASSETS Beginning of period 137,934,601 160,547,599 ----------- ------------- End of period $ 148,823,352 $137,934,601 =========== ============= Accumulated net investment income (loss) $ 103,068 $ (225,750) =========== ============= (a) A summary of capital share transactions is as follows: Six Months Ended Year Ended June 30, 2003# December 31, 2002 ---------------------- ------------------------ Shares Value Shares Value ------ ----- ------ ----- Shares sold 1,319,537 $ 13,199,619 4,042,720 $ 42,963,163 Shares redeemed* (2,061,991) (19,923,271) (4,039,202) (41,949,075) ----------- ------------ ----------- ------------ Net increase (decrease) (742,454) $ (6,723,652) 3,518 $ 1,014,088 =========== ============ =========== ============ # Unaudited. * Net of redemption fee proceeds of $9,103 and $64,198, respectively. See accompanying Notes to Financial Statements. Masters' Select Equity Fund FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
Year Ended December 31, Six Months Ended -------------------------------- June 30, 2003# 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------- Net asset value, beginning of period $10.19 $12.59 $12.98 $14.38 $13.57 $11.84 --------------------------------------------------------- Income from investment operations: Net investment income (loss) (0.02) (0.03) (0.04) (0.05) (0.01) 0.03 Net realized and unrealized gain (loss) on investments and foreign currency 1.23 (2.37) (0.29) 0.42 3.52 1.73 --------------------------------------------------------- Total from investment operations 1.21 (2.40) (0.33) 0.37 3.51 1.76 --------------------------------------------------------- Less distributions: From net investment income - - - - (0.02) (0.02) From net realized gain - - (0.06) (1.77) (2.68) (0.01) --------------------------------------------------------- Total distributions - - (0.06) (1.77) (2.70) (0.03) --------------------------------------------------------- Redemption fee proceeds++ -^ -^ -^ -^ -^ N/A --------------------------------------------------------- Net asset value, end of period $11.40 $10.19 $12.59 $12.98 $14.38 $13.57 --------------------------------------------------------- Total return 11.87%+ (19.06)% (2.55)% 3.17% 26.45% 14.90% --------------------------------------------------------- Ratios/supplemental data: Net assets, end of period $492.7 $431.2 $508.9 $469.0 $449.2 $405.5 (millions) --------------------------------------------------------- Ratio of total expenses to average net assets: Before fees waived 1.27%* 1.27% 1.28% 1.26% 1.28% 1.38% --------------------------------------------------------- After fees waived 1.25%* 1.25% 1.26% 1.24% 1.26% 1.38% --------------------------------------------------------- Ratio of net investment income (loss) to average net assets: (0.33)%* (0.30)% (0.36)% (0.35)% (0.12)% 0.30% --------------------------------------------------------- Portfolio turnover rate 30.59%+ 93.76% 94.98% 129.70% 116.42% 135.41% # Unaudited. * Annualized. + Not annualized. ^ Amount represents less than $0.01 per share. ++ Reemption fee instituted on November 1, 1999.
See accompanying Notes to Financial Statements. Masters' Select International Fund FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
Year Ended December 31, Six Months Ended -------------------------------- June 30, 2003# 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 10.70 $ 12.53 $ 15.31 $ 18.67 $ 10.95 $ 9.88 --------------------------------------------------------- Income from investment operations: Net investment income 0.10 0.05 0.06 0.07 -^ 0.08 Net realized and unrealized gain (loss) on investments and foreign 1.07 (1.85) (2.83) (1.04) 8.13 1.08 currency --------------------------------------------------------- Total from investment operations 1.17 (1.80) (2.77) (0.97) 8.13 1.16 --------------------------------------------------------- Less distributions: From net investment income - (0.03) (0.03) (0.05) (0.03) (0.09) From net realized gain - - - (2.34) (0.38) - Return of capital - -^ -^ - - - --------------------------------------------------------- Total distributions - (0.03) (0.03) (2.39) (0.41) (0.09) --------------------------------------------------------- Redemption fee proceeds++ -^ -^ 0.02 -^ -^ N/A --------------------------------------------------------- Net asset value, end of period $ 11.87 $ 10.70 $ 12.53 $ 15.31 $ 18.67 $10.95 --------------------------------------------------------- Total return 10.93%+ (14.34) %(17.94)% (5.01)% 75.01% 11.74% --------------------------------------------------------- Ratios/supplemental data: Net assets, end of period $433.7 $336.0 $278.9 $275.8 $219.4 $95.2 (millions) --------------------------------------------------------- Ratio of total expenses to average net assets: Before fees waived 1.31%* 1.32% 1.37% 1.34% 1.41% 1.63% --------------------------------------------------------- After fees waived 1.11%* 1.13% 1.19% 1.18% 1.29% 1.55% --------------------------------------------------------- Ratio of net investment income to average net assets: 1.94%* 0.47% 0.52% 0.47% 0.01% 0.87% --------------------------------------------------------- Portfolio turnover rate 62.62%+ 141.07% 174.19% 149.25% 100.00% 73.59% # Unaudited. * Annualized. + Not annualized. ^ Amount represents less than $0.01 per share. ++Redemption fee instituted on November 1, 1999.
See accompanying Notes to Financial Statements. Masters' Select Value Fund FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
Six Months Year Ended December 31, Period Ended ----------------------- Ended ** June 30, 2003 # 2002 2001 December 31, 2000 ---------------------------------------------------------------------------------------------- Net asset value, beginning of period $ 9.82 $ 11.43 $ 10.45 $10.00 ------------------------------------------------------------ Income from investment operations: Net investment income 0.01 0.06 -^ 0.00 Net realized and unrealized gain (loss) on investments and foreign currency 1.35 (1.67) 1.00 0.44 ------------------------------------------------------------ Total from investment operations 1.36 (1.61) 1.00 0.45 ------------------------------------------------------------ Less distributions: From net investment income - - -^ - From net realized gain - - (0.03) - ------------------------------------------------------------ Total distributions - - (0.03) - ------------------------------------------------------------ Redemption fee proceeds -^ -^ 0.01 -^ ------------------------------------------------------------ Net asset value, end of period $11.18 $9.82 $ 11.43 $10.45 ------------------------------------------------------------ Total return 13.85%+ (14.09)% 9.64% 4.50%+ ------------------------------------------------------------ Ratios/supplemental data: Net assets, end of period (millions) $148.8 $137.9 $160.5 $56.4 ------------------------------------------------------------ Ratio of total expenses to average net assets: Before fees waived 1.34%* 1.31% 1.37% 1.75%* ------------------------------------------------------------ After fees waived 1.31%* 1.29% 1.35% 1.70%* ------------------------------------------------------------ Ratio of net investment income (loss) to average net assets: 0.49%* 0.55% (0.04)% 0.07%* ------------------------------------------------------------ Portfolio turnover rate 7.30%+ 54.08% 32.67% 17.05%+ # Unaudited. * Annualized. + Not annualized. ^ Amount represents less than $0.01 per share. **Commenced operations on June 30, 2000.
See accompanying Notes to Financial Statements. Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 - Organization ................................................................................ The Masters' Select Funds Trust (the "Trust") was organized as a Delaware business trust on August 1, 1996 and is registered under the Investment Company Act of 1940 (the "1940 Act") as an open-end management investment company. The Trust consists of four separate series: the Masters' Select Equity Fund, the Masters' Select International Fund, the Masters' Select Value Fund and the Masters' Select Smaller Companies Fund. The first three of which, (each a "Fund" and collectively the "Funds") are covered by this report. The Masters' Select Smaller Companies Fund commenced operations on June 30, 2003. The Masters' Select Equity Fund is a growth fund that seeks to increase the value of your investment over the long-term by using the combined talents and favorite stock picking ideas of six highly regarded portfolio managers. The Masters' Select International Fund invests primarily in foreign companies. It seeks to increase the value of your investment over the long-term by using the combined talents and favorite stock-picking ideas of four highly regarded international portfolio managers. The Masters' Select Value Fund is a growth fund that seeks to increase the value of your investment over the long-term by using the combined talents and favorite stock picking ideas of four highly regarded value managers. Note 2 - Significant Accounting Policies ................................................................................ The following is a summary of the significant accounting policies followed by the Funds. These policies are in conformity with accounting principles generally accepted in the United States of America. A. Security Valuation. Investments in securities traded on a national securities exchange or Nasdaq are valued at the last reported sales price (or the Nasdaq official closing price for Nasdaq-reported securities, if such price is provided by the Fund's accountant) at the close of regular trading on each day that the exchanges are open for trading. Securities traded on an exchange or Nasdaq for which there have been no sales and other over-the-counter securities are valued at the mean between the closing bid and asked prices. Securities for which market prices are not readily available are valued at fair value as determined in good faith by the Managers and the Trust's Valuation Committee pursuant to procedures approved by or under the Board of Trustees. Debt securities maturing within 60 days or less are valued at amortized cost unless the Board of Trustees determines that amortized cost does not represent fair value. B. Foreign Currency Translation. The Funds' records are maintained in U.S. dollars. The value of securities, currencies and other assets and liabilities denominated in currencies other than U.S. dollars are translated into U.S. dollars based upon foreign exchange rates prevailing at the end of the reporting period. Purchases and sales of investment Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) securities, income and expenses are translated on the respective dates of such transactions. The Funds do not isolate that portion of their net realized and unrealized gains and losses on investments resulting from changes in foreign exchange rates from the impact arising from changes in market prices. Such fluctuations are included with net realized and unrealized gain or loss from investments and foreign currency. Net realized foreign currency transaction gains and losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the differences between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds' books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency translation gains and losses arise from changes in the value of assets and liabilities, other than investments in securities, resulting from changes in the exchange rates. C. Forward Foreign Currency Exchange Contracts. The Funds may utilize forward foreign currency exchange contracts ("forward contracts") under which they are obligated to exchange currencies on specified future dates at specified rates, and are subject to the translations of foreign exchange fluctuations. All contracts are "marked-to-market" daily and any resulting unrealized gains or losses are included as unrealized appreciation or depreciation on foreign currency translations. The Funds record realized gains or losses at the time the forward contract is settled. Counter parties to these forward contracts are major U.S. financial institutions. D. Federal Income Taxes. The Funds intend to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of their taxable income to their shareholders. Accordingly, no provisions for federal income taxes are required. E. Distributions to Shareholders. Distributions paid to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains is determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. To the extent these "book/tax" differences are permanent in nature (i.e., that they result from other than timing of recognition - "temporary differences"), such amounts are reclassified within the capital accounts based on their federal tax-basis. F. Security Transactions, Dividend and Interest Income. Security transactions are accounted for on the trade date. Realized gains and losses on securities transactions are reported on an identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Purchase discounts and premiums on fixed-income securities are accreted and amortized to maturity using the effective interest method. Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) G. Repurchase Agreements. It is the Trust's policy that its Custodian take possession of securities as collateral under repurchase agreements and to determine on a daily basis that the value of such securities, including recorded interest, is sufficient to cover the value of the repurchase agreements. If the counterparty defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the counterparty of the security, realization of the collateral by the Fund may be delayed or limited. H. Expenses Paid Indirectly. Under terms of the Trust's Custodial Agreement, the Funds earn credits on cash balances which are applied against custodian fees. I. Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. Note 3 - Management Fees and Transactions with Affiliates ................................................................................ The Trust, on behalf of the Funds, entered into an Investment Advisory Agreement (the "Agreement") with Litman/Gregory Fund Advisors, LLC (the "Advisor"). Under the terms of the Agreement, the Funds pay a fee to the Advisor, at the annual rate of 1.10% of the Funds' average daily net assets before any fee waivers. Through December 31, 2003, the Advisor has contractually agreed to waive a portion of its advisory fees equal to approximately 0.02% of the average daily net assets of the the Masters' Select Equity Fund, 0.1925% of the average daily net assets of the Masters' Select International Fund, and 0.02% of the average daily net assets of the Masters' Select Value Fund. The Advisor has agreed not to seek recoupment of such waived fees. The Trust, on behalf of the Funds, has also entered into an Administration Agreement with U.S. Bancorp Fund Services, L.L.C. (the "Administrator"). Under its terms, the Funds pay monthly a fee based on the value of the total average net assets of the Trust at an annual rate of 0.100% of the first $100 million of such net assets, 0.050% of the next $150 million, 0.020% of the next $250 million, 0.015% of the next $2 billion and 0.0125% thereafter. Affiliated entities of the Trust received net commissions on purchases and sales of the Funds' portfolio securities for the six months ended June 30, 2003 of $350, $6,448 and $8,900 for the Masters' Select Equity Fund, the Masters' Select International Fund, the Masters' Select Value Fund, respectively. Each unaffiliated Trustee is compensated by the Trust at the rate of $25,000 per year. Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) Note 4 - Investment Transactions ................................................................................ The cost of securities purchased and the proceeds from securities sold for six months ended June 30, 2003 excluding short-term investments, were as follows: Fund Purchases Sales -------------------------------------------------------------------------------- Equity $137,106,578 $129,278,742 International 284,521,761 209,440,426 Value 9,413,819 19,341,199 Note 5 - Income Taxes and Distributions to Shareholders ................................................................................ Net investment income and net realized gains differ for financial statement and tax purposes due to differing treatments of wash sale losses deferred, foreign currency transactions and losses realized subsequent to October 31 on the sale of securities and foreign currencies. As of June 30, 2003, the components of net assets on a tax basis were as follows:
Equity Fund International Fund Value Fund --------------------------------------------------------------------------------------- Cost of investments for tax purposes $429,540,398 $405,067,585 $134,843,620 =========== =========== =========== Gross tax unrealized appreciation $ 81,694,520 $ 57,931,733 $ 25,063,490 Gross tax unrealized depreciation (18,699,747) (30,358,416) (11,831,813) Net tax unrealized appreciation ----------- ----------- ----------- on investments 62,994,773 27,573,317 13,231,677 Net tax unrealized/realized appreciation (depreciation) on forward contracts and foreign-currency denominated assets and liabilities 1,264 (15,940) 70,236 ----------- ----------- ----------- Net tax unrealized appreciation $ 62,996,037 $ 27,557,377 $ 13,301,913 =========== =========== ===========
Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) The tax composition of dividends (other than return of capital dividends for the years ended December 31, 2002 and 2001) were as follows: 2002 2001 ----------------------------------------------------------- Ordinary Long-term Ordinary Long-term Income Capital Gain Income Capital Gain ------------------------------------------------------------ Equity Fund - - - $2,245,807 International Fund $977,517 - $600,517 - Value Fund - - $397,466 - For Federal income tax purposes, the following Funds have capital loss carryforwards at December 31, 2002 that may reduce distributions of realized gains in future years. Expiring in Equity Fund International Fund Value Fund -------------------------------------------------------------------------------- 2009 $17,370,664 $31,376,686 $ 658,549 2010 32,383,752 31,902,291 9,906,719 ---------- ---------- --------- $49,754,416 $63,278,977 $10,565,268 ========== ========== ========== Note 6 - Off-Balance Sheet Risk ................................................................................ The Funds are parties to financial instruments with off-balance sheet risk, primarily forward contracts, in order to hedge the impact of adverse changes in the relationship between the U.S. dollar and various foreign currencies and certain assets and liabilities denominated in foreign currencies. These instruments involve market risk in excess of the amount recognized in the Statement of Assets and Liabilities. Risks also arise from the possible inability of counter parties to meet the terms of their contracts, future adverse movement in currency values and contract positions that are not exact offsets. The contract amount indicates the extent of the Funds' involvement in such currencies. A forward exchange contract is an agreement between two parties to exchange different currencies at a specified rate at an agreed future date. Forward contracts are reported in the financial statements at the Funds' net equity as measured by the difference between the forward exchange rate at the reporting date and the forward exchange rate on the date the contract is entered into. At June 30, 2003, the Funds had the following forward contracts outstanding: Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) Masters' Select International Fund In Exchange Settlement Unrealized Contracts to Buy For Date Gain (Loss) ------------------------------------------------------------------------------ 2,107,327 Swiss Franc U.S. $1,560,105 07/01/2003 $ (930) 2,265,129 Swiss Franc 1,678,184 07/02/2003 (2,213) 17,599,228 Swedish Krona 2,195,704 07/02/2003 5,520 ------------------------------------------------------------------------------ 2,377 ------------------------------------------------------------------------------ Contracts to Sell ------------------------------------------------------------------------------ 204,576 Euro 233,626 07/01/2003 (1,681) 1,226,212 British Pound Sterling 2,019,915 07/02/2003 (6,892) ------------------------------------------------------------------------------ (8,573) ------------------------------------------------------------------------------ Net unrealized loss on forward contracts $(6,196) ============================================================================== Masters' Select Value Fund In Exchange Settlement Unrealized Contracts to Buy For Date Gain (Loss) ------------------------------------------------------------------------------ 2,790,000 Euro U.S. $3,253,503 08/21/2003 $(49,210) 250,000 Euro 288,635 08/21/2003 (1,512) 2,500,000 Swiss Franc 1,813,263 08/13/2003 38,327 ------------------------------------------------------------------------------ (12,395) ------------------------------------------------------------------------------ Contracts to Sell ------------------------------------------------------------------------------ 1,214,075 British Pound Sterling 2,014,356 06/28/2003 11,744 5,577,866 Euro 6,497,043 08/21/2003 90,909 2,380,000,000 South Korean Won 1,975,924 09/15/2003 (3,204) 2,500,000 Swiss Franc 1,832,677 08/13/2003 (18,914) ------------------------------------------------------------------------------ 80,535 ------------------------------------------------------------------------------ Net unrealized gain on forward contracts $ 68,140 ============================================================================== Note 7 - Line of Credit ................................................................................ The Trust has an unsecured $15,000,000 line of credit with its custodian. Borrowings under this arrangement bear interest at the federal funds rate plus 0.50% per annum. As compensation for holding available the lending commitment, the Trust pays a 0.10% per annum fee on the unused portion of the commitment which is allocated among the Funds based on their relative net assets. The fee is payable quarterly in arrears. At June 30, 2003, the Trust has no outstanding borrowings. Masters' Select Funds Trust NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued) Note 8 - Subsequent Event ................................................................................ As of June 30, 2003, the Masters' Select Equity Fund held 800,000 shares of Mirant Corp. common stock, representing 0.5% of the Fund's total net assets. On July 14, 2003, Mirant Corp. filed for bankruptcy protection. Masters' Select Funds Trust TRUSTEE AND OFFICER INFORMATION Background information for the Trustees and Officers of the Trust is presented below. All Trustees oversee the three Masters' Select Funds. The SAI includes additional information about the Trust's Trustees and is available, without charge, by calling 1-800-656-8864.
Position(s) Term of Office Principal Occupation(s) Other Name, Address, Held and Length of During the Directorships and Age with Trust Time Served Past 5 Years Held by Trustee ----------------------------------------------------------------------------------------- George Battle (59) Trustee Term: Open ended Chief Executive Director of C/O Masters' Time Served: Officer, Ask Jeeves; Select 6 years Ask Jeeves, since Peoplesoft, Funds 2000; Senior Inc.; Barra, 4 Orinda Way, Fellow, The Aspen Inc.; and Suite 230D Institute, since Fair, Isaac. Orinda, CA 1995. 94563 ----------------------------------------------------------------------------------------- Frederick August Trustee Term: Open ended Vice President, None Eigenbrod, Jr. Time Served: RuotSource PhD (62) 6 years Consulting Services C/O Masters' (organizationalLanding Circle, Select planning Funds and development) 4 Orinda Way, since 2002; Senior Suite 230D Vice President, Orinda, CA Consulting Services, 94563 Silicon Valley, Right Associates (industrial psychologists) from 1990 to 2002. ----------------------------------------------------------------------------------------- Kenneth E. President Term: Open ended President of the None Gregory* (45) and Time Served: Advisor; President 4 Orinda Way, Trustee 6 years of Litman/Gregory Suite 230D Research, Inc. Orinda, CA (publishers) and 94563 Litman/Gregory Asset Management, LLC (investment advisors), Officer of Litman/ Gregory Analytics, LLC (web based publisher of financial research), since 2000 ----------------------------------------------------------------------------------------- Craig A. Secretary Term: Open ended Treasurer and None Litman* (56) and Time Served: Secretary of the 100 Larkspur Trustee 6 years Advisor; Vice Suite 204 President and Larkspur, CA Secretary of Litman/ 94939 Gregory Research Inc.; Chairman of Litman/Gregory Asset Management, LLC. ----------------------------------------------------------------------------------------- Taylor M. Welz (43) Trustee Term: Open ended CPA/PFS, CFP. Partner, None Bowman & Time Served: Bowman & Company LLP Company LLP 6 years (certified public 2431 W. March Lane, accountants) Suite 100 Stockton, CA 95207 ----------------------------------------------------------------------------------------- John Coughlan (47) Treasurer Term: Open ended Chief Operating None Time Served: Officer, 4 Orinda Way, 6 years Litman/Gregory Fund Suite 230D Advisors, LLC and Chief Orinda, CA 94563 Financial Officer of Litman/Gregory Asset Management, LLC
*Denotes Trustees who are "interested persons" of the Trust under the 1940 Act. Advisor: ................................................................................ Litman/Gregory Fund Advisors, LLC Orinda, CA 94563 Distributor: ................................................................................ Quasar Distributors, LLC 615 E. Michigan St., 3rd Floor Milwaukee, WI 53202 Transfer Agent: ................................................................................ NFDS P.O. Box 219922 Kansas City, MO 64121-9922 1-800-960-0188 For Overnight Delivery: Masters' Select Funds C/O NFDS 330 W. 9th Street Kansas City, MO 64105 Investment Professionals: -------------------------------------------------------------------------------- Registered Investment Advisors, broker/dealers, and other investment professionals may contact Fund Services at 1-925-253-5238. Prospectus: ................................................................................ To request a prospectus, statement of additional information, or an IRA application, call 1-800-656-8864. Shareholder Inquiries: ................................................................................ To request action on your existing account, contact the Transfer agent, NFDS, at 1-800-960-0188, from 9:00 a.m. to 6:00 p.m. eastern time, Monday through Friday. 24-Hour Automated Information: ................................................................................ For access to automated reporting of daily prices, account balances and transaction activity, call 1-800-960-0188, 24 hours a day, seven days a week. Please have your Fund number (see below) and account number ready in order to access your account information. Fund Information: ................................................................................ Fund Symbol CUSIP Fund Number ------------ ---------- --------- ----------- Equity Fund MSEFX 576417109 305 International Fund MSILX 576417208 306 Value Fund MSVFX 576417406 307 Smaller Companies Fund MSSFX 576417307 308 Website: ................................................................................ www.mastersselectfunds.com Item 2. Code of Ethics. Not applicable to semi-annual reports filed for periods ending before July 15, 2003. Item 3. Audit Committee Financial Expert. Not applicable to semi-annual reports filed for periods ending before July 15, 2003. Item 4. Principal Accountant Fees and Services. Not required for semi-annual reports filed for periods ending before December 15, 2003. Item 5. Audit Committee of Listed Registrants. Not applicable to open-end investment companies. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable to open-end investment companies. Item 8. [Reserved] Item 9. Controls and Procedures. (a) Based on their evaluation of the Registrant's Disclosure Controls and Procedures as of a date within 90 days of the Filing Date, the Registrant's President and Treasurer/CFO have determined that the Disclosure Controls and Procedures (as defined in Rule 30a-2(c) under the Act) are designed to ensure that information required to be disclosed by the Registrant is recorded, processed, summarized and reported by the filing Date, and that information required to be disclosed in the report is communicated to the Registrant's management, as appropriate, to allow timely decisions regarding required disclosure. (b) There were no significant changes in the Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses. Item 10. Exhibits. (a) Any code of ethics or amendment thereto. Not applicable to semi-annual reports for periods ending before July 15, 2003. (b) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. (c) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Masters' Select Funds --------------------- By (Signature and Title) /s/ Kenneth E. Gregory ---------------------- Kenneth E. Gregory, President Date August 18, 2003 --------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ Kenneth E. Gregory ---------------------- Kenneth E. Gregory, President Date August 18, 2003 --------------- By (Signature and Title)* /s/ John Coughlan ----------------- John Coughlan, Treasurer Date August 18, 2003 ---------------