-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BTby/6/cGvawCjBSpCPxqDEjjaBRabBo8/xGmlNsGO5nnIzMSoBHi+OEjG4BpkSY byWirxQj5gobi4ULsBL8JQ== 0001193125-05-040714.txt : 20050302 0001193125-05-040714.hdr.sgml : 20050302 20050302145920 ACCESSION NUMBER: 0001193125-05-040714 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050302 DATE AS OF CHANGE: 20050302 EFFECTIVENESS DATE: 20050302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWESTERN MUTUAL VARIABLE LIFE ACCOUNT CENTRAL INDEX KEY: 0000742277 IRS NUMBER: 390509570 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03989 FILM NUMBER: 05653904 BUSINESS ADDRESS: STREET 1: 720 E WISCONSIN AVE CITY: MILWAUKEE STATE: WI ZIP: 53202 BUSINESS PHONE: 4146652508 MAIL ADDRESS: STREET 1: 720 EAST WISCONSIN AVENUE CITY: MILWAUKEE STATE: WI ZIP: 53202 N-30D 1 dn30d.txt NML VARIABLE LIFE ACCOUNT ANNUAL REPORT Annual Report December 31, 2004 [PHOTO APPEARS HERE] The Northwestern Mutual Life Insurance Company VariableLifeAccount DECEMBER 31, 2004 Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and Russell Investment Funds The Northwestern Mutual Life Insurance Company 720 East Wisconsin Avenue Milwaukee, WI 53202 www.northwesternmutual.com (414) 271-1444 90-1899 (0786) (REV 0105) [LOGO] Northwestern Mutual(R) Letter to Policyowners December 31, 2004 During the first three quarters of 2004, the stock market produced lackluster results, as concerns over rising oil prices, a weakening dollar, the Iraqi war, and the presidential election put a drag on the economy and the market. In the final quarter of the year, however, the market experienced a dramatic turnaround. The elections in November and a significant drop in oil prices beginning in October served as catalysts for the change, and gains made during the fourth quarter accounted for most of the return in the stock market for the year. The S&P 500 Index (a widely used benchmark of U.S. equity performance) gained 10.88% for the year. Small capitalization stocks and international equities were the strongest performers, as measured by the S&P SmallCap 600 Index, which gained 22.65%, and the EAFE Index, which was up 20.70% for the year. The bond market also posted positive returns for the year, with high yield bonds significantly outperforming investment grade bonds. The total return of the Merrill Lynch Domestic Master Index (a broad-based bond index) was 4.34% for the year, while high yield bonds returned 10.85%, as measured by the Lehman High Yield Intermediate Market Index (an index of non-investment grade bonds). Credit spreads narrowed during the year as bond investors looking for higher yields took on more credit risk rather than locking in longer term bonds. Yields on Treasuries remained basically unchanged over the year, as investors seeking higher yields put money in more speculative areas of the bond market. The 10-year Treasury started the year at 4.25% and ended at 4.22%; the 30-year Treasury bond began the year at 4.89%, and finished at 4.83%. Through most of the first half of 2004, short-term interest rates remained at 45-year lows, where they had been unchanged since mid 2003. Beginning in June, however, the Federal Reserve began a series of interest rate increases, and by year end the federal funds rate stood at 2.25%, up from 1.00%. The Federal Reserve has indicated that it will continue to increase rates in 2005, although a variety of economic variables could impact its decisions on rates in the coming months. Although the consensus calls for 3.0% to 3.5% growth in GDP in 2005, a number of concerns compel us to urge caution. The fiscal and monetary policies that have stimulated the economy over the past two years are behind us, with the immediate impact of the 2003 tax cuts already factored into the economy and the Fed signaling its intention to raise rates further. This late in the business cycle, we believe investors would be wise to moderate their expectations for returns in both stocks and bonds. The market is currently "priced for perfection." If the year ahead turns out to be less than perfect, some asset classes could give back returns of the past few years. We believe we are closer to the time when investors should hold on to past returns rather than chase yields and returns. All markets now have had a nice run up and most asset classes are rich compared to historic standards. We believe a well-balanced portfolio -- one diversified between stocks and bonds, as well as among foreign and domestic investments -- is the wisest course of action. As always, at Northwestern Mutual we take very seriously our commitment to the highest quality investment management and ethical business practices. We appreciate the trust you have placed in our organization, and will work steadfastly in 2005 to preserve that trust. [PHOTO] Edward J. Zore [PHOTO] Mark G. Doll /s/ Edward J. Zore /s/ Mark G. Doll Edward J. Zore Mark G. Doll President and Chief Senior Vice President Executive Officer Investments The Northwestern Mutual Life Insurance Company [GRAPHIC] Northwestern Mutual(R) i How To Get More Information Northwestern Mutual Express: 1-800-519-4665 Get up-to-date information about your Variable CompLife policy at your convenience with your policy number and your Personal Identification Number (PIN). Call toll-free to review policy values, fund performance information, and request a change to the allocations of your existing assets or future premiums/dividends. Information on the Internet: Northwestern Mutual Financial Network WWW.NMFN.COM To obtain current performance information and information about Northwestern Mutual, visit us on our website. You can also visit us at our customer service section from our Web site for information on Policy values and current fund performance. This site also allows you to view past confirmation and policy statements, as well as transfer funds online. To sign up for this service please call 1-866-424-2609 between 7 a.m. - 6 p.m. Central Time Monday - Friday. As always, your Investment Services representative of the Northwestern Mutual Financial Network is available to answer any questions you have about your variable life insurance policy or any of our products. For Variable Executive Life and Variable Joint Life inforce policy service questions please call 1-866-464-3800 between 7:30 a.m. - 5 p.m. Central Time Monday - Friday. ii Contents Performance Summary for the Northwestern Mutual Variable Life Account Northwestern Mutual Series Fund, Inc. - Annual Report Fidelity VIP Mid Cap Portfolio - Annual Report (This report follows the end of the Northwestern Mutual Series Fund, Inc.) Russell Investment Funds - Annual Report (This report follows the end of the Fidelity VIP Mid Cap Portfolio.) Northwestern Mutual Variable Life Account Financial Statements You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. Your Northwestern Mutual Investment Services Registered Representative can provide you with a policy and fund prospectus that will contain the information noted above, and other important information that you should read carefully before you invest or send money. iii Performance Summary as of December 31, 2004 VARIABLE LIFE -- Policies Issued Before October 11, 1995
Franklin T. Rowe Templeton AllianceBernstein Small Cap Price Small Aggressive International International Mid Cap Index 400 Total return(j) Growth Stock Cap Value Growth Stock Growth Equity Value Stock (as of 12/31/04) Division Division Division Division Division Division Division - ---------------------------------------------------------------------------------------------------------------------- 1 year.............. 17.97% 23.70% 13.42% 20.74% 18.50% 17.84% 15.45% 5 years............. 27.87% -- (7.75%) -- 14.06% -- 50.83% Annualized......... 5.04% -- (1.60%) -- 2.67% -- 8.57% 10 years............ -- -- 157.15% -- 120.87% -- -- Annualized......... -- -- 9.91% -- 8.25% -- -- Since division inception in Variable Life Account............ 96.15%(b) 57.94%(c) -- 31.06%(c) -- 56.19%(d) 60.75%(b) Annualized......... 13.02% 14.30% -- 8.23% -- 30.63% 9.01% Since portfolio inception(a)....... 136.87%(b) -- -- -- -- -- 69.39%(b) Annualized......... 16.42% -- -- -- -- -- 9.74% Current Yield(h).... VARIABLE COMPLIFE -- Polices Issued On or After October 11, 1995** - ---------------------------------------------------------------------------------------------------------------------- 1 year.............. 18.09% 23.83% 13.53% 20.86% 18.62% 17.96% 15.57% 5 years............. 28.52% -- (7.28%) -- 14.64% -- 51.59% Annualized......... 5.15% -- (1.50%) -- 2.77% -- 8.68% 10 years............ -- -- 159.77% -- 123.12% -- -- Annualized......... -- -- 10.02% -- 8.36% -- -- Since division inception in Variable Life Account............ 97.25%(b) 58.48%(c) -- 31.50%(c) -- 56.44%(d) 61.64%(b) Annualized......... 13.14% 14.42% -- 8.34% -- 30.76% 9.12% Since portfolio inception(a)....... 138.23%(b) -- -- -- -- -- 70.36%(b) Annualized......... 16.54% -- -- -- -- -- 9.85% Current Yield(h)....
The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performances may be lower or higher than the performance data quoted. For the most recent month-end performance information visit www.nmfn.com. All total return figures shown above reflect the deduction of portfolio expenses, as well as mortality and expense risk charges for each product. Returns do not reflect deductions such as sales charges or premium taxes, administrative charges, surrender charges or cost of insurance charges. These deductions would significantly impact the returns if they were included. Performance data quoted represents past results and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that, when redeemed, it may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Performance for other separate accounts will differ. (a)Returns stated are as of the inception date of the portfolio which preceeds availability in the Variable Life Account. See the following footnotes for portfolio inception dates. (b)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 4/30/99. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (c)Inception date of 7/31/01. (d)Inception date of 5/1/03. (e)Inception date of this dvision in the Variable Life Account was 5/1/03. Actual fund inception was 12/28/98. Performance quoted prior to 5/1/03 is based on actual investment experience, adjusted for expenses of the product and premium charges. (f)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 1/2/97. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (h)For the seven-day period ended December 31, 2004, the Money Market Portfolio's yield was 2.17% and was equivalent to a compound effective yield of 2.20%. The seven-day yield does not include deductions that are included in the separate accounts. The yield quotation more closely reflects the current earnings of the Money Market Portfolio than the total return quotation. (j)Returns shown inlcude any fee waivers in effect and deductions for all Fund expenses. In the absence of fee waivers, total return would be less. For the Money Market Division, total returns include the effect of a fee waiver from December 2, 2002 through December 31, 2004, which ended on December 31, 2004. ** Product inception date of 10/11/95. Returns prior to 10/11/95 were reflected using the actual investment experience of each division, adjusted for the expenses of the product and premium charges. ***Product inception date of 3/2/98. (For use with non-tax qualified executive benefit plans.) Returns prior to 3/2/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. ****Product inception date of December 28, 1998 (For use primarily in estate planning, provides coverage on two insureds with a death benefit payable on the second death). Returns prior to 12/28/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. iv
Capital T. Rowe Janus Guardian Price Capital Growth Large Cap Domestic Equity Index 500 Asset High Yield Select Appreciation Stock Core Stock Equity Income Stock Allocation Balanced Bond Bond Division Division Division Division Division Division Division Division Division Division - ---------------------------------------------------------------------------------------------------------- 18.84% 5.93% 7.41% 16.04% 14.36% 9.93% 9.25% 7.14% 11.98% 4.02% -- (18.87%) (20.18%) -- -- (13.97%) -- 9.90% 36.74% 45.48% -- (4.09%) (4.41%) -- -- (2.97%) -- 1.91% 6.46% 7.79% -- 149.71% 108.63% -- -- 190.11% -- 144.42% 109.08% 100.49% -- 9.58% 7.63% -- -- 11.24% -- 9.35% 7.65% 7.20% 41.83%(d) -- -- 18.14%(c) 40.73%(d) -- 13.85%(c) -- -- -- 23.30% -- -- 5.00% 22.73% -- 3.87% -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------- 18.96% 6.03% 7.52% 16.15% 14.47% 10.04% 9.36% 7.25% 12.09% 4.12% -- (18.46%) (19.78%) -- -- (13.54%) -- 10.45% 37.43% 46.21% -- (4.00%) (4.31%) -- -- (2.87%) -- 2.01% 6.57% 7.89% -- 152.26% 110.77% -- -- 193.06% -- 146.91% 111.21% 102.53% -- 9.69% 7.74% -- -- 11.35% -- 9.46% 7.76% 7.31% 42.07%(d) -- -- 18.54%(c) 40.97%(d) -- 14.24%(c) -- -- -- 23.42% -- -- 5.10% 22.85% -- 3.97% -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
v Performance Summary, continued as of December 31, 2004 VARIABLE LIFE -- Policies Issued Before October 11, 1995
Russell Russell Money Fidelity VIP Multi-Style Aggressive Russell Russell Total return(j) Market Mid Cap Equity Equity Non-U.S. Core Bond (as of 12/31/04) Division Division Division Division Division Division - --------------------------------------------------------------------------------------------------------------------------- 1 year........................................... 0.73% 23.79% 9.04% 13.93% 17.48% 3.94% 5 years.......................................... 11.34% 92.62% (21.00%) 26.63% (10.25%) 37.95% Annualized..................................... 2.17% 14.01% (4.61%) 4.84% (2.14%) 6.65% 10 years......................................... 39.93% -- -- -- -- -- Annualized..................................... 3.42% -- -- -- -- -- Since division inception in Variable Life Account -- 73.32%(e) (17.74%)(f) 32.52%(f) 11.43%(f) 38.17%(f) Annualized..................................... -- 39.04% (3.49%) 5.25% 1.99% 6.05% Since portfolio inception(a)..................... -- 193.72%(e) 49.95%(f) 79.48%(f) 32.79%(f) 58.21%(f) Annualized..................................... -- 19.64% 5.20% 7.59% 3.61% 5.91% Current Yield(h)................................. 2.20% VARIABLE COMPLIFE -- Polices Issued On or After October 11, 1995** - --------------------------------------------------------------------------------------------------------------------------- 1 year........................................... 0.83% 23.91% 9.15% 14.05% 17.59% 4.04% 5 years.......................................... 11.90% 93.60%(e) (20.60%) 27.27% (9.80%) 38.64% Annualized..................................... 2.27% 14.13% (4.51%) 4.94% (2.04%) 6.75% 10 years......................................... 41.35% -- -- -- -- Annualized..................................... 3.52% -- -- -- -- Since division inception in Variable Life Account -- 73.61%(e) (17.28%)(f) 33.26%(f) 12.05%(f) 38.94%(f) Annualized..................................... -- 39.18% (3.39%) 5.35% 2.09% 6.16% Since portfolio inception(a)..................... -- 195.51%(e) 51.17%(f) 80.95%(f) 33.87%(f) 59.50%(f) Annualized..................................... -- 19.76% 5.30% 7.70% 3.72% 6.01% Current Yield(h)................................. 2.20%
Russell Real Estate Total return(j) Securities (as of 12/31/04) Division - -------------------------------------------------------------- 1 year........................................... 33.94% 5 years.......................................... 154.52% Annualized..................................... 20.54% 10 years......................................... -- Annualized..................................... -- Since division inception in Variable Life Account 138.80%(b) Annualized..................................... 17.13% Since portfolio inception(a)..................... 134.94%(b) Annualized..................................... 16.25% Current Yield(h)................................. VARIABLE COMPLIFE -- Polices Issued On or After October 11, 1995** - --------------------------------------------------------------------------------------------------------------------------- 1 year........................................... 34.07% 5 years.......................................... 155.80% Annualized..................................... 20.67% 10 years......................................... -- Annualized..................................... -- Since division inception in Variable Life Account 140.12%(b) Annualized..................................... 17.25% Since portfolio inception(a)..................... 136.28%(b) Annualized..................................... 16.37% Current Yield(h).................................
All total return figures shown above reflect the deduction of portfolio expenses, as well as mortality and expense risk charges for each product. Returns do not reflect deductions such as sales charges or premium taxes, administrative charges, surrender charges or cost of insurance charges. These deductions would significantly impact the returns if they were included. Performance data quoted represents past results and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that, when redeemed, it may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Performance for other separate accounts will differ. (a)Returns stated are as of the inception date of the portfolio which precedes availability in the Variable Life Account. See the following footnotes for portfolio inception dates. (b)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 4/30/99. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (c)Inception date of 7/31/01. (d)Inception date of 5/1/03. (e)Inception date of this division in the Variable Life Account was 5/1/03. Actual fund inception was 12/28/98. Performance quoted prior to 5/1/03 is based on actual investment experience, adjusted for expenses of the product and premium charges. (f)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 1/2/97. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (h)For the seven-day period ended December 31, 2004, the Money Market Portfolio's yield was 2.17% and was equivalent to a compound effective yield of 2.20%. The seven-day yield does not include deductions that are included in the separate accounts. The yield quotation more closely reflects the current earnings of the Money Market Portfolio than the total return quotation. (j)Returns shown include any fee waivers in effect and deductions for all Fund expenses. In the absence of fee waivers, total return would be less. For the Money Market Division, total returns include the effect of a fee waiver from December 2, 2002 through December 31, 2004, which ended on December 31, 2004. ** Product inception date of 10/11/95. Returns prior to 10/11/95 were reflected using the actual investment experience of each division, adjusted for the expenses of the product and premium charges. ***Product inception date of 3/2/98. (For use with non-tax qualified executive benefit plans.) Returns prior to 3/2/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. ****Product inception date of December 28, 1998 (For use primarily in estate planning, provides coverage on two insureds with a death benefit payable on the second death). Returns prior to 12/28/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. vi Performance Summary, continued as of December 31, 2004 VARIABLE EXECUTIVE LIFE -- Policies First Offered on March 2, 1998***
Franklin T. Rowe Aggressive Templeton AllianceBernstein Small Cap Price Small Growth International International Mid Cap Index 400 Total return(j) (as of Growth Stock Cap Value Stock Growth Equity Value Stock 12/31/04) Division Division Division Division Division Division Division - ------------------------------------------------------------------------------------------------------------------------- 1 year................... 18.80% 24.57% 14.22% 21.59% 19.33% 18.67% 16.26% 5 years.................. 32.43% -- (4.46%) -- 18.12% -- 56.20% Annualized.............. 5.78% -- (0.91%) -- 3.39% -- 9.33% 10 years................. -- -- 175.82% -- 136.89% -- -- Annualized.............. -- -- 10.68% -- 9.01% -- -- Since division inception in Variable Life Account 103.86%(b) 61.76%(c) -- 34.22%(c) -- 58.01%(d) 67.06%(b) Annualized.............. 13.81% 15.10% -- 8.99% -- 31.55% 9.77% Since portfolio inception(a)............ 146.46%(b) -- -- -- -- -- 76.25%(b) Annualized.............. 17.24% -- -- -- -- -- 10.51% Current Yield(h)......... VARIABLE JOINT LIFE -- Policies First Offered on December 28, 1998**** - ------------------------------------------------------------------------------------------------------------------------- 1 year................... 18.80% 24.57% 14.22% 21.59% 19.33% 18.67% 16.26% 5 years.................. 32.43% -- (4.46%) -- 18.12% -- 56.20% Annualized.............. 5.78% -- (0.91%) -- 3.39% -- 9.33% 10 years................. -- -- 175.82% -- 136.89% -- -- Annualized.............. -- -- 10.68% -- 9.01% -- -- Since division inception in Variable Life Account 103.86%(b) 61.76%(c) -- 34.22%(c) -- 58.01%(d) 67.06%(b) Annualized.............. 13.81% 15.10% -- 8.99% -- 31.55% 9.77% Since portfolio inception(a)............ 146.46%(b) -- -- -- -- -- 76.25%(b) Annualized.............. 17.24% -- -- -- -- -- 10.51% Current Yield(h).........
All total return figures shown above reflect the deduction of portfolio expenses, as well as mortality and expense risk charges for each product. Returns do not reflect deductions such as sales charges or premium taxes, administrative charges, surrender charges or cost of insurance charges. These deductions would significantly impact the returns if they were included. Performance data quoted represents past results and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that, when redeemed, it may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Performance for other separate accounts will differ. (a)Returns stated are as of the inception date of the portfolio which preceeds availability in the Variable Life Account. See the following footnotes for portfolio inception dates. (b)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 4/30/99. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (c)Inception date of 7/31/01. (d)Inception date of 5/1/03. (e)Inception date of this dvision in the Variable Life Account was 5/1/03. Actual fund inception was 12/28/98. Performance quoted prior to 5/1/03 is based on actual investment experience, adjusted for expenses of the product and premium charges. (f)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 1/2/97. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (h)For the seven-day period ended December 31, 2004, the Money Market Portfolio's yield was 2.17% and was equivalent to a compound effective yield of 2.20%. The seven-day yield does not include deductions that are included in the separate accounts. The yield quotation more closely reflects the current earnings of the Money Market Portfolio than the total return quotation. (j)Returns shown inlcude any fee waivers in effect and deductions for all Fund expenses. In the absence of fee waivers, total return would be less. For the Money Market Division, total returns include the effect of a fee waiver from December 2, 2002 through December 31, 2004, which ended on December 31, 2004. ** Product inception date of 10/11/95. Returns prior to 10/11/95 were reflected using the actual investment experience of each division, adjusted for the expenses of the product and premium charges. ***Product inception date of 3/2/98. (For use with non-tax qualified executive benefit plans.) Returns prior to 3/2/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. ****Product inception date of December 28, 1998 (For use primarily in estate planning, provides coverage on two insureds with a death benefit payable on the second death). Returns prior to 12/28/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. vii Performance Summary, continued as of December 31, 2004 VARIABLE EXECUTIVE LIFE -- Policies First Offered on March 2, 1998***
Capital T. Rowe Janus Large Guardian Price Capital Growth Cap Core Domestic Equity Index 500 Asset Total return(j) Appreciation Stock Stock Equity Income Stock Allocation (as of 12/31/04) Division Division Division Division Division Division Division - ------------------------------------------------------------------------------------------------------------------------------ 1 year........................................... 19.67% 6.67% 8.16% 16.85% 15.16% 10.70% 10.02% 5 years.......................................... -- (15.98%) (17.34%) -- -- (10.91%) -- Annualized..................................... -- (3.42%) (3.74%) -- -- (2.28%) -- 10 years......................................... -- 167.83% 123.78% -- -- 211.15% -- Annualized..................................... -- 10.35% 8.39% -- -- 12.02% -- Since division inception in Variable Life Account 43.49%(d) -- -- 20.99%(c) 42.38%(d) -- 16.60%(c) Annualized..................................... 24.16% -- -- 5.73% 23.59% -- 4.59% Since portfolio inception(a)..................... -- -- -- -- -- -- -- Annualized..................................... -- -- -- -- -- -- -- Current Yield(h)................................. VARIABLE JOINT LIFE -- Policies First Offered on December 28, 1998**** - ------------------------------------------------------------------------------------------------------------------------------ 1 year........................................... 19.67% 6.67% 8.16% 16.85% 15.16% 10.70% 10.02% 5 years.......................................... -- (15.98%) (17.34%) -- -- (10.91%) -- Annualized..................................... -- (3.42%) (3.74%) -- -- (2.28%) -- 10 years......................................... -- 167.83% 123.78% -- -- 211.15% -- Annualized..................................... -- 10.35% 8.39% -- -- 12.02% -- Since division inception in Variable Life Account 43.49%(d) -- -- 20.99%(c) 42.38%(d) -- 16.60%(c) Annualized..................................... 24.16% -- -- 5.73% 23.59% -- 4.59% Since portfolio inception(a)..................... -- -- -- -- -- -- -- Annualized..................................... -- -- -- -- -- -- -- Current Yield(h).................................
All total return figures shown above reflect the deduction of portfolio expenses, as well as mortality and expense risk charges for each product. Returns do not reflect deductions such as sales charges or premium taxes, administrative charges, surrender charges or cost of insurance charges. These deductions would significantly impact the returns if they were included. Performance data quoted represents past results and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that, when redeemed, it may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Performance for other separate accounts will differ. (a)Returns stated are as of the inception date of the portfolio which preceeds availability in the Variable Life Account. See the following footnotes for portfolio inception dates. (b)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 4/30/99. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (c)Inception date of 7/31/01. (d)Inception date of 5/1/03. (e)Inception date of this dvision in the Variable Life Account was 5/1/03. Actual fund inception was 12/28/98. Performance quoted prior to 5/1/03 is based on actual investment experience, adjusted for expenses of the product and premium charges. (f)Inception date of this division in the Variable Life Account was 6/30/99. Actual fund inception was 1/2/97. Performance quoted prior to 6/30/99 is based on actual investment experience, adjusted for expenses of the product and premium charges. (h)For the seven-day period ended December 31, 2004, the Money Market Portfolio's yield was 2.17% and was equivalent to a compound effective yield of 2.20%. The seven-day yield does not include deductions that are included in the separate accounts. The yield quotation more closely reflects the current earnings of the Money Market Portfolio than the total return quotation. (j)Returns shown inlcude any fee waivers in effect and deductions for all Fund expenses. In the absence of fee waivers, total return would be less. For the Money Market Division, total returns include the effect of a fee waiver from December 2, 2002 through December 31, 2004, which ended on December 31, 2004. ** Product inception date of 10/11/95. Returns prior to 10/11/95 were reflected using the actual investment experience of each division, adjusted for the expenses of the product and premium charges. ***Product inception date of 3/2/98. (For use with non-tax qualified executive benefit plans.) Returns prior to 3/2/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. ****Product inception date of December 28, 1998 (For use primarily in estate planning, provides coverage on two insureds with a death benefit payable on the second death). Returns prior to 12/28/98 were reflected using the actual investment experience of each division adjusted for expenses of the product and premium charges. viii
Russell Russell Russell High Yield Select Fidelity VIP Multi-Style Aggressive Russell Russell Real Estate Balanced Bond Bond Money Market Mid Cap Equity Equity Non-U.S. Core Bond Securities Division Division Division Division Division Division Division Division Division Division - --------------------------------------------------------------------------------------------------------------------- 7.89% 12.76% 4.75% 1.43% 24.66% 9.81% 14.73% 18.30% 4.66% 34.87% 13.81% 41.61% 50.65% 15.30% 99.49%(e) (18.19%) 31.14% (7.05%) 42.86% 163.58% 2.62% 7.21% 8.54% 2.89% 14.81% (3.94%) 5.57% (1.45%) 7.39% 21.39% 162.15% 124.24% 115.03% 50.07% -- -- -- -- -- -- 10.12% 8.41% 7.96% 4.14% -- -- -- -- -- -- -- -- -- -- 75.35%(e) (14.51%)(f) 37.72%(f) 15.81%(f) 43.59%(f) 148.17%(b) -- -- -- -- 40.02% (2.81%) 5.99% 2.70% 6.79% 17.96% -- -- -- -- 206.34%(e) 58.58%(f) 89.82%(f) 40.43%(f) 67.31%(f) 144.44%(b) -- -- -- -- 20.48% 5.94% 8.35% 4.34% 6.65% 17.07% 2.20% - --------------------------------------------------------------------------------------------------------------------- 7.89% 12.76% 4.75% 1.43% 24.66% 9.81% 14.73% 18.30% 4.66% 34.87% 13.81% 41.61% 50.65% 15.30% 99.49%(e) (18.19%) 31.14% (7.05%) 42.86% 163.58% 2.62% 7.21% 8.54% 2.89% 14.81% (3.94%) 5.57% (1.45%) 7.39% 21.39% 162.15% 124.24% 115.03% 50.07% -- -- -- -- -- -- 10.12% 8.41% 7.96% 4.14% -- -- -- -- -- -- -- -- -- -- 75.35%(e) (14.51%)(f) 37.72%(f) 15.81%(f) 43.59%(f) 148.17%(b) -- -- -- -- 40.02% (2.81%) 5.99% 2.70% 6.79% 17.96% -- -- -- -- 206.34%(e) 58.58%(f) 89.82%(f) 40.43%(f) 67.31%(f) 144.44%(b) -- -- -- -- 20.48% 5.94% 8.35% 4.34% 6.65% 17.07% 2.20%
ix [GRAPHIC] Annual Report December 31, 2004 [LOGO] Northwestern Mutual(R) --------------------------------------------------------- Northwestern Mutual Series Fund, Inc. A Series Fund Offering Eighteen Portfolios . Small Cap Growth Stock Portfolio . T. Rowe Price Small Cap Value Portfolio . Aggressive Growth Stock Portfolio . International Growth Portfolio . Franklin Templeton International Equity Portfolio . AllianceBernstein Mid Cap Value Portfolio . Index 400 Stock Portfolio . Janus Capital Appreciation Portfolio . Growth Stock Portfolio . Large Cap Core Stock Portfolio . Capital Guardian Domestic Equity Portfolio . T. Rowe Price Equity Income Portfolio . Index 500 Stock Portfolio . Asset Allocation Portfolio . Balanced Portfolio . High Yield Bond Portfolio . Select Bond Portfolio . Money Market Portfolio Northwestern Mutual Series Fund, Inc. Table of Contents Series Fund Objectives and Schedules of Investments Small Cap Growth Stock Portfolio................... 1 T. Rowe Price Small Cap Value Portfolio............ 6 Aggressive Growth Stock Portfolio.................. 11 International Growth Portfolio..................... 16 Franklin Templeton International Equity Portfolio.. 22 AllianceBernstein Mid Cap Value Portfolio.......... 28 Index 400 Stock Portfolio.......................... 32 Janus Capital Appreciation Portfolio............... 40 Growth Stock Portfolio............................. 44 Large Cap Core Stock Portfolio..................... 49 Capital Guardian Domestic Equity Portfolio......... 54 T. Rowe Price Equity Income Portfolio.............. 59 Index 500 Stock Portfolio.......................... 64 Asset Allocation Portfolio......................... 73 Balanced Portfolio................................. 88 High Yield Bond Portfolio.......................... 103 Select Bond Portfolio.............................. 111 Money Market Portfolio............................. 120 Statements of Assets and Liabilities................... 124 Statements of Operations............................... 126 Statements of Changes in Net Assets.................... 128 Financial Highlights................................... 137 Notes to Series Fund Financial Statements.............. 146 Report of Independent Registered Public Accounting Firm 151 Proxy Voting and Portfolio Holdings.................... 152 Director and Officer Information....................... 153 Small Cap Growth Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Maximum long-term appreciation of Strive for the highest possible rate of capital appreciation by $442 million capital investing in companies with potential for rapid growth.
The Small Cap Growth Stock Portfolio seeks long-term growth of capital. The Portfolio seeks to achieve this objective by investing in emerging companies with rapidly growing revenues and earnings supported by financial strength and capable management. Holdings are smaller companies with a median market capitalization of approximately $1 billion; the range of market capitalization is generally between $200 million and $3 billion. A strong orientation to quality and a commitment to broad diversification mean that this Portfolio is generally less risky and less volatile than many small-capitalization growth portfolios. In evaluating individual companies, factors such as the growth rates of revenues and earnings, opportunities for margin expansion, financial strength and quality of management are important variables. The investment process involves detailed studies of individual companies. Factors evaluated include the growth rates of revenues and earnings, opportunities for margin expansion, financial strength and quality of management. Since growth stock portfolios tend to react strongly to changes in financial and economic markets, as well as to changes in the prospects for individual companies, returns of this Portfolio can vary considerably from time to time. A higher level of risk (with risk defined as variability of returns over time) is accepted for the potential of greater long-term returns. For the year ended December 31, 2004, the Small Cap Growth Portfolio returned 18.80%, outperforming the Russell 2000 Index, which had a return of 18.44%, but lagging the S&P SmallCap 600 Index, which had a return of 22.65%. (These indices are unmanaged, cannot be invested in directly, and do not include administrative expenses or sales charges.) The Portfolio outperformed its peer group, Small-Cap Growth Funds, which had an average return of 11.71% for the year ended December 31, 2004, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's underperformance relative to the S&P SmallCap 600 Index was the result of both industry weightings and stock selection, and reflects the Portfolio's emphasis on financially sound, profitable small-cap stocks with predictable future earnings streams, at a time when lower quality issues performed better. Following an extraordinary year in 2003, small-capitalization stocks once again rewarded investors in 2004. During 2004, however, the major portion of the gain in small-cap stocks, as well as in the overall stock market, was realized in the fourth quarter. Earlier in the year, the stock market produced lackluster results as economic concerns, including rising oil prices, the weakening U.S. dollar, the war in Iraq and the upcoming presidential election, hampered performance. Indications that the Federal Reserve might start raising interest rates -- after a long period in which U.S. consumers had benefited from rates at 45-year lows -- also had a dampening effect on the market. In the fourth quarter, however, especially following the elections in November, the stock market experienced a dramatic rally, in which all asset classes gained. The S&P 500 Index (a gauge of broad stock market performance), which returned 10.88% for the year, gained 9.23% in the fourth quarter alone. Higher beta stocks -- particularly small-cap and international stocks -- experienced an even more dramatic lift during the fourth quarter. Small-capitalization stocks, as measured by the S&P 600 SmallCap Index, returned 22.65% for the year ended December 31, 2004, with 13.00% of that gain coming in the fourth quarter. International stocks, as measured by the EAFE (Europe, Australasia, Far East) Index, gained 20.70% for the year, 15.36% of which came in the fourth quarter. The drive for beta in the fourth quarter pushed up prices of lower quality issues as investors demonstrated a willingness to take on more risk in order to make up for the lower returns earlier in the year. Differences in performance versus the benchmarks during 2004 resulted mainly from individual security selection, and secondarily from sector selection. Positive impacts in the Portfolio included an overweight position in Consumer Discretionary stocks, as well as good stock selection within the sector. Holdings that added the most performance in the Portfolio in 2004 included Aaron Rents (which rents and sells residential and office furniture, and is one of the Portfolio's top ten holdings), Pinnacle Entertainment (a diversified gaming company), Guitar Center Inc. (a musical instrument retailer), Polaris Industries (manufactures snowmobiles and other outdoor vehicles), and Getty Images (a media company). Several Technology holdings also performed very well for the year. Cognizant Technology Solution (which provides custom information technology management services, and is one of the Portfolio's top ten holdings), Cree Inc. (manufactures carbide-based semiconductor materials) and Verint Systems Inc. (provides analytical software-based solutions) all posted very good returns. Consumer Staple stocks United Natural Foods Inc. and Peet's Coffee & Tea also posted excellent gains. Negative impacts on the Portfolio during 2004 included poor performance in several Technology stocks, especially semiconductor-related Genesis Microchip (designs integrated circuits), Entegris (provides materials management solutions to microelectronics industry), and Plexus Corp. Inc. (provides product realization services to original equipment manufacturers). In addition, although the Portfolio was slightly overweight in the Energy sector, it did not benefit as much from the substantial run-up in Energy prices because most of its holdings were in service stocks and not in energy production stocks. Heading into 2005, we look for earnings growth for small-capitalization stocks to outpace larger companies. We do not expect, however, that a rising tide will lift all boats equally. While sector positioning can be an important driver of overall performance, stock selection will be important in 2005. We continue to remain focused on individual stock selection, looking for companies with above-average growth potential, and we believe we should continue to find attractive candidates for the portfolio. Small Cap Growth Stock Portfolio 1 Small Cap Growth Stock Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Small Cap Growth Stock S&P 600 Russell 2000 Portfolio Index Index ------------ -------- ------------ 4/99 $10,000 $10,000 $10,000 12/99 18,611 11,586 11,778 12/00 19,860 12,954 11,435 12/01 19,113 13,802 11,736 12/02 15,591 11,782 9,335 12/03 20,746 16,350 13,747 12/04 24,646 20,063 16,277 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year 5 Years Inception* Small Cap Growth Stock Portfolio 18.80% 5.78% 17.24% S&P Small Cap 600 Index 22.65% 11.60% 13.06% Russell 2000 Index 18.44% 6.68% 8.97% Small Cap Core Funds Lipper Average 11.71% -1.42% - *inception date of 4/30/99 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 4/30/99 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account, are shown beginning on page iv of the Performance Summary of the Separate Account report. Since the Portfolio invests primarily in small capitalization issues, the indices that best reflect the portfolio's performance are the Standard and Poor's (S&P) SmallCap 600 Index and Russell 2000 Index. The indices cannot be invested in directly and do not include sales charges. The Standard & Poors SmallCap 600 Index is an unmanaged index of 600 selected common stocks of smaller U.S. -based companies compiled by Standard & Poor's Corporation. As of December 31, 2004, the 600 companies in the composite had a median market capitalization of $754.0 million and total market value of $522.8 billion. The SmallCap 600 represents approximately 2.8% of the market value of Compustat's database of over 9,381 equities. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. These 3,000 companies represent approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization of companies in the Russell 3000 was approximately $4.4 billion; the median market capitalization was approximately $822.4 million. Market capitalization of companies in the Index ranged from $175.8 million to $317.8 billion. The Russell 2000 Index represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization of companies in the Russell 2000 was approximately $607.1 million; the median market capitalization was approximately $496.4 million. The largest company in the Index had an approximate market capitalization of $1.6 billion. The Lipper Variable Insurance Products (VIP) Small Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) less than 250% of the dollar-weighted median of the smallest 500 of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Small-cap growth funds typically have an above average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P SmallCap 600 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets Knight Transportation, Inc. 2.4% Aaron Rents, Inc. 2.4% Airgas, Inc. 2.3% Guitar Centar, Inc. 2.2% Cognizant Technology Solutions Corp. - Class A 2.2% WMS Industries, Inc. 2.2% Amphenol Corp. - Class A 2.1% Ventana Medical Systems, Inc. 2.1% MSC Industrial Direct Co., Inc. - Class A 2.0% Minerals Technologies, Inc. 2.0% [CHART] Sector Allocation 12/31/04 Information Technology ....... 22% Consumer Discretionary ....... 19% Industrials .................. 18% Health Care .................. 11% Financials ................... 7% Short-Term Investments ....... 7% Materials .................... 6% Energy ....................... 5% Consumer Staples ............. 3% Other Holdings ............... 1% Telecommunication Services ... 1% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Investing in small company stocks involves a greater degree of risk than investing in medium or large company stocks. 2 Small Cap Growth Stock Portfolio Small Cap Growth Stock Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Paid Beginning During Period Account Ending July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------ Actual $1,000.00 $1,090.60 $2.97 ------------------------------------------------------ Hypothetical (5% return before expenses) $1,000.00 $1,021.99 $2.87 ------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.56%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Small Cap Growth Stock Portfolio 3 Small Cap Growth Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (93.3%) $ Par $ (000's) --------------------------------------------------------- Consumer Discretionary (18.6%) Aaron Rents, Inc. 425,992 10,649 *Digital Theater Systems, Inc. 197,100 3,968 *Getty Images, Inc. 69,550 4,789 *Guitar Center, Inc. 188,000 9,906 *Hibbett Sporting Goods, Inc. 92,200 2,453 *McCormick & Schmick's Seafood Restaurants, Inc. 201,017 3,387 *O'Reilly Automotive, Inc. 98,400 4,433 Orient-Express Hotel, Ltd. -- Class A 425,837 8,759 *Pinnacle Entertainment, Inc. 408,900 8,088 Polaris Industries, Inc. 126,900 8,632 Station Casinos, Inc. 139,550 7,631 *WMS Industries, Inc. 288,400 9,673 ------ Total 82,368 ------ Consumer Staples (3.0%) *Peet's Coffee & Tea, Inc. 249,900 6,615 *United Natural Foods, Inc. 212,800 6,618 ------ Total 13,233 ------ Energy (4.5%) *FMC Technologies, Inc. 157,900 5,084 *Grant Prideco, Inc. 263,000 5,274 *Grey Wolf, Inc. 836,700 4,409 *National-Oilwell, Inc. 148,250 5,232 ------ Total 19,999 ------ Financials (6.9%) BankAtlantic Bancorp, Inc. -- Class A 150,400 2,993 Boston Private Financial Holdings, Inc. 128,200 3,611 *Community Bancorp 68,600 2,099 First Republic Bank 70,500 3,737 Investors Financial Services Corp. 111,550 5,575 Placer Sierra Bancshares 94,700 2,693 *Portfolio Recovery Associates, Inc. 114,400 4,716 *Silicon Valley Bancshares 111,900 5,015 ------ Total 30,439 ------ Health Care (11.4%) *Impax Laboratories, Inc. 212,900 3,381 *Kyphon, Inc. 84,500 2,177 LCA-Vision, Inc. 48,300 1,130 *Nabi Biopharmaceuticals 142,400 2,086 *Pediatrix Medical Group, Inc. 46,600 2,985 *Providence Service Corp. 317,586 6,660 *Psychiatric Solutions, Inc. 192,700 7,045 *Radiation Therapy Services, Inc. 170,600 2,900 *Renal Care Group, Inc. 154,900 5,575 *ResMed, Inc. 83,200 4,252 *Salix Pharmaceuticals, Ltd. 82,150 1,445 *Ventana Medical Systems, Inc. 142,100 9,092 *Wright Medical Group, Inc. 64,000 1,824 ------ Total 50,552 ------
Shares/ Value Common Stocks (93.3%) $ Par $ (000's) -------------------------------------------------------- Industrials (18.0%) *Arbinet Holdings, Inc. 12,900 321 Brady Corp. -- Class A 35,600 2,227 C.H. Robinson Worldwide, Inc. 138,050 7,665 The Corporate Executive Board Co. 118,900 7,959 *Corrections Corp. of America 209,750 8,484 *DiamondCluster International, Inc. 352,800 5,056 *Forward Air Corp. 168,600 7,536 *HouseValues, Inc. 17,766 267 *Intersections, Inc. 217,700 3,755 Knight Transportation, Inc. 434,678 10,781 *Marlin Business Services, Inc. 216,920 4,121 MSC Industrial Direct Co., Inc. -- Class A 251,800 9,060 *Resources Connection, Inc. 43,400 2,357 *School Specialty, Inc. 181,800 7,010 Strayer Education, Inc. 27,200 2,986 ------ Total 79,585 ------ Information Technology (22.1%) *Amphenol Corp. -- Class A 250,700 9,211 *Cogent, Inc. 94,600 3,122 *Cognizant Technology Solutions Corp. -- Class A 230,300 9,748 *Cree, Inc. 77,600 3,110 *Digital River, Inc. 124,100 5,164 *Entegris, Inc. 550,600 5,478 *Essex Corp. 113,900 2,306 *Euronet Worldwide, Inc. 307,300 7,996 *Genesis Microchip, Inc. 353,700 5,737 *iPayment, Inc. 86,800 4,298 *Kanbay International, Inc. 31,800 995 Lipman Electronic Engineering Ltd. 8,300 232 *MKS Instruments, Inc. 297,350 5,516 *O2Micro International, Ltd. 382,400 4,375 *Plexus Corp. 146,400 1,905 *ScanSource, Inc. 73,100 4,544 *Tekelec 257,900 5,271 *Tessera Technologies, Inc. 183,900 6,843 *THQ, Inc. 100,600 2,308 *Verint Systems, Inc. 195,700 7,110 *Westell Technologies, Inc. -- Class A 397,000 2,700 ------ Total 97,969 ------ Materials (6.2%) Airgas, Inc. 382,950 10,152 Minerals Technologies, Inc. 135,600 9,045 Silgan Holdings, Inc. 133,800 8,156 ------ Total 27,353 ------ Other Holdings (1.1%) iShares Russell 2000 Index Fund 36,700 4,749 ------ Total 4,749 ------
4 Small Cap Growth Stock Portfolio Small Cap Growth Stock Portfolio
Shares/ Value Common Stocks (93.3%) $ Par $ (000's) -------------------------------------------------------- Telecommunication Services (1.5%) *Alamosa Holdings, Inc. 364,900 4,551 *JAMDAT Mobile, Inc. 96,000 1,982 ------- Total 6,533 ------- Total Common Stocks (Cost: $320,455) 412,780 ------- Money Market Investments (6.7%) -------------------------------------------------------- Federal Government & Agencies (1.0%) (b)Federal National Mortgage Assoc., 2.34%, 3/28/05 4,500,000 4,475 ------- Total 4,475 ------- Finance Lessors (2.3%) (b)Ranger Funding Co., LLC, 2.34%, 1/13/05 5,000,000 4,996 (b)Thunder Bay Funding, Inc, 2.34%, 1/24/05 5,000,000 4,993 ------- Total 9,989 ------- Finance Services (1.1%) (b)Preferred Receivable Funding, 2.34%, 1/13/05 5,000,000 4,996 ------- Total 4,996 ------- Personal Credit Institutions (2.2%) Rabobank Financial Corp., 2.17%, 1/4/05 5,000,000 4,999 USAA Capital Corp., 2.28%, 1/13/05 5,000,000 4,996 ------- Total 9,995 -------
Shares/ Value Money Market Investments (6.7%) $ Par $ (000's) -------------------------------------------------------------- Short Term Business Credit (0.1%) CXC Inc., 2.20%, 1/3/05 400,000 400 ------- Total 400 ------- Total Money Market Investments (Cost: $29,855) 29,855 ------- Total Investments (100.0%) (Cost $350,310)(a) 442,635 ------- Other Assets, Less Liabilities (0.0%) (215) ------- Total Net Assets (100.0%) 442,420 -------
* Non-Income Producing (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $350,536 and the net unrealized appreciation of investments based on that cost was $92,099 which is comprised of $96,753 aggregate gross unrealized appreciation and $4,654 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) --------------------------------------------------------------- Russell 2000 Index Futures 47 3/05 $497 (Total Notional Value at December 31, 2004, $14,870)
The Accompanying Notes are an Integral Part of the Financial Statements 5 Small Cap Growth Stock Portfolio T. Rowe Price Small Cap Value Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital Invest in small companies whose common stocks are $200 million believed to be undervalued.
The T. Rowe Price Small Cap Value Portfolio invests in companies with market capitalizations in the range of the S&P SmallCap 600 whose current stock prices do not appear to reflect their underlying value. For this Portfolio, value is defined broadly, with consideration given to stock price relative to long-term growth prospects and business franchises, in addition to typical value measures such as assets, current earnings and cash flow. The major emphasis is on selection of individual stocks, with secondary consideration given to industry weightings in order to keep the Portfolio broadly diversified among economic sectors. U.S. stocks rose moderately in 2004, extending the previous year's brisk gains. After beginning the year on a strong note, stocks struggled to make headway as economic growth moderated amid rising short-term interest rates, surging energy costs, and a heated presidential campaign. Stock prices rose as oil prices backed away from their late-October peak of $55 per barrel, and gains accelerated following the re-election of President Bush. By year-end, several major indices were at or near their highest levels of the year. Small- and mid-cap stocks outperformed their larger counterparts. As measured by various Russell indices, growth stocks lagged value across all market capitalizations. The T. Rowe Price Small Cap Value Portfolio outpaced the S&P 600 Index over the twelve months ended December 31, 2004. The Portfolio benefited throughout most of the year from the market's renewed focus on earnings, cash flow, and sales growth. The Portfolio's returns were helped considerably by our investments in the industrials and business services sectors. The air freight and road and rail industries were beneficiaries of increased economic activity as more raw materials and finished goods moved around the world. Transportation services firms Landstar Systems and UTi Worldwide benefited from strong demand for shipping. Other areas of strength included our regional and community bank holdings, including East West Bancorp, Texas Regional Bancshare, and First Republic Bank of San Francisco. Hotel REITs benefited from the rebound in business travel. LaSalle Hotel Properties and Innkeepers USA Trust helped results. Relatively few of the Portfolio's holdings lost ground over the past year, although some lagged well behind the benchmark. Restaurant holding Ruby Tuesday was squeezed by rising commodity prices. Unifi, a diversified textile yarn producer, lost ground as its proposed joint venture in China fell through. Tetra Technologies, an oil services company, hurt relative performance as the hurricanes disrupted its offshore oil business. Oil equipment company Lone Star Technologies, on the other hand, was a very strong performer for the Portfolio. Business fundamentals continue to improve as economic strength drives earnings growth. Significant risks remain, however, including higher inflation, widening budget and trade deficits, a weak U.S. dollar, and geopolitical concerns. Small-caps have beaten large-caps for the past six years, and while growth stocks outperformed their value counterparts during the fourth quarter of 2004, value maintains a significant five-year advantage. Given that we are near the upper end of historic relative valuation levels for smaller-cap stocks, we are cautious. We continue to find good risk/reward candidates among small- and mid-caps, but they are somewhat harder to come by than in previous years. [CHART] Relative Performance T. Rowe Price Small Cap Russell 2000 S&P Small Cap Value Portfolio Index 600 Index --------------- ------------- ------------ 7/01 $10,000 $10,000 $10,000 12/01 10,176 10,144 10,200 12/02 9,608 8,069 8,708 12/03 12,985 11,883 12,084 12/04 16,176 14,070 14,825 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception* T. Rowe Price Small Cap Value Portfolio 24.57% 15.10% S&P Small Cap 600 Index 22.65% 12.21% Russell 2000 Index 18.44% 10.50% Small Cap Core Funds Lipper Average 17.47% - *inception date of 7/31/01 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 7/31/01 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account, are shown beginning on page iv of the Performance Summary of the Separate Account report. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. These 3,000 companies represent approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization of companies in the Russell 3000 was approximately $4.4 billion; the median market capitalization was approximately $822.4 million. Market capitalization of companies in the Index ranged from $175.8 million to $317.8 billion. These indices are unmanaged, cannot be invested in directly, and do not include administrative expenses or sales charges. The Russell 2000 Index represents approximately 8% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization of companies in the Russell 2000 was approximately $607.1 million; the median market capitalization was approximately $496.4 million. The largest company in the Index had an approximate market capitalization of $1.6 billion. The Standard & Poors SmallCap 600 Index is an unmanaged index of 600 selected common stocks of smaller U.S. -based companies compiled by Standard & Poor's Corporation. As of December 31, 2004, the 600 companies in the composite had a median market capitalization of $754.0 million and total market value of $522.8 billion. The SmallCap 600 represents approximately 2.8% of the market value of Compustat's database of over 9,381 equities. These indices are unmanaged, cannot be invested in directly, and do not include administrative expenses or sales charges. The Lipper Variable Insurance Products (VIP) Small Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) less than 250% of the dollar-weighted median of the smallest 500 of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Small-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P SmallCap 600 Index. Source: Lipper, Inc. 6 T. Rowe Price Small Cap Value Portfolio T. Rowe Price Small Cap Value Portfolio - -------------------------------------------------------------------------------- [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets - ------- --------------------- Landstar System, Inc. .............................. 2.3% Texas Regional Bancshares, Inc. - Class A .......... 1.7% East West Bancorp, Inc. ............................ 1.6% Aaron Rents, Inc. .................................. 1.5% First Republic Bank ................................ 1.4% Silicon Valley Bancshares .......................... 1.3% ProAssurance Corp. ................................. 1.3% Matthews International Corp. - Class A ............. 1.2% Franklin Electric Co., Inc. ........................ 1.2% RARE Hospitality International, Inc. ............... 1.1% [CHART] Sector Allocation 12/31/04 Financials .................... 22% Industrials ................... 19% Consumer Discretionary ........ 16% Information Technology ........ 10% Materials ..................... 10% Energy ........................ 8% Health Care ................... 5% Utilities ..................... 4% Short-Term Investments ........ 4% Telecommunication Services .... 1% Consumer Staples .............. 1% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Part of the Northwestern Mutual Series Fund, Inc. The investment advisor for the fund is Mason Street Advisors, LLC. Investing in small company stocks involves a greater degree of risk than investing in medium or large company stocks. Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,120.70 $4.65 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.45 $4.43 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.87%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). T. Rowe Price Small Cap Value Portfolio 7 T. Rowe Price Small Cap Value Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ----------------------------------------------------------- Consumer Discretionary (15.7%) Aaron Rents, Inc. 122,700 3,067 Aaron Rents, Inc. -- Class A 4,725 105 *AnnTaylor Stores Corp. 13,800 297 *Big Lots, Inc. 8,200 99 *Cablevision Systems Corp. 17,100 426 Centerplate Inc. 1,700 22 *Cox Radio Inc. -- Class A 7,800 129 CSS Industries, Inc. 37,400 1,188 *Culp, Inc. 30,400 206 Dillard's, Inc. -- Class A 11,900 320 Dow Jones & Co., Inc. 10,900 469 *Entercom Communications Corp. -- Class A 12,200 438 Family Dollar Stores, Inc. 13,600 425 Fred's, Inc. 65,150 1,134 The Gap, Inc. 21,400 452 Hancock Fabrics, Inc. 52,700 546 Haverty Furniture Companies, Inc. 86,300 1,597 Hearst-Argyle Television, Inc. 2,200 58 *IAC/InterActiveCorp 5,700 157 *Journal Register Co. 58,000 1,121 Mattel, Inc. 35,700 696 Matthews International Corp. -- Class A 67,000 2,466 Meredith Corp. 5,800 314 The New York Times Co. -- Class A 9,900 404 Newell Rubbermaid, Inc. 17,400 421 Outback Steakhouse, Inc. 7,800 357 Pearson PLC-Sponsored ADR 30,000 365 *RARE Hospitality International, Inc. 70,450 2,245 Reuters Group PLC-Spons ADR 6,400 275 Ruby Tuesday, Inc. 36,500 952 *Saga Communications, Inc. -- Class A 64,500 1,087 Saks, Inc. 5,900 86 *Scholastic Corp. 9,900 366 SCP Pool Corp. 61,225 1,953 Sinclair Broadcast Group, Inc. -- Class A 18,600 171 Skyline Corp. 23,400 955 Stanley Furniture Co., Inc. 25,500 1,146 *Stein Mart, Inc. 117,320 2,001 *TBC Corp. 68,400 1,902 Tribune Co. 8,300 350 *Unifi, Inc. 11,600 44 *Univision Communications, Inc. -- Class A 7,900 231 The Washington Post Co. -- Class B 219 215 *Weight Watchers International, Inc. 2,600 107 ------ Total 31,365 ------ Consumer Staples (1.6%) Archer-Daniels-Midland Co. 2,500 56 Campbell Soup Co. 19,500 583 Casey's General Stores, Inc. 71,300 1,293 H.J. Heinz Co. 9,300 363
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ------------------------------------------------------ Consumer Staples continued Nash-Finch Co. 12,400 468 *Wild Oats Markets, Inc. 42,300 373 ------ Total 3,136 ------ Energy (7.7%) *Atwood Oceanics, Inc. 21,100 1,099 CARBO Ceramics, Inc. 20,000 1,380 *Cooper Cameron Corp. 4,000 215 Diamond Offshore Drilling, Inc. 26,800 1,073 *Forest Oil Corp. 53,450 1,696 *Grant Prideco, Inc. 17,900 359 *Hanover Compressor Co. 18,000 254 *Lone Star Technologies, Inc. 25,400 850 *Magnum Hunter Resources, Inc. 74,100 956 Murphy Oil Corp. 2,500 201 Penn Virginia Corp. 48,200 1,956 *Petroleum Geo-Services-ADR 1,500 93 *TETRA Technologies, Inc. 57,950 1,641 *Todco -- Class A 76,400 1,407 *W-H Energy Services, Inc. 36,100 807 *Whiting Petroleum Corp. 45,800 1,385 ------ Total 15,372 ------ Financials (21.7%) Allied Capital Corp. 51,400 1,328 American Capital Strategies, Ltd. 21,500 717 *Ameritrade Holding Corp. 15,000 213 Aon Corp. 14,500 346 Apartment Investment and Management Co. -- Class A 7,100 274 AXIS Capital Holdings Ltd. 14,100 386 Bedford Property Investors, Inc. 39,100 1,111 Brown & Brown, Inc. 11,500 501 The Charles Schwab Corp. 41,900 501 Citizens Banking Corp. 1,600 55 Commerce Bancshares, Inc. 3,811 191 East West Bancorp, Inc. 74,200 3,113 Equity Office Properties Trust 3,300 96 Federated Investors, Inc. -- Class B 7,900 240 First Financial Fund, Inc. 64,900 1,394 First Horizon National Corp. 3,700 160 First Republic Bank 51,000 2,703 Genworth Financial, Inc. 16,100 435 Glenborough Realty Trust, Inc. 30,000 638 Huntington Bancshares, Inc. 13,900 344 Innkeepers USA Trust 43,400 616 Janus Capital Group, Inc. 20,800 350 Jefferson-Pilot Corp. 6,300 327 Kilroy Realty Corp. 48,600 2,078 *LaBranche & Co., Inc. 15,200 136 Lasalle Hotel Properties 47,700 1,518 Loews Corp. 2,000 141 *Markel Corp. 5,100 1,856
8 T. Rowe Price Small Cap Value Portfolio T. Rowe Price Small Cap Value Portfolio
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ------------------------------------------------------------ Financials continued Marsh & McLennan Companies, Inc. 18,700 615 Midland Co. 33,300 1,041 MoneyGram International, Inc. 18,348 388 Netbank, Inc. 65,300 680 Northern Trust Corp. 8,800 428 *Ohio Casualty Corp. 11,200 260 The PNC Financial Services Group, Inc. 8,000 460 *ProAssurance Corp. 64,100 2,507 Protective Life Corp. 3,700 158 Radian Group, Inc. 5,700 303 Regions Financial Corp. 6,900 246 SAFECO Corp. 5,200 272 Scottish Annuity & Life Holdings, Ltd. 41,300 1,070 *Silicon Valley Bancshares 58,900 2,640 The St. Paul Travelers Companies, Inc. 17,530 650 Strategic Hotel Capital, Inc. 38,500 635 Sun Communities, Inc. 36,600 1,473 Synovus Financial Corp. 15,700 449 Texas Regional Bancshares, Inc. -- Class A 101,450 3,316 *Triad Guaranty, Inc. 35,500 2,147 UnumProvident Corp. 21,200 380 Washington Real Estate Investment Trust 37,200 1,260 XL Capital, Ltd. -- Class A 3,900 303 ------ Total 43,449 ------ Health Care (5.5%) *Accredo Health, Inc. 1,000 28 AmerisourceBergen Corp. 8,100 475 Analogic Corp. 11,600 520 Arrow International, Inc. 21,530 667 *Barr Pharmaceuticals, Inc. 1,400 64 *Bone Care International, Inc. 59,500 1,657 *Chiron Corp. 13,900 463 *Community Health Systems, Inc. 1,800 50 *Diversa Corp. 85,700 749 *Exelixis Inc. 76,400 726 *HEALTHSOUTH Corp. 91,300 573 *Human Genome Sciences, Inc. 11,700 141 *Lexicon Genetics Inc. 107,500 834 *Lincare Holdings, Inc. 12,400 529 McKesson Corp. 6,300 198 *MedImmune, Inc. 18,600 504 Owens & Minor, Inc. 75,100 2,116 *Tenet Healthcare Corp. 45,100 495 Valeant Pharmaceuticals International 4,300 113 *Vertex Pharmaceuticals, Inc. 9,200 97 ------ Total 10,999 ------ Industrials (19.6%) *Allied Waste Industries, Inc. 28,400 264 Ameron International Corp. 21,700 822 C&D Technologies, Inc. 49,600 845 *Casella Waste Systems, Inc. -- Class A 89,900 1,316 CSX Corp. 12,700 509 *Dollar Thrifty Automotive Group, Inc. 47,100 1,422 EDO Corp. 25,900 822 Electro Rent Corp. 72,900 1,037
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ----------------------------------------------------------- Industrials continued ElkCorp 43,900 1,502 Equifax, Inc. 13,700 385 Franklin Electric Co., Inc. 55,900 2,362 *FTI Consulting, Inc. 48,700 1,026 G & K Services, Inc. -- Class A 38,200 1,659 *Genesee & Wyoming, Inc. 34,900 982 Herman Miller, Inc. 7,400 204 IDEX Corp. 46,000 1,863 *Insituform Technologies, Inc. -- Class A 72,400 1,641 JLG Industries, Inc. 92,100 1,808 *Kirby Corp. 41,500 1,842 *Laidlaw International, Inc. 13,800 295 *Landstar System, Inc. 62,200 4,581 *Macquarie Infrastructure Co. Trust 26,600 781 Manpower, Inc. 10,000 483 McGrath Rentcorp 37,600 1,640 Nordson Corp. 44,200 1,771 Raytheon Co. 9,400 365 Rockwell Collins, Inc. 7,000 276 The ServiceMaster Co. 9,400 130 Southwest Airlines Co. 26,200 427 Thomas Industries, Inc. 43,900 1,752 Union Pacific Corp. 6,100 410 UTI Worldwide, Inc. 30,740 2,091 *Waste Connections, Inc. 31,900 1,093 Woodward Governor Co. 12,800 917 ------ Total 39,323 ------ Information Technology (9.9%) *ATMI, Inc. 35,200 793 AVX Corp. 22,500 284 *Bearingpoint, Inc. 62,700 503 Belden CDT, Inc. 62,700 1,455 *The BISYS Group, Inc. 21,600 355 *BMC Software, Inc. 20,400 379 *Ceridian Corp. 2,500 46 *Exar Corp. 62,500 887 Helix Technology Corp. 64,300 1,118 *Intuit, Inc. 7,400 326 *Jabil Circuit, Inc. 11,400 292 *KLA-Tencor Corp. 1,700 79 Landauer, Inc. 18,300 836 *Littelfuse, Inc. 40,000 1,366 *McAfee, Inc. 1,800 52 Methode Electronics, Inc. -- Class A 42,800 550 Molex, Inc. -- Class A 17,500 466 *MPS Group, Inc. 139,900 1,716 *Mykrolis Corp. 80,000 1,134 *Novellus Systems, Inc. 19,300 538 *Packeteer, Inc. 91,700 1,325 *Progress Software Corp. 59,500 1,389 *SPSS, Inc. 52,225 817 Startek, Inc. 29,200 831 *Synopsys, Inc. 20,300 398 *Tellabs, Inc. 5,400 46 *Websense, Inc. 36,300 1,842 ------ Total 19,823 ------
T. Rowe Price Small Cap Value Portfolio 9 T. Rowe Price Small Cap Value Portfolio
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ----------------------------------------------------------- Materials (9.9%) Abitibi-Consolidated Inc. 25,200 174 Agrium, Inc. 3,100 52 Airgas, Inc. 57,700 1,530 AptarGroup, Inc. 37,250 1,967 Arch Chemicals, Inc. 42,500 1,223 Bowater, Inc. 10,800 475 Carpenter Technology Corp. 30,200 1,765 Chesapeake Corp. 18,500 502 Deltic Timber Corp. 31,800 1,350 Domtar, Inc. 32,800 396 Florida Rock Industries, Inc. 32,025 1,906 Gibraltar Industries, Inc. 65,276 1,542 Great Lakes Chemical Corp. 9,200 262 Harmony Gold Mining Co.-Sponsored ADR 30,500 283 MacDermid, Inc. 24,100 870 MeadWestvaco Corp. 10,500 356 *Meridian Gold, Inc. 68,800 1,305 *The Mosaic Co. 6,500 106 Myers Industries, Inc. 48,767 624 *Nalco Holding Co. 25,300 494 Potlatch Corp. 2,200 111 *Symyx Technologies, Inc. 31,900 960 Wausau-Mosinee Paper Corp. 86,500 1,545 ------ Total 19,798 ------ Telecommunication Services (1.1%) AT&T Corp. 3,700 71 *Crown Castle International Corp. 900 15 *Qwest Communications International, Inc. 85,400 379 Telephone and Data Systems, Inc. 4,700 362 Telus Corp. 5,400 156 *US Cellular Corp. 1,400 63 *Wireless Facilities, Inc. 122,600 1,156 ------ Total 2,202 ------ Utilities (3.8%) Black Hills Corp. 38,300 1,176 Cleco Corp. 43,000 871 *CMS Energy Corp. 26,700 279 Duke Energy Corp. 13,800 350 *Dynegy, Inc. -- Class A 33,000 152 *El Paso Electric Co. 57,200 1,083 FirstEnergy Corp. 5,100 202 NiSource, Inc. 28,700 654 *Northwestern Corp. 3,300 92 *NRG Energy, Inc. 12,300 443
Shares/ Value Common Stocks (96.5%) $ Par $ (000's) ----------------------------------------------------------------- Utilities continued Otter Tail Corp. 24,100 615 Pinnacle West Capital Corp. 3,400 151 TECO Energy, Inc. 39,600 607 Vectren Corp. 32,000 858 Xcel Energy, Inc. 4,000 73 -------- Total 7,606 -------- Total Common Stocks (Cost: $143,616) 193,073 -------- Convertible Corporate Debt (0.0%) ----------------------------------------------------------------- Utilities (0.0%) Xcel Energy Inc., 7.50%, 11/21/07 144A 2,000 3 -------- Total Convertible Corporate Debt (Cost: $3) 3 -------- Money Market Investments (4.0%) ----------------------------------------------------------------- Other Holdings (4.0%) Reserve Investment Fund 8,045,168 8,045 -------- Total Money Market Investments (Cost: $8,045) 8,045 -------- Total Investments (100.5%) (Cost $151,664)(a) 201,121 -------- Other Assets, Less Liabilities (-0.5%) (978) -------- Total Net Assets (100.0%) $200,143 --------
* Non-Income Producing ADR -- American Depository Receipt 144A after the name of a security represents a security exempt from registration under Rule 144A of the securities Act of 1933. These securities may be resold as transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2004, the value of these securities was $3, representing 0% of net assets. (a) AtDecember 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $151,654 and the net unrealized appreciation of investments based on that cost was $49,467 which is comprised of $51,112 aggregate gross unrealized appreciation and $1,645 aggregate gross unrealized depreciation. The Accompanying Notes are an Integral Part of the Financial Statements 10 T. Rowe Price Small Cap Value Portfolio Aggressive Growth Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Maximum long-term appreciation of Strive for the highest possible rate of capital appreciation by $1.3 billion capital investing in companies with potential for rapid growth.
The Aggressive Growth Stock Portfolio seeks emerging growth companies in the middle-capitalization range, generally with market capitalizations of less than $10 billion. The Portfolio's focus in stock selection is on the individual companies' ability to generate revenue, expand profit margins and maintain solid balance sheets; industry sector selection is of secondary importance. Since growth stock portfolios tend to react strongly to changes in financial and economic markets, as well as to changes in the prospects for individual companies, returns of this Portfolio can vary considerably from time to time. A higher level of risk (with risk defined as variability of returns over time) is accepted for the potential of greater long-term returns. For the year ended December 31, 2004, the Aggressive Growth Stock Portfolio had a return of 14.22%, compared with 16.49% for its benchmark, the S&P MidCap 400 Index. (This index is unmanaged, cannot be invested in directly, and does not include administrative expenses or sales charges.) The Portfolio underperformed its peer group, Mid-Cap Growth Funds, which had an average return of 14.75% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's underperformance relative to the Index resulted mainly from sector selection, and also reflects its emphasis on quality stocks at a time when lower quality issues performed better. Following an extraordinary year in 2003, mid-capitalization stocks once again rewarded investors in 2004. For 2004, however, the major portion of the gain in mid-cap stocks, as well as in the overall stock market, was realized in the fourth quarter. Earlier in the year, the stock market produced lackluster results as economic concerns, including rising oil prices, the weakening U.S. dollar, the war in Iraq and the upcoming presidential election, hampered performance. Indications that the Federal Reserve might start raising interest rates -- after a long period in which U.S. consumers had benefited from rates at 45-year lows -- also had a dampening effect on the market. In the fourth quarter, however, especially following the elections in November, the stock market experienced a dramatic rally, in which all asset classes gained. The S&P 500 Index (a gauge of broad stock market performance), which returned 10.88% for the year, gained 9.23% in the fourth quarter alone. Higher beta stocks -- including small- and mid-cap stocks -- experienced an even more dramatic lift during the fourth quarter. Small-capitalization stocks, as measured by the S&P 600 SmallCap Index, returned 22.65% for the year ended December 31, 2004, with 13.00% of that gain coming in the fourth quarter. Mid-cap stocks, as measured by the S&P 400 MidCap Index, returned 16.49% for the year, 12.16% of which came in the last quarter. The drive for beta in the fourth quarter pushed up prices of lower quality issues as investors demonstrated a willingness to take on more risk in order to make up for the low returns earlier in the year. The Portfolio's underperformance relative to the Index this year resulted primarily from sector selection. Overweight positions in the Industrial and Technology sectors, together with poor returns in several stocks in those sectors, hurt performance. Industrial sector stocks that performed poorly included Cintas Corp. (designs and manufactures corporate identity uniform programs), ARAMARK Corp. (provides outsourced services), and Manpower Inc. (an employment service organization). Technology sector stocks that hurt performance included Silicon Laboratories (designs and develops integrated circuits), Microchip Technology Inc. (develops and manufactures microcontrollers), and Integrated Circuit Systems (designs and develops silicon timing devices). Several Consumer Discretionary stocks also hurt performance; the biggest detractors were radio holdings Univision Communications and Westwood One. Retailers Jones Apparel Group and Ann Taylor also performed poorly during the year. Adding to the Portfolio's performance was a substantial overweight position in the Health Care sector. Individual holdings, including Elan Corp. (research and development of therapeutic products for neurology and autoimmune diseases), Kinetic Concepts Inc. (a global medical technology company), Cytyc Corp. (designs and manufactures systems for diagnostic applications), and Biogen Idec Inc. (research and development of targeted cancer therapies) all experienced large gains earlier in the year. Positions in these stocks were subsequently trimmed back to lock in gains. Also adding to performance in 2004 were Consumer Discretionary stocks PetSmart (a retailer and online supplier of pet supplies), Getty Images (a media company), Pixar Inc. (a digital animation studio), and Michaels Stores Inc. (an art and home decor retailer). Stocks in the Industrial sector that performed well included Expeditors International (global logistics management), L-3 Communications Holdings (supplier of secure communications systems), and Corporate Executive Board Co. (provides analysis on corporate strategy and operations). Education stock Apollo Group Inc., Technology stock VeriSign Inc., and Consumer Staples stock Whole Foods Market Inc. also performed well. In addition, an increased position in the Portfolio's top holding, CIT Group (a finance company), helped performance for the year. As of early January 2005, the market had corrected from its December 2004 highs. We believe earnings growth may slow from its previously torrid pace, but may go to a more sustainable level. Because of this, we will be looking for favorable returns from mid-cap stocks and continue to expect mid-cap companies to outperform their larger brethren in the near future. We look to keep cash low and our holdings list fresh during 2005. 11 Aggressive Growth Stock Portfolio Aggressive Growth Stock Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Aggressive Growth S&P MidCap Stock Portfolio 400 Index ----------------- ----------- 12/94 $10,000 $10,000 12/95 13,929 13,095 12/96 16,395 15,613 12/97 18,668 20,645 12/98 20,078 24,587 12/99 28,869 28,201 12/00 30,653 33,139 12/01 24,562 32,939 12/02 19,367 28,160 12/03 24,149 38,190 12/04 27,582 44,486 Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years Aggressive Growth Stock Portfolio 14.22% -0.91% 10.68% S&P MidCap 400 Index 16.49% 9.54% 16.10% Mid Cap Growth Funds Lipper Average 14.75% -1.73% 10.08% Aggressive Growth Stock Portfolio S&P 400 Index The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account, are shown beginning on page iv of the Performance Summary of the Separate Account report. Since the Portfolio invests primarily in medium-capitalization (Mid Cap) issues, the index that best reflects the Portfolio's performance is the S&P MidCap 400 Index. This is a capitalization-weighted index that measures the performance of the mid-range sector of the U.S. stock market. The index cannot be invested in directly and does not include sales charges. As of December 31, 2004, the 400 companies in the composite had a median market capitalization of $2.4 billion and a total market value of $1.1 trillion. The MidCap 400 represents approximately 5.8% of the market value of the Compustat's database of about 9,381 equities. The Lipper Variable Insurance Products (VIP) Mid Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) less than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Mid-cap growth funds typically have an above-average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P MidCap 400 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Net Assets CIT Group, Inc. 2.2% Graco, Inc. 2.2% DaVita, Inc. 2.1% Waters Corp. 2.1% Fastenal Co. 1.9% Nabors Industrials, Inc. 1.9% The Corporate Executive Board Co. 1.9% Zebra Technologies Corp. - Class A 1.8% Legg Mason, Inc. 1.8% Kinetic Concepts, Inc. 1.8% [CHART] Sector Allocation 12/31/04 Health Care ................ 27% Information Technology ..... 25% Industrials ................ 15% Consumer Discretionary ..... 12% Financials ................. 11% Energy ..................... 6% Short-Term Investments ..... 2% Consumer Staples ........... 1% Materials .................. 1% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Investing in small company stocks involves a greater degree of risk than investing in medium or large company stocks. Investing in medium company stocks involves a greater degree of risk than investing in large company stocks. 12 Aggressive Growth Stock Portfolio Aggressive Growth Stock Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,070.60 $2.71 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,022.21 $2.65 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.52%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Aggressive Growth Stock Portfolio 13 Aggressive Growth Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Market Shares/ Value Common Stocks (98.6%) $ Par $ (000's) ------------------------------------------------------ Consumer Discretionary (12.3%) Choice Hotels International, Inc. 155,200 9,002 *Dick's Sporting Goods, Inc. 240,300 8,447 Garmin, Ltd. 368,100 22,395 Gentex Corp. 475,130 17,589 *Getty Images, Inc. 234,170 16,123 Jones Apparel Group, Inc. 158,200 5,785 *Lamar Advertising Co. -- Class A 393,025 16,814 Michaels Stores, Inc. 395,600 11,856 *O'Reilly Automotive, Inc. 348,730 15,710 PETsMART, Inc. 323,900 11,508 *Pixar, Inc. 65,600 5,616 *Univision Communications, Inc. -- Class A 244,127 7,146 *Westwood One, Inc. 354,600 9,549 ------- Total 157,540 ------- Consumer Staples (1.3%) *Smithfield Foods, Inc. 249,500 7,383 Whole Foods Market, Inc. 92,000 8,772 ------- Total 16,155 ------- Energy (5.5%) BJ Services Co. 309,600 14,409 *Cooper Cameron Corp. 224,200 12,064 *Nabors Industries, Ltd. 463,800 23,788 *Quicksilver Resources, Inc. 211,100 7,764 *Smith International, Inc. 233,700 12,716 ------- Total 70,741 ------- Financials (10.9%) *Ameritrade Holding Corp. 1,236,600 17,584 Assured Guaranty, Ltd. 421,400 8,289 *CapitalSource, Inc. 867,800 22,276 CIT Group, Inc. 609,100 27,910 Investors Financial Services Corp. 343,280 17,157 Legg Mason, Inc. 308,770 22,620 St. Joe Co. 173,100 11,113 Ventas, Inc. 452,700 12,409 ------- Total 139,358 ------- Health Care (27.0%) *Affymetrix, Inc. 171,500 6,268 *Angiotech Pharmaceuticals, Inc. 728,977 13,450 *Barr Pharmaceuticals, Inc. 206,700 9,413 *Biogen Idec, Inc. 151,300 10,078 Biomet, Inc. 412,810 17,912 *Caremark Rx, Inc. 395,494 15,594 *Charles River Laboratories International, Inc. 423,900 19,504 *Covance, Inc. 440,600 17,073 *Cytyc Corp. 596,000 16,432 *DaVita, Inc. 675,900 26,717 *Elan Corp. PLC, ADR 259,800 7,080 *Gen-Probe, Inc. 140,600 6,357
Market Shares/ Value Common Stocks (98.6%) $ Par $ (000's) --------------------------------------------------------- Health Care continued Health Management Associates, Inc. -- Class A 756,210 17,181 *Kinetic Concepts, Inc. 296,200 22,600 *Lincare Holdings, Inc. 433,900 18,506 Medicis Pharmaceutical Corp. 258,500 9,076 *Neurocrine Biosciences, Inc. 161,300 7,952 *Patterson Companies, Inc. 448,996 19,482 *St. Jude Medical, Inc. 487,500 20,441 *Thermo Electron Corp. 340,400 10,277 *Varian Medical Systems, Inc. 328,800 14,217 *VCA Antech, Inc. 597,400 11,709 *Waters Corp. 561,570 26,275 ------- Total 343,594 ------- Industrials (15.1%) *Apollo Group, Inc. -- Class A 107,280 8,659 ARAMARK Corp. -- Class B 604,300 16,020 Cintas Corp. 198,050 8,686 The Corporate Executive Board Co. 355,020 23,765 Deere & Co. 155,740 11,587 Expeditors International of Washington, Inc. 369,630 20,655 Fastenal Co. 403,390 24,833 Graco, Inc. 744,500 27,807 L-3 Communications Holdings, Inc. 162,150 11,876 Manpower, Inc. 261,840 12,647 Pentair, Inc. 213,200 9,287 Robert Half International, Inc. 598,300 17,608 ------- Total 193,430 ------- Information Technology (25.5%) *Activision, Inc. 444,700 8,974 Adobe Systems, Inc. 196,330 12,318 *Amdocs, Ltd. 575,550 15,108 *Avaya, Inc. 883,600 15,198 CDW Corp. 224,640 14,905 *Cogent, Inc. 279,900 9,237 *Cognos, Inc. 457,000 20,135 *DST Systems, Inc. 178,800 9,319 *FLIR Systems, Inc. 120,200 7,668 Harris Corp. 259,900 16,059 Infosys Technologies Ltd., ADR 296,070 20,521 *Integrated Circuit Systems, Inc. 562,880 11,775 *Jabil Circuit, Inc. 311,200 7,960 *KLA-Tencor Corp. 237,180 11,048 *Kronos, Inc. 266,200 13,611 *Lam Research Corp. 417,800 12,079 Microchip Technology, Inc. 587,395 15,660 *NAVTEQ Corp. 128,900 5,976 Paychex, Inc. 555,840 18,943 *QLogic Corp. 160,070 5,879 *Semtech Corp. 820,490 17,944 * Silicon Laboratories, Inc. 347,900 12,284
14 Aggressive Growth Stock Portfolio Aggressive Growth Stock Portfolio
Market Shares/ Value Common Stocks (98.6%) $ Par $ (000's) --------------------------------------------------------- Information Technology continued *VeriSign, Inc. 606,820 20,341 *Zebra Technologies Corp. -- Class A 407,252 22,920 --------- Total 325,862 --------- Materials (1.0%) Praxair, Inc. 303,840 13,415 --------- Total 13,415 --------- Total Common Stocks (Cost: $1,004,819) 1,260,095 --------- Money Market Investments (1.8%) --------------------------------------------------------- Federal Government & Agencies (0.2%) Federal Home Loan Mortgage Corp., 2.42%, 3/22/05 3,000,000 2,985 --------- Total 2,985 --------- Finance Lessors (0.0%) Delaware Funding, 2.25%, 1/4/05 600,000 600 --------- Total 600 --------- Finance Services (0.0%) Ciesco LP, 2.20%, 1/3/05 300,000 300 --------- Total 300 --------- Short Term Business Credit (0.8%) Sheffield Receivables, 2.23%, 1/4/05 9,600,000 9,598 --------- Total 9,598 --------- Utilities (0.8%) (b)National Rural Utility, 2.21%, 1/10/05 10,000,000 9,994 --------- Total 9,994 ---------
Market Shares/ Value Money Market Investments (1.8%) $ Par $ (000's) ----------------------------------------------------------- Total Money Market Investments (Cost: $23,476) 23,477 --------- Total Investments (100.4%) (Cost $1,028,295)(a) 1,283,572 --------- Other Assets, Less Liabilities (-0.4%) (5,077) --------- Total Net Assets (100.0%) 1,278,495 ---------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $1,032,320 and the net unrealized appreciation of investments based on that cost was $251,252 which is comprised of $267,321 aggregate gross unrealized appreciation and $16,069 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) -------------------------------------------------------------- S&P MidCap 400 Index 17 3/05 $126 Futures (Total Notional Value at December 31, 2004, $5,529)
The Accompanying Notes are an Integral Part of the Financial Statements Aggressive Growth Stock Portfolio 15 International Growth Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term capital appreciation Invest in stocks of companies outside the U.S. that are $110 million expected to experience above-average growth.
The International Growth Stock Portfolio seeks long-term capital appreciation. The Portfolio seeks to achieve this objective by investing primarily in common stocks of companies that are headquartered or trade primarily in markets outside the United States and that are expected to grow more rapidly than market averages. Normally, the Portfolio invests at least 80% of its assets in non-U.S. securities. The investments comprising the Portfolio are chosen individually, reflecting the managers' assessment of their attractiveness. Equities purchased will possess, in the managers' judgment, a combination of solid fundamentals, attractive valuation, and positive technical evaluation. Companies judged to have a positive fundamental situation are likely to exhibit a history of superior sales and profit growth, or expectations of such growth, strong product/service positioning, experienced management, and solid or improving financial position. Prices are evaluated in reference to the company's own expected growth, comparable companies within the same or similar industries, and/or companies with similar expected growth characteristics. Technical indicators would include such things as past price performance and anticipated supply and demand balance. Industry and country weights within the Portfolio, while monitored as a gauge of the Portfolio's exposure to risk, are treated primarily as by-products of the stock selection process. The equities in the Portfolio will include small, medium, and large capitalization issues. Current income will be a secondary consideration in stock selection. Following an extraordinary year in 2003, international stocks once again produced very nice returns in 2004, aided by a continuation of the cyclical recovery and a boost from foreign currencies. For the year ended December 31, 2004, the International Growth Stock Portfolio had a return of 21.59%, outperforming the MSCI EAFE (Europe, Australasia Far East) Index, which returned 20.70% for the year. (This index is unmanaged, cannot be invested in directly, and does not include administrative expenses or sales charges.) The Portfolio also outperformed its peer group, International Growth, which had an average return of 17.44% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's outperformance relative to the Index can be attributed to its participation in some of the strongest international markets. For instance, the Scandinavian countries of Sweden, Norway and Denmark were all strong performers. Additionally, Ireland and Spain turned in superior returns. In general, these countries showed stronger economic growth than their European counterparts. These are all countries to which the Portfolio maintained a healthy exposure. A higher weighting in Scandinavian stocks, especially in Sweden, Norway and Denmark, added to the Portfolio's performance during 2004. Stocks of special interest in those countries included Ericcson (the world's leading manufacturer of mobile telecommunications infrastructure equipment), Nobia AB (manufactures kitchen interiors), and Volvo (international transport equipment group). Nokian Renkaat (a Finnish tire manufacturer) also added value. Several stocks based in the United Kingdom also added to performance, including Punch Taverns (a pub leasing company, which is one of the Portfolio's top ten holdings), Capita Group (corporate services), Wolseley (building material distribution), and Tesco Foods (a retailer, which is also a top ten holding). Exposure to Emerging Markets also increased returns for the Portfolio in 2004. The emerging markets generally, and in particular Indonesia, Brazil, Mexico, and the countries of Eastern Europe, were strong in 2004. In the Indonesian market, which benefited from investor perceptions of reform, the Portfolio's holdings in PT Telecom and Bank Rakyat did very well. OTP Bank in Hungary (another one of the Portfolio's top ten holdings), as well as Erste Bank in Austria, also performed strongly as investors sought ways to capitalize on the addition of a number of Eastern European countries to the European Union. The Portfolio would have benefited from more holdings in Mexico, which rose smartly. Urbi Desarrollos (a home builder) shared those gains. Brazil also rose strongly on relief over the new government's policies. The Portfolio's single holding in Brazil, Natura Cosmeticos (manufactures and distributes cosmetics), more than doubled. An underweight position in Japan helped performance in 2004 as Japan was a relative laggard. Japan's economy slowed markedly in the second half of the year, rekindling investor fears about the sustainability of growth and dragging the market downward. Strong performers for the Portfolio in Japan in 2004 included Bridgestone (tire manufacturer), Kubota (industrial and farm machinery manufacturer), and USS (auto auctions). While country selection aided portfolio performance, sector weightings worked against it. Markets were led by a sector in which it is difficult for growth investors to participate, Utilities (+32.36%). Also exceptionally strong were Energy (+27.62%) and Financials (+25.26%). The Portfolio is significantly underweight in each of these sectors. Stock selection within these groups was good, with the Portfolio's holdings outperforming the Index in each sector. Information Technology was the weakest sector (+8.84%), followed by Health Care (+11.39%), and Consumer Discretionary (+15.10%). The Portfolio is heavily overweighted in all three sectors versus the Index. Here again stock selection within sectors was good, with significantly superior performance in both the Health Care and Consumer Discretionary sectors. The Portfolio's exposure to small and mid-capitalization issues aided performance as returns by market capitalization sectors were inverse, with large cap issues gaining 19.50%, mid-cap issues gaining 27.92%, and small cap issues gaining 31.15%. 16 International Growth Portfolio International Growth Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance International Growth Portfolio EAFE Index ---------------- ----------- 7/01 $10,000 $10,000 12/01 9,060 9,375 12/02 7,942 7,907 12/03 11,039 11,004 12/04 13,422 13,282 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception* International Growth Portfolio 21.59% 8.99% EAFE Index 20.70% 8.65% International Growth Funds Lipper Average 17.44% - *inception date of 7/31/01 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 7/31/01 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. As depicted in the graph, the International Growth Portfolio is compared against the Morgan Stanley Capital International EAFE ("Europe-Australasia-Far East") Index. The MSCI EAFE(R) Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of December 31, 2004 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The objective of the Index is to reflect the movements of stock markets in these countries by representing an unmanaged (indexed) portfolio within each country. The Index seeks to include securities to represent 85% of the free float-adjusted market capitalization within each industry group within each country. A cross section of large, medium, and small capitalization stocks are included, taking into account liquidity concerns. The Index is calculated in U.S. dollars. The Index cannot be invested in directly and does not include administrative expenses or sales charges. The Lipper Variable Insurance Products (VIP) International Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies strictly outside of the U.S. Growth funds typically have an above-average price-to-cash flow ratio, price-to-book ratio, and three-year sales-per-share growth value compared to the S&P/Citigroup World ex-U.S. BMI. Source: Lipper, Inc. Investors should be aware of the risks of investments in foreign securities, particularly investments in securities of companies in developing nations. These include the risks of currency fluctuation, of political and economic instability and of less well-developed government supervision and regulation of business and industry practices, as well as differences in accounting standards. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets - ------- --------------------- Anglo Irish Bank Corp. ................................. 1.8% Puma AG Rudolf Dassler Sport ........................... 1.3% Grupo Ferrovial, S.A. .................................. 1.1% OTP Bank ............................................... 1.1% Next PLC ............................................... 1.1% Mobistar SA ............................................ 1.1% Wienerberger AG ........................................ 1.1% Vinci SA ............................................... 1.0% Tesco PLC .............................................. 1.0% Punch Taverns PLC ...................................... 1.0% [CHART] Sector Allocation 12/31/04 Consumer Cyclical ............................ 20% Financials ................................... 19% Technology ................................... 10% Industrials .................................. 9% Consumer Non-Cyclical ........................ 8% Health Care .................................. 7% Basic Materials .............................. 6% Energy ....................................... 5% Short-Term Investments ....................... 5% Telecommunications ........................... 4% Conglomerates ................................ 3% Transportation ............................... 3% Utilities .................................... 1% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. International Growth Portfolio 17 International Growth Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,156.40 $5.15 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.05 $4.83 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.95%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 18 International Growth Portfolio International Growth Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Foreign Common Shares/ Value Stocks (94.1%) Country $ Par $ (000's) -------------------------------------------------------- Basic Materials (5.7%) BASF AG Germany 11,180 805 CRH PLC Ireland 30,226 809 K+S AG Germany 10,955 582 Nippon Steel Corp. Japan 268,500 658 Stora Enso OYJ Finland 47,500 728 Sumitomo Chemical Co., Ltd. Japan 142,000 696 *Syngenta AG Switzerland 8,455 898 Wienerberger AG Austria 24,545 1,172 ----- Total 6,348 ----- Conglomerates (2.9%) Grupo Ferrovial SA Spain 23,015 1,230 Nomura TOPIX Exchange Traded Fund Japan 74,500 843 Vinci SA France 8,510 1,143 ----- Total 3,216 ----- Consumer Cyclical (20.0%) Belluna Warrants Japan 1,452 4 Beru AG Germany 941 88 Bridgestone Corp. Japan 32,000 637 Bulgari SPA Italy 61,360 758 Burberry Group PLC United Kingdom 85,100 655 Carnival Corp. United Kingdom 15,015 865 Edgars Consolidated Stores, Ltd. South Africa 12,888 691 Esprit Holdings, Ltd. Hong Kong 177,500 1,073 Four Seasons Hotels Co. Canada 5,040 412 Hilton Group PLC United Kingdom 103,170 564 *Hyundai Motor Co. Korea 16,030 859 Intercontinental Hotels Group PLC United Kingdom 46,906 583 Lagardere S.C.A. France 10,280 742 Lottomatica SPA Italy 26,280 964 Mediaset SPA Italy 22,465 285 Next PLC United Kingdom 37,835 1,198 NHK Spring Co., Ltd. Japan 77,000 526 Nissan Motor Co., Ltd. Japan 56,800 618 Nobia AB Sweden 50,810 841 Nokian Renkaat OYJ Finland 5,955 905 Opap SA Greece 31,690 876 Punch Taverns PLC United Kingdom 81,670 1,082 Ryohin Keikaku Co., Ltd. Japan 13,600 684 Signet Group PLC United Kingdom 317,675 671 Square Enix Co., Ltd. Japan 23,700 701 Swatch Group AG Switzerland 5,280 775 Techtronic Industries Co. Hong Kong 393,500 861 *Urbi Desarrollos Urbanos SA Mexico 74,085 324
Foreign Common Shares/ Value Stocks (94.1%) Country $ Par $ (000's) ---------------------------------------------------------- Consumer Cyclical continued USS Co., Ltd. Japan 8,010 672 *Vivendi Universal SA France 26,170 836 Walmart de Mexico -- Series V Mexico 167,665 576 Wolseley PLC United Kingdom 36,295 678 ------ Total 22,004 ------ Consumer Non-Cyclical (7.9%) Axfood AB Sweden 18,200 616 *Cott Corp. ADR Canada 19,980 494 *GEOX SPA Italy 49,640 386 Metro AG Germany 6,625 365 Natura Cosmeticos SA Brazil 24,150 705 Nestle SA Switzerland 2,015 527 Puma AG Germany 5,105 1,404 Reckitt Benckiser PLC United Kingdom 24,950 754 *Royal Numico NV Netherlands 19,425 700 SABMiller PLC United Kingdom 39,175 650 Swedish Match AB Sweden 87,270 1,011 Tesco PLC United Kingdom 178,830 1,105 ------ Total 8,717 ------ Energy (5.3%) BG Group PLC United Kingdom 103,515 704 BP PLC United Kingdom 63,385 618 EnCana Corp. Canada 16,115 920 Eni SPA Italy 36,445 912 Suncor Energy Inc. Canada 5,800 205 Technip SA France 5,120 947 *TGS Nopec Geophysical Co. ASA Norway 13,215 338 Total SA France 2,620 572 *Western Oil Sands Inc. Canada 17,865 624 ------ Total 5,840 ------ Financials (18.9%) *Admiral Group PLC United Kingdom 15,070 93 Aktiv Kapital ASA Norway 500 11 Allianz AG Germany 2,540 337 Alpha Bank AE Greece 28,138 981 AMP, Ltd. Australia 163,440 930 Anglo Irish Bank Corp. PLC Ireland 80,292 1,954 Banca Fideuram SPA Italy 110,155 570 *Banco Espanol de Credito SA Spain 55,900 799 Banco Popolare Di Verona Italy 44,165 898 Bangkok Bank PCL Thailand 55,300 162 Bank of Yokohama Japan 109,000 687 Bank Rakyat Indonesia Indonesia 3,145,500 974
International Growth Portfolio 19 International Growth Portfolio
Foreign Common Shares/ Value Stocks (94.1%) Country $ Par $ (000's) -------------------------------------------------------- Financials continued BNP Paribas France 9,925 719 Chiba Bank, Ltd. Japan 93,000 622 Credit Saison Co., Ltd. Japan 18,900 688 *Credit Suisse Group Switzerland 10,250 431 DNB NOR ASA Norway 85,235 841 Erste Bank Der Oester Austria 17,120 915 Foereningssparbanken AB Sweden 31,305 780 Fondiaria SAI SPA Italy 26,740 721 HSBC Holdings PLC Hong Kong 42,783 732 ING Groep NV Netherlands 28,329 857 *Kookmin Bank Korea 18,080 707 Man Group PLC United Kingdom 22,725 642 Manulife Financial Corp. Canada 13,510 624 MPC Muenchmeyer Petersen Capital AG Germany 3,300 249 OTP Bank Hungary 39,770 1,226 Royal Bank of Scotland Group PLC United Kingdom 21,199 713 Storebrand ASA Norway 101,220 978 ------ Total 20,841 ------ Health Care (6.9%) CSL, Ltd. Australia 36,905 846 *Elekta AB Sweden 21,375 616 GN Store Nord Denmark 71,235 768 Nobel Biocare Holding AG Switzerland 4,495 814 Novartis AG Switzerland 14,545 733 Roche Holding AG Switzerland 7,140 822 Schwarz Pharma AG Germany 18,795 851 Smith & Nephew PLC United Kingdom 70,660 723 Stada Arzneimittel AG Germany 24,045 650 *Synthes Inc. Switzerland 7,215 809 ------ Total 7,632 ------ Industrial Goods (8.5%) Atlas Copco AB Sweden 18,345 828 Capita Group PLC United Kingdom 131,980 928 *Chiyoda Corp. Japan 107,000 782 Cobham PLC United Kingdom 28,215 670 *Daewoo Shipbuilding & Marine Engineering Co., Ltd. Korea 48,740 725 *Deutz AG Germany 26,733 107 Hays PLC United Kingdom 271,135 647 Keyence Corp. Japan 3,000 672 Kubota Corp. Japan 159,000 788 Meggitt PLC United Kingdom 139,428 701 Metso OYJ Finland 21,460 340 Neopost SA France 11,555 898 Omron Corp. Japan 25,900 618 Volvo AB Sweden 17,860 708 ------ Total 9,412 ------
Foreign Common Shares/ Value Stocks (94.1%) Country $ Par $ (000's) ------------------------------------------------------------ Technology (10.3%) *Axalto Holding NV France 26,700 695 Canon Inc. Japan 12,700 685 Dassault Systemes SA France 12,225 616 *Ericsson LM - B Shares Sweden 291,690 931 Fuji Photo Film Co., Ltd. Japan 17,100 624 *Gresham Computing PLC United Kingdom 109,785 582 Hoya Corp. Japan 6,800 768 Indra Sistemas SA Spain 46,030 786 Infosys Technologies, Ltd. India 17,953 863 *Kontron AG Germany 84,470 775 Net One Systems Co., Ltd. Japan 178 742 Nidec Corp. Japan 5,300 645 Samsung Electronics Co., Ltd. Korea 1,530 666 Siemens AG Germany 8,765 743 Tandberg ASA Norway 47,240 587 TDK Corp. Japan 8,900 659 ------- Total 11,367 ------- Telecommunications (3.7%) *Deutsche Telekom AG Germany 37,508 849 *Mobistar SA Belgium 12,670 1,188 PT Telekomunikasi Indonesia Indonesia 1,172,500 609 Telefonica SA Spain 43,330 816 Vodafone Group PLC United Kingdom 245,225 665 ------- Total 4,127 ------- Transportation (2.5%) Canadian National Railway Co. Canada 13,655 833 Fraport AG Germany 17,485 746 *Golar LNG, Ltd. Norway 32,220 469 Kamigumi Co., Ltd. Japan 76,000 607 *Societe Des Autoroutes Paris-Rhin-Rhone France 1,810 109 ------- Total 2,764 ------- Utilities (1.5%) Brisa Auto Estrada de Portugal SA Portugal 82,205 754 Iberdrola SA Spain 33,615 855 ------- Total 1,609 ------- Total Foreign Common Stocks (Cost: $75,656) 103,877 ------- Call Options (0.0%) ------------------------------------------------------------ Technology (0.0%) C/O Kontron AG, expiring 3/14/05 @ 6.67 Germany 1,726 1 ------- Total Call Options (Cost: $0) 1 -------
20 International Growth Portfolio International Growth Portfolio
Money Market Shares/ Value Investments (5.2%) Country $ Par $ (000's) ---------------------------------------------------------------- Federal Government and Agencies (4.9%) Federal Home Loan Banks, 2.10%, 1/18/05 United States 5,500,000 5,495 ------- Total 5,495 ------- Finance Services (0.3%) Ciesco LP, 2.20%, 1/3/05 United States 300,000 300 ------- Total 300 ------- Total Money Market Investments (Cost: $5,795) 5,795 ------- Total Investments (99.3%) (Cost $81,451)(a) 109,673 ------- Other Assets, Less Liabilities (0.7%) 825 ------- Total Net Assets (100.0%) 110,498 -------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $81,739 and the net unrealized appreciation of investments based on that cost was $27,934 which is comprised of $28,200 aggregate gross unrealized appreciation and $266 aggregate gross unrealized depreciation. Investment Percentage by Country: United Kingdom 14.2% Japan 14.2% Germany 7.8% France 6.6% Sweden 5.8% Switzerland 5.3% Italy 5.0% Other 41.1% ------ Total 100.0% ------
The Accompanying Notes are an Integral Part of the Financial Statements International Growth Portfolio 21 Franklin Templeton International Equity Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term appreciation of capital Participate in the growth of foreign economies by investing $981 million through diversification into markets in securities with high long-term earnings potential relative outside the United States to current market values.
The Franklin Templeton International Equity Portfolio seeks long-term growth of capital. The Portfolio seeks to achieve this objective by investing primarily in equity securities of issuers from countries outside the U.S. The Portfolio's holdings will consist primarily of equity securities of issuers in foreign countries. The Portfolio's strategy is to identify and invest in the undervalued stocks of foreign companies offering the greatest discounts to their long-term values. The strategy will reflect a bottom-up, value-oriented and long-term investment philosophy. In choosing equities, the Portfolio's manager will focus on the market price of a company's security in relation to its long-term earnings, asset value and cash flow potential. A company's historical value measure, including price/earnings ratio, profit margins and liquidation value, also will be considered. For the second year in a row, most stock markets throughout the world posted strong performance in 2004. The fourth quarter, in particular, was strong for international stocks, as the flight away from the U.S. dollar continued and we saw the biggest currency moves of the year. For the year ended December 31, 2004, the International Equity Portfolio had a total return of 19.33%, slightly below the 20.70% return on the MSCI EAFE Index. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The average return for the Portfolio's peer group, International Value Funds, was 20.75% for the year ended December 31, 2004, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's slight underperformance relative to the Index can be attributed to two factors: underweight positions in the Financials and Consumer Staples sectors, and underweight positions in countries that turned in strong performance for the year. Although the Financials sector represented the Portfolio's largest sector weighting (approximately 20%), it was well below the EAFE Index's weighting of more than 27%. A minor underweighting in Europe also slightly detracted from results. Other country weights were positive for return in 2004. Overweightings in two countries, South Korea (which is not in the EAFE Index) and Hong Kong, benefited the Portfolio as Emerging Markets experienced good returns in 2004. In addition, the Portfolio had holdings in Latin America (which is not in the EAFE Index) that added value through currency appreciation and strong price appreciation. Other sector weightings that were positive for the Portfolio included overweightings in the Materials, Industrials and Utilities sectors. Individual stocks that benefited the Portfolio in 2004 included E.ON AG (a German-based industrial company). We like E.ON on its cheap valuation and fundamentals: the company is growing its dividends at 10% a year, has great cash flow and a debt-to-assets ratio of approximately 20%. Under its new CEO, the company committed its efforts to efficiency and streamlining business during 2004 by selling off non-core assets and focusing on electric and gas. The stock appreciated nicely during the year due to cost reductions and higher prices for gas and electric. Suez SA, one of the largest utilities in France, also turned in good performance and is now among the Portfolio's top ten holdings because of price appreciation. In addition, Nordea Bank benefited from the continued consolidation of banks in northern Europe, Brazilian company CVRD, the world's largest iron ore producer, benefited from the strong demand from China. Energy companies posted very strong returns as the price of oil remained at high levels throughout the year, which in turn benefited Portfolio holding CNOOC in China, Norsk Hydro in Norway and Respsol YPF in Spain. The utility sector was the best performing area in the EAFE Index and in the Portfolio was up 34% on strength in companies such as Korea Energy Power Company (KEPCO). 22 Franklin Templeton International Equity Portfolio Franklin Templeton International Equity Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Franklin Templeton International Equity Portfolio EAFE Index ------------------ ------------ 12/93 $10,000 $10,000 12/94 9,989 10,810 12/95 11,445 12,059 12/96 13,850 12,824 12/97 15,551 13,094 12/98 16,301 15,756 12/99 20,034 20,057 12/00 19,875 17,257 12/01 17,093 13,598 12/02 14,118 11,469 12/03 19,831 15,961 12/04 23,690 17,815 Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years Franklin Templeton International Equity Portfolio 19.33% 3.39% 9.01% EAFE Index 20.70% -0.80% 5.94% International Value Funds Lipper Average 20.75% 2.87% 8.18% The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. As depicted in the graph, the Franklin Templeton International Equity Portfolio is compared against the Morgan Stanley Capital International EAFE ("Europe-Australasia-Far East") Index. The MSCI EAFE(R) Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. As of December 31, 2004 the MSCI EAFE Index consisted of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The objective of the Index is to reflect the movements of stock markets in these countries by representing an unmanaged (indexed) portfolio within each country. The Index seeks to include securities to represent 85% of the free float-adjusted market capitalization within each industry group within each country. A cross section of large, medium, and small capitalization stocks are included, taking into account liquidity concerns. The Index is calculated in U.S. dollars. The Index cannot be invested in directly and does not include administrative expenses or sales charges. The Lipper Variable Insurance Products (VIP) International Value Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies strictly outside of the U.S. Value funds typically have a below-average price-to-cash flow ratio, price-to-book ratio, and three-year sales-per-share growth value compared to the S&P/Citigroup World ex-U.S. BMI. Source: Lipper, Inc. Investors should be aware of the risks of investments in foreign securities, particularly investments in securities of companies in developing nations. These include the risks of currency fluctuation, of political and economic instability and of less well-developed government supervision and regulation of business and industry practices, as well as differences in accounting standards. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets - ------- --------------------- Samsung Electronics Co., Ltd. ......................... 2.1% Suez SA ............................................... 1.8% Nordea Bank AB ........................................ 1.7% BAE Systems PLC ....................................... 1.5% BASF AG ............................................... 1.5% Norske Skogindustrier ................................. 1.5% Telefonica SA, ADR .................................... 1.5% Deutsche Post AG ...................................... 1.4% E.On AG ............................................... 1.4% KCI Konecranes International PLC ...................... 1.4% [CHART] Asset Allocation 12/31/04 Continential Europe ........ 45% United Kingdom ............. 22% Asia ....................... 21% North America .............. 4% Australia/New Zealand ...... 4% Latin America/Caribbean .... 3% Mid-East/Africa ............ 1% Allocation is based on percentage of equities. Allocation and Top 10 Holdings is subject to change. Franklin Templeton International Equity Portfolio 23 Franklin Templeton International Equity Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,143.70 $3.83 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.26 $3.61 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.71%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 24 Franklin Templeton International Equity Portfolio Franklin Templeton International Equity Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Foreign Common Shares/ Value Stocks (96.0%) Country $ Par $ (000)'s ---------------------------------------------------- Consumer Discretionary (11.2%) Accor SA France 173,000 7,574 British Sky Broadcasting Group PLC United Kingdom 1,225,270 13,220 Compass Group PLC United Kingdom 1,478,070 6,988 Fuji Photo Film Co., Ltd. Japan 159,300 5,814 GKN PLC United Kingdom 2,091,540 9,497 Koninklijke (Royal) Philips Electronics NV Netherlands 449,135 11,911 Michelin SA -- Class B France 156,780 10,056 Pearson PLC United Kingdom 697,770 8,420 Reed Elsevier NV Netherlands 645,340 8,798 Sony Corp. Japan 200,900 7,764 Valeo SA France 148,650 6,223 Volkswagen AG Germany 230,450 10,447 Wolters Kluwer NV Netherlands 166,630 3,345 ------- Total 110,057 ------- Consumer Staples (3.6%) Boots Group PLC United Kingdom 601,970 7,576 Cadbury Schweppes PLC United Kingdom 1,086,340 10,115 Nestle SA Switzerland 38,980 10,198 Unilever PLC United Kingdom 773,990 7,601 ------- Total 35,490 ------- Energy (5.8%) BP PLC United Kingdom 1,037,940 10,123 ENI SPA Italy 414,535 10,379 IHC Caland NV Netherlands 112,800 7,166 Repsol YPF SA Spain 493,680 12,858 Shell Transport & Trading Co. PLC United Kingdom 1,428,430 12,176 Total SA France 21,182 4,627 ------- Total 57,329 ------- Financials (20.1%) ACE, Ltd. Bermuda 234,580 10,028 Australia & New Zealand Banking Group, Ltd. Australia 89,588 1,446 Axa SA France 460,957 11,391 *Banca Nazionale del Lavora SPA Italy 3,584,211 10,694 Banco Santander Central Hispano SA Spain 906,009 11,244 Cheung Kong Hldgs, Ltd. Hong Kong 1,035,000 10,353
Foreign Common Shares/ Value Stocks (96.0%) Country $ Par $ (000)'s ------------------------------------------------------- Financials continued Dbs Group Holdings, Ltd. Singapore 1,192,000 11,756 HSBC Holdings PLC United Kingdom 530,937 9,085 ING Groep NV Netherlands 436,000 13,191 *Kookmin Bank South Korea 130,600 5,109 Lloyds TSB Group PLC United Kingdom 1,165,150 10,581 National Australia Bank, Ltd. Australia 514,130 11,615 Nomura Holdings, Inc. Japan 332,400 4,846 Nordea Bank AB Sweden 1,651,590 16,769 Riunione Adriatica di Sicurta SPA Italy 447,283 10,117 Royal Bank of Scotland Group PLC United Kingdom 303,290 10,202 Sompo Japan Insurance, Inc. Japan 1,103,000 11,238 Standard Chartered PLC United Kingdom 370,360 6,887 Swiss Re Switzerland 170,200 12,139 XL Capital, Ltd., -- Class A Bermuda 94,850 7,365 ------- Total 196,056 ------- Health Care (5.2%) *CK Life Sciences International, Inc. Hong Kong 29,640 5 GlaxoSmithKline PLC United Kingdom 365,910 8,585 Mayne Group, Ltd. Australia 10 0 Ono Pharmaceutical Co., Ltd. Japan 191,000 10,718 SANOFI- AVENTIS France 164,625 13,157 Shire Pharmaceuticals Group PLC United Kingdom 1,124,010 11,804 Takeda Pharmaceutical Co., Ltd. Japan 140,600 7,080 ------- Total 51,349 ------- Industrials (17.0%) Adecco SA Switzerland 124,930 6,290 Atlas Copco AB Sweden 221,760 10,011 BAE Systems PLC United Kingdom 3,411,020 15,095 *British Airways PLC United Kingdom 1,228,800 5,544 Deutsche Post AG Germany 602,100 13,831
Franklin Templeton International Equity Portfolio 25 Franklin Templeton International Equity Portfolio
Foreign Common Shares/ Value Stocks (96.0%) Country $ Par $ (000's) ------------------------------------------------------ Industrials continued East Japan Railway, Co. Japan 876 4,873 Empresa Brasiliera DE AE, ADR Brazil 148,150 4,954 Hutchison Whampoa, Ltd. Hong Kong 1,081,000 10,118 KCI Konecranes International PLC Finland 302,500 13,367 Rentokil Initial PLC United Kingdom 2,672,940 7,582 *Rolls-Royce Group PLC United Kingdom 1,916,990 9,091 Securitas AB -- Class B Sweden 541,000 9,281 Smiths Group PLC United Kingdom 480,490 7,583 Societe Bic SA France 173,740 8,738 Swire Pacific, Ltd. -- Class A Hong Kong 1,276,500 10,675 Toto, Ltd. Japan 873,000 8,332 Vestas Wind Systems AS Denmark 835,280 10,379 Volvo AB -- Class B Sweden 278,740 11,052 ------- Total 166,796 ------- Information Technology (6.3%) *Celestica, Inc. Canada 415,600 5,862 *Check Point Software Technologies, Ltd. Israel 387,430 9,542 Hitachi, Ltd. Japan 1,198,000 8,301 Nintendo Co., Ltd. Japan 64,600 8,114 Samsung Electronics Co., Ltd. South Korea 46,140 20,079 Toshiba Corp. Japan 2,350,000 10,091 ------- Total 61,989 ------- Materials (10.8%) Akzo Nobel NV Netherlands 234,050 9,983 Alumina, Ltd. Australia 1,908,930 8,889 BASF AG Germany 206,800 14,898 Bayer AG Germany 263,150 8,921 BHP Billiton, Ltd. Australia 1,042,700 12,538 *Cia Vale Do Rio Doce, ADR Brazil 461,880 11,261 Domtar, Inc. Canada 455,490 5,512 Norske Skogindustrier Norway 684,860 14,813 Stora Enso OYJ -- Class R Finland 658,140 10,082 UPM-Kymmene OYJ Finland 394,760 8,778 ------- Total 105,675 -------
Foreign Common Shares/ Value Stocks (96.0%) Country $ Par $ (000's) ------------------------------------------------------- Telecommunication Services (9.0%) BCE, Inc. Canada 430,910 10,401 KT Corp., ADR South Korea 385,100 8,399 Nippon Telegraph & Telephone Corp. Japan 1,930 8,664 Portugal Telecom SA Portugal 632,670 7,826 SK Telecom, Ltd., ADR South Korea 322,890 7,184 Telefonica SA, ADR Spain 251,528 14,212 Telefonos de Mexico SA, ADR Mexico 257,344 9,861 Telenor ASA Norway 1,208,610 10,975 Vodafone Group PLC United Kingdom 3,802,400 10,312 ------- Total 87,834 ------- Utilities (7.0%) E.On AG Germany 146,700 13,372 Endesa SA Spain 211,210 4,964 Hong Kong Electric Holdings, Ltd. Hong Kong 1,549,500 7,077 Iberdrola SA Spain 387,080 9,839 Korea Electric Power Corp. South Korea 224,850 5,832 National Grid Transco PLC United Kingdom 1,093,990 10,418 Suez SA France 646,510 17,241 ------- Total 68,743 ------- Total Foreign Common Stocks (Cost: $713,861) 941,318 ------- Money Market Investments (3.9%) ------------------------------------------------------- Autos (1.0%) Daimler Chrysler Auto, 2.25%, 1/12/05 United States 10,000,000 9,993 ------- Total 9,993 ------- Finance Services (1.9%) Ciesco LLC, 2.20%, 1/3/05 United States 8,500,000 8,499 Citicorp, 2.27%, 1/20/05 United States 10,000,000 9,988 ------- Total 18,487 -------
26 Franklin Templeton International Equity Portfolio Franklin Templeton International Equity Portfolio
Money Market Shares/ Value Investments (3.9%) Country $ Par $ (000's) -------------------------------------------------------------- Short Term Business Credit (1.0%) Sheffield Receivables, 2.23%, 1/4/05 United States 10,000,000 9,998 ------- Total 9,998 ------- Total Money Market Investments (Cost: $38,478) 38,478 ------- Total Investments (99.9%) (Cost $752,339)(a) 979,796 ------- Other Assets, Less Liabilities (0.1%) 1,181 ------- Total Net Assets (100.0%) 980,977 -------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $754,397 and the net unrealized appreciation of investments based on that cost was $225,399 which is comprised of $242,967 aggregate gross unrealized appreciation and $17,568 aggregate gross unrealized depreciation. Investment Percentage by Country: United Kingdom 21.3% Japan 9.8% France 8.1% Germany 6.3% Netherlands 5.6% Spain 5.4% Other 43.5% ------ Total 100.0% ------
The Accompanying Notes are an Integral Part of the Financial Statements Franklin Templeton International Equity Portfolio 27 AllianceBernstein Mid Cap Value Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital and current Invest primarily in the equity securities of mid-sized $72 million income. companies that are believed to be undervalued.
The primary investment objective of the AllianceBernstein Mid Cap Value Portfolio is long-term capital growth. The portfolio invests primarily in a diversified portfolio of equities of mid-sized companies that are believed to be undervalued. The portfolio's investment policies emphasize investment in companies that are determined by Alliance to be undervalued, using Bernstein's fundamental value approach. In selecting investments, management uses its fundamental research to identify companies whose long-term earnings power is not reflected in the current market price of their securities. 2004 was another great year for small- and mid-cap stocks, and for the sixth consecutive year, the Russell 2500 Index beat the broad market, as represented by the Standard & Poor's (S&P) 500 Stock Index. For the year, the Portfolio returned 18.67%, slightly outperforming its style-neutral benchmark, the Russell 2500 Index, which returned 18.29%, but modestly trailing the value benchmark, the Russell 2500 Value Index, which returned 21.58% during the same period. Within the small- and mid-cap universe, larger stocks are now much cheaper than smaller stocks, and the Portfolio's management team has positioned the Portfolio to take advantage of this valuation disparity. The Portfolio outperformed its benchmark, the Russell 2500 Index, returning 18.67% versus 18.29% for the benchmark during the twelve months ended December 31, 2004. Both sector selection and stock selection contributed to our premium during 2004. Strong stock selection in the producer durables, materials and processing and consumer staples sectors offset negative stock selection positions in the financial services, consumer discretionary and autos & transportation sectors. An underweighted position in the technology sector, in addition to an overweighted position in the materials and processing sector, also contributed to the Portfolio's premium. Notable contributors for the year included Terex, PacifiCare Health Systems, Texas Industries, Andrew and FMC. Detractors during the annual period included Vishay Intertechnology, Group 1 Automotive, American Axle & Manufacturing, Dana Corp. and Universal Health. With no major controversy creating anxiety today, there are few sizeable value themes and the value opportunity, as we measure it, is smaller than usual. Our research continues to identify, however, some pockets of opportunity. We remain convinced that among small companies, larger is cheaper. After a period of extraordinary outperformance, the smallest companies in the Russell 2500 Index are still posting losses collectively, while the largest are selling at just 22 times trailing earnings. Moreover, the larger the company, the cheaper it gets. The discount of larger-cap stocks within the group is all the more striking because over the long-term, the largest small-cap companies have delivered higher returns on both equity and investment, with lower volatility. Looking at sectors, we continue to maintain a pro-cyclical investment stance, although the character is shifting somewhat. Overweighted positions in commodities and capital equipment have been pared as stocks have appreciated. That capital has been recycled into consumer stocks as anxiety about consumer spending has created some relative bargains. We have also been investing in business services as we feel that there are companies with attractive valuations that are likely to enjoy improved results with an eventual rebound in white collar employment that accompanies every economic recovery. [CHART] Relative Performance AllianceBernstein Mid Cap Value Portfolio Russell 2500 Index ---------------------- ------------------ 5/03 10,000 10,000 12/03 13,316 13,941 12/04 15,801 16,491 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception# AllianceBernstein Mid Cap Value Portfolio 18.67% 31.55% Russell 2500 Index 18.29% 34.96% Mid Cap Value Funds Lipper Average 19.03% - #inception date of 5/1/03, returns not annualized The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 5/1/03 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Russell 2500 Index measures the performance of the 2,500 smallest companies in the Russell 3000 Index. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization. These 3,000 companies represent approximately 98% of the investable US equity market. As of the latest reconstitution, the average market capitalization of companies in the Russell 3000 was approximately $4.4 billion; the median market capitalization was approximately $822.4 million. Market capitalization of companies in the Index ranged from $317.8 billion to $175.8 million. The index is unmanaged and cannot be invested in directly and does not include administrative expenses or sales charges. The Russell 2500 Index represents approximately 16% of the total market capitalization of the Russell 3000 Index. As of the latest reconstitution, the average market capitalization of companies in the Russell 2500 was approximately $992.9 million; the median market capitalization was approximately $640 million. The largest company in the Index had an approximate market capitalization of $4.0 billion. The Lipper Variable Insurance Products (VIP) Mid Cap Value Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) less than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Mid-cap value funds typically have a below-average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value,compared to the S&P MidCap 400 Index. Source: Lipper, Inc. Investing in small company stocks involves a greater degree of risk than investing in medium or large company stocks. Investing in medium company stocks involves a greater degree of risk than investing in large company stocks. 28 AllianceBernstein Mid Cap Value Portfolio AllianceBernstein Mid Cap Value Portfolio - -------------------------------------------------------------------------------- [CHART] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets URS Corp. 2.1% A.G. Edwards 1.9% Constellation Brands, Inc. - Class A 1.9% Radian Group, Inc. 1.8% Borders Group, Inc. 1.8% Jones Apparel Group, Inc. 1.8% ArvinMeritor, Inc. 1.7% MAF Bancorp, Inc. 1.6% Universal Corp. 1.6% PacifiCare Health Systems, Inc. 1.6% [CHART] Sector Allocation 12/31/04 Consumer Discretionary ....... 22% Financials ................... 20% Industrials .................. 17% Information Technology ....... 9% Materials .................... 9% Consumer Staples ............. 7% Short-Term Investments ....... 6% Health Care .................. 4% Utilities .................... 4% Energy ....................... 2% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,118.30 $4.66 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.43 $4.44 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.88%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). AllianceBernstein Mid Cap Value Portfolio 29 AllianceBernstein Mid Cap Value Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (94.1%) $ Par $ (000's) -------------------------------------------------------- Consumer Discretionary (22.0%) American Axle & Manufacturing Holdings, Inc. 32,500 996 ArvinMeritor, Inc. 53,800 1,204 *AutoNation, Inc. 47,900 920 Beazer Homes USA, Inc. 6,200 907 Borders Group, Inc. 50,300 1,278 BorgWarner, Inc. 14,400 780 Dana Corp. 51,700 896 Federated Department Stores, Inc. 6,400 370 Foot Locker, Inc. 9,100 245 *Group 1 Automotive, Inc. 34,900 1,099 Jones Apparel Group, Inc. 34,800 1,273 Liz Claiborne, Inc. 27,400 1,157 The Neiman Marcus Group, Inc. -- Class A 16,000 1,145 *Office Depot, Inc. 66,200 1,149 *Payless ShoeSource, Inc. 82,800 1,018 RadioShack Corp. 22,200 730 V. F. Corp. 13,900 770 ------ Total 15,937 ------ Consumer Staples (7.2%) *BJ's Wholesale Club, Inc. 39,000 1,136 *Constellation Brands, Inc. -- Class A 28,700 1,335 Corn Products International, Inc. 9,100 487 *Del Monte Foods Co. 95,800 1,056 Universal Corp. 24,400 1,167 ------ Total 5,181 ------ Energy (2.3%) Pogo Producing Co. 19,100 926 *SEACOR Holdings, Inc. 13,900 742 ------ Total 1,668 ------ Financials (20.3%) A.G. Edwards, Inc. 31,600 1,366 Astoria Financial Corp. 23,300 931 Banknorth Group, Inc. 12,000 439 Central Pacific Financial Corp. 20,300 734 Commercial Federal Corp. 34,000 1,010 Fidelity National Financial, Inc. 6,300 288 Hibernia Corp. -- Class A 35,000 1,033 MAF Bancorp, Inc. 26,500 1,188 Old Republic International Corp. 40,400 1,022 Popular, Inc. 27,600 796 Radian Group, Inc. 24,200 1,288 Sovereign Bancorp, Inc. 38,600 870 StanCorp Financial Group, Inc. 13,000 1,073 UnionBanCal Corp. 12,000 774 Washington Federal, Inc. 34,000 902 Whitney Holding Corp. 20,100 904 ------ Total 14,618 ------
Shares/ Value Common Stocks (94.1%) $ Par $ (000's) ---------------------------------------------------- Health Care (4.2%) Owens & Minor, Inc. 41,050 1,156 *PacifiCare Health Systems, Inc. 20,500 1,159 Universal Health Services, Inc. -- Class B 16,000 712 ------ Total 3,027 ------ Industrials (16.8%) Cooper Industries, Ltd. -- Class A 12,000 815 Harsco Corp. 14,200 792 Hughes Supply, Inc. 31,700 1,025 *Moog, Inc. -- Class A 25,200 1,143 Mueller Industries, Inc. 19,600 631 PACCAR, Inc. 9,750 785 Parker-Hannifin Corp. 10,500 795 Reliance Steel & Aluminum Co. 25,000 974 *Terex Corp. 12,600 600 Textron, Inc. 12,000 886 *United Stationers, Inc. 24,700 1,141 *URS Corp. 46,200 1,482 USF Corp. 27,000 1,025 ------ Total 12,094 ------ Information Technology (8.8%) *ADC Telecommunications, Inc. 235,000 630 *Andrew Corp. 79,900 1,089 Anixter International, Inc. 25,900 932 IKON Office Solutions, Inc. 89,100 1,030 *Tech Data Corp. 18,000 817 *Tellabs, Inc. 70,000 601 *Vishay Intertechnology, Inc. 60,400 907 *Western Digital Corp. 31,700 344 ------ Total 6,350 ------ Materials (8.9%) Albemarle Corp. 27,500 1,065 Ball Corp. 19,200 844 Crompton Corp. 35,000 413 Cytec Industries, Inc. 21,300 1,096 MeadWestvaco Corp. 18,000 610 Silgan Holdings, Inc. 11,700 713 Texas Industries, Inc. 14,900 929 United States Steel Corp. 14,500 743 ------ Total 6,413 ------ Utilities (3.6%) Northeast Utilities 32,800 618 PNM Resources, Inc. 22,800 577 Puget Energy, Inc. 43,700 1,079 WPS Resources Corp. 6,100 305 ------ Total 2,579 ------ Total Common Stocks (Cost: $53,566) 67,867 ------
30 AllianceBernstein Mid Cap Value Portfolio AllianceBernstein Mid Cap Value Portfolio
Shares/ Value Money Market Investments (5.7%) $ Par $ (000's) ------------------------------------------------------- Federal Government & Agencies (5.7%) Federal Home Loan Bank, 2.10%, 1/18/05 4,100,000 4,096 ------ Total Money Market Investments (Cost: $4,096) 4,096 ------ Total Investments (99.8%) (Cost $57,662)(a) 71,963 ------ Other Assets, Less Liabilities (0.2%) 168 ------ Total Net Assets (100.0%) 72,131 ------
* Non-Income Producing (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $57,668 and the net unrealized appreciation of investments based on that cost was $14,295 which is comprised of $14,710 aggregate gross unrealized appreciation and $415 aggregate gross unrealized depreciation. The Accompanying Notes are an Integral Part of the Financial Statements AllianceBernstein Mid Cap Value Portfolio 31 Index 400 Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term capital appreciation through Invest in a portfolio designed to approximate the $427 million cost-effective participation in broad composition and returns of the S&P MidCap 400 Index. market performance
The Index 400 Stock Portfolio seeks investment results that approximate the performance of the Standard & Poor's MidCap 400 Composite Stock Price Index by investing in stocks included in the S&P MidCap 400 Index, which is composed of 400 common stocks. The S&P MidCap 400 Index does not include the very large issues that account for most of the weighting in the S&P 500(R) Index. Most of the companies in the S&P MidCap 400 Index have a market value in the range of $750 million to $5 billion. The Portfolio's strategy is to capture mid-cap market performance by investing in a portfolio modeled after a mid-cap stock index. The Portfolio invests in stocks included in the S&P MidCap 400 Index in proportion to their weightings in the Index, and may buy or sell securities after announced changes in the Index but before or after the effective date of the changes to attempt to achieve higher correlation with the Index. The Index 400 Stock Portfolio is not managed in the traditional sense using economic, financial and market analysis. A computer program is used to determine which stocks are to be purchased or sold to achieve the Portfolio's objective. Therefore, the Portfolio remains neutral relative to the benchmark in terms of economic sectors, market capitalization and growth and value styles of investing. The Portfolio will, to the extent feasible, remain full invested, and cash flows are invested promptly to attempt to minimize their impact on returns. The Portfolio may purchase Index futures contracts in amounts approximating the cash held in the Index. For the year ended December 31, 2004, the Index 400 Stock Portfolio had a return of 16.26%, slightly behind the return on the S&P MidCap 400 Index of 16.49%. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) Portfolio performance slightly lagged the S&P 400 MidCap Index due to transaction costs, administrative expenses, cash flow effects and holdings of stock index futures contracts. The average return for the Portfolio's peer group, Mid-Cap Core Funds, was 16.47% for the year ended December 31, 2004, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. However, the Mid-Cap Core Funds peer group is not strictly comparable to the Index 400 Stock Portfolio because many of the portfolios in the group are actively managed. Following a spectacular year for stocks in 2003, the U.S. stock market experienced very nice gains again for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%. The higher risk segments of the market posted even larger gains: the S&P SmallCap 600 Index gained 22.65% and the S&P MidCap 400 Index gained 16.49% for the year. The majority of the gains in 2004, however, came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. For the S&P MidCap 400 Index, the fourth quarter accounted for 12.16% of its 2004 annual gain of 16.49%. The 400 stocks in the MidCap 400 Index are divided into ten industry sectors. For the year ended December 31, 2004, all but one of the sectors showed substantial gains. The strongest sectors were Energy (up 31.82%), Materials (up 28.14%), Consumer Staples (up 20.74%), Consumer Discretionary (up 18.38%) and Industrials (up 18.15%). Energy was the top performing sector for the year, benefiting from a dramatic rise in oil prices through much of 2004. However, oil prices dropped substantially beginning in October and the sector turned in poor performance for the fourth quarter. Other sectors that performed well were Financials (up 17.04%), Health Care (up 14.94%), Utilities (up 14.39%) and Telecommunications Services (up 13.31%). The only sector with negative performance for the year was Information Technology (down -3.70%). The sector was hit hard earlier in 2004 as investors turned more defensive, but Info Tech stocks had a very nice gain in the fourth quarter as the market rallied and investors were willing to take on more risk. The Portfolio seeks to track the performance and weightings of stocks in the S&P MidCap 400 Index. Accordingly, changes are made to the Portfolios' holdings as the Index changes. Such changes occur as companies go public or private, merge, divest or have major changes in market capitalization. Additionally, Standard & Poor's adjusts the Index to better reflect the companies that are most representative of the composition of the U.S. economy. There were 25 additions to the Index during 2004. Those added in the fourth quarter were Advance Auto Parts, Crane Co., Deluxe Corp., Steel Dynamics, Worthington Industries, Weingarten Realty CBI, Techne Corp. and VCA Antech. There were also 25 companies eliminated from the Index during the year. Those eliminated during the fourth quarter were XTO Energy, Six Flags, Quantum Corp., Superior Industries, Compass Bancshares, L-3 Communications, Advanced Fibre Communications and IMC Global. 32 Index 400 Stock Portfolio Index 400 Stock Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Index 400 S&P MidCap Stock Portfolio 400 index --------------- ---------- 4/99 10,000 10,000 12/99 11,283 11,356 12/00 13,225 13,344 12/01 13,138 13,264 12/02 11,228 11,340 12/03 15,159 15,376 12/04 17,625 17,914 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year 5 Years Inception* Index 400 Stock Portfolio 16.26% 9.33% 10.51% S&P MidCap 400 Index 16.49% 9.54% 10.83% Mid Cap Core Funds Lipper Average 16.47% 9.51% - *inception date of 4/30/99 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 4/30/99 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The S&P MidCap 400 Index is a capitalization-weighted index that measures the performance of the mid-range sector of the U.S. stock market. As of December 31, 2004, the 400 companies in the composite had a median market capitalization of $2.4 billion and a total market value of $1.1 trillion. The MidCap 400 represents approximately 5.8% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Mid Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) less than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Mid-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P MidCap 400 Index. Source: Lipper, Inc. "Standard & Poor's(R)", "S&P(R)", "S&P MidCap 400 Index", "Standard & Poor's MidCap 400 Index", "S&P 500(R)" and "Standard & Poor's 500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by The Northwestern Mutual Life Insurance Company. The funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets D.R. Horton, Inc. 0.8% The Washington Post Co. - Class B 0.8% Lennar Corp. - Class A 0.7% Harman International Industries, Inc. 0.7% Fidelity National Financial, Inc. 0.7% Murphy Oil Corp. 0.6% Legg Mason, Inc. 0.6% Lyondell Chemical Co. 0.6% Weatherford International, Ltd. 0.6% Tyson Foods, Inc. - Class A 0.5% [CHART] Sector Allocation 12/31/04 Consumer Discretionary ....................... 18% Financials ................................... 17% Information Technology ....................... 13% Industrials .................................. 11% Health Care .................................. 10% Telecommunications & Other Holdings .......... 10% Energy ....................................... 6% Utilities .................................... 5% Consumer Staples ............................. 4% Sector Allocation is based on equities. Sector Allocation and Top 10 Holdings are subject to change. Index 400 Stock Portfolio 33 Index 400 Stock Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,097.50 $1.39 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,023.51 $1.34 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.26%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 34 Index 400 Stock Portfolio Index 400 Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) --------------------------------------------------------- Consumer Discretionary (17.6%) *99 Cents Only Stores 24,833 401 Abercrombie & Fitch Co. -- Class A 33,800 1,587 *Advance Auto Parts, Inc. 26,700 1,166 *Aeropostale, Inc. 19,900 586 American Eagle Outfitters, Inc. 26,350 1,241 American Greetings Corp. -- Class A 24,500 621 *AnnTaylor Stores Corp. 25,150 541 Applebee's International, Inc. 28,900 764 ArvinMeritor, Inc. 24,750 554 Bandag, Inc. 6,900 344 *Barnes & Noble, Inc. 25,000 807 Belo Corp. -- Class A 41,000 1,076 Blyth, Inc. 14,600 432 Bob Evans Farms, Inc. 12,600 329 Borders Group, Inc. 26,800 681 BorgWarner, Inc. 20,100 1,089 Boyd Gaming Corp. 31,100 1,295 *Brinker International, Inc. 30,850 1,082 *Caesars Entertainment, Inc. 111,800 2,252 Callaway Golf Co. 27,200 367 *CarMax, Inc. 37,200 1,155 Catalina Marketing Corp. 18,700 554 CBRL Group, Inc. 17,200 720 *The Cheesecake Factory, Inc. 27,750 901 *Chico's FAS, Inc. 31,900 1,452 Claire's Stores, Inc. 35,300 750 D.R. Horton, Inc. 83,250 3,357 *Dollar Tree Stores, Inc. 40,400 1,159 *Emmis Communications Corp. -- Class A 20,100 386 *Entercom Communications Corp. -- Class A 17,800 639 Foot Locker, Inc. 55,600 1,497 Furniture Brands International, Inc. 18,900 473 Gentex Corp. 27,700 1,025 GTECH Holdings Corp. 41,400 1,074 Harman International Industries, Inc. 23,900 3,035 Harte-Hanks, Inc. 30,450 791 *Hovnanian Enterprises, Inc. -- Class A 21,800 1,080 International Speedway Corp. -- Class A 19,000 1,003 *Krispy Kreme Doughnuts, Inc. 22,000 277 Lear Corp. 24,000 1,464 Lee Enterprises, Inc. 16,100 742 Lennar Corp. -- Class A 55,700 3,157 Mandalay Resort Group 24,100 1,697 Media General, Inc. -- Class A 8,500 551 Michaels Stores, Inc. 48,400 1,451 Modine Manufacturing Co. 12,300 415 *Mohawk Industries, Inc. 23,800 2,172 The Neiman Marcus Group, Inc. -- Class A 17,400 1,245 *O'Reilly Automotive, Inc. 19,700 887 Outback Steakhouse, Inc. 26,300 1,204 *Pacific Sunwear of California, Inc. 26,500 590
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) ---------------------------------------------------------- Consumer Discretionary continued *Payless ShoeSource, Inc. 24,342 299 PETsMART, Inc. 51,800 1,840 Pier 1 Imports, Inc. 30,700 605 The Reader's Digest Association, Inc. -- Class A 35,500 494 Regis Corp. 15,800 729 *Rent-A-Center, Inc. 27,100 718 Ross Stores, Inc. 52,700 1,521 Ruby Tuesday, Inc. 23,200 605 Ryland Group, Inc. 17,000 978 Saks, Inc. 49,800 723 *Scholastic Corp. 14,200 525 Thor Industries, Inc. 20,300 752 *The Timberland Co. -- Class A 12,300 771 *Toll Brothers, Inc. 26,700 1,832 Tupperware Corp. 20,900 433 *Urban Outfitters, Inc. 28,900 1,283 *Valassis Communications, Inc. 18,300 641 The Washington Post Co. -- Class B 3,400 3,343 *Westwood One, Inc. 34,300 924 *Williams-Sonoma, Inc. 41,600 1,458 ------ Total 74,592 ------ Consumer Staples (4.1%) *BJ's Wholesale Club, Inc. 24,800 722 Church & Dwight Co., Inc. 22,250 748 *Constellation Brands, Inc. -- Class A 38,500 1,791 *Dean Foods Co. 53,214 1,753 *Energizer Holdings, Inc. 27,800 1,381 Hormel Foods Corp. 49,500 1,552 The J.M. Smucker Co. 20,796 979 Lancaster Colony Corp. 12,500 536 PepsiAmericas, Inc. 49,400 1,049 Ruddick Corp. 16,700 362 *Smithfield Foods, Inc. 39,600 1,172 Tootsie Roll Industries, Inc. 18,654 646 Tyson Foods, Inc. -- Class A 126,040 2,320 Universal Corp. 9,100 435 Whole Foods Market, Inc. 22,200 2,117 ------ Total 17,563 ------ Energy (6.1%) *Cooper Cameron Corp. 19,600 1,055 ENSCO International, Inc. 53,900 1,711 *FMC Technologies, Inc. 24,369 785 *Forest Oil Corp. 21,200 672 *Grant Prideco, Inc. 44,100 884 *Hanover Compressor Co. 27,900 394 Helmerich & Payne, Inc. 18,000 613 Murphy Oil Corp. 32,800 2,640 *National-Oilwell, Inc. 30,700 1,083 *Newfield Exploration Co. 22,200 1,311 Noble Energy, Inc. 21,000 1,295 Overseas Shipholding Group, Inc. 14,100 778 Patterson-UTI Energy, Inc. 59,800 1,163
Index 400 Stock Portfolio 35 Index 400 Stock Portfolio
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) -------------------------------------------------------- Energy continued Pioneer Natural Resources Co. 52,100 1,829 *Plains Exploration and Production Co. 27,500 715 Pogo Producing Co. 23,000 1,115 *Pride International, Inc. 48,600 998 *Smith International, Inc. 37,400 2,035 Tidewater, Inc. 21,600 769 *Varco International, Inc. 34,962 1,019 *Weatherford International, Ltd. 48,500 2,488 Western Gas Resources, Inc. 26,400 772 ------ Total 26,124 ------ Financials (16.7%) A.G. Edwards, Inc. 27,300 1,180 *Allmerica Financial Corp. 19,000 624 AMB Property Corp. 29,600 1,196 American Financial Group, Inc. 26,300 823 *AmeriCredit Corp. 55,400 1,355 AmerUs Group, Co. 14,000 634 Arthur J. Gallagher & Co. 33,000 1,073 Associated Banc-Corp. 46,263 1,536 Astoria Financial Corp. 26,600 1,063 Bank of Hawaii Corp. 18,900 959 Banknorth Group, Inc. 62,800 2,297 Brown & Brown, Inc. 24,700 1,076 City National Corp. 17,600 1,243 The Colonial BancGroup, Inc. 47,700 1,013 Commerce Bancorp, Inc. 28,300 1,823 Cullen/Frost Bankers, Inc. 18,600 904 Developers Diversified Realty Corp. 38,500 1,708 Eaton Vance Corp. 24,000 1,252 Everest Re Group, Ltd. 20,000 1,791 Fidelity National Financial, Inc. 62,315 2,845 The First American Corp. 32,000 1,124 FirstMerit Corp. 30,100 858 GATX Corp. 17,600 520 Greater Bay Bancorp 18,200 507 HCC Insurance Holdings, Inc. 24,200 802 Hibernia Corp. -- Class A 55,400 1,635 Highwoods Properties, Inc. 19,100 529 Horace Mann Educators Corp. 15,300 292 Hospitality Properties Trust 24,000 1,104 Independence Community Bank Corp. 30,200 1,286 IndyMac Bancorp, Inc. 22,100 761 Investors Financial Services Corp. 23,700 1,185 Jefferies Group, Inc. 20,400 822 *LaBranche & Co., Inc. 21,400 192 Legg Mason, Inc. 35,950 2,633 Leucadia National Corp. 25,600 1,779 Liberty Property Trust 30,600 1,322 Mack-Cali Realty Corp. 21,700 999 Mercantile Bankshares Corp. 28,300 1,477 MoneyGram International, Inc. 31,600 668 New Plan Excel Realty Trust, Inc. 36,600 991 New York Community Bancorp, Inc. 94,621 1,946 *Ohio Casualty Corp. 22,100 513 Old Republic International Corp. 65,100 1,647 The PMI Group, Inc. 34,000 1,420
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) ------------------------------------------------------------ Financials continued Protective Life Corp. 24,800 1,059 Radian Group, Inc. 32,800 1,746 Raymond James Financial, Inc. 26,350 816 Rayonier, Inc. 17,811 871 SEI Investments Co. 36,600 1,535 *Silicon Valley Bancshares 12,800 574 StanCorp Financial Group, Inc. 10,100 833 TCF Financial Corp. 49,500 1,591 United Dominion Realty Trust, Inc. 47,300 1,173 Unitrin, Inc. 24,500 1,114 W.R. Berkley Corp. 30,000 1,415 Waddell & Reed Financial, Inc. -- Class A 29,500 705 Washington Federal, Inc. 28,150 747 Webster Financial Corp. 18,900 957 Weingarten Realty Investments 31,700 1,271 Westamerica Bancorporation 11,400 665 Wilmington Trust Corp. 24,000 868 ------ Total 71,347 ------ Health Care (9.7%) *Apria Healthcare Group, Inc. 17,300 570 *Barr Pharmaceuticals, Inc. 36,600 1,667 Beckman Coulter, Inc. 21,700 1,454 *Cephalon, Inc. 20,600 1,048 *Charles River Laboratories International, Inc. 23,100 1,063 *Community Health Systems, Inc. 31,100 867 *Covance, Inc. 22,300 864 *Coventry Health Care, Inc. 32,000 1,699 *Cytyc Corp. 39,900 1,100 DENTSPLY International, Inc. 28,850 1,621 *Edwards Lifesciences Corp. 21,200 875 *First Health Group Corp. 32,800 614 *Health Net, Inc. 39,600 1,143 *Henry Schein, Inc. 15,400 1,072 Hillenbrand Industries, Inc. 22,100 1,227 *INAMED Corp. 12,800 810 *Invitrogen Corp. 18,300 1,228 *IVAX Corp. 89,531 1,416 *LifePoint Hospitals, Inc. 13,800 481 *Lincare Holdings, Inc. 35,800 1,527 *Millennium Pharmaceuticals, Inc. 109,200 1,324 Omnicare, Inc. 37,200 1,288 *PacifiCare Health Systems, Inc. 30,100 1,701 *Par Pharmaceutical Companies, Inc. 12,100 501 *Patterson Companies, Inc. 49,000 2,125 Perrigo Co. 25,800 446 *Protein Design Labs, Inc. 34,100 705 *Renal Care Group, Inc. 24,050 866 *Sepracor, Inc. 37,500 2,225 *STERIS Corp. 24,700 586 *Techne Corp. 14,700 572 *Triad Hospitals, Inc. 27,439 1,021 Universal Health Services, Inc. -- Class B 20,800 926 Valeant Pharmaceuticals International 30,000 791 *Varian Medical Systems, Inc. 48,500 2,096 *Varian, Inc. 12,400 509
36 Index 400 Stock Portfolio Index 400 Stock Portfolio
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) --------------------------------------------------------- Health Care continued *VCA Antech, Inc. 29,300 574 *Vertex Pharmaceuticals, Inc. 28,700 303 *VISX, Inc. 17,700 458 ------ Total 41,363 ------ Industrials (11.5%) Adesa, Inc. 32,700 694 *AGCO Corp. 32,200 705 *AirTran Holdings, Inc. 30,600 327 *Alaska Air Group, Inc. 9,600 322 Alexander & Baldwin, Inc. 15,200 645 *Alliant Techsystems, Inc. 13,500 883 AMETEK, Inc. 24,500 874 Banta Corp. 8,900 398 The Brink's Co. 20,300 802 C.H. Robinson Worldwide, Inc. 30,500 1,693 *Career Education Corp. 36,600 1,464 Carlisle Companies, Inc. 11,100 721 *ChoicePoint, Inc. 31,700 1,458 CNF, Inc. 18,400 922 *Copart, Inc. 32,100 845 *Corinthian Colleges, Inc. 32,300 609 Crane Co. 21,100 609 Deluxe Corp. 17,900 668 *DeVry, Inc. 25,100 436 Donaldson Co., Inc. 29,700 968 *The Dun & Bradstreet Corp. 24,800 1,479 *Dycom Industries, Inc. 17,300 528 *Education Management Corp. 26,200 865 Expeditors International of Washington, Inc. 38,000 2,124 Fastenal Co. 27,100 1,668 Federal Signal Corp. 17,200 304 *Flowserve Corp. 19,700 543 Graco, Inc. 24,700 923 Granite Construction, Inc. 14,900 396 Harsco Corp. 14,700 819 Herman Miller, Inc. 25,200 696 HNI Corp. 20,100 865 Hubbell, Inc. -- Class B 21,700 1,135 *ITT Educational Services, Inc. 16,400 780 J.B. Hunt Transport Services, Inc. 29,000 1,301 *Jacobs Engineering Group, Inc. 20,100 961 *JetBlue Airways Corp. 36,950 858 Kelly Services, Inc. -- Class A 12,600 380 Kennametal, Inc. 13,600 677 *Korn/Ferry International 13,900 288 *Laureate Education, Inc. 17,219 759 Manpower, Inc. 32,200 1,555 Nordson Corp. 12,900 517 Pentair, Inc. 36,000 1,568 Precision Castparts Corp. 23,500 1,543 *Quanta Services, Inc. 41,800 334 Republic Services, Inc. 53,800 1,805 Rollins, Inc. 16,350 430 *Sequa Corp. -- Class A 3,700 226 *Sotheby's Holdings, Inc. -- Class A 22,700 412 SPX Corp. 26,800 1,074
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) --------------------------------------------------------- Industrials continued *Stericycle, Inc. 16,100 740 *Swift Transportation Co., Inc. 26,200 563 Tecumseh Products Co. -- Class A 6,600 315 Teleflex, Inc. 14,400 748 *Thomas & Betts Corp. 21,100 649 Trinity Industries, Inc. 17,000 579 *United Rentals, Inc. 27,800 525 Werner Enterprises, Inc. 28,150 637 York International Corp. 14,800 511 ------ Total 49,123 ------ Information Technology (13.2%) *3Com Corp. 135,500 565 *Activision, Inc. 49,650 1,002 Acxiom Corp. 30,800 810 ADTRAN, Inc. 27,300 523 *Advent Software, Inc. 11,600 238 *Alliance Data Systems Corp. 29,200 1,386 *Amphenol Corp. -- Class A 31,600 1,161 *Arrow Electronics, Inc. 41,400 1,006 *Ascential Software Corp. 20,975 342 *Atmel Corp. 170,400 668 *Avnet, Inc. 43,000 784 *Avocent Corp. 17,800 721 *The BISYS Group, Inc. 42,900 706 *Cabot Microelectronics Corp. 8,892 356 *Cadence Design Systems, Inc. 96,500 1,333 CDW Corp. 29,700 1,971 *Ceridian Corp. 53,000 969 Certegy, Inc. 22,300 792 *CheckFree Corp. 31,000 1,180 *Cognizant Technology Solutions Corp. -- Class A 47,500 2,012 *CommScope, Inc. 19,400 367 *Credence Systems Corp. 34,000 311 *Cree, Inc. 26,400 1,058 *CSG Systems International, Inc. 18,200 340 *Cypress Semiconductor Corp. 44,900 527 Diebold, Inc. 25,500 1,421 *DST Systems, Inc. 29,900 1,558 Fair Isaac Corp. 25,100 921 *Fairchild Semiconductor International, Inc. 42,700 694 *Gartner, Inc. 39,500 492 Harris Corp. 23,900 1,477 Imation Corp. 12,100 385 *Integrated Circuit Systems, Inc. 25,100 525 *Integrated Device Technology, Inc. 38,100 440 *International Rectifier Corp. 23,800 1,061 Intersil Corp. -- Class A 53,700 899 Jack Henry & Associates, Inc. 32,300 643 *Keane, Inc. 22,100 325 *KEMET Corp. 30,900 277 *Lam Research Corp. 48,700 1,408 *Lattice Semiconductor Corp. 40,500 231 *LTX Corp. 21,800 168 *Macromedia, Inc. 25,300 787 *Macrovision Corp. 17,800 458 *McAfee, Inc. 57,200 1,655
Index 400 Stock Portfolio 37 Index 400 Stock Portfolio
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) ---------------------------------------------------------- Information Technology continued *McDATA Corp. -- Class A 42,200 252 *Mentor Graphics Corp. 27,200 416 *Micrel, Inc. 32,200 355 Microchip Technology, Inc. 73,612 1,962 *MPS Group, Inc. 36,600 449 National Instruments Corp. 28,250 770 *Newport Corp. 15,300 216 Plantronics, Inc. 17,300 717 *Plexus Corp. 15,400 200 *Polycom, Inc. 35,000 816 *Powerwave Technologies, Inc. 37,300 316 *Retek, Inc. 20,000 123 The Reynolds and Reynolds Co. -- Class A 23,100 612 *RF Micro Devices, Inc. 66,900 458 *RSA Security, Inc. 24,800 497 *SanDisk Corp. 58,200 1,453 *Semtech Corp. 26,400 577 *Silicon Laboratories, Inc. 18,500 653 *Storage Technology Corp. 38,000 1,201 *Sybase, Inc. 34,000 678 *Synopsys, Inc. 54,300 1,065 *Tech Data Corp. 20,700 940 *The Titan Corp. 30,200 489 *Transaction Systems Architects, Inc. -- Class A 13,400 266 *TriQuint Semiconductor, Inc. 49,111 219 *UTStarcom, Inc. 40,800 904 *Vishay Intertechnology, Inc. 59,287 890 *Wind River Systems, Inc. 29,400 398 *Zebra Technologies Corp. -- Class A 25,600 1,441 ------ Total 56,286 ------ Materials (4.8%) Airgas, Inc. 26,800 710 Albemarle Corp. 14,900 577 Arch Coal, Inc. 22,300 793 Bowater, Inc. 19,900 875 Cabot Corp. 22,000 851 Crompton Corp. 40,963 483 Cytec Industries, Inc. 14,200 730 Ferro Corp. 15,000 348 *FMC Corp. 13,200 638 Longview Fibre Co. 18,200 330 The Lubrizol Corp. 23,800 877 Lyondell Chemical Co. 86,300 2,495 Martin Marietta Materials, Inc. 17,100 918 Minerals Technologies, Inc. 7,300 487 Olin Corp. 25,100 553 P.H. Glatfelter Co. 15,700 240 Packaging Corp. of America 38,200 900 Peabody Energy Corp. 23,100 1,869 Potlatch Corp. 10,600 536 RPM International, Inc. 41,500 816 *The Scotts Co. -- Class A 11,700 860 Sensient Technologies Corp. 16,700 401 Sonoco Products Co. 35,100 1,041 Steel Dynamics, Inc. 17,700 670
Shares/ Value Common Stocks (90.3%) $ Par $ (000's) -------------------------------------------------------- Materials continued The Valspar Corp. 18,300 915 Worthington Industries, Inc. 31,200 611 ------- Total 20,524 ------- Telecommunication Services (0.5%) *Cincinnati Bell, Inc. 87,600 364 Telephone and Data Systems, Inc. 20,500 1,577 ------- Total 1,941 ------- Utilities (6.1%) AGL Resources, Inc. 26,800 891 Alliant Energy Corp. 41,200 1,178 Aqua America, Inc. 33,250 818 *Aquila, Inc. 86,300 318 Black Hills Corp. 11,600 356 DPL, Inc. 45,200 1,135 Duquesne Light Holdings, Inc. 27,400 516 Energy East Corp. 52,400 1,398 Equitable Resources, Inc. 21,900 1,328 Great Plains Energy, Inc. 26,500 802 Hawaiian Electric Industries, Inc. 28,800 840 IDACORP, Inc. 14,900 455 MDU Resources Group, Inc. 42,200 1,126 National Fuel Gas Co. 29,500 836 Northeast Utilities 45,800 863 NSTAR 19,000 1,031 OGE Energy Corp. 31,800 843 ONEOK, Inc. 36,900 1,049 Pepco Holdings, Inc. 67,100 1,431 PNM Resources, Inc. 21,550 545 Puget Energy, Inc. 35,600 879 Questar Corp. 30,100 1,535 SCANA Corp. 40,100 1,581 *Sierra Pacific Resouces 41,881 440 Vectren Corp. 27,100 726 Westar Energy, Inc. 30,700 702 WGL Holdings, Inc. 17,400 537 Wisconsin Energy Corp. 41,800 1,409 (b)WPS Resources Corp. 13,300 664 ------- Total 26,232 ------- Total Common Stocks (Cost: $306,971) 385,095 ------- Money Market Investments (9.6%) -------------------------------------------------------- Federal Government & Agencies (2.6%) (b)Federal Home Loan Mortgage Corp., 2.42%, 3/22/05 2,000,000 1,990 (b)Federal National Mortgage Assoc., 1.05%, 1/3/05 9,200,000 9,199 ------- Total 11,189 ------- Finance Services (4.2%) (b)Ciesco LP, 2.20%, 1/3/05 6,000,000 5,999 (b)Citicorp, 2.27%, 1/20/05 6,000,000 5,993 (b)Preferred Receivable Funding, 2.28%, 1/13/05 6,000,000 5,995 ------- Total 17,987 -------
38 Index 400 Stock Portfolio Index 400 Stock Portfolio
Shares/ Value Money Market Investments (9.6%) $ Par $ (000's) ------------------------------------------------------- Personal Credit Institutions (1.4%) (b)Rabobank Financial Corp., 2.17%, 1/4/05 6,000,000 5,999 ------- Total 5,999 ------- Short Term Business Credit (1.4%) (b)Old Line Funding Corp., 2.25%, 1/13/05 6,000,000 5,996 ------- Total 5,996 ------- Total Money Market Investments (Cost: $41,171) 41,171 ------- Total Investments (99.9%) (Cost $348,142)(a) 426,266 ------- Other Assets, Less Liabilities (0.1%) 561 ------- Total Net Assets (100.0%) 426,827 -------
* Non-Income Producing (a) AtDecember 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $350,821 and the net unrealized appreciation of investments based on that cost was $75,445 which is comprised of $99,879 aggregate gross unrealized appreciation and $24,434 aggregate gross unrealized depreciation. (b) Allor a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) ------------------------------------------------------- S&P MidCap 400 Index Futures 124 3/05 $1,412 (Total Notional Value at December 31, 2004, $39,839)
The Accompanying Notes are an Integral Part of the Financial Statements Index 400 Stock Portfolio 39 Janus Capital Appreciation Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital Invest in equity securities selected for their growth $57 million potential.
The Janus Capital Appreciation Portfolio seeks long-term growth of capital through investments in the equities of companies selected for their growth potential; the main emphasis is on large-capitalization stocks. The Portfolio is managed using a "bottom-up" approach, which means that the holdings are selected by examining individual securities, rather than focusing on broad economic trends or industry sectors. For the year ended December 31, 2004, the Janus Capital Appreciation Portfolio returned 19.67% while its benchmark, the S&P 500 Index, returned 10.88%. Among the reasons the Portfolio significantly outperformed the S&P 500 Index was our decision to maintain overweight positions in the healthcare and information technology sectors and the exceptionally strong results posted by a number of our picks in these two groups. Weaker areas of investment included industrials and telecommunications services, where select portfolio holdings experienced setbacks. The Portfolio's impressive metrics can be credited to the quality and depth of the investment research performed by our analysts. Their work has given us the confidence to invest early and with conviction in some of our best ideas. In fact, our investments in strong performers such as Apple Computer, eBay and UnitedHealth Group, among others, are the result of long-term investment commitments. Our investment in Apple Computer was the strongest contributor to performance during the period. Apple recently launched one of its most elegant products to date, the new G5 iMac. The early reviews have been overwhelmingly positive and we expect this to be an important product for the company. More importantly, Apple's wildly successful iPod music player continues to be the music-listening device of choice and sales continue to exceed most investors' expectations. Another strong-performing position in the Portfolio was eBay. Its management team, the sheer financial power of its business model and the global proliferation of the "eBay economy" have all continued to impress us. The eBay trading platform is well on its way to enabling the buying and selling of products worldwide with a gross merchandise value (GMV) in excess of $34 billion dollars. Ebay's own revenues from those sales were in excess of $2.5 billion in 2004 and we expect both to grow rapidly again in 2005. To give you an idea of the velocity of trade on eBay, a car is sold every six minutes, a digital camera is sold every 14 minutes and a piece of jewelry every eight minutes. Today, over 430,000 people are making a living buying and selling on eBay. Finally, we continue to be impressed with eBay's entire management team and their ability to guide the company's explosive growth. Investing in the managed care sector is not for the faint of heart; very few issues are as highly charged as healthcare. But, as consumers become increasingly responsible for the first dollars spent on their healthcare needs, it's clear to us that UnitedHealth Group is succeeding in the marketplace. The company's flexible plan designs, along with its increasing focus on making healthcare more affordable for larger and larger segments of the population, are a powerful financial combination. Janus' healthcare team continues to do an outstanding job monitoring medical and financial trends as well as anticipating the changes in this emotionally charged space. We continue to have the utmost confidence in Bill Maguire, Steve Hemsley and the entire UnitedHealth management team. Not all of our investments have met our expectations. Drugmaker Forest Labs was a poor performer. While the stock will be faced with some issues over the next several quarters, including product competition and generic challenges to key drugs, we believe that the worst is priced into the stock and have maintained our stake for now. Meanwhile, we liquidated our position in Nvidia, a stock that was among our biggest detractors. While we like the longer-term prospects for graphic-intensive semiconductor manufacturers, we feel that better opportunities lie elsewhere. 40 Janus Capital Appreciation Portfolio Janus Capital Appreciation Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Janus Capital Appreciation Portfolio S&P 500 Index -------------------------- ------------- 5/03 $10,000 $10,000 12/03 11,990 12,282 12/04 14,349 13,618 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception# Janus Capital Appreciation Portfolio 19.67% 24.16% S&P 500 Index 10.88% 13.97% Large Cap Growth Funds Lipper Average 8.04% - #inception date of 5/1/03, returns not annualized The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 5/1/03 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap growth funds typically have an above-average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets UnitedHealth Group, Inc. 8.6% Genentech, Inc. 7.1% Apple Computer, Inc. 5.7% Electronic Arts, Inc. 5.5% Aetna, Inc. 5.5% eBay, Inc. 4.8% NIKE, Inc. - Class B 4.4% Bank of America Corp. 4.3% Nextel Communications, Inc. - Class A 3.6% United Parcel Service, Inc. - Class B 3.5% [CHART] Sector Allocation 12/31/04 Health Care ................... 23% Financials .................... 17% Consumer Discretionary ........ 16% Information Technology ........ 15% Short-Term Investments ........ 12% Industrials ................... 6% Telecommunication Services .... 4% Consumer Staples .............. 4% Energy ........................ 3% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Janus Capital Appreciation Portfolio 41 Janus Capital Appreciation Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,135.10 $4.46 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,020.66 $4.22 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.83%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 42 Janus Capital Appreciation Portfolio Janus Capital Appreciation Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (87.6%) $ Par $ (000's) -------------------------------------------------------- Consumer Discretionary (15.5%) *Advance Auto Parts, Inc. 19,470 850 *Amazon.com, Inc. 21,485 952 *eBay, Inc. 23,365 2,717 J. C. Penney Co., Inc. 6,195 256 *Kohl's Corp. 27,550 1,355 NIKE, Inc. -- Class B 27,200 2,467 Outback Steakhouse, Inc. 4,615 211 ------ Total 8,808 ------ Consumer Staples (4.3%) *Energizer Holdings, Inc. 19,815 985 The Procter & Gamble Co. 26,125 1,439 ------ Total 2,424 ------ Energy (2.9%) Murphy Oil Corp. 11,745 945 Suncor Energy, Inc. 19,865 703 ------ Total 1,648 ------ Financials (17.1%) The Allstate Corp 23,395 1,210 Bank of America Corp. 51,895 2,438 *Berkshire Hathaway, Inc. -- Class B 184 540 The Goldman Sachs Group, Inc. 17,115 1,781 SLM Corp. 36,880 1,969 Wells Fargo & Co. 28,190 1,752 ------ Total 9,690 ------ Health Care (22.9%) Aetna, Inc. 24,910 3,108 *Forest Laboratories, Inc. 9,640 432 *Genentech, Inc. 74,040 4,031 *Invitrogen Corp. 7,845 527 UnitedHealth Group, Inc. 55,565 4,891 ------ Total 12,989 ------ Industrials (5.9%) 3M Co. 16,350 1,342 United Parcel Service, Inc. -- Class B 23,530 2,011 ------ Total 3,353 ------
Shares/ Value Common Stocks (87.6%) $ Par $ (000's) --------------------------------------------------------- Information Technology (15.4%) *Apple Computer, Inc. 50,060 3,224 *Electronic Arts, Inc. 50,930 3,141 Texas Instruments, Inc. 48,465 1,193 *Yahoo!, Inc. 30,730 1,158 ------ Total 8,716 ------ Telecommunication Services (3.6%) *Nextel Communications, Inc. -- Class A 68,420 2,053 ------ Total 2,053 ------ Total Common Stocks (Cost: $35,061) 49,681 ------ Money Market Investments (12.0%) --------------------------------------------------------- Federal Government & Agencies (12.0%) Federal Home Loan Bank, 2.10%, 1/18/05 6,800,000 6,793 ------ Total Money Market Investments (Cost: $6,793) 6,793 ------ Total Investments (99.6%) (Cost $41,854)(a) 56,474 ------ Other Assets, Less Liabilities (0.4%) 216 ------ Total Net Assets (100.0%) 56,690 ------
* Non-Income Producing (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $41,872 and the net unrealized appreciation of investments based on that cost was $14,602 which is comprised of $14,725 aggregate gross unrealized appreciation and $123 aggregate gross unrealized depreciation. The Accompanying Notes are an Integral Part of the Financial Statements Janus Capital Appreciation Portfolio 43 Growth Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term appreciation of capital with Hold a diversified mix of high quality growth stocks of $687 million moderate risk medium and large companies with above-average potential for earnings growth.
The Growth Stock Portfolio seeks long-term growth of capital by investing in companies believed to have above-average earnings growth potential; current income is secondary. The Portfolio's holdings will consist primarily of high quality growth stocks of medium and large companies. The Portfolio's strategy is to analyze economic trends to determine their impact on various sectors and industries and to select high quality stocks from industries with the best earnings potential. The Portfolio invests primarily in equity securities of well-established companies selected for their growth potential, with emphasis placed on high quality companies with strong financial characteristics. The investment process is initiated with an analysis of the economic outlook. Further study of economic sectors leads to the identification of growth-oriented industries, and to detailed studies of individual companies. In evaluating individual companies, factors such as the company management team, product outlook, global exposure, industry leadership position and financial characteristics are important variables used in the analysis. For the year ended December 31, 2004, the Growth Stock Portfolio returned 6.67%, lagging the S&P 500 Index, which returned 10.88%. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The Portfolio's underperformance compared to the Index can be attributed primarily to two factors: overweight positions in the Information Technology and Health Care sectors, which registered small gains for the year, and the Portfolio's investment style, which is to invest in quality companies with consistent growth in earnings. That strategy emphasizes long-term growth of capital and is designed to capture the long-term potential outperformance of medium and large-cap stocks with reduced volatility. It is not uncommon, therefore, for the Portfolio to lag in a market led by riskier areas of the market, which was true in 2004, particularly in the fourth quarter. The average return for the Large-Cap Core Funds--the peer group in which Lipper places the Portfolio -- was 8.59% for the year ended December 31, 2004, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The average return for the Large-Cap Growth Funds - -- the peer group which the managers believe better suits the Portfolio's investment style -- was 8.04% for 2004, according to Lipper. Following a spectacular year for stocks in 2003, the U.S. stock market experienced very nice gains again for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%. As the cyclical recovery continued in 2004, returns on large capitalization stocks lagged for the second year in a row, as investors sought higher returns in riskier segments of the market such as small-cap and international stocks. Those segments posted even larger gains: the S&P SmallCap 600 Index gained 22.65% and the MSCI EAFE Index gained 20.70% for the year. The majority of the gains in all segments of the market, however, came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. In the Growth Stock Portfolio, overweight positions in Information Technology and Health Care, as well as individual stock selections in those sectors, hurt performance in 2004. Cisco Systems Inc. (computer networking solutions) and Intel Corporation (semiconductors) both performed poorly; Health Care stocks Pfizer Inc. (pharmaceuticals and consumer products) and Eli Lilly & Co. (pharmaceuticals) put a drag on the Portfolio's return for the year, as the sector was affected by negative news on a number of prescription drugs. A lack of exposure to the Utilities sector, which was one of the highest performing sectors in 2004, also held down total return. Positives for the Portfolio in 2004 included an overweight position in Consumer Discretionary stocks relative to the S&P 500. Target Corp. (general merchandise retailer), which is one of the Portfolio's top ten holdings, posted strong gains for the year. Individual stock selection in the Industrials and Energy sectors also added value. Energy was the strongest performing sector in 2004, and the Portfolio benefited from stock selection within this sector, particularly from its positions in EOG Resources, Inc. (natural gas and crude oil exploration) and Halliburton Holding Co. (engineering and construction service provider). Other individual securities that helped performance were Federal Express, Yahoo! Inc. and American Standard. Diversification within the Portfolio continued to increase during 2004, and the ten largest holdings represented 21.7% of the Portfolio's net asset value as of December 31, 2004, compared to 24.6% at the end of 2003. Looking forward to 2005, quality, large capitalization stocks, which have lagged the market for the past two years, may be poised for an upturn. If large cap stocks return to favor, the Portfolio should be well positioned to take advantage of an environment that rewards quality. 44 Growth Stock Portfolio Growth Stock Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Growth Stock Portfolio S&P 500 Index ---------------------- -------------- 5/94 $10,000 $10,000 12/94 10,155 10,344 12/95 13,285 14,226 12/96 16,063 17,490 12/97 20,858 23,322 12/98 26,425 29,986 12/99 32,369 36,294 12/00 31,563 32,992 12/01 27,077 29,072 12/02 21,436 22,650 12/03 25,497 29,144 12/04 26,782 31,258 - -------------------------------------------------------- Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years - -------------------------------------------------------- Growth Stock Portfolio 6.67% -3.42% 10.35% S&P 500 Index 10.88% -2.30% 12.07% Large Cap Core Funds Lipper Average 8.59% -2.66% 9.90% Large Cap Growth Funds Lipper Average 8.04% -7.30% 9.47% - -------------------------------------------------------- The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Large Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Source: Lipper, Inc. The Lipper Variable Insurance Products (VIP) Large Cap Growth Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap growth funds typically have an above-average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets General Electric Co. 3.4% Microsoft Corp. 3.0% American Standard Companies, Inc. 2.3% FedEx Corp. 2.1% Wells Fargo & Co. 2.0% Target Corp. 1.9% Fortune Brands, Inc. 1.8% Cisco Systems, Inc. 1.8% Wal-Mart Stores, Inc. 1.7% Dell, Inc. 1.7% [CHART] Sector Allocation 12/31/04 Information Technology ....................... 22% Consumer Discretionary ....................... 18% Health Care .................................. 15% Financials ................................... 14% Industrials .................................. 9% Consumer Staples ............................. 7% Energy ....................................... 6% Short-Term Investments ....................... 6% Materials .................................... 2% Telecommunication Services ................... 1% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Growth Stock Portfolio 45 Growth Stock Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,055.30 $2.22 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,022.68 $2.18 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.43%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 46 Growth Stock Portfolio Growth Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (94.0%) $ Par $ (000's) ---------------------------------------------------- Consumer Discretionary (17.6%) *Bed Bath & Beyond, Inc. 116,900 4,656 Best Buy Co., Inc. 68,500 4,070 Carnival Corp. 126,000 7,261 *Comcast Corp. -- Class A 121,084 4,030 *eBay, Inc. 41,100 4,779 Fortune Brands, Inc. 156,700 12,094 Harley-Davidson, Inc. 98,000 5,954 J. C. Penney Co., Inc. 194,200 8,040 *Kohl's Corp. 92,300 4,538 Lowe's Companies, Inc. 87,900 5,062 McDonald's Corp. 179,800 5,764 The McGraw-Hill Companies, Inc. 84,900 7,772 News Corp. -- Class A 279,600 5,217 NIKE, Inc. -- Class B 74,200 6,729 PETsMART, Inc. 126,500 4,495 Staples, Inc. 197,900 6,671 Target Corp. 245,600 12,755 *Time Warner, Inc. 301,500 5,861 Viacom, Inc. -- Class B 149,900 5,455 ------- Total 121,203 ------- Consumer Staples (7.4%) Altria Group, Inc. 152,400 9,312 Anheuser-Busch Companies, Inc. 88,300 4,479 Avon Products, Inc. 140,400 5,433 PepsiCo, Inc. 185,900 9,704 The Procter & Gamble Co. 85,300 4,698 Wal-Mart Stores, Inc. 224,700 11,870 Walgreen Co. 131,000 5,026 ------- Total 50,522 ------- Energy (5.4%) ConocoPhillips 73,708 6,400 EOG Resources, Inc. 97,700 6,972 Exxon Mobil Corp. 222,934 11,428 Halliburton Co. 162,900 6,392 *Noble Corp. 123,800 6,158 ------- Total 37,350 ------- Financials (14.4%) American Express Co. 193,200 10,891 American International Group, Inc. 119,900 7,874 Capital One Financial Corp. 51,000 4,295 Citigroup, Inc. 207,100 9,978 The Goldman Sachs Group, Inc. 58,700 6,107 Legg Mason, Inc. 50,600 3,707 Lehman Brothers Holdings, Inc. 73,600 6,439 Morgan Stanley 126,500 7,023 Principal Financial Group, Inc. 177,500 7,267 Prudential Financial, Inc. 157,900 8,678 U.S. Bancorp 235,100 7,363 Wachovia Corp. 106,800 5,618 Wells Fargo & Co. 217,500 13,517 ------- Total 98,757 -------
Shares/ Value Common Stocks (94.0%) $ Par $ (000's) ----------------------------------------------------------- Health Care (14.6%) Abbott Laboratories 153,800 7,175 *Amgen, Inc. 168,200 10,790 *Boston Scientific Corp. 138,200 4,913 *Caremark Rx, Inc. 159,100 6,273 Eli Lilly and Co. 105,700 5,998 *Fisher Scientific International, Inc. 52,500 3,275 *Genentech, Inc. 90,500 4,927 *Gilead Sciences, Inc. 155,300 5,434 Guidant Corp. 21,500 1,550 Johnson & Johnson 182,400 11,567 Medtronic, Inc. 177,900 8,836 Pfizer, Inc. 350,150 9,416 *St. Jude Medical, Inc. 112,200 4,705 Teva Pharmaceutical Industries, Ltd., ADR 206,800 6,175 UnitedHealth Group, Inc. 38,100 3,354 *Zimmer Holdings, Inc. 72,900 5,841 ------- Total 100,229 ------- Industrials (9.4%) *American Standard Companies, Inc. 378,300 15,631 Caterpillar, Inc. 42,100 4,105 FedEx Corp. 146,100 14,389 General Electric Co. 640,400 23,376 Tyco International, Ltd. 193,800 6,926 ------- Total 64,427 ------- Information Technology (21.7%) *Accenture Ltd. -- Class A 182,000 4,914 *Affiliated Computer Services, Inc. -- Class A 126,300 7,602 Analog Devices, Inc. 141,400 5,220 *ASML Holding N.V. 337,000 5,362 *Broadcom Corp. -- Class A 95,700 3,089 *Cisco Systems, Inc. 623,700 12,037 *Dell, Inc. 278,600 11,740 First Data Corp. 223,500 9,508 *Fiserv, Inc. 125,362 5,038 *Google, Inc. -- Class A 12,742 2,460 Hewlett-Packard Co. 215,800 4,525 Intel Corp. 375,200 8,776 International Business Machines Corp. 94,500 9,316 *Lexmark International, Inc. -- Class A 70,700 6,010 Microsoft Corp. 782,200 20,894 National Semiconductor Corp. 232,900 4,181 SAP AG, ADR 78,900 3,488 *Symantec Corp. 97,200 2,504 Taiwan Semiconductor Manufacturing Co., Ltd., ADR 349,037 2,963 *Telefonaktiebolget LM Ericsson, ADR 172,800 5,441 Texas Instruments, Inc. 154,100 3,794 *VeriSign, Inc. 127,200 4,264 *Yahoo!, Inc. 140,710 5,302 ------- Total 148,428 -------
Growth Stock Portfolio 47 Growth Stock Portfolio
Shares/ Value Common Stocks (94.0%) $ Par $ (000's) -------------------------------------------------------- Materials (2.4%) Alcoa, Inc. 141,600 4,449 PPG Industries, Inc. 60,700 4,137 Praxair, Inc. 171,600 7,577 ------- Total 16,163 ------- Other Holdings (0.2%) *Nasdaq-100 Trust, Series 1 40,500 1,616 ------- Total 1,616 ------- Telecommunication Services (0.9%) Vodafone Group PLC, ADR 235,700 6,453 ------- Total 6,453 ------- Total Common Stocks (Cost: $559,864) 645,148 ------- Money Market Investments (6.0%) -------------------------------------------------------- Federal Government & Agencies (0.6%) Federal Home Loan Bank, 2.42%, 3/22/05 4,000,000 3,980 ------- Total 3,980 ------- Finance Lessors (2.8%) (b)Ranger Funding Co., LLC, 2.34%, 1/13/05 10,000,000 9,993 (b)Windmill Funding Corp., 2.33%, 1/25/05 10,000,000 9,984 ------- Total 19,977 ------- Personal Credit Institutions (1.5%) USAA Capital Corp., 2.28%, 1/13/05 10,000,000 9,992 ------- Total 9,992 -------
Shares/ Value Money Market Investments (6.0%) $ Par $ (000's) ----------------------------------------------------- Short Term Business Credit (1.1%) CXC Inc., 2.20%, 1/3/05 7,500,000 7,499 ------- Total 7,499 ------- Total Money Market Investments (Cost: $41,447) 41,448 ------- Total Investments (100.0%) (Cost $601,311)(a) 686,596 ------- Other Assets, Less Liabilities (0.0%) 253 ------- Total Net Assets (100.0%) 686,849 -------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $601,428 and the net unrealized appreciation of investments based on that cost was $85,168 which is comprised of $107,770 aggregate gross unrealized appreciation and $22,602 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) --------------------------------------------------------------- S&P 500 Index Futures 60 3/05 $503 (Total Notional Value at December 31, 2004, $17,702)
The Accompanying Notes are an Integral Part of the Financial Statements 48 Growth Stock Portfolio Large Cap Core Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital and income, Actively manage a portfolio of equity securities with a goal $470 million consistent with moderate investment risk of exceeding the total return of the S&P 500 Index.
The Large Cap Core Stock Portfolio seeks long-term growth of capital and income. The Portfolio seeks to achieve these objectives primarily by investing in the equity securities of companies selected for their growth potential. The Portfolio's holdings will consist primarily of equity securities of large companies. The Portfolio's strategy is to actively manage a portfolio of selected equity securities with a goal of outperforming the total return of the S&P 500(R) Index. The Portfolio attempts to reduce risk by investing in many different economic sectors, industries and companies. The Portfolio's manager may underweight or overweight selected economic sectors against the sector weightings of the S&P 500 Index to seek to enhance the Portfolio's total return or reduce fluctuations in market value relative to the S&P 500 Index. For the year ended December 31, 2004, the Large Cap Core Stock Portfolio had a return of 8.16%, lagging the 10.88% return on the S&P 500 Index. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The average return for the Portfolio's peer group, Large-Cap Core Funds, was 8.59% for the same time period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's underperformance relative to the Index resulted mainly from a lack of higher risk stocks, particularly in the Information Technology sector, at a time when investor's preference was for more speculative stocks than those that populate the Large Cap Core Stock Portfolio. Our investment approach, which emphasizes long-term growth of capital and income, is designed to capture the long-term potential outperformance of large cap stocks with reduced volatility. It is not uncommon, therefore, for the Portfolio to lag in a market led by speculative stocks, which was true particularly in the fourth quarter of 2004. Following a spectacular year for stocks in 2003, the U.S. stock market experienced very nice gains again for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%. The higher risk segments of the market posted even larger gains: the S&P SmallCap 600 Index gained 22.65% and the S&P MidCap 400 Index gained 16.49% for the year. The majority of the gains in 2004, however, came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. The fourth quarter rally was even more pronounced in small and mid-cap stocks. The S&P SmallCap 600 Index gained 13.00% in the fourth quarter, while its gain for the year was 22.65%. And in the S&P MidCap 400 Index, the fourth quarter accounted for 12.16% of its annual gain of 16.49%. The Portfolio's underperformance relative to the Index was primarily due to our position in the Information Technology sector. Early in 2004, the Portfolio was too aggressively positioned here. During the second quarter as the Technology sector rallied, we trimmed back some of our higher-beta holdings, which left the Portfolio defensively positioned -- overweight in business service stocks such as First Data Corp. and bellwethers such as IBM and Microsoft. Performance was hurt by this defensive positioning late in 2004 as the market returned to high beta, low capitalization stocks. We continue to be fairly defensively positioned here, focusing on technology companies with non-commodity products and steady earnings growth. Despite an overweight position in the Technology sector during the year, the Portfolio didn't own the riskier stocks that were the biggest gainers in 2004. The Portfolio's holdings in National Semiconductor Corp., Intel Corporation, and Cisco Systems Inc. (one of the Portfolio's top ten holdings) were all negative for the year. Also putting a drag on the Portfolio's performance was an underweight position in the Industrials sector, which performed well during the year. In 2004, we underweighted Industrials because we believed this sector already had a premium valuation relative to the S&P 500 Index. We felt that earnings estimates may have gotten ahead of themselves, possibly setting some of these stocks up for a disappointment. Positions in the Industrials sector, however, were added throughout 2004, including increasing our existing holding in General Electric and initiating a position in Tyco International. Individual security selection in the Health Care sector detracted from the Portfolio's performance in 2004. Two pharmaceutical stocks held in the Portfolio, Eli Lilly & Co. and Pfizer Inc., sustained substantial losses in 2004. The Health Care sector as a whole was impacted by negative news from studies on several prescription drugs. During the fourth quarter of 2004, the Portfolio's positions in Lilly and Pfizer were substantially reduced. Sector allocation and individual security selection within the Materials and Energy sectors made a positive contribution. The Portfolio's 2004 performance benefited from overweight positions in both of those sectors, as both of these sectors outperformed. Stocks that performed well included Monsanto Co. (agricultural products), which was substantially overweight in the Portfolio, ConocoPhillips (a global energy company), which is also one of the Portfolio's top ten holdings, and EOG Resources Inc. (natural gas and crude oil exploration). Energy was the best performing sector in the S&P 500 Index in 2004, driven by rising prices in oil and gas through much of the year. Despite a fallback in prices in the fourth quarter, the Energy sector gained nearly 29% for the year. Other individual holdings that added substantially to the Portfolio's performance in 2004 included Google Inc. (a global technology company, best known for its online index of websites), PetsMart (a pet supply retailer), Prudential Financial Inc. (a financial services company), and Canadian National Railway Co. U.S. economic growth in 2005 may lag that of 2004. In an environment like that, companies with more stable growth, including larger capitalization companies, could be more attractive to investors. The Portfolio focuses on companies with stable earnings growth, strong market share and pricing power. We also look for companies with increasing amounts of free cash flow that are focused on returning that to shareholders through share Large Cap Core Stock Portfolio 49 Large Cap Core Stock Portfolio buybacks, dividend increases or accretive acquisitions. As of December 31, 2004, the Portfolio has overweight positions in the Energy and Materials sectors; an underweight position in Financials; and is near market weight in all other sectors. These weightings are intended to take advantage of previous under spending and high demand levels in the Energy and Materials areas. The underweight in Financials is due to potentially higher interest rates and the flattening of the yield curve as a result. While sector weighting can be an important driver of overall Portfolio performance, we continue to remain focused on individual stock selection, looking for companies with long-term growth of capital and income potential. [CHART] Relative Performance Large Cap Core Stock Portfolio S&P 500 Index --------------- ------------- 5/94 $10,000 $10,000 12/94 10,034 10,344 12/95 13,156 14,226 12/96 15,783 17,490 12/97 20,523 23,322 12/98 25,271 29,986 12/99 27,162 36,294 12/00 25,269 32,992 12/01 23,305 29,072 12/02 16,734 22,650 12/03 20,759 29,144 12/04 22,376 31,258 Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years Large Cap Core Stock Portfolio 8.16% -3.74% 8.39% S&P 500 Index 10.88% -2.30% 12.07% Large Cap Core Funds Lipper Average 8.59% -2.66% 9.90% The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Large Cap Core Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalizations (on a three-year weighted basis) greater than 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Large-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets General Electric Co. 3.7% Microsoft Corp. 2.7% Exxon Mobil Corp. 2.7% Altria Group, Inc. 1.9% Johnson & Johnson 1.9% Cisco Systems, Inc. 1.8% Wells Fargo & Co. 1.7% The Procter & Gamble Co. 1.6% Bank of America Corp. 1.5% ConocoPhillips 1.5% [CHART] Sector Allocation 12/31/04 Financials ....................... 16% Information Technology ........... 16% Consumer Discretionary ........... 13% Health Care ...................... 12% Industrials ...................... 11% Consumer Staples ................. 9% Energy ........................... 9% Materials ........................ 6% Telecommunication Services ....... 3% Utilities ........................ 3% Short-Term Investments ........... 2% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. 50 Large Cap Core Stock Portfolio Large Cap Core Stock Portfolio Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,065.30 $2.29 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,022.61 $2.25 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.44%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Large Cap Core Stock Portfolio 51 Large Cap Core Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (98.2%) $ Par $ (000's) ---------------------------------------------------- Consumer Discretionary (13.0%) Best Buy Co., Inc. 43,100 2,561 Carnival Corp. 84,700 4,881 *Comcast Corp. -- Class A 78,014 2,596 DaimlerChrysler AG 47,000 2,258 *eBay, Inc. 29,000 3,372 Fortune Brands, Inc. 60,000 4,631 J. C. Penney Co., Inc. 130,500 5,404 Lear Corp. 49,700 3,032 McDonald's Corp. 110,600 3,546 News Corp. -- Class A 188,000 3,508 NIKE, Inc. -- Class B 57,700 5,233 Omnicom Group, Inc. 30,000 2,530 PETsMART, Inc. 87,600 3,112 Staples, Inc. 133,200 4,490 Target Corp. 100,500 5,219 *Time Warner, Inc. 178,000 3,460 Viacom, Inc. -- Class B 39,700 1,445 ------ Total 61,278 ------ Consumer Staples (8.8%) Altria Group, Inc. 149,300 9,123 Anheuser-Busch Companies, Inc. 60,100 3,049 Avon Products, Inc. 98,900 3,827 The Gillette Co. 57,500 2,575 PepsiCo, Inc. 106,400 5,554 The Procter & Gamble Co. 138,400 7,623 Wal-Mart Stores, Inc. 123,000 6,497 Walgreen Co. 87,000 3,338 ------ Total 41,586 ------ Energy (8.8%) BP PLC, ADR 40,800 2,383 ConocoPhillips 80,244 6,968 Devon Energy Corp. 56,200 2,187 EOG Resources, Inc. 69,300 4,945 Exxon Mobil Corp. 246,400 12,631 Halliburton Co. 120,900 4,744 *Noble Corp. 47,500 2,363 Schlumberger, Ltd. 44,100 2,952 Valero Energy Corp. 47,800 2,170 ------ Total 41,343 ------ Financials (16.4%) American Express Co. 60,200 3,393 American International Group, Inc. 89,300 5,864 Bank of America Corp. 148,900 6,997 Capital One Financial Corp. 36,300 3,057 The Chubb Corp. 29,200 2,245 CIT Group, Inc. 56,200 2,575 Citigroup, Inc. 116,000 5,589 Countrywide Financial Corp. 52,400 1,939 Freddie Mac 32,000 2,358 The Goldman Sachs Group, Inc. 40,000 4,162 J.P. Morgan Chase & Co. 115,896 4,521
Shares/ Value Common Stocks (98.2%) $ Par $ (000's) --------------------------------------------------------- Financials continued Legg Mason, Inc. 36,100 2,645 Lehman Brothers Holdings, Inc. 46,100 4,033 Morgan Stanley 62,800 3,487 Prudential Financial, Inc. 110,000 6,046 U.S. Bancorp 197,300 6,179 Wachovia Corp. 68,900 3,624 Wells Fargo & Co. 129,600 8,054 ------ Total 76,768 ------ Health Care (11.5%) Abbott Laboratories 93,900 4,380 *Amgen, Inc. 69,100 4,433 *Boston Scientific Corp. 96,200 3,420 *Caremark Rx, Inc. 107,300 4,231 Eli Lilly and Co. 62,800 3,564 *Fisher Scientific International, Inc. 36,700 2,289 *Genentech, Inc. 46,600 2,537 Guidant Corp. 15,200 1,096 Johnson & Johnson 142,900 9,063 Medtronic, Inc. 90,900 4,515 Pfizer, Inc. 144,512 3,886 *St. Jude Medical, Inc. 75,800 3,178 Teva Pharmaceutical Industries, Ltd., ADR 88,900 2,655 UnitedHealth Group, Inc. 26,400 2,324 *Zimmer Holdings, Inc. 28,000 2,243 ------ Total 53,814 ------ Industrials (10.9%) 3M Co. 73,000 5,991 Canadian National Railway Co. 90,000 5,513 FedEx Corp. 50,600 4,984 General Electric Co. 480,100 17,524 Honeywell International, Inc. 89,790 3,179 Tyco International, Ltd. 137,500 4,914 United Technologies Corp. 55,000 5,684 Waste Management, Inc. 121,000 3,623 ------ Total 51,412 ------ Information Technology (16.0%) *Accenture Ltd. -- Class A 122,400 3,305 *Affiliated Computer Services, Inc. -- Class A 42,500 2,558 Analog Devices, Inc. 71,600 2,643 *ASML Holding N.V. 133,700 2,127 *Broadcom Corp. -- Class A 77,200 2,492 *Cisco Systems, Inc. 435,700 8,409 *Dell, Inc. 151,000 6,363 First Data Corp. 133,700 5,688 *Google, Inc. -- Class A 9,000 1,738 Intel Corp. 254,600 5,955 International Business Machines Corp. 47,100 4,643 *Lexmark International, Inc. -- Class A 48,300 4,106 Microsoft Corp. 474,400 12,670 National Semiconductor Corp. 99,800 1,791
52 Large Cap Core Stock Portfolio Large Cap Core Stock Portfolio
Shares/ Value Common Stocks (98.2%) $ Par $ (000's) --------------------------------------------------------- Information Technology continued SAP AG, ADR 88,500 3,913 *Symantec Corp. 68,200 1,757 *VeriSign, Inc. 90,000 3,017 *Yahoo!, Inc. 56,700 2,136 ------- Total 75,311 ------- Materials (5.6%) Alcoa, Inc. 94,000 2,953 The Dow Chemical Co. 80,200 3,971 Monsanto Co. 100,800 5,599 Newmont Mining Corp. 47,700 2,118 PPG Industries, Inc. 36,000 2,454 Praxair, Inc. 86,300 3,810 Temple-Inland, Inc. 46,900 3,208 Weyerhaeuser Co. 31,800 2,138 ------- Total 26,251 ------- Other Holdings (0.9%) iShares DJ Select Dividend Index Fund 36,200 2,221 *iShares Nasdaq Biotechnology Index Fund 25,000 1,885 ------- Total 4,106 ------- Telecommunication Services (3.5%) *Nextel Communications, Inc. -- Class A 131,500 3,945 SBC Communications, Inc. 114,000 2,938 Sprint Corp. 98,600 2,450 Verizon Communications, Inc. 108,348 4,389 Vodafone Group PLC, ADR 93,500 2,560 ------- Total 16,282 ------- Utilities (2.8%) DTE Energy Co. 50,100 2,161 Duke Energy Corp. 118,800 3,009 Edison International 70,501 2,258 *PG&E Corp. 178,600 5,944 ------- Total 13,372 ------- Total Common Stocks (Cost: $393,979) 461,523 -------
Shares/ Value Money Market Investments (1.7%) $ Par $ (000's) ---------------------------------------------------------------- Federal Government & Agencies (0.1%) Federal Home Loan Mortgage Corp., 2.42%, 3/22/05 500,000 497 ------- Total 497 ------- Short Term Business Credit (1.6%) (b)CXC Inc., 2.20%, 1/3/05 7,600,000 7,600 ------- Total 7,600 ------- Total Money Market Investments (Cost: $8,096) 8,097 ------- Total Investments (99.9%) (Cost $402,075)(a) 469,620 ------- Other Assets, Less Liabilities (0.1%) 315 ------- Total Net Assets (100.0%) 469,935 -------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $403,298 and the net unrealized appreciation of investments based on that cost was $66,322 which is comprised of $85,822 aggregate gross unrealized appreciation and $19,500 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) -------------------------------------------------------------- S&P 500 Index Futures 14 3/05 $117 (Total Notional Value at December 31, 2004, $4,131)
The Accompanying Notes are an Integral Part of the Financial Statements Large Cap Core Stock Portfolio 53 Capital Guardian Domestic Equity Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital and income Invest in larger American companies that exhibit value $212 million characteristics relative to S&P 500 Index.
The Capital Guardian Domestic Equity Portfolio seeks long-term growth of capital and income. The Portfolio seeks to meet this objective primarily by investing in equity securities of U.S. issuers and securities whose principal markets are in the U.S., including American Depository Receipts (ADRs) and other U.S. registered securities. The companies in which the Portfolio invests will generally have a market capitalization of $1 billion dollars or more at the time of purchase. In selecting securities for purchase or sale, the Portfolio's investment adviser attempts to keep the Portfolio's assets invested in securities that exhibit one or more value characteristics relative to the market norms reflected in the S&P 500 Index. These value characteristics include below market price to earnings ratios, below market price to book ratios, and dividend yields that are equal to or above the market norms. For the year ended December 31, 2004, the Capital Guardian Domestic Equity Portfolio returned 16.85%, outperforming the S&P 500 Index, which had a return of 10.88%, by nearly six percentage points. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The average return for the Portfolio's peer group, Multi-Cap Value Funds, was 14.62%, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. Following a spectacular year for stocks in 2003, the U.S. stock market experienced very nice gains again for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%. The higher risk segments of the market posted even larger gains: the S&P SmallCap 600 Index gained 22.65% and the S&P MidCap 400 Index gained 16.49% for the year. The majority of the gains in 2004, however, came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. The Portfolio's strong performance in 2004 can be attributed to a combination of sector weighting decisions and individual stock selection. Overweight positions in the Energy and Telecommunication Services sectors added performance for the year as those sectors enjoyed very nice returns. The Energy sector, aided by rising oil prices through much of the year, was the best performing sector in the S&P 500 Index in 2004. Underweight positions in Information Technology and Health Care also helped performance. The Health Care sector, which was hurt by negative news on a number of prescription drugs, was the worst performing sector for 2004. Individual stock selection was also key to performance. Five of the Portfolio's top ten holdings were among the top ten contributors to performance in 2004, including SLM Corp. (financial services), Altria Group Inc. (consumer products), General Electric Co. (diversified industrial corp.), Hartford Financial Services (diversified insurance co.) and General Growth Properties (real estate investment trust). Individual securities in the Energy and Telecommunication Services sectors that added value included Transocean Inc. (oil and gas well drilling) and Sprint FON Group (long-distance, local and wireless communications). Both posted impressive gains for the year. Although being underweight in the Information Technology and Health Care sectors helped the Portfolio's performance overall, a number of stocks in those sectors performed well. Advanced Micro Devices Inc. (semiconductor manufacturer), Sabre Holdings Corp. (proprietary computer reservation system), Sun Microsystems Inc. (network computer products and services), Fairchild Semiconductor International (designs and develops semiconductors), WellPoint Inc. (health benefits company), Becton Dickinson Co. (health care supplies and systems), Cigna Corp. (insurance and financial services), and Lincare Holdings Inc. (provides in-home respiratory therapy services) were all good performers. Key sector detractors to the Portfolio's performance in 2004 included an underweight position in Consumer Discretionary stocks, as well as individual Health Care holdings Merck & Co. Inc., Pfizer Inc., Eli Lilly & Co., and AstraZeneca Group PLC. Technology stocks Cadence Design Systems, Avnet Inc., Hewlett-Packard Co. and MicronTechnology, Inc. also had poor performance in 2004. 54 Capital Guardian Domestic Equity Portfolio Capital Guardian Domestic Equity Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Capital Guardian Domestic Equity Portfolio S&P 500 Index ------------------------- ------------- 7/01 $10,000 $10,000 12/01 9,781 9,538 12/02 7,703 7,431 12/03 10,354 9,562 12/04 12,099 10,601 - -------------------------------------------------------------------------- Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception* - -------------------------------------------------------------------------- Capital Guardian Domestic Equity Portfolio 16.85% 5.73% S&P 500 Index 10.88% 1.72% Multi Cap Value Funds Lipper Average 14.62% - - -------------------------------------------------------------------------- *inception date of 7/31/01 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 7/31/01 (commencement of the portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Multi Cap Value Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by portfolio practice, invest in a variety of market capitalization ranges without concentrating 75% of their equity assets in any one market capitalization range over an extended period of time. Multi-cap funds typically have between 25% to 75% of their assets invested in companies with market capitalizations (on a three-year weighted basis) above 300% of the dollar-weighted median market capitalization of the middle 1,000 securities of the S&P SuperComposite 1500 Index. Multi-cap value funds typically have a below-average price-to-earnings ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P SuperComposite 1500 Index. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets JPMorgan Chase & Co. 3.7% SLM Corp. 2.9% Kraft Foods, Inc. - Class A 2.7% Wells Fargo & Co. 2.7% Altria Group, Inc. 2.7% General Electric Co. 2.6% Verizon Communications, Inc. 2.4% The Hartford Financial Services Group, Inc. 2.3% E. I. du Pont de Nemours and Co. 2.3% General Growth Properties, Inc. 2.3% [CHART] Sector Allocation 12/31/04 Financials ............................. 22% Consumer ............................... 14% Industrials ............................ 12% Energy ................................. 10% Information Technology ................. 9% Health Care ............................ 8% Materials .............................. 7% Telecommunication Services .. ........... 7% Short-Term Investments ................. 6% Utilities .............................. 5% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. Capital Guardian Domestic Equity Portfolio 55 Capital Guardian Domestic Equity Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,114.10 $3.28 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.73 $3.14 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.62%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 56 Capital Guardian Domestic Equity Portfolio Capital Guardian Domestic Equity Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (93.7%) $ Par $ (000's) -------------------------------------------------------- Consumer Discretionary (2.8%) *AutoNation, Inc. 60,100 1,155 Mattel, Inc. 54,200 1,056 McDonald's Corp. 22,000 705 OfficeMax, Inc. 19,700 618 Starwood Hotels & Resorts Worldwide, Inc. 24,900 1,455 *Time Warner, Inc. 45,700 888 ------ Total 5,877 ------ Consumer Staples (11.3%) Altria Group, Inc. 92,400 5,646 Anheuser-Busch Companies, Inc. 51,800 2,628 Campbell Soup Co. 105,100 3,141 Colgate-Palmolive Co. 23,700 1,212 General Mills, Inc. 22,800 1,133 Kimberly-Clark Corp. 30,300 1,994 Kraft Foods, Inc. -- Class A 163,500 5,823 Unilever NV 36,800 2,455 ------ Total 24,032 ------ Energy (10.3%) ChevronTexaco Corp. 9,800 515 Exxon Mobil Corp. 39,300 2,015 Kinder Morgan, Inc. 46,200 3,379 Royal Dutch Petroleum Co. 80,100 4,595 Shell Transport & Trading Co. ADR 65,800 3,382 *Transocean, Inc. 63,200 2,679 Unocal Corp. 85,800 3,710 *Weatherford International, Ltd. 31,700 1,626 ------ Total 21,901 ------ Financials (21.6%) American International Group, Inc. 38,000 2,495 *AmeriCredit Corp. 82,100 2,007 Assurant, Inc. 9,900 302 The Chubb Corp. 5,300 408 Everest Re Group, Ltd. 20,900 1,872 Fannie Mae 23,100 1,645 General Growth Properties, Inc. 133,320 4,821 The Goldman Sachs Group, Inc. 6,800 707 The Hartford Financial Services Group, Inc. 70,800 4,907 J.P. Morgan Chase & Co. 201,988 7,879 Marsh & McLennan Companies, Inc. 52,200 1,717 The PMI Group, Inc. 41,000 1,712 SLM Corp. 114,100 6,092 The St. Paul Travelers Companies, Inc. 15,823 587 Washington Mutual, Inc. 49,700 2,101 Wells Fargo & Co. 92,800 5,768 XL Capital, Ltd. -- Class A 8,400 652 ------ Total 45,672 ------
Shares/ Value Common Stocks (93.7%) $ Par $ (000's) ---------------------------------------------------------------- Health Care (7.8%) AstraZeneca PLC ADR 54,400 1,980 Eli Lilly and Co. 37,800 2,145 *Lincare Holdings, Inc. 30,500 1,301 *Medco Health Solutions, Inc. 43,200 1,797 Merck & Co., Inc. 57,500 1,848 *PacifiCare Health Systems, Inc. 4,800 271 Pfizer, Inc. 45,100 1,213 *Triad Hospitals, Inc. 40,200 1,496 *WellPoint, Inc. 39,400 4,531 ------ Total 16,582 ------ Industrials (12.1%) Canadian National Railway Co. 6,750 413 Cooper Industries, Ltd. -- Class A 35,300 2,397 Emerson Electric Co. 13,400 939 General Electric Co. 153,300 5,596 Hubbell, Inc. -- Class B 22,600 1,182 Ingersoll-Rand Co. -- Class A 34,700 2,786 *Navistar International Corp. 12,100 532 Northrop Grumman Corp. 8,700 473 Raytheon Co. 14,700 571 Siemens AG ADR 11,400 965 Tyco International, Ltd. 63,100 2,255 Union Pacific Corp. 50,900 3,423 United Technologies Corp. 38,900 4,021 ------ Total 25,553 ------ Information Technology (9.1%) *Advanced Micro Devices, Inc. 93,700 2,063 *Affiliated Computer Services, Inc. -- Class A 17,100 1,029 *Avnet, Inc. 95,400 1,740 *Cadence Design Systems, Inc. 104,200 1,439 *Fairchild Semiconductor International, Inc. 124,000 2,016 *Flextronics International, Ltd. 267,700 3,700 *Freescale Semiconductor, Inc. -- Class A 157,800 2,812 *Micron Technology, Inc. 224,300 2,770 *Polycom, Inc. 12,300 287 *Teradyne, Inc. 82,700 1,412 ------ Total 19,268 ------ Materials (7.1%) Air Products and Chemicals, Inc. 67,700 3,925 Alcoa, Inc. 26,600 836 The Dow Chemical Co. 57,100 2,827 E. I. du Pont de Nemours and Co. 99,700 4,890 International Paper Co. 62,200 2,612 ------ Total 15,090 ------ Telecommunication Services (6.7%) BellSouth Corp. 59,500 1,654 SBC Communications, Inc. 109,500 2,822 Sprint Corp. 188,100 4,674 Verizon Communications, Inc. 123,500 5,003 ------ Total 14,153 ------
Capital Guardian Domestic Equity Portfolio 57 Capital Guardian Domestic Equity Portfolio
Shares/ Value Common Stocks (93.7%) $ Par $ (000's) ---------------------------------------------------------- Utilities (4.9%) Duke Energy Corp. 137,600 3,485 Equitable Resources, Inc. 55,600 3,373 NiSource, Inc. 63,300 1,442 Pinnacle West Capital Corp. 47,300 2,101 ------- Total 10,401 ------- Total Common Stocks (Cost: $165,951) 198,529 ------- Money Market Investments (6.1%) ---------------------------------------------------------- Federal Government & Agencies (6.1%) Federal Home Loan Bank, 2.10%, 1/18/05 13,000,000 12,987 Total Money Market Investments (Cost: $12,987) 12,987 ------- Total Investments (99.8%) (Cost $178,938)(a) 211,516 ------- Other Assets, Less Liabilities (0.2%) 461 ------- Total Net Assets (100.0%) 211,977 -------
* Non-Income Producing ADR -- American Depository Receipt (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $178,973 and the net unrealized appreciation of investments based on that cost was $32,543 which is comprised of $34,634 aggregate gross unrealized appreciation and $2,091 aggregate gross unrealized depreciation. The Accompanying Notes are an Integral Part of the Financial Statements 58 Capital Guardian Domestic Equity Portfolio T. Rowe Price Equity Income Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term growth of capital and income. Invest in the equity securities of established companies. $90 million
The objective of the T. Rowe Price Equity Income Portfolio is long-term growth of capital and income. Management seeks to achieve this objective mainly through investment in the stocks of well-established companies paying above-average dividends. A value approach is used in selecting investments, with an effort made to identify companies that appear to be undervalued by various measures but have good prospects for capital appreciation and dividend growth. Management looks for characteristics such as an established operating history, above-average dividend yield, a low price/earnings ratio, sound financial condition, and a low stock price relative to a company's underlying value. U.S. stocks posted their second consecutive year of gains for the first time since 1998-99. Value shares outstripped growth by an impressive margin in 2004, while small- and mid-cap stocks outpaced large-company shares. The widely followed Dow Jones Industrial Average registered the smallest gain, while the broader market indices, including the S&P 500 Index and Nasdaq Composite, were stronger. The Federal Open Market Committee's (FOMC) five rate increases in 2004, which lifted the fed fund's rate target from 1.00% to 2.25%, failed to dampen the economic boost provided by firm stock prices, low long-term interest rates, tight yields among bonds of various qualities, and a falling dollar. Consumer and housing demand continue to draw support from job gains, income growth, and low interest rates. Resilient profit margins, steady cash flow, and rising utilization rates underpin capital expenditures. While employment gains have been somewhat choppy, we believe they are strong enough to gradually reduce the unemployment rate over time. An upturn in the growth of labor costs and higher import prices, driven by a weak dollar, are generating a cyclical rise in inflation. That said, inflation remains relatively low in historical terms, allowing the FOMC to continue to tighten monetary policy gradually in coming months. The past year ended on a positive note as consumer confidence recovered to the level attained in mid-summer. The weakness in recent months was most likely related to uncertainty about employment prospects, spiking oil prices, and uneasiness surrounding the election -- concerns that moderated during the final weeks of the year. We anticipate continuing economic growth in 2005. The T. Rowe Price Equity Income Portfolio posted strong absolute results and significantly outpaced the S&P 500 Stock Index for the twelve-month period due to several factors, including a significant underweight in information technology (IT) and strong stock selection plus an underweight in health care. Due to concerns about tech companies' ability to meet second-half earnings projections, IT traded significantly lower in the third quarter and was one of the worst-performing S&P 500 sectors during 2004. Health care badly lagged the market as pharmaceutical stocks were impaired by limited growth prospects, generic competitive pressures, and more recently by Merck's problems with Vioxx and Pfizer's with Celebrex. Within the sector, health care insurer CIGNA boosted relative results because of an improvement in the firm's fundamentals and stronger-than-anticipated performance in its health care business. Cardinal Health, a new portfolio position, rebounded following a series of negative events that drove the stock down in the second and third quarters. Energy was the best-performing sector in the Index in 2004, thanks to rising energy prices and improved investor sentiment, and an overweight position benefited relative performance. In addition, strong stock selection in the utilities sector enhanced our return versus the benchmark. TXU benefited from a new management team and the sale of non-core assets to improve the company's balance sheet. On a negative note, stock selection in the consumer discretionary sector detracted slightly as New York Times, Dow Jones, and Knight-Ridder were hurt by sluggish advertising trends. We are cautious heading into 2005. The market is fairly valued and the corporate profit outlook appears to be moderating; earnings have reached record levels over the past year, and profit growth will likely be pressured by relatively high energy prices and higher short-term interest rates. Additionally, the trade and budget deficits, along with the ongoing war in Iraq, could make for a tougher environment. Nevertheless, despite these headwinds, we continue to view the economic environment as favorable; corporate balance sheets appear strong with healthy levels of cash, and value stocks should benefit from favorable tax treatments for dividends and capital gains. 59 T. Rowe Price Equity Income Portfolio T. Rowe Price Equity Income Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance T. Rowe Price Equity Income Portfolio S&P 500 Index ------------------- ------------- 5/03 $10,000 $10,000 12/03 12,364 12,282 12/04 14,238 13,618 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception# T. Rowe Price Equity Income Portfolio 15.16% 23.59% S&P 500 Index 10.88% 13.97% Equity Income Funds Lipper Average 13.64% -- #inception date of 5/1/03, returns not annualized The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 5/1/03 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Equity Income Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that, by prospectus language and portfolio practice, seek relatively high current income and growth of income by investing primarily in dividend-paying equity securities. These funds' gross or net yield must be at least 125% of the average gross or net yield of the U.S. diversified equity fund universe. Source: Lipper, Inc. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets - ------- --------------------- General Electric Co. .................................... 2.0% JPMorgan Chase & Co. .................................... 1.9% Exxon Mobil Corp. ....................................... 1.8% ChevronTexaco Corp. ..................................... 1.7% Marsh & Mclennan Companies, Inc. ........................ 1.6% Viacom, Inc. - Class B .................................. 1.6% Merck & Co., Inc. ....................................... 1.6% Royal Dutch Petroleum Co. ............................... 1.4% Honeywell International, Inc. ........................... 1.4% Bank of America Corp. ................................... 1.4% [CHART] Sector Allocation 12/31/04 Financials ....................... 18% Consumer Discretionary ........... 17% Industrials ...................... 12% Energy ........................... 9% Health Care ...................... 9% Consumer Staples ................. 8% Materials ........................ 6% Telecommunication Services ....... 6% Information Technology ........... 5% Utilities ........................ 5% Short-Term Investments ........... 5% Sector Allocation is based on Net Assets. Sector Allocation and Top 10 Holdings are subject to change. 60 T. Rowe Price Equity Income Portfolio T. Rowe Price Equity Income Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,101.81 $3.49 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.51 $3.36 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.66%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). T. Rowe Price Equity Income Portfolio 61 T. Rowe Price Equity Income Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (94.6%) $ Par $ (000's) ------------------------------------------------------ Consumer Discretionary (17.0%) *Comcast Corp. -- Class A 36,500 1,215 Dow Jones & Co., Inc. 21,500 926 Eastman Kodak Co. 26,400 851 Fortune Brands, Inc. 8,900 687 Genuine Parts Co. 17,000 749 Hilton Hotels Corp. 24,800 564 The Home Depot, Inc. 16,400 701 Knight-Ridder, Inc. 7,100 475 Mattel, Inc. 50,000 975 The May Department Stores Co. 14,200 417 McDonald's Corp. 19,300 619 The New York Times Co. -- Class A 29,200 1,191 Newell Rubbermaid, Inc. 37,400 905 Sony Corp. 11,000 429 Starwood Hotels & Resorts Worldwide, Inc. 8,400 491 *Time Warner, Inc. 60,300 1,172 Viacom, Inc. -- Class B 38,900 1,415 The Walt Disney Co. 34,100 948 Whirlpool Corp. 7,600 526 ------ Total 15,256 ------ Consumer Staples (7.5%) Altria Group, Inc. 7,200 440 Campbell Soup Co. 24,900 744 The Clorox Co. 6,000 354 The Coca-Cola Co. 29,200 1,216 Coca-Cola Enterprises, Inc. 1,200 25 Colgate-Palmolive Co. 21,000 1,074 ConAgra Foods, Inc. 11,600 342 General Mills, Inc. 15,200 756 Kimberly-Clark Corp. 10,700 704 Unilever NV 7,200 480 UST, Inc. 12,000 577 ------ Total 6,712 ------ Energy (9.0%) Amerada Hess Corp. 11,400 939 Anadarko Petroleum Corp. 10,100 655 Baker Hughes, Inc. 4,900 209 BP PLC, ADR 15,000 876 ChevronTexaco Corp. 29,900 1,570 Exxon Mobil Corp. 31,100 1,593 Royal Dutch Petroleum Co. 22,600 1,297 Schlumberger, Ltd. 5,900 395 Unocal Corp. 11,600 502 ------ Total 8,036 ------ Financials (18.2%) American Express Co. 12,100 682 AmSouth Bancorporation 2,100 54 Bank of America Corp. 26,300 1,236 Bank of Ireland ADR 6,200 414 The Charles Schwab Corp. 78,500 939
Shares/ Value Common Stocks (94.6%) $ Par $ (000's) -------------------------------------------------------- Financials continued The Chubb Corp. 7,600 584 Citigroup, Inc. 11,400 549 Fannie Mae 8,500 605 J.P. Morgan Chase & Co. 43,688 1,704 Janus Capital Group, Inc. 10,500 177 Lincoln National Corp. 16,276 760 Marsh & McLennan Companies, Inc. 45,000 1,481 Mellon Financial Corp. 26,700 831 Mercantile Bankshares Corp. 6,500 339 Morgan Stanley 17,300 960 National City Corp. 9,900 372 Northern Trust Corp. 6,100 296 SAFECO Corp. 14,600 763 Simon Property Group, Inc. 7,300 472 The St. Paul Travelers Companies, Inc. 19,827 735 SunTrust Banks, Inc. 11,200 827 UnumProvident Corp. 35,600 639 Wells Fargo & Co. 6,800 423 Wilmington Trust Corp. 4,500 163 XL Capital, Ltd. -- Class A 4,700 365 ------ Total 16,370 ------ Health Care (9.3%) Abbott Laboratories 15,100 704 Baxter International, Inc. 20,600 712 Bristol-Myers Squibb Co. 44,800 1,148 Cardinal Health, Inc. 9,800 570 *Chiron Corp. 900 30 CIGNA Corp. 3,200 261 Johnson & Johnson 18,800 1,192 *MedImmune, Inc. 24,000 651 Merck & Co., Inc. 43,400 1,395 Schering-Plough Corp. 31,700 662 Wyeth 24,400 1,039 ------ Total 8,364 ------ Industrials (12.0%) Cendant Corp. 19,500 456 Cooper Industries, Ltd. -- Class A 10,900 740 *The Dun & Bradstreet Corp. 600 36 Emerson Electric Co. 5,300 372 General Electric Co. 49,900 1,821 Honeywell International, Inc. 35,900 1,271 Lockheed Martin Corp. 14,600 811 Norfolk Southern Corp. 16,800 608 Pall Corp. 22,700 657 Raytheon Co. 20,700 804 Rockwell Automation, Inc. 10,200 505 Rockwell Collins, Inc. 19,800 781 Union Pacific Corp. 17,500 1,177 Waste Management, Inc. 25,400 760 ------ Total 10,799 ------
62 T. Rowe Price Equity Income Portfolio T. Rowe Price Equity Income Portfolio
Shares/ Value Common Stocks (94.6%) $ Par $ (000's) ---------------------------------------------------------- Information Technology (4.7%) *Agilent Technologies, Inc. 1,100 27 *Freescale Semiconductor Inc. -- Class B 2,350 43 Hewlett-Packard Co. 36,600 768 Intel Corp. 15,700 367 *Lucent Technologies, Inc. 47,400 178 Microsoft Corp. 30,500 815 Motorola, Inc. 38,500 662 Nokia Corp., ADR 38,000 595 Texas Instruments, Inc. 31,700 780 ------ Total 4,235 ------ Materials (6.3%) Alcoa, Inc. 17,100 537 The Dow Chemical Co. 17,200 853 E. I. du Pont de Nemours and Co. 15,100 741 Great Lakes Chemical Corp. 12,400 353 *Hercules, Inc. 20,500 304 International Flavors & Fragrances, Inc. 10,300 441 International Paper Co. 25,500 1,072 MeadWestvaco Corp. 15,800 535 Nucor Corp. 6,600 345 Vulcan Materials Co. 9,000 491 ------ Total 5,672 ------ Telecommunication Services (5.9%) ALLTEL Corp. 13,700 805 AT&T Corp. 31,900 608 *Qwest Communications International, Inc. 155,500 690 SBC Communications, Inc. 31,800 819 Sprint Corp. 42,700 1,062 Telus Corp. 9,700 280 Verizon Communications, Inc. 25,400 1,029 ------ Total 5,293 ------ Utilities (4.7%) Constellation Energy Group, Inc. 14,600 638 Duke Energy Corp. 35,300 894 FirstEnergy Corp. 12,100 478 NiSource, Inc. 40,200 916 Progress Energy, Inc. 6,900 312 TECO Energy, Inc. 11,700 179 TXU Corp. 4,800 310 Xcel Energy, Inc. 25,700 468 ------ Total 4,195 ------ Total Common Stocks (Cost: $71,769) 84,932 ------
Shares/ Value Convertible Corporate Debt (0.2%) $ Par $ (000's) ----------------------------------------------------------- Information Technology (0.2%) Lucent Technologies, 8.00%, 8/1/31 165,000 184 ------ Total Convertible Corporate Debt (Cost: $158) 184 ------ Preferred Stocks (0.3%) ----------------------------------------------------------- Consumer Discretionary (0.1%) Ford Motor Co., Capital Trust II 1,400 74 ------ Total 74 ------ Financials (0.2%) Unumprovident Corp. 5,900 179 ------ Total 179 ------ Total Preferred Stocks (Cost: $208) 253 ------ Money Market Investments (5.3%) ----------------------------------------------------------- Other Holdings (5.3%) Reserve Investment Fund 4,777,882 4,778 ------ Total Money Market Investments (Cost: $4,778) 4,778 ------ Total Investments (100.4%) (Cost $76,913)(a) 90,147 ------ Other Assets, Less Liabilities (-0.4%) (400) ------ Total Net Assets (100.0%) 89,747 ------
* Non-Income Producing ADR -- American Depository Receipt (a) AtDecember 31, 2004 the aggregate cost of securities for federal tax purposes was $76,918 and the net unrealized appreciation of investments based on that cost was $13,229 which is comprised of $14,093 aggregate gross unrealized appreciation and $864 aggregate gross unrealized depreciation. The Accompanying Notes are an Integral Part of the Financial Statements T. Rowe Price Equity Income Portfolio 63 Index 500 Stock Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Long-term capital appreciation through Invest in a portfolio designed to approximate the $1.9 billion cost-effective participation in broad composition and returns of the S&P 500 Index. market performance
The Index 500 Stock Portfolio seeks investment results that approximate the performance of the Standard & Poor's 500 Composite Stock Price Index. The S&P 500(R) Index is composed of 500 common stocks representing approximately three-fourths of the total market value of all publicly traded common stocks in the U.S. The Portfolio's strategy is to capture broad market performance by investing in a portfolio modeled after a broadly based stock index. The Portfolio invests in stocks included in the S&P 500 Index in proportion to their weightings in the Index, and may buy or sell securities after announced changes in the Index but before or after the effective date of the changes to attempt to achieve higher correlation with the Index. The Index 500 Stock Portfolio is not managed in the traditional sense using economic, financial and market analysis. A computer program is used to determine which stocks are to be purchased or sold to achieve the Portfolio's objective. Therefore, the Portfolio remains neutral relative to the benchmarks in terms of economic sectors, market capitalization, and the growth and value styles of investing. The Portfolio will, to the extent feasible, remain fully invested, and may purchase Index futures contracts in amounts approximating the cash held in the Index. For the year ended December 31, 2004, the Portfolio had a total return of 10.70%, slightly lagging the S&P 500 Index, which returned 10.88%. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) Portfolio performance slightly lagged the S&P 500 Index due to transaction costs, administrative expenses, cash flow effects and holdings of stock index futures contracts. The average return for the Portfolio's peer group, S&P Index 500 Objective Funds, was 10.35% for the twelve months ended December 31, 2004, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. Following a spectacular year for stocks in 2003, the U.S. stock market experienced very nice gains again for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%. The higher risk segments of the market posted even larger gains: the S&P SmallCap 600 Index gained 22.65% and the S&P MidCap 400 Index gained 16.49% for the year. The majority of the gains in 2004, however, came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.79%. For 2004, all ten of the sectors within the S&P 500 Index had positive returns. The strongest sectors were Energy (up 28.77%), Utilities (up 19.60%), Telecommunications (up 15.98%), and Industrials (up 15.95%). Energy stocks enjoyed the best gains as oil prices rose dramatically throughout most of the year before backing off in the fourth quarter. Other sectors that performed well included Consumer Discretionary (up 12.15%), Materials (up 10.88%), and Financials (up 8.23%). Although still positive, the remaining sectors had smaller gains: Consumer Staples (up 6.04%), Information Technology (up 2.13%), and Health Care (up 0.24%). The worst performing sector -- Health Care -- was adversely affected during the year by negative news on a number of prescription drugs. The Fund seeks to track the performance and weightings of stocks in the S&P 500 Index. Accordingly, changes are made to the Fund's holding as the Index changes. Such changes occur as companies go public or private, merge, divest or have major changes in market capitalization. Additionally, Standard & Poor's adjusts the Index to better reflect the companies that are most representative of the composition of the U.S. economy. During 2004, there were 20 companies added to the Index. Those added during the fourth quarter were XTO Energy, Compass Bancshares, Archstone-Smith Trust, News Corp., Freescale Semiconductor Inc., L-3 Communications Holdings, Laboratory Corp of America Holdings and CIT Group. There were 20 companies eliminated from the Index during the year. During the fourth quarter the stocks eliminated were PeopleSoft Inc., Worthington Industries, Crane Co., Deluxe Corp., Winn-Dixie, WellPoint Health Networks, South Trust Corp., and AT&T Wireless. 64 Index 500 Stock Portfolio Index 500 Stock Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Index 500 Stock Portfolio S&P 500 Index ------------------------- ------------- 12/93 $10,000 $10,000 12/94 10,121 10,131 12/95 13,892 13,933 12/96 17,052 17,129 12/97 22,713 22,842 12/98 29,236 29,368 12/99 35,349 35,547 12/00 32,255 32,312 12/01 28,423 28,474 12/02 22,150 22,184 12/03 28,448 28,544 12/04 31,115 31,258 Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years Index 500 Stock Portfolio 10.70% -2.28% 12.02% S&P 500 Index 10.88% -2.30% 12.07% S&P 500 Index Objective Lipper Average 10.35% -2.64% 11.69% The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) S&P 500 Index Objective Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that are passively managed and commit by prospectus language to replicate the performance of the S&P 500 Index, including reinvested dividends. In addition, S&P 500 Index funds have limited expenses (advisor fee no higher than 0.50%). Source: Lipper, Inc. "Standard & Poor's(R)", "S&P(R)", "S&P MidCap 400 Index", "Standard & Poor's MidCap 400 Index", "S&P 500(R)" and "Standard & Poor's 500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by The Northwestern Mutual Life Insurance Company. The funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. [GRAPHIC] Top 10 Equity Holdings 12/31/04 Company % of Total Net Assets General Electric Co. 3.4% Exxon Mobil Corp. 2.9% Microsoft Corp. 2.5% Citigroup, Inc. 2.2% Wal-Mart Stores, Inc. 1.9% Pfizer, Inc. 1.8% Bank of America Corp. 1.7% Johnson & Johnson 1.6% American International Group, Inc. 1.5% International Business Machines Corp. 1.4% [CHART] Sector Allocation 12/31/04 Financials ....................... 20% Information Technology ........... 16% Consumer Discretionary ........... 12% Health Care ...................... 12% Industrials ...................... 12% Consumer Staples ................. 10% Energy ........................... 7% Materials ........................ 3% Telecommunication Services ....... 3% Utilities ........................ 3% Short-term Investments ........... 2% Sector Allocation is based on equities. Sector Allocation and Top 10 Holdings are subject to change. Index 500 Stock Portfolio 65 Index 500 Stock Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,071.40 $1.05 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,023.81 $1.03 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.20%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 66 Index 500 Stock Portfolio Index 500 Stock Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ----------------------------------------------------------- Consumer Discretionary (11.8%) *AutoNation, Inc. 43,900 843 *AutoZone, Inc. 13,225 1,208 *Bed Bath & Beyond, Inc. 49,900 1,988 Best Buy Co., Inc. 53,750 3,194 *Big Lots, Inc. 18,700 227 The Black & Decker Corp. 13,400 1,184 Brunswick Corp. 16,000 792 Carnival Corp. 105,009 6,052 Centex Corp. 20,600 1,227 Circuit City Stores, Inc. 32,400 507 Clear Channel Communications, Inc. 95,050 3,183 *Coach, Inc. 31,300 1,765 *Comcast Corp. -- Class A 368,070 12,249 Cooper Tire & Rubber Co. 12,400 267 Dana Corp. 24,850 431 Darden Restaurants, Inc. 26,050 723 Delphi Automotive Systems Corp. 93,087 840 Dillard's, Inc. -- Class A 13,664 367 Dollar General Corp. 54,348 1,129 Dow Jones & Co., Inc. 13,620 586 Eastman Kodak Co. 47,483 1,531 *eBay, Inc. 109,900 12,779 Family Dollar Stores, Inc. 27,800 868 Federated Department Stores, Inc. 28,051 1,621 Ford Motor Co. 303,394 4,442 Fortune Brands, Inc. 23,867 1,842 Gannett Co., Inc. 42,350 3,460 The Gap, Inc. 145,375 3,070 General Motors Corp. 93,627 3,751 Genuine Parts Co. 29,000 1,278 *The Goodyear Tire & Rubber Co. 29,100 427 Harley-Davidson, Inc. 48,700 2,959 Harrah's Entertainment, Inc. 18,550 1,241 Hasbro, Inc. 29,325 568 Hilton Hotels Corp. 64,050 1,456 The Home Depot, Inc. 364,094 15,561 International Game Technology 57,100 1,963 *The Interpublic Group of Companies, Inc. 70,100 939 J. C. Penney Co., Inc. 47,350 1,960 Johnson Controls, Inc. 31,600 2,005 Jones Apparel Group, Inc. 20,300 742 KB Home 7,700 804 Knight-Ridder, Inc. 12,750 853 *Kohl's Corp. 56,867 2,796 Leggett & Platt, Inc. 31,633 899 The Limited, Inc. 67,387 1,551 Liz Claiborne, Inc. 18,000 760 Lowe's Companies, Inc. 128,150 7,380 Marriott International, Inc. -- Class A 37,100 2,337 Mattel, Inc. 68,788 1,341 The May Department Stores Co. 48,450 1,424 Maytag Corp. 13,133 277 McDonald's Corp. 208,478 6,684
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ---------------------------------------------------- Consumer Discretionary continued The McGraw-Hill Companies, Inc. 31,460 2,880 Meredith Corp. 8,300 450 The New York Times Co. -- Class A 24,070 982 Newell Rubbermaid, Inc. 45,592 1,103 News Corp. -- Class A 495,100 9,239 NIKE, Inc. -- Class B 43,500 3,945 Nordstrom, Inc. 23,267 1,087 *Office Depot, Inc. 51,757 899 OfficeMax, Inc. 15,500 486 Omnicom Group, Inc. 30,900 2,605 Pulte Homes, Inc. 21,100 1,346 RadioShack Corp. 26,300 865 Reebok International, Ltd. 9,600 422 Sears, Roebuck & Co. 34,250 1,748 The Sherwin-Williams Co. 23,413 1,045 Snap-on, Inc. 9,517 327 The Stanley Works 13,650 669 Staples, Inc. 82,600 2,784 *Starbucks Corp. 66,350 4,138 Starwood Hotels & Resorts Worldwide, Inc. 34,400 2,009 Target Corp. 148,457 7,709 Tiffany & Co. 24,167 773 *Time Warner, Inc. 759,500 14,765 The TJX Companies, Inc. 79,900 2,008 *Toys R" Us, Inc. 35,650 730 Tribune Co. 52,636 2,218 *Univision Communications, Inc. -- Class A 53,600 1,569 V. F. Corp. 18,457 1,022 Viacom, Inc. -- Class B 282,748 10,289 Visteon Corp. 21,483 210 The Walt Disney Co. 338,757 9,417 Wendy's International, Inc. 18,850 740 Whirlpool Corp. 11,050 765 Yum! Brands, Inc. 48,580 2,292 ------- Total 223,867 ------- Consumer Staples (10.3%) Adolph Coors Co. -- Class B 6,200 469 Alberto-Culver Co. 15,050 731 Albertson's, Inc. 61,054 1,458 Altria Group, Inc. 340,322 20,794 Anheuser-Busch Companies, Inc. 130,949 6,643 Archer-Daniels-Midland Co. 108,503 2,421 Avon Products, Inc. 78,400 3,034 Brown-Forman Corp. -- Class B 20,218 984 Campbell Soup Co. 68,222 2,039 The Clorox Co. 25,250 1,488 The Coca-Cola Co. 401,175 16,701 Coca-Cola Enterprises, Inc. 77,800 1,622 Colgate-Palmolive Co. 87,922 4,498 ConAgra Foods, Inc. 85,267 2,511
Index 500 Stock Portfolio 67 Index 500 Stock Portfolio
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) -------------------------------------------------- Consumer Staples continued Costco Wholesale Corp. 77,764 3,765 CVS Corp. 66,367 2,991 General Mills, Inc. 60,367 3,001 The Gillette Co. 164,635 7,372 H.J. Heinz Co. 57,917 2,258 Hershey Foods Corp. 40,800 2,266 Kellogg Co. 68,457 3,057 Kimberly-Clark Corp. 80,856 5,321 *The Kroger Co. 122,505 2,149 McCormick & Co., Inc. 22,700 876 The Pepsi Bottling Group, Inc. 41,500 1,122 PepsiCo, Inc. 279,330 14,581 The Procter & Gamble Co. 420,610 23,167 Reynolds American, Inc. 24,500 1,926 *Safeway, Inc. 74,200 1,465 Sara Lee Corp. 130,135 3,141 SUPERVALU, Inc. 22,250 768 SYSCO Corp. 106,125 4,051 UST, Inc. 27,367 1,317 Wal-Mart Stores, Inc. 702,200 37,090 Walgreen Co. 169,446 6,502 Wm. Wrigley Jr. Co. 37,167 2,572 ------- Total 196,151 ------- Energy (7.0%) Amerada Hess Corp. 15,200 1,252 Anadarko Petroleum Corp. 40,962 2,655 Apache Corp. 54,146 2,738 Ashland, Inc. 11,800 689 Baker Hughes, Inc. 55,630 2,374 BJ Services Co. 26,800 1,247 Burlington Resources, Inc. 64,866 2,822 ChevronTexaco Corp. 351,314 18,447 ConocoPhillips 114,410 9,934 Devon Energy Corp. 80,600 3,137 El Paso Corp. 106,671 1,109 EOG Resources, Inc. 19,660 1,403 Exxon Mobil Corp. 1,069,656 54,830 Halliburton Co. 73,269 2,875 Kerr-McGee Corp. 25,105 1,451 Kinder Morgan, Inc. 20,567 1,504 Marathon Oil Corp. 57,509 2,163 *Nabors Industries, Ltd. 24,750 1,269 *Noble Corp. 22,450 1,117 Occidental Petroleum Corp. 65,420 3,818 *Rowan Companies, Inc. 17,750 460 Schlumberger, Ltd. 97,567 6,532 Sunoco, Inc. 12,150 993 *Transocean, Inc. 53,351 2,262 Unocal Corp. 43,667 1,888 Valero Energy Corp. 42,600 1,934 The Williams Companies, Inc. 92,300 1,504 ------- Total 132,407 ------- Financials (20.2%) ACE, Ltd. 47,100 2,014 AFLAC, Inc. 83,850 3,341 The Allstate Corp 113,728 5,882
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) -------------------------------------------------------- Financials continued Ambac Financial Group, Inc. 18,000 1,478 American Express Co. 208,075 11,729 American International Group, Inc. 431,830 28,357 AmSouth Bancorporation 58,855 1,524 Aon Corp. 52,500 1,253 Apartment Investment and Management Co. -- Class A 15,700 605 Archstone-Smith Trust 32,400 1,241 Bank of America Corp. 669,672 31,467 The Bank of New York Co., Inc. 128,853 4,306 BB&T Corp. 91,600 3,852 The Bear Stearns Companies, Inc. 17,095 1,749 Capital One Financial Corp. 40,200 3,385 The Charles Schwab Corp. 223,339 2,671 The Chubb Corp. 31,750 2,442 Cincinnati Financial Corp. 27,834 1,232 CIT Group, Inc. 34,800 1,595 Citigroup, Inc. 860,448 41,455 Comerica, Inc. 28,250 1,724 Compass Bancshares, Inc. 20,300 988 Countrywide Financial Corp. 96,200 3,560 *E*TRADE Group, Inc. 61,700 922 Equity Office Properties Trust 66,900 1,948 Equity Residential Properties Trust 46,900 1,697 Fannie Mae 160,448 11,426 Federated Investors, Inc. -- Class B 17,800 541 Fifth Third Bancorp 93,034 4,399 First Horizon National Corp. 20,400 879 Franklin Resources, Inc. 41,350 2,880 Freddie Mac 114,286 8,423 Golden West Financial Corp. 50,800 3,120 The Goldman Sachs Group, Inc. 80,300 8,354 The Hartford Financial Services Group, Inc. 48,650 3,372 Huntington Bancshares, Inc. 38,342 950 J.P. Morgan Chase & Co. 590,697 23,042 Janus Capital Group, Inc. 39,129 658 Jefferson-Pilot Corp. 22,634 1,176 KeyCorp 67,375 2,284 Lehman Brothers Holdings, Inc. 44,622 3,904 Lincoln National Corp. 28,940 1,351 Loews Corp. 30,767 2,163 M&T Bank Corp. 19,300 2,081 Marsh & McLennan Companies, Inc. 87,380 2,875 Marshall & Ilsley Corp. 37,000 1,635 MBIA, Inc. 23,350 1,478 MBNA Corp. 211,815 5,971 Mellon Financial Corp. 70,268 2,186 Merrill Lynch & Co., Inc. 154,400 9,228 MetLife, Inc. 123,436 5,000 MGIC Investment Corp. 16,000 1,103 Moody's Corp. 24,475 2,126 Morgan Stanley 181,513 10,078 National City Corp. 112,297 4,217 North Fork Bancorporation, Inc. 78,050 2,252 Northern Trust Corp. 36,350 1,766 Plum Creek Timber Co., Inc. (REIT) 30,400 1,169
68 Index 500 Stock Portfolio Index 500 Stock Portfolio
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) -------------------------------------------------------- Financials continued The PNC Financial Services Group, Inc. 46,867 2,692 Principal Financial Group, Inc. 50,900 2,084 The Progressive Corp. 33,200 2,817 ProLogis 30,500 1,322 *Providian Financial Corp. 48,557 800 Prudential Financial, Inc. 85,100 4,677 Regions Financial Corp. 77,030 2,741 SAFECO Corp. 21,050 1,100 Simon Property Group, Inc. 36,700 2,373 SLM Corp. 71,242 3,804 Sovereign Bancorp, Inc. 57,200 1,290 The St. Paul Travelers Companies, Inc. 111,010 4,115 State Street Corp. 55,300 2,716 SunTrust Banks, Inc. 61,433 4,539 Synovus Financial Corp. 51,350 1,468 T. Rowe Price Group, Inc. 21,200 1,319 Torchmark Corp. 17,950 1,026 U.S. Bancorp 309,621 9,697 UnumProvident Corp. 49,131 881 Wachovia Corp. 265,857 13,984 Washington Mutual, Inc. 144,787 6,122 Wells Fargo & Co. 280,480 17,432 XL Capital, Ltd. -- Class A 23,000 1,786 Zions Bancorporation 14,900 1,014 ------- Total 386,303 ------- Health Care (12.5%) Abbott Laboratories 258,250 12,047 Aetna, Inc. 24,477 3,054 Allergan, Inc. 21,767 1,765 AmerisourceBergen Corp. 17,400 1,021 *Amgen, Inc. 210,617 13,511 Applera Corp. -- Applied Biosystems Group 32,533 680 Bausch & Lomb, Inc. 8,900 574 Baxter International, Inc. 102,200 3,530 Becton, Dickinson and Co. 41,950 2,383 *Biogen Idec, Inc. 55,290 3,683 Biomet, Inc. 41,945 1,820 *Boston Scientific Corp. 139,972 4,976 Bristol-Myers Squibb Co. 322,608 8,265 C. R. Bard, Inc. 17,400 1,113 Cardinal Health, Inc. 71,625 4,165 *Caremark Rx, Inc. 75,400 2,973 *Chiron Corp. 31,022 1,034 CIGNA Corp. 22,229 1,813 Eli Lilly and Co. 187,606 10,647 *Express Scripts, Inc. 12,600 963 *Fisher Scientific International, Inc. 19,400 1,210 *Forest Laboratories, Inc. 61,066 2,739 *Genzyme Corp. 41,100 2,387 *Gilead Sciences, Inc. 71,800 2,512 Guidant Corp. 52,788 3,806 HCA, Inc. 69,811 2,790 Health Management Associates, Inc. -- Class A 40,400 918 *Hospira, Inc. 25,865 866
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) --------------------------------------------------------- Health Care continued *Humana, Inc. 26,400 784 IMS Health, Inc. 38,467 893 Johnson & Johnson 492,037 31,205 *King Pharmaceuticals, Inc. 40,066 497 *Laboratory Corp. of America Holdings 22,900 1,141 Manor Care, Inc. 14,300 507 McKesson Corp. 48,705 1,532 *Medco Health Solutions, Inc. 45,172 1,879 *MedImmune, Inc. 41,200 1,117 Medtronic, Inc. 200,400 9,954 Merck & Co., Inc. 367,720 11,819 *Millipore Corp. 8,200 408 Mylan Laboratories, Inc. 44,600 789 PerkinElmer, Inc. 21,200 477 Pfizer, Inc. 1,248,634 33,575 Quest Diagnostics, Inc. 16,800 1,605 Schering-Plough Corp. 244,150 5,098 *St. Jude Medical, Inc. 59,300 2,486 Stryker Corp. 66,700 3,218 *Tenet Healthcare Corp. 77,350 849 *Thermo Electron Corp. 26,500 800 UnitedHealth Group, Inc. 108,372 9,540 *Waters Corp. 20,000 936 *Watson Pharmaceuticals, Inc. 18,200 597 *WellPoint, Inc. 48,900 5,624 Wyeth 221,229 9,422 *Zimmer Holdings, Inc. 40,637 3,256 ------- Total 237,253 ------- Industrials (11.6%) 3M Co. 129,076 10,593 *Allied Waste Industries, Inc. 52,750 490 American Power Conversion Corp. 31,750 679 *American Standard Companies, Inc. 35,600 1,471 *Apollo Group, Inc. -- Class A 30,700 2,478 Avery Dennison Corp. 18,350 1,100 The Boeing Co. 139,176 7,205 Burlington Northern Santa Fe Corp. 62,285 2,947 Caterpillar, Inc. 56,588 5,518 Cendant Corp. 174,533 4,081 Cintas Corp. 28,433 1,247 Cooper Industries, Ltd. -- Class A 15,200 1,032 CSX Corp. 35,650 1,429 Cummins, Inc. 7,500 628 Danaher Corp. 51,200 2,939 Deere & Co. 41,160 3,062 *Delta Air Lines, Inc. 21,467 161 Dover Corp. 33,767 1,416 Eaton Corp. 25,200 1,823 Emerson Electric Co. 69,550 4,875 Equifax, Inc. 22,400 629 FedEx Corp. 49,820 4,907 Fluor Corp. 13,900 758 General Dynamics Corp. 33,200 3,473 General Electric Co. 1,752,906 63,982 Goodrich Corp. 19,700 643 H&R Block, Inc. 27,350 1,340
Index 500 Stock Portfolio 69 Index 500 Stock Portfolio
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ----------------------------------------------------------- Industrials continued Honeywell International, Inc. 142,650 5,051 Illinois Tool Works, Inc. 49,000 4,541 Ingersoll-Rand Co. -- Class A 28,580 2,295 ITT Industries, Inc. 15,300 1,292 L-3 Communications Holdings, Inc. 19,100 1,399 Lockheed Martin Corp. 73,408 4,078 Masco Corp. 74,300 2,714 *Monster Worldwide, Inc. 19,767 665 *Navistar International Corp. 11,550 508 Norfolk Southern Corp. 65,657 2,376 Northrop Grumman Corp. 61,020 3,317 PACCAR, Inc. 28,807 2,318 Pall Corp. 20,550 595 Parker-Hannifin Corp. 19,775 1,498 Pitney Bowes, Inc. 38,237 1,770 *Power-One, Inc. 13,900 124 R. R. Donnelley & Sons Co. 36,434 1,286 Raytheon Co. 75,000 2,912 Robert Half International, Inc. 28,740 846 Rockwell Automation, Inc. 30,550 1,514 Rockwell Collins, Inc. 29,250 1,154 Ryder System, Inc. 10,700 511 Southwest Airlines Co. 129,267 2,104 Textron, Inc. 22,850 1,686 Tyco International, Ltd. 333,508 11,920 Union Pacific Corp. 43,060 2,896 United Parcel Service, Inc. -- Class B 185,800 15,878 United Technologies Corp. 84,767 8,761 W.W. Grainger, Inc. 14,900 993 Waste Management, Inc. 94,885 2,841 ------- Total 220,749 ------- Information Technology (15.8%) *ADC Telecommunications, Inc. 134,150 360 Adobe Systems, Inc. 39,525 2,480 *Advanced Micro Devices, Inc. 64,000 1,409 *Affiliated Computer Services, Inc. -- Class A 21,300 1,282 *Agilent Technologies, Inc. 80,537 1,941 *Altera Corp. 61,711 1,277 Analog Devices, Inc. 62,357 2,302 *Andrew Corp. 26,637 363 *Apple Computer, Inc. 66,700 4,295 *Applied Materials, Inc. 281,600 4,815 *Applied Micro Circuits Corp. 51,100 215 Autodesk, Inc. 38,068 1,445 Automatic Data Processing, Inc. 96,550 4,282 *Avaya, Inc. 75,916 1,306 *BMC Software, Inc. 36,760 684 *Broadcom Corp. -- Class A 54,600 1,762 *CIENA Corp. 94,800 317 *Cisco Systems, Inc. 1,091,800 21,072 *Citrix Systems, Inc. 28,120 690 Computer Associates International, Inc. 97,092 3,016 *Computer Sciences Corp. 31,350 1,767 *Compuware Corp. 64,157 415 *Comverse Technology, Inc. 32,800 802 *Convergys Corp. 23,450 352
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ----------------------------------------------------------- Information Technology continued *Corning, Inc. 232,500 2,737 *Dell, Inc. 411,933 17,359 *Electronic Arts, Inc. 50,600 3,121 Electronic Data Systems Corp. 85,167 1,967 *EMC Corp. 397,274 5,907 First Data Corp. 137,632 5,855 *Fiserv, Inc. 32,425 1,303 *Freescale Semiconductor Inc. -- Class B 64,623 1,186 *Gateway, Inc. 61,950 372 Hewlett-Packard Co. 500,726 10,500 Intel Corp. 1,048,363 24,521 International Business Machines Corp. 276,039 27,211 *Intuit, Inc. 31,100 1,369 *Jabil Circuit, Inc. 33,367 854 *JDS Uniphase Corp. 239,400 759 *KLA-Tencor Corp. 32,400 1,509 *Lexmark International, Inc. -- Class A 21,400 1,819 Linear Technology Corp. 50,950 1,975 *LSI Logic Corp. 63,800 350 *Lucent Technologies, Inc. 732,936 2,756 Maxim Integrated Products, Inc. 53,900 2,285 *Mercury Interactive Corp. 14,000 638 *Micron Technology, Inc. 101,550 1,254 Microsoft Corp. 1,802,600 48,146 Molex, Inc. 31,250 938 Motorola, Inc. 403,677 6,943 National Semiconductor Corp. 59,386 1,066 *NCR Corp. 15,500 1,073 *Network Appliance, Inc. 59,500 1,977 *Novell, Inc. 62,300 421 *Novellus Systems, Inc. 23,200 647 *NVIDIA Corp. 27,600 650 *Oracle Corp. 850,325 11,666 *Parametric Technology Corp. 44,580 263 Paychex, Inc. 62,735 2,138 *PMC-Sierra, Inc. 29,500 332 *QLogic Corp. 15,350 564 QUALCOMM, Inc. 271,734 11,522 Sabre Holdings Corp. -- Class A 22,467 498 *Sanmina-SCI Corp. 86,400 732 Scientific-Atlanta, Inc. 25,400 838 *Siebel Systems, Inc. 84,300 885 *Solectron Corp. 161,000 858 *Sun Microsystems, Inc. 557,597 3,000 *SunGard Data Systems, Inc. 47,900 1,357 *Symantec Corp. 105,200 2,710 Symbol Technologies, Inc. 39,850 689 Tektronix, Inc. 14,960 452 *Tellabs, Inc. 76,592 658 *Teradyne, Inc. 32,150 549 Texas Instruments, Inc. 286,500 7,054 *Unisys Corp. 55,650 567 *VERITAS Software Corp. 70,032 1,999 *Xerox Corp. 158,100 2,689 Xilinx, Inc. 57,800 1,714 *Yahoo!, Inc. 228,000 8,591 ------- Total 300,442 -------
70 Index 500 Stock Portfolio Index 500 Stock Portfolio
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ---------------------------------------------------------- Materials (3.0%) Air Products and Chemicals, Inc. 37,667 2,184 Alcoa, Inc. 144,307 4,534 Allegheny Technologies, Inc. 15,817 343 Ball Corp. 18,632 819 Bemis Co., Inc. 17,700 515 The Dow Chemical Co. 156,309 7,740 E. I. du Pont de Nemours and Co. 164,628 8,076 Eastman Chemical Co. 12,925 746 Ecolab, Inc. 42,700 1,500 Engelhard Corp. 20,300 623 Freeport-McMoRan Copper & Gold, Inc. -- Class B 29,581 1,131 Georgia-Pacific Corp. 42,804 1,604 Great Lakes Chemical Corp. 8,500 242 *Hercules, Inc. 18,600 276 International Flavors & Fragrances, Inc. 15,600 668 International Paper Co. 80,666 3,388 Louisiana-Pacific Corp. 18,200 487 MeadWestvaco Corp. 33,579 1,138 Monsanto Co. 43,853 2,436 Newmont Mining Corp. 73,580 3,268 Nucor Corp. 26,366 1,380 *Pactiv Corp. 24,600 622 Phelps Dodge Corp. 15,824 1,565 PPG Industries, Inc. 28,467 1,940 Praxair, Inc. 53,800 2,375 Rohm and Haas Co. 37,280 1,649 *Sealed Air Corp. 13,821 736 Sigma-Aldrich Corp. 11,400 689 Temple-Inland, Inc. 9,300 636 United States Steel Corp. 18,850 966 Vulcan Materials Co. 17,000 928 Weyerhaeuser Co. 39,780 2,674 ------ Total 57,878 ------ Telecommunication Services (3.2%) ALLTEL Corp. 50,357 2,959 AT&T Corp. 132,007 2,516 BellSouth Corp. 303,765 8,442 CenturyTel, Inc. 22,300 791 Citizens Communications Co. 55,600 767 *Nextel Communications, Inc. -- Class A 184,250 5,528 *Qwest Communications International, Inc. 301,135 1,337 SBC Communications, Inc. 549,747 14,166 Sprint Corp. 243,889 6,061 Verizon Communications, Inc. 459,142 18,599 ------ Total 61,166 ------ Utilities (2.9%) *The AES Corp. 107,600 1,471 *Allegheny Energy, Inc. 22,800 449
Shares/ Value Common Stocks (98.3%) $ Par $ (000's) ---------------------------------------------------------- Utilities continued Ameren Corp. 32,267 1,618 American Electric Power Co., Inc. 65,640 2,254 *Calpine Corp. 88,560 349 Centerpoint Energy, Inc. 51,062 577 Cinergy Corp. 30,084 1,252 *CMS Energy Corp. 32,300 338 Consolidated Edison, Inc. 40,150 1,757 Constellation Energy Group, Inc. 29,200 1,276 Dominion Resources, Inc. 54,995 3,725 DTE Energy Co. 28,850 1,244 Duke Energy Corp. 158,630 4,018 *Dynegy, Inc. -- Class A 63,000 291 Edison International 54,020 1,730 Entergy Corp. 37,109 2,508 Exelon Corp. 109,824 4,841 FirstEnergy Corp. 54,665 2,160 FPL Group, Inc. 30,757 2,299 KeySpan Corp. 26,600 1,049 Nicor, Inc. 7,350 272 NiSource, Inc. 44,873 1,022 Peoples Energy Corp. 6,200 272 *PG&E Corp. 66,825 2,224 Pinnacle West Capital Corp. 15,200 675 PPL Corp. 31,334 1,669 Progress Energy, Inc. 40,992 1,854 Public Service Enterprise Group, Inc. 39,436 2,042 Sempra Energy 38,702 1,420 The Southern Co. 122,600 4,110 TECO Energy, Inc. 33,100 508 TXU Corp. 39,865 2,574 Xcel Energy, Inc. 66,420 1,209 --------- Total 55,057 --------- Total Common Stocks (Cost: $1,382,618) 1,871,273 --------- Money Market Investments (1.6%) ---------------------------------------------------------- Federal Government & Agencies (0.2%) (b)Federal Home Loan Mortgage Corp., 2.42%, 3/22/05 3,000,000 2,985 --------- Total 2,985 --------- Finance Services (0.5%) (b)Preferred Receivable Funding, 2.25%, 1/6/05 10,000,000 9,997 --------- Total 9,997 --------- Personal Credit Institutions (0.5%) (b)Rabobank Financial Corp., 2.17%, 1/4/05 10,000,000 9,998 --------- Total 9,998 ---------
Index 500 Stock Portfolio 71 Index 500 Stock Portfolio
Shares/ Value Money Market Investments (1.6%) $ Par $ (000's) --------------------------------------------------------- Short Term Business Credit (0.4%) (b)CXC Inc., 2.20%, 1/3/05 7,500,000 7,499 --------- Total 7,499 --------- Total Money Market Investments (Cost: $30,478) 30,479 --------- Total Investments (99.9%) (Cost $1,413,096)(a) 1,901,752 --------- Other Assets, Less Liabilities (0.1%) 2,370 --------- Total Net Assets (100.0%) 1,904,122 ---------
* Non-Income Producing (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $1,417,226 and the net unrealized appreciation of investments based on that cost was $484,526 which is comprised of $641,921 aggregate gross unrealized appreciation and $157,395 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) --------------------------------------------------------------- S&P 500 Index Futures 100 3/05 $472 (Total Notional Value at December 31, 2004, $29,871)
The Accompanying Notes are an Integral Part of the Financial Statements 72 Index 500 Stock Portfolio Asset Allocation Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Realize highest total return, including Flexible policy of allocating assets among stocks, bonds $197 million current income and capital appreciation, and cash, with mix adjusted to capitalize on changing consistent with reasonable investment risk financial markets and economic conditions.
The investment objective of the Asset Allocation Portfolio is to realize as high a level of total return as is consistent with reasonable investment risk. The Portfolio will follow a flexible policy for allocating assets among equity securities, debt investments, and cash or cash equivalents. The Asset Allocation Portfolio invests in six categories of assets: large capitalization stocks, small capitalization stocks, foreign stocks, investment grade bonds, below investment grade bonds, and cash equivalents. The proportion of investments in each category is adjusted as appropriate to take advantage of market trends and opportunities, and securities within each category are actively managed by an investment professional with expertise in that category. The Portfolio is managed to maintain broad diversification, while blending asset classes to achieve both capital appreciation and current income. Comparison of returns of the Asset Allocation Portfolio with stock or bond indices is of limited usefulness because there is no index that includes both equity and debt securities. The Portfolio's performance is generally a blend of stock and bond performance. For the year ended December 31, 2004, the Asset Allocation Portfolio had a total return of 10.02%. The return was below the return of 10.88% for the S&P 500 Index, but above the return of the bond benchmark, the Merrill Lynch Domestic Master Index, which had a return of 4.34%. (These indices are unmanaged, cannot be invested in directly, and do not include administrative expenses or sales charges.) The Portfolio outperformed its peer group, Flexible Portfolio Funds, which had an average return of 8.25% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. Stocks, which had a spectacular year in 2003, experienced very nice gains again for the year ended December 31, 2004. As the cyclical recovery continued, returns on large capitalization stocks lagged for the second year in a row, as investors sought higher returns in riskier equities including small cap and international stocks. The majority of the gains in all segments of the market came in the fourth quarter alone. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. Bonds also posted positive returns in 2004, and high yield bonds significantly outperformed investment grade bonds for the second year in a row. The bond market experienced significant fluctuations during the year, however. Short-term interest rates began to rise in April, after a sustained period in which they had remained at 45-year lows, and the second quarter of 2004 was the worst quarter for bond returns since 1980. Reversing course in the third quarter -- an unusual time in which bond prices rose while short-term interest rates were moving up -- bonds had their best quarter in two years. The fourth quarter of 2004 was typified by generally rising yields, with the rise most acute at the front end of the yield curve, and the yield curve continued to flatten. With the economy seemingly on stable footing -- growing not too fast and not too slow -- the incremental yields of both high grade corporates and high yield bonds looked appealing. Overall for the year, the Treasury yield curve flattened and corporate credit spreads tightened as bond investors looking for higher yields took on more credit risk rather than locking in longer term bonds. Adding to the Portfolio's return in 2004 was an overweight position in foreign stocks, which benefited from strength in most international stock markets and from the weaker dollar. International stocks, as measured by the MSCI EAFE (Europe, Australasia, Far East) Index, returned 20.70% for the year. Seeing more potential in international stocks than in domestic stocks, we made a conscious decision to add to this position, and at year end, 16% of the Portfolio was invested in foreign stocks compared to 15.0% at the beginning of the year. A substantial position in small-capitalization stocks (12.8% of assets at year end) also helped the Portfolio's performance, as riskier securities outperformed high quality stocks for the year. Small cap stocks were the best performing asset class in 2004, as measured by the S&P 600 SmallCap Index, which gained 22.65% for the year. A neutral weighting in large cap domestic stocks (32%, including futures, at year end), which underperformed riskier small-cap and mid-cap stocks during the year, was a slight drag on performance. The Portfolio's weighting in investment grade bonds, which was too high given the environment that rewarded riskier assets, was also a negative for the year. At year end, the Portfolio held approximately 28% of its assets in investment grade bonds and approximately 7% in below-investment grade bonds. As we enter the first quarter of 2005, we see no obvious valuation anomalies among asset classes, and the Portfolio is staying close to neutral. A modest overweight position in equities is an indication of the team's view that stocks still look relatively inexpensive compared to bonds. The variability of returns in many asset classes in recent years provides convincing evidence of the advantage of a diversified portfolio. This Portfolio gives investors the advantage of ongoing analysis of all market sectors, with shifts among sectors as appropriate for market conditions. We will continue to evaluate each asset class individually and comparatively, and choose the asset allocation we believe is likely to maximize overall long-term returns. Asset Allocation Portfolio 73 Asset Allocation Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Merrill Lynch Merrill Lynch Asset Allocation Domestic Master Three Months Portfolio Index T-Bill Index S&P 500 Index ---------------- --------------- ------------- ------------- 7/01 $10,000 $10,000 $10,000 $10,000 12/01 9,770 10,240 10,139 9,538 12/02 8,768 11,306 10,320 7,431 12/03 10,577 11,772 10,438 9,562 12/04 11,660 10,601 12,283 10,577 Average Annual Total Return For Periods Ended December 31, 2004 Since 1 Year Inception* Asset Allocation Portfolio 10.02% 4.59% S&P 500 Index 10.88% 1.72% Merrill Lynch Domestic Master Index 4.34% 6.20% Merrill Lynch Three Months T-Bill Index 1.33% 1.65% Flexible Portfolio Funds Lipper Average 8.25% - *inception date of 7/31/01 The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 7/31/01 (commencement of the Portfolio's operations). Returns shown reflect fee waivers, deductions for management and other Portfolio expenses, and reinvestment of all dividends. In the absence of fee waivers, total return would be reduced. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account Report. In the graph, the Portfolio is compared against three indices representing the three major components of the Fund: equities, fixed income and cash equivalent investments. The indices cannot be invested in directly and do not include sales charges. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Merrill Lynch Domestic Master Index is an unmanaged market value weighted index comprised of U.S. Government, mortgage and investment-grade corporate bonds. The Index measures the income provided by, and the price changes of, the underlying securities. The Merrill Lynch Three Months T-Bill Index is comprised of a single issue purchased at the beginning of each month and held for a full month. The issue selected at each month-end rebalancing is the outstanding Treasury bill that matures closest to, but not beyond, three months from the rebalancing date. The Lipper Variable Insurance Products (VIP) Flexible Portfolio Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that allocate investments across various asset classes, including domestic common stocks, bonds, and money market instruments with a focus on total return. Source: Lipper, Inc. Investors should be aware of the risks of investments in foreign securities, particularly investments in securities of companies in developing nations. These include the risks of currency fluctuation, of political and economic instability and of less well-developed government supervision and regulation of business and industry practices, as well as differences in accounting standards. Small-cap stocks also may carry additional risk. Small or newer issuers are more likely to realize more substantial growth as well as suffer more significant losses than larger or more established issuers. Investments in such companies can be both more volatile and more speculative. [CHART] Sector Allocation 12/31/04 Large Cap Stocks (including index futures) 32% Investment Grade Bonds 28% Foreign Stocks 16% Small Cap Stocks 13% Below Investment Grade Bonds 7% Short-Term Investments & Other Net Assets 4% Sector Allocation is based on Net Assets. Sector Allocation is subject to change. No investment strategy can guarantee a profit or protect against a loss. 74 Asset Allocation Portfolio Asset Allocation Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,078.00 $3.31 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,021.64 $3.22 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.63%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Asset Allocation Portfolio 75 Asset Allocation Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Domestic Common Stocks, Options and Shares/ Value Warrants (36.5%) $ Par $ (000's) ----------------------------------------------------- Large Cap Common Stocks (23.8%) ----------------------------------------------------- Consumer Discretionary (4.7%) *Bed Bath & Beyond, Inc. 8,300 331 Best Buy Co., Inc. 4,600 273 Carnival Corp. 8,800 507 *Comcast Corp. -- Class A 8,500 283 DaimlerChrysler AG 4,700 226 *eBay, Inc. 3,000 349 Fortune Brands, Inc. 11,300 872 Harley-Davidson, Inc. 7,200 437 J. C. Penney Co., Inc. 13,400 555 *Kohl's Corp. 6,900 339 Lowe's Companies, Inc. 3,200 184 McDonald's Corp. 12,100 388 The McGraw-Hill Companies, Inc. 5,600 513 News Corp., Inc. -- Class A 20,400 381 NIKE, Inc. -- Class B 5,400 490 Omnicom Group, Inc. 6,800 573 PETsMART, Inc. 9,200 327 Staples, Inc. 14,400 485 Target Corp. 17,700 920 *Time Warner, Inc. 21,200 412 Viacom, Inc. -- Class B 12,900 469 ----- Total Consumer Discretionary 9,314 ----- Consumer Staples (1.9%) Altria Group, Inc. 14,700 899 Anheuser-Busch Companies, Inc. 6,100 309 Avon Products, Inc. 10,000 387 PepsiCo, Inc. 12,900 673 The Procter & Gamble Co. 6,000 330 Wal-Mart Stores, Inc. 15,200 803 Walgreen Co. 9,500 365 ----- Total Consumer Staples 3,766 ----- Energy (1.5%) BP PLC, ADR 3,800 222 ConocoPhillips 5,600 486 EOG Resources, Inc. 7,400 528 Exxon Mobil Corp. 15,500 795 Halliburton Co. 12,300 483 *Noble Corp. 8,500 423 ----- Total Energy 2,937 ----- Financials (3.7%) American Express Co. 7,200 406 American International Group, Inc. 10,900 716 Capital One Financial Corp. 3,600 303 The Chubb Corp. 6,400 492 Citigroup, Inc. 15,100 728 Countrywide Financial Corp. 3,898 144 Freddie Mac 3,300 243 The Goldman Sachs Group, Inc. 4,300 447 Legg Mason, Inc. 3,700 271
Shares/ Value Large Cap Common Stocks (23.8%) $ Par $ (000's) ----------------------------------------------------------- Financials continued Lehman Brothers Holdings, Inc. 5,400 472 Morgan Stanley 8,600 477 Prudential Financial, Inc. 9,400 517 U.S. Bancorp 17,300 542 Wachovia Corp. 7,900 416 Wells Fargo & Co. 16,900 1,051 ----- Total Financials 7,225 ----- Health Care (3.6%) Abbott Laboratories 9,800 457 *Amgen, Inc. 12,800 821 *Boston Scientific Corp. 9,900 352 *Caremark Rx, Inc. 11,300 446 Eli Lilly and Co. 6,300 358 *Fisher Scientific International, Inc. 3,700 231 *Genentech, Inc. 6,600 359 *Gilead Sciences, Inc. 10,900 381 Guidant Corp. 1,600 115 Johnson & Johnson 12,900 818 Medtronic, Inc. 13,000 646 Pfizer, Inc. 25,300 680 *St. Jude Medical, Inc. 8,000 335 Teva Pharmaceutical Industries, Ltd., ADR 14,800 442 UnitedHealth Group, Inc. 2,700 238 *Zimmer Holdings, Inc. 5,300 425 ----- Total Health Care 7,104 ----- Industrials (1.9%) Canadian National Railway Co. 10,700 655 Caterpillar, Inc. 3,100 302 FedEx Corp. 2,800 276 General Electric Co. 48,700 1,778 Tyco International, Ltd. 14,200 508 United Parcel Service, Inc. -- Class B 3,300 282 ----- Total Industrials 3,801 ----- Information Technology (5.2%) *Accenture Ltd. -- Class A 12,700 343 *Affiliated Computer Services, Inc. -- Class A 9,300 560 Analog Devices, Inc. 9,600 354 *ASML Holding N.V. 24,300 387 *Broadcom Corp. -- Class A 6,700 216 *Cisco Systems, Inc. 41,600 802 *Dell, Inc. 18,800 792 First Data Corp. 13,700 583 *Fiserv, Inc. 8,100 326 *Google, Inc. -- Class A 900 174 Hewlett-Packard Co. 15,800 331 Intel Corp. 24,900 582 International Business Machines Corp. 5,900 582 *Lexmark International, Inc. -- Class A 5,200 442 Microsoft Corp. 53,300 1,423 National Semiconductor Corp. 16,900 303
76 Asset Allocation Portfolio Asset Allocation Portfolio
Shares/ Value Large Cap Common Stocks (23.8%) $ Par $ (000's) --------------------------------------------------------- Information Technology continued SAP AG -- Sponsored ADR 5,700 252 *Symantec Corp. 7,000 180 Taiwan Semiconductor Manufacturing Co., Ltd., ADR 25,288 215 *Telefonaktiebolget LM Ericsson 12,500 394 Texas Instruments, Inc. 11,200 276 *VeriSign, Inc. 8,700 292 *Yahoo!, Inc. 10,366 391 ------ Total Information Technology 10,200 ------ Materials (1.0%) Alcoa, Inc. 25,300 795 Newmont Mining Corp. 5,500 244 Praxair, Inc. 11,600 512 Weyerhaeuser Co. 7,500 504 ------ Total Materials 2,055 ------ Other Holdings (0.1%) *Nasdaq-100 Trust, Series 1 3,700 148 ------ Total Other Holdings 148 ------ Telecommunication Services (0.2%) Vodafone Group PLC, ADR 17,300 474 ------ Total Telecommunication Services 474 ------ Total Large Cap Common Stocks 47,024 ------ Small Cap Common Stocks (12.7%) --------------------------------------------------------- Consumer Discretionary (2.4%) *AnnTaylor Stores Corp. 10,425 224 Choice Hotels International, Inc. 3,100 180 *Coach, Inc. 4,300 243 *Digital Theater Systems, Inc. 9,200 185 *eLong, Inc. -- Sponsored ADR 4,346 81 Garmin, Ltd. 4,300 262 *Hibbett Sporting Goods, Inc. 5,300 141 Jones Apparel Group, Inc. 5,100 187 *Lamar Advertising Co. -- Class A 7,700 329 Leggett & Platt, Inc. 18,800 534 Michaels Stores, Inc. 15,400 462 *O'Reilly Automotive, Inc. 17,300 779 Orient-Express Hotel, Ltd. -- Class A 12,800 263 *Pinnacle Entertainment, Inc. 18,500 366 Polaris Industries, Inc. 2,400 163 *Sharper Image Corp. 6,000 113 The Talbots, Inc. 6,500 177 *Westwood One, Inc. 4,300 116 ------ Total Consumer Discretionary 4,805 ------ Energy (0.6%) BJ Services Co. 5,100 237 *National-Oilwell, Inc. 8,800 311 Patterson-UTI Energy, Inc. 15,900 309 *Quicksilver Resources, Inc. 3,600 132 *Smith International, Inc. 4,400 239 ------ Total Energy 1,228 ------
Shares/ Value Small Cap Common Stocks (12.7%) $ Par $ (000's) ------------------------------------------------------------ Financials (1.0%) Assured Guaranty, Ltd. 7,000 138 BankAtlantic Bancorp, Inc. -- Class A 7,000 139 *CapitalSource, Inc. 7,900 203 Investors Financial Services Corp. 15,000 750 Main Street Banks, Inc. 2,300 80 Old Republic International Corp. 10,150 257 *Silicon Valley Bancshares 3,700 166 *Trammell Crow Co. 9,800 177 ----- Total Financials 1,910 ----- Health Care (3.7%) *Angiotech Pharmaceuticals, Inc. 9,600 177 *Caremark Rx, Inc. 11,936 471 *Cytyc Corp. 8,300 229 *DaVita, Inc. 49,750 1,966 Health Management Associates, Inc. -- Class A 15,800 359 *Impax Laboratories, Inc. 8,800 140 *Kinetic Concepts, Inc. 5,800 443 *Kyphon, Inc. 7,100 183 *Lincare Holdings, Inc. 14,500 618 *Patterson Companies, Inc. 17,800 772 *Psychiatric Solutions, Inc. 8,800 322 *Radiation Therapy Services, Inc. 9,100 155 *Renal Care Group, Inc. 14,600 525 Select Medical Corp. 10,500 185 *Thermo Electron Corp. 8,900 269 *Varian Medical Systems, Inc. 5,600 242 ----- Total Health Care 7,056 ----- Industrials (1.8%) *Arbinet Holdings, Inc. 800 20 Brady Corp. -- Class A 2,000 125 C.H. Robinson Worldwide, Inc. 8,200 455 Cintas Corp. 2,700 118 The Corporate Executive Board Co. 5,000 335 *Forward Air Corp. 5,200 232 *HouseValues, Inc. 1,010 15 *Intersections, Inc. 11,700 202 Knight Transportation, Inc. 18,825 467 L-3 Communications Holdings, Inc. 3,300 242 Manpower, Inc. 1,600 77 *Marlin Business Services, Inc. 7,300 139 MSC Industrial Direct Co., Inc. -- Class A 11,600 417 Pentair, Inc. 3,100 135 Robert Half International, Inc. 9,200 271 Teleflex, Inc. 6,600 343 ----- Total Industrials 3,593 ----- Information Technology (3.2%) *Activision, Inc. 7,700 155 *Amdocs, Ltd. 9,700 255 *Avaya, Inc. 15,200 261 CDW Corp. 4,100 272 *Cogent, Inc. 5,100 168 *Cognos, Inc. 8,500 375 *Cree, Inc. 4,400 176 *Digital River, Inc. 6,200 258
Asset Allocation Portfolio 77 Asset Allocation Portfolio
Shares/ Value Small Cap Common Stocks (12.7%) $ Par $ (000's) --------------------------------------------------------- Information Technology continued *Essex Corp. 6,500 132 *Genesis Microchip, Inc. 11,500 187 Harris Corp. 3,500 216 *Hewitt Associates, Inc. 8,300 266 *Integrated Circuit Systems, Inc. 9,800 205 *iPayment, Inc. 3,400 168 *Kanbay International, Inc. 1,900 59 *KLA-Tencor Corp. 2,600 121 *Kronos Inc. 4,600 235 *Lam Research Corp. 10,000 289 Microchip Technology, Inc. 9,300 248 *NAVTEQ Corp. 2,500 116 Paychex, Inc. 8,200 279 *QLogic Corp. 3,300 121 *Semtech Corp. 5,500 120 *Silicon Laboratories, Inc. 5,500 194 *Tekelec 5,900 121 *Tessera Technologies, Inc. 9,800 365 *Verint Systems, Inc. 4,400 160 *VeriSign, Inc. 5,600 188 *Westell Technologies, Inc. -- Class A 16,700 114 *Zebra Technologies Corp. -- Class A 8,100 456 ------ Total Information Technology 6,280 ------ Total Small Cap Common Stocks 24,872 ------ Call Options and Warrants (0.0%) --------------------------------------------------------- Foods (0.0%) B&G Foods, Inc. -- EIS 3,875 58 ------ Total Foods 58 ------ Information Technology (0.0%) Belluna Co., Ltd. -- Warrants 307 1 C/O Kontron AG, expiring 3/14/05 @ 6.67 296 0 ------ Total Information Technology 1 ------ Telecommunications (0.0%) American Tower Corp. 100 2 IWO Holdings, Inc. 144A 50 0 ------ Total Telecommunications 2 ------ Total Call Options and Warrants 61 ------ Total Domestic Common Stocks, Options and Warrants (Cost: $59,479) 71,957 ------
Foreign Common Stocks (16.5%) Country ---------------------------------------------------- Basic Materials (0.9%) BASF AG Germany 3,460 249 CRH PLC Ireland 8,356 224 K+S AG Germany 3,380 180 Nippon Steel Corp. Japan 83,000 203 Stora Enso OYJ Finland 14,540 223 Sumitomo Chemical Co., Ltd. Japan 42,000 206 *Syngenta AG Switzerland 2,620 278
Foreign Common Shares/ Value Stocks (16.5%) Country $ Par $ (000's) ------------------------------------------------------ Basic Materials continued *Umicore -- Strip VVPR Belgium 75 0 Wienerberger AG Austria 6,131 293 ----- Total Basic Materials 1,856 ----- Conglomerates (0.8%) Grupo Ferrovial SA Spain 7,220 386 iShares MSCI EAFE Index Fund United States 3,280 526 Nomura TOPIX Exchange Traded Fund Japan 22,400 253 Vinci SA France 2,580 346 ----- Total Conglomerates 1,511 ----- Consumer Cyclical (3.6%) Beru AG Germany 350 32 Bridgestone Corp. Japan 10,000 199 Bulgari SPA Italy 18,620 230 Burberry Group PLC United Kingdom 26,310 203 Carnival Corp. United Kingdom 4,695 271 Edgars Consolidated Stores, Ltd. South Africa 3,982 214 Esprit Holdings, Ltd. Hong Kong 55,500 333 Four Seasons Hotels, Inc. Canada 1,530 125 Hilton Group PLC United Kingdom 31,070 170 *Hyundai Motor Co. Korea 4,840 259 Intercontinental Hotels Group PLC United Kingdom 13,919 173 Lagardere S.C.A. France 3,050 220 Lottomatica SPA Italy 8,135 298 Mediaset SPA Italy 6,810 86 Next PLC United Kingdom 15,580 495 NHK Spring Co., Ltd. Japan 25,000 171 Nissan Motor Co., Ltd. Japan 17,100 186 Nobia AB Sweden 15,735 260 Nokian Renkaat OYJ Finland 1,845 280 Opap SA Greece 9,485 262 Punch Taverns PLC United Kingdom 24,600 326 Ryohin Keikaku Co., Ltd. Japan 4,200 211 Signet Group PLC United Kingdom 98,745 209 Square Enix Co., Ltd. Japan 7,300 216 Swatch Group AG Switzerland 1,675 246 Techtronic Industries Co. Hong Kong 116,500 255 *Urbi Desarrollos Urbanos SA Mexico 22,815 100 USS Co., Ltd. Japan 2,410 202 *Vivendi Universal SA France 7,910 253 Walmart de Mexico -- Series V Mexico 50,645 174 Wolseley PLC United Kingdom 11,000 206 ----- Total Consumer Cyclical 6,865 -----
78 Asset Allocation Portfolio Asset Allocation Portfolio
Foreign Common Shares/ Value Stocks (16.5%) Country $ Par $ (000's) ------------------------------------------------------ Consumer Non-Cyclical (1.3%) Axfood AB Sweden 5,650 191 *Cott Corp. ADR Canada 5,610 139 *GEOX SPA Italy 15,730 122 Metro AG Germany 2,065 114 Natura Cosmeticos SA Brazil 7,820 228 Nestle SA Switzerland 605 158 Puma AG Germany 1,440 394 Reckitt Benckiser PLC United Kingdom 7,890 238 *Royal Numico NV Netherlands 5,725 206 SABMiller PLC United Kingdom 11,965 198 Swedish Match AB Sweden 27,200 315 Tesco PLC United Kingdom 54,555 338 ----- Total Consumer Non-Cyclical 2,641 ----- Energy (0.9%) BG Group PLC United Kingdom 38,280 260 BP PLC United Kingdom 19,620 191 EnCana Corp. Canada 4,375 250 Eni SPA Italy 10,420 261 Suncor Energy, Inc. Canada 1,930 69 Technip SA France 1,538 285 *TGS Nopec Geophysical Co. ASA Norway 3,990 102 Total SA France 770 168 *Western Oil Sands, Inc. Canada 5,590 195 ----- Total Energy 1,781 ----- Financials (3.3%) *Admiral Group PLC United Kingdom 4,515 28 Aktiv Kapital ASA Norway 200 4 Allianz AG Germany 780 103 Alpha Bank AE Greece 7,842 274 AMP, Ltd. Australia 51,445 291 Anglo Irish Bank Corp. PLC Ireland 23,858 581 Banca Fideuram SPA Italy 32,340 167 *Banco Espanol de Credito SA Spain 16,495 236 Banco Popolare Di Verona Italy 13,705 279 Bangkok Bank PCL Thailand 17,000 50 Bank of Yokohama Japan 35,000 221 Bank Rakyat Indonesia Indonesia 947,000 293 BNP Paribas France 3,080 223 Chiba Bank, Ltd. Japan 29,000 194 Credit Saison Co., Ltd. Japan 5,800 211 *Credit Suisse Group Switzerland 3,145 132 DNB NOR ASA Norway 27,030 267 Erste Bank Der Oester Austria 7,245 388 Foereningssparbanken AB Sweden 9,655 240 Fondiaria SAI SPA Italy 8,235 222
Foreign Common Shares/ Value Stocks (16.5%) Country $ Par $ (000's) -------------------------------------------------------- Financials continued HSBC Holdings PLC Hong Kong 13,053 223 ING Groep NV Netherlands 8,770 265 *Kookmin Bank Korea 5,600 219 Man Group PLC United Kingdom 6,900 195 Manulife Financial Corp. Canada 4,080 188 MPC Muenchmeyer Petersen Capital AG Germany 970 73 OTP Bank Hungary 11,775 363 Royal Bank of Scotland Group PLC United Kingdom 6,391 215 Storebrand ASA Norway 31,040 300 ----- Total Financials 6,445 ----- Health Care (1.2%) CSL, Ltd. Australia 9,990 228 *Elekta AB Sweden 5,695 164 GN Store Nord Denmark 21,370 230 Nobel Biocare Holding AG Switzerland 1,500 272 Novartis AG Switzerland 4,510 227 Roche Holding AG Switzerland 2,270 261 Schwarz Pharma AG Germany 5,850 265 Smith & Nephew PLC United Kingdom 21,855 224 Stada Arzneimittel AG Germany 7,455 201 *Synthes, Inc. Switzerland 2,010 225 ----- Total Health Care 2,297 ----- Industrial Goods (1.4%) Atlas Copco AB Sweden 5,475 247 Capita Group PLC United Kingdom 36,925 259 *Chiyoda Corp. Japan 32,000 234 Cobham PLC United Kingdom 7,855 187 *Daewoo Shipbuilding & Marine Engineering Co., Ltd. Korea 14,420 215 *Deutz AG Germany 8,909 36 Hays PLC United Kingdom 83,190 198 Keyence Corp. Japan 900 202 Kubota Corp. Japan 49,000 243 Meggitt PLC United Kingdom 42,593 214 Metso OYJ Finland 6,315 100 Neopost SA France 3,580 277 Omron Corp. Japan 7,400 177 Volvo AB Sweden 5,395 214 ----- Total Industrial Goods 2,803 ----- Technology (1.8%) *Axalto Holding NV France 8,065 210 Canon, Inc. Japan 3,900 210 Dassault Systemes SA France 3,625 183 *Ericsson LM -- B Shares Sweden 87,525 279 Fuji Photo Film Co., Ltd. Japan 5,300 193 *Gresham Computing PLC United Kingdom 33,125 176
Asset Allocation Portfolio 79 Asset Allocation Portfolio
Foreign Common Shares/ Value Stocks (16.5%) Country $ Par $ (000's) ------------------------------------------------------ Technology continued Hoya Corp. Japan 2,100 237 Indra Sistemas SA Spain 14,135 242 Infosys Technologies, Ltd. India 5,967 287 *Kontron AG Germany 25,985 238 Net One Systems Co., Ltd. Japan 70 292 Nidec Corp. Japan 1,600 195 Samsung Electronics Co., Ltd. Korea 450 196 Siemens AG Germany 2,665 226 Tandberg ASA Norway 14,840 184 TDK Corp. Japan 2,800 207 ------ Total Technology 3,555 ------ Telecommunications (0.6%) *Deutsche Telekom AG Germany 11,015 249 *Mobistar SA Belgium 3,770 353 PT Telekomunikasi Indonesia Indonesia 361,000 188 Telefonica SA Spain 12,795 241 United Vodafone Group PLC Kingdom 73,775 200 ------ Total Telecommunications 1,231 ------ Transportation (0.4%) Canadian National Railway Co. Canada 4,605 282 Fraport AG Germany 5,245 224 *Golar LNG, Ltd. Norway 9,500 138 Kamigumi Co., Ltd. Japan 24,000 192 *Societe Des Autoroutes Paris-Rhin-Rhone France 575 35 ------ Total Transportation 871 ------ Utilities (0.3%) Brisa Auto Estrada de Portugal SA Portugal 25,240 232 Iberdrola SA Spain 11,010 279 ------ Total Utilities 511 ------ Total Foreign Common Stocks (Cost: $23,438) 32,367 ------
Revenue Bonds (0.2%) ------------------------------------------------------- Municipal Bonds -- Revenue (0.2%) Nashville & Davidson County, Tennessee Health and Educational Facilities Board of The Metropolitan Government, 0.00%, 6/1/21, RB 850,000 388 --- Total Revenue Bonds (Cost: $371) 388 --- Investment Grade Bonds (12.7%) ------------------------------------------------------- Auto Related (0.6%) American Honda Finance, 4.50%, 5/26/09 144A 350,000 356
Shares/ Value Investment Grade Bonds (12.7%) $ Par $ (000's) --------------------------------------------------------- Auto Related continued Ford Motor Credit Co., 5.70%, 1/15/10 105,000 106 Ford Motor Credit Co., 7.375%, 10/28/09 155,000 167 General Motors Acceptance Corp., 5.625%, 5/15/09 200,000 200 General Motors Acceptance Corp., 6.75%, 12/1/14 110,000 110 Household Finance Corp., 4.125%, 11/16/09 195,000 194 ----- Total Auto Related 1,133 ----- Automobiles And Other Motor Vehicles (0.2%) Ford Motor Co., 7.45%, 7/16/31 65,000 65 General Motors Corp., 8.375%, 7/15/33 230,000 239 ----- Total Automobiles And Other Motor Vehicles 304 ----- Beverages, Malt Beverages (0.1%) Anheuser-Busch Companies, Inc., 7.50%, 3/15/12 23,000 27 Coca-Cola Enterprises, Inc., 5.25%, 5/15/07 125,000 131 Coca-Cola Enterprises, Inc., 5.375%, 8/15/06 75,000 77 ----- Total Beverages, Malt Beverages 235 ----- Cable and Other Pay Television Services (0.2%) Comcast Corp., 5.30%, 1/15/14 250,000 258 Time Warner Entertainment Co., 8.375%, 7/15/33 85,000 110 ----- Total Cable and Other Pay Television Services 368 ----- Chemicals and Allied Products (0.1%) Monsanto Co., 4.00%, 5/15/08 185,000 186 ----- Total Chemicals and Allied Products 186 ----- Commercial Banks (1.4%) Bank of America Corp., 5.375%, 6/15/14 35,000 37 Bank One Corp., 5.25%, 1/30/13 250,000 257 Citigroup, Inc., 4.50%, 7/29/09 160,000 162 HBOS Treasury Services PLC, 4.00%, 9/15/09 144A 335,000 334 Key Bank NA, 5.80%, 7/1/14 250,000 265 PNC Bank NA, 5.25%, 1/15/17 385,000 387 Rabobank Capital Fund II, 5.26%, 12/31/13 144A 230,000 234 Royal Bank of Scotland Group PLC, 5.05%, 1/8/15 350,000 353 UnionBanCal Corp., 5.25%, 12/16/13 350,000 354 US Bank NA, 4.95%, 10/30/14 180,000 181 Wachovia Bank NA, 4.80%, 11/1/14 50,000 50 Wells Fargo & Co., 4.20%, 1/15/10 250,000 251 ----- Total Commercial Banks 2,865 -----
80 Asset Allocation Portfolio Asset Allocation Portfolio
Shares/ Value Investment Grade Bonds (12.7%) $ Par $ (000's) --------------------------------------------------------------- Computer and Other Data Processing Service (0.3%) Gtech Holdings Corp., 4.75%, 10/15/10 565,000 567 ----- Total Computer and Other Data Processing Service 567 ----- Consumer Non-Cyclical (0.4%) The Clorox Co., 4.20%, 1/15/10 144A 190,000 191 The Clorox Co., 5.00%, 1/15/15 144A 115,000 117 Estee Lauder, Inc., 5.75%, 10/15/33 115,000 118 The Gillette Co., 2.50%, 6/1/08 350,000 340 ----- Total Consumer Non-Cyclical 766 ----- Crude Petroleum and Natural Gas (0.5%) Conoco Funding Co., 6.35%, 10/15/11 335,000 374 Occidental Petroleum, 4.00%, 11/30/07 120,000 121 Occidental Petroleum, 7.65%, 2/15/06 200,000 209 Occidental Petroleum, 10.125%, 9/15/09 120,000 148 XTO Energy, Inc., 5.00%, 1/31/15 144A 165,000 164 ----- Total Crude Petroleum and Natural Gas 1,016 ----- Data Processing and Preparation (0.2%) First Data Corp., 3.90%, 10/1/09 360,000 359 ----- Total Data Processing and Preparation 359 ----- Eating Places (0.1%) McDonald's Corp., 3.875%, 8/15/07 110,000 110 McDonald's Corp., 5.375%, 4/30/07 90,000 94 ----- Total Eating Places 204 ----- Electric Services (1.2%) FPL Group Capital, Inc., 4.086%, 2/16/07 195,000 197 Indiana Michigan Power, 5.05%, 11/15/14 160,000 160 Kiowa Power Partners LLC, 4.811%, 12/30/13 144A 75,000 75 Kiowa Power Partners LLC, 5.737%, 3/30/21 144A 200,000 201 Oncor Electric Delivery, 6.375%, 1/15/15 70,000 77 PacifiCorp, 5.45%, 9/15/13 240,000 251 Peco Energy Co., 4.75%, 10/1/12 1,000,000 1,010 PPL Electric Utilities Corp., 4.30%, 6/1/13 375,000 362 Public Service Electric & Gas Corp., 5.00%, 1/1/13 100,000 102 Virginia Electric & Power Co., 5.25%, 12/15/15 190,000 193 ----- Total Electric Services 2,628 ----- Electrical and Electronic Machinery, Equipment (0.2%) General Electric Co., 5.00%, 2/1/13 300,000 308 ----- Total Electrical and Electronic Machinery, Equipment 308 -----
Shares/ Value Investment Grade Bonds (12.7%) $ Par $ (000's) ----------------------------------------------------------- Electrical Equipment and Supplies (0.1%) Cooper Industries, Inc., 5.50%, 11/1/09 200,000 212 ----- Total Electrical Equipment and Supplies 212 ----- Electronic Computers (0.6%) Hewlett-Packard Co., 6.50%, 7/1/12 1,000,000 1,120 ----- Total Electronic Computers 1,120 ----- Federal Savings Institutions (0.2%) World Savings Bank FSB, 4.125%, 12/15/09 345,000 345 ----- Total Federal Savings Institutions 345 ----- Fire, Marine and Casualty Insurance (0.8%) Berkley (WR) Corp., 9.875%, 5/15/08 600,000 706 Berkshire Hathaway, Inc., 5.10%, 7/15/14 144A 400,000 410 Berkshire Hathaway, Inc., 3.40%, 7/2/07 144A 250,000 249 Progressive Corp., 6.375%, 1/15/12 130,000 143 ----- Total Fire, Marine and Casualty Insurance 1,508 ----- Gas Transmission And Distribution (0.1%) Consolidated Natural Gas Co., 5.00%, 12/1/14 230,000 230 ----- Total Gas Transmission And Distribution 230 ----- Media (0.7%) Time Warner, Inc., 6.875%, 5/1/12 165,000 188 Viacom, Inc., 5.625%, 5/1/07 1,000,000 1,046 Viacom, Inc., 5.625%, 8/15/12 165,000 176 ----- Total Media 1,410 ----- Miscellaneous Business Credit Institutions (0.2%) Textron Financial Corp., 2.75%, 6/1/06 350,000 346 ----- Total Miscellaneous Business Credit Institutions 346 ----- Motors and Generators (0.5%) Emerson Electric Co., 4.50%, 5/1/13 70,000 69 Emerson Electric Co., 4.625%, 10/15/12 690,000 699 Emerson Electric Co., 5.75%, 11/1/11 48,000 52 Emerson Electric Co., 5.85%, 3/15/09 190,000 204 ----- Total Motors and Generators 1,024 ----- Personal Credit Institutions (0.1%) SLM Corp., 4.00%, 1/15/10 255,000 253 ----- Total Personal Credit Institutions 253 ----- Petroleum Refining (0.2%) Amerada Hess Corp., 7.125%, 3/15/33 165,000 181 Valero Energy Corp., 4.75%, 6/15/13 165,000 163 ----- Total Petroleum Refining 344 -----
Asset Allocation Portfolio 81 Asset Allocation Portfolio
Shares/ Value Investment Grade Bonds (12.7%) $ Par $ (000's) ---------------------------------------------------------- Pharmaceutical Preparations (0.4%) Abbott Laboratories, 3.75%, 3/15/11 260,000 255 Astrazeneca PLC, 5.40%, 6/1/14 165,000 173 GlaxoSmithKline Capital, Inc., 4.375%, 4/15/14 180,000 175 Merck & Co., Inc., 6.40%, 3/1/28 90,000 98 Pfizer, Inc., 4.50%, 2/15/14 120,000 119 ----- Total Pharmaceutical Preparations 820 ----- Phone Communications Except Radiophone (0.6%) BellSouth Corp., 5.20%, 9/15/14 330,000 336 SBC Communications, Inc., 5.10%, 9/15/14 125,000 126 Sprint Capital Corp., 8.375%, 3/15/12 335,000 409 Telecom Italia Capital, 4.95%, 9/30/14 144A 50,000 49 Verizon Global Funding Corp., 4.375%, 6/1/13 335,000 326 ----- Total Phone Communications Except Radiophone 1,246 ----- Radio, TV Electronic Stores (0.2%) RadioShack Corp., 6.95%, 9/1/07 350,000 379 ----- Total Radio, TV Electronic Stores 379 ----- Railroads, Line-Haul Operating (0.4%) Burlington Northern Santa Fe, 6.125%, 3/15/09 240,000 258 Union Pacific Corp., 3.875%, 2/15/09 240,000 238 Union Pacific Corp., 7.375%, 9/15/09 240,000 271 ----- Total Railroads, Line-Haul Operating 767 ----- Real Estate Investment Trusts (0.2%) ERP Operating LP, 4.75%, 6/15/09 60,000 61 ERP Operating LP, 5.25%, 9/15/14 300,000 305 First Industrial LP, 5.25%, 6/15/09 50,000 51 ----- Total Real Estate Investment Trusts 417 ----- Retail-Retail Stores (0.7%) Fortune Brands, Inc., 4.875%, 12/1/13 350,000 355 Home Depot, Inc., 3.75%, 9/15/09 144A 600,000 595 Limited Brands, Inc., 6.95%, 3/1/33 125,000 136 VF Corp., 6.00%, 10/15/33 200,000 204 ----- Total Retail-Retail Stores 1,290 ----- Savings Institutions Except Federal (0.2%) U.S. Central Credit Union, 2.75%, 5/30/08 350,000 339 ----- Total Savings Institutions Except Federal 339 ----- Security Brokers and Dealers (0.6%) Credit Suisse First Boston USA, Inc., 4.70%, 6/1/09 190,000 194 Goldman Sachs Group, Inc., 5.15%, 1/15/14 350,000 355
Shares/ Value Investment Grade Bonds (12.7%) $ Par $ (000's) ---------------------------------------------------------- Security Brokers and Dealers continued Merrill Lynch & Co., Inc., 5.00%, 1/15/15 300,000 299 Morgan Stanley, 5.30%, 3/1/13 325,000 335 ------ Total Security Brokers and Dealers 1,183 ------ Steel Wire and Related Products (0.2%) Hubbell, Inc., 6.375%, 5/15/12 300,000 327 ------ Total Steel Wire and Related Products 327 ------ Television Broadcasting Stations (0.1%) Clear Channel Communications, 5.50%, 12/15/16 255,000 251 ------ Total Television Broadcasting Stations 251 ------ Wines and Distilled Beverages (0.1%) Brown Forman Corp., 3.00%, 3/15/08 125,000 122 ------ Total Wines and Distilled Beverages 122 ------ Total Investment Grade Bonds (Cost: $24,781) 24,872 ------ Domestic and Foreign -- Government and Agency Bonds (11.8%) ---------------------------------------------------------- Federal Government and Agencies (11.8%) BECCS, 0.00%, 11/15/11 500,000 470 Federal Home Loan Mortgage Corp., 4.50%, 5/1/19 306,500 306 Federal Home Loan Mortgage Corp., 5.00%, 11/1/19 498,195 506 Federal Home Loan Mortgage Corp., 5.50%, 9/1/19 95,752 99 Federal Home Loan Mortgage Corp., 5.50%, 8/1/34 1,496,810 1,522 Federal Home Loan Mortgage Corp., 6.50%, 5/1/34 106,696 112 Housing & Urban Development, 6.08%, 8/1/13 100,000 110 State of Israel, 7.25%, 12/15/28 350,000 394 Tennessee Valley Authority Stripped, 0.00%, 4/15/42 1,000,000 747 US Treasury, 2.25%, 4/30/06 7,525,000 7,463 US Treasury, 2.875%, 11/30/06 3,550,000 3,539 US Treasury, 3.00%, 11/15/07 1,890,000 1,878 US Treasury, 3.50%, 12/15/09 4,970,000 4,946 US Treasury, 4.25%, 11/15/14 980,000 983 US Treasury, 5.375%, 2/15/31 55,000 59 ------ Total Domestic and Foreign -- Government and Agency Bonds (Cost: $23,207) 23,134 ------
82 Asset Allocation Portfolio Asset Allocation Portfolio
Mortgage and Asset Backed Shares/ Value Securities (2.8%) $ Par $ (000's) ---------------------------------------------------------- Federal Government and Agencies (2.7%) Federal National Mortgage Association, 5.00%, 3/1/34 398,204 396 Federal National Mortgage Association, 5.00%, 11/1/34 1,273,567 1,264 Federal National Mortgage Association, 5.50%, 9/1/34 417,879 424 Federal National Mortgage Association, 5.50%, 10/1/34 797,243 810 Federal National Mortgage Association, 6.00%, 10/1/34 837,996 867 Federal National Mortgage Association, 6.00%, 11/1/34 799,196 827 Federal National Mortgage Association, TBA, 6.00%, 1/1/35 250,000 258 Government National Mortgage Association, TBA, 4.50%, 1/1/35 585,726 571 ----- Total Federal Government and Agencies 5,417 ----- International Affairs (0.1%) Overseas Private Investment, 4.10%, 11/15/14 125,040 125 ----- Total International Affairs 125 ----- Total Mortgage and Asset Backed Securities (Cost: $5,545) 5,542 ----- Below Investment Grade Bonds (7.2%) ---------------------------------------------------------- Autos/Vehicle Parts (0.3%) Affinia Group, Inc., 9.00%, 11/30/14 144A 55,000 57 Collins & Aikman Products, 10.75%, 12/31/11 47,000 48 Cooper Tire & Rubber Co., 8.375%, 12/15/14 144A 115,000 114 Delco Remy International, Inc., 9.375%, 4/15/12 63,000 65 HLI Operating Co., 10.50%, 6/15/10 87,000 93 The Pep Boys -- Manny, Moe & Jack, 7.50%, 12/15/14 47,000 48 (e)Standadyne Corp., 0.00%, 2/15/15 144A 160,000 95 Tenneco Automotive, Inc., 8.625% 11/15/14 144A 65,000 68 Visteon Corp., 7.00%, 3/10/14 86,000 82 ----- Total Autos/Vehicle Parts 670 ----- Basic Materials (1.0%) Chemicals (0.5%) BCP Caylux Holding, 9.625%, 6/15/14 144A 107,000 121 Borden US Fin/Nova Scot, 9.00%, 7/15/14 144A 38,000 42 Crompton Corp., 9.875%, 8/1/12 144A 63,000 72 Huntsman International, LLC, 7.375%, 1/1/15 144A 71,000 71
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) ------------------------------------------------------------ Chemicals continued Huntsman LLC, 11.625%, 10/15/10 50,000 59 Huntsman LLC, 11.50%, 7/15/12 144A 75,000 89 Invista, 9.25%, 5/1/12 144A 130,000 145 (e)KI Holdings, Inc., 0.00%, 11/15/14 144A 150,000 96 Rockwood Specialties Group, Inc., 10.265%, 5/15/11 100,000 115 Terra Capital Corp., 11.50%, 6/1/10 64,000 73 ----- Total 883 ----- Metals/Mining (0.1%) Asia Aluminum Holdings, Ltd., 8.00%, 12/23/11 144A 37,000 37 IMCO Recycling Escrow, 9.00%, 11/15/14 144A 100,000 104 Ispat Inland ULC, 9.75%, 4/1/14 17,000 21 Ryerson Tull, Inc., 8.25%, 12/15/11 144A 81,000 82 ----- Total 244 ----- Packaging/Containers (0.2%) Anchor Glass Container, 11.00%, 2/15/13 60,000 64 (e)Consolidated Container, Co., 9.00%, 6/15/09 75,000 63 Graham Packaging Co., 9.875%, 10/15/14 144A 142,000 152 Owens-Brockway Glass Containers, 6.75%, 12/1/14 144A 66,000 67 Pliant Corp., 11.125%, 9/1/09 111,000 121 ----- Total 467 ----- Paper & Forest Products (0.2%) Abitibi-Consolidated, Inc., 7.75%, 06/15/11 104,000 109 Ainsworth Lumber Co., Ltd., 7.25%, 10/1/12 144A 88,000 90 Appleton Papers, Inc., 8.125%, 6/15/11 57,000 61 Appleton Papers, Inc., 9.75%, 6/15/14 50,000 55 Neenah Paper, Inc., 7.375%, 11/15/14 144A 47,000 48 ----- Total 363 ----- Total Basic Materials 1,957 ----- Builders/Building Materials (0.3%) Building Materials (0.2%) Goodman Global Holdings, 7.875%, 12/15/12 144A 117,000 115 Integrated Electrical Services, Inc., 9.375%, 2/1/09 40,000 38 Ply Gem Industries, Inc., 9.00%, 2/15/12 144A 99,000 100 RMCC Acquisition Co., 9.50%, 11/1/12 144A 58,000 58 THL BuildCo, Inc., 8.50%, 9/1/14 144A 50,000 52 ----- Total 363 -----
Asset Allocation Portfolio 83 Asset Allocation Portfolio
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) ----------------------------------------------------------- Home Builders (0.1%) Technical Olympic USA, Inc., 7.50%, 3/15/11 75,000 76 Technical Olympic USA, Inc., 9.00%, 7/1/10 50,000 54 William Lyon Homes, 7.50%, 2/15/14 75,000 72 William Lyon Homes, 7.625%, 12/15/12 144A 32,000 31 ----- Total 233 ----- Total Builders/Building Materials 596 ----- Capital Goods (0.5%) Ames True Temper, Inc., 10.00%, 7/15/12 124,000 127 Amsted Industries, Inc., 10.25%, 10/15/11 144A 50,000 57 Bombardier Recreational, 8.375%, 12/15/13 25,000 27 Coleman Cable, Inc., 9.875%, 10/1/12 144A 70,000 74 Columbus McKinnon Corp., 10.00%, 8/1/10 50,000 56 DA-Lite Screen Co., Inc., 9.50%, 5/15/11 120,000 133 Douglas Dynamics LLC, 7.75%, 1/15/12 144A 72,000 73 ITRON, Inc., 7.75%, 5/15/12 144A 75,000 76 Parker-Ohio Industries, Inc., 8.375%, 11/15/14 144A 94,000 94 Rexnord Corp., 10.125%, 12/15/12 100,000 113 Sup Essx Com & Essx Group, 9.00%, 4/15/12 110,000 113 Trimas Corp., 9.875%, 6/15/12 50,000 53 ----- Total Capital Goods 996 ----- Consumer Products/Retailing (1.1%) Consumer Products (0.5%) American Achievement Corp., 8.25%, 4/1/12 75,000 78 Amscan Holdings, Inc., 8.75%, 5/1/14 109,000 109 Coinmach Corp., 9.00%, 2/1/10 86,000 90 Hines Nurseries, Inc., 10.25%, 10/1/11 81,000 88 Jafra Cosmetics, 10.75%, 5/15/11 50,000 57 Jostens IH Corp., 7.625%, 10/1/12 144A 52,000 54 (e)Jostens Holding Corp., 10.25%, 12/1/13 75,000 53 Playtex Products, Inc., 9.375%, 6/1/11 138,000 147 Samsonite Corp., 8.875%, 6/1/11 123,000 133 Sealy Mattress Co., 8.25%, 6/15/14 76,000 81 (e)Simmons Co., 0.00%, 12/15/14 144A 180,000 110 ----- Total 1,000 ----- Retail Food & Drug (0.2%) Jean Coutu Group, Inc., 8.50%, 8/1/14 144A 123,000 126 Rite Aid Corp., 9.25%, 6/1/13 114,000 115 Stater Brothers Holdings, 8.125%, 6/15/12 108,000 114 ----- Total 355 -----
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) ---------------------------------------------------------- Retail Stores (0.1%) Blockbuster, Inc., 9.00%, 9/1/12 144A 105,000 104 Finlay Fine Jewelry Corp., 8.375%, 6/1/12 88,000 95 ----- Total 199 ----- Textile/Apparel (0.3%) Levi Strauss & Co., 9.75%, 1/15/15 144A 102,000 101 Oxford Industries, Inc., 8.875%, 6/1/11 118,000 127 Perry Ellis International, Inc., 8.875%, 9/15/13 50,000 53 Phillips Van Heusen, 7.25%, 2/15/11 100,000 105 Propex Fabrics, Inc., 10.00%, 12/1/12 144A 116,000 120 ----- Total 506 ----- Total Consumer Products/Retailing 2,060 ----- Energy (0.2%) Gas Pipelines/Oil Field Services (0.1%) Hanover Equipment Trust 01 A, 0.00%, 3/31/07 50,000 44 Parker Drilling Co., 9.625%, 10/1/13 75,000 84 ----- Total 128 ----- Oil & Gas Exploration/Production (0.1%) Chesapeake Energy Corp., 6.375%, 6/15/15 144A 58,000 60 Harvest Operations Corp., 7.875%, 10/15/11 144A 29,000 29 Stone Energy Corp., 6.75%, 12/15/14 144A 48,000 48 Venoco, Inc., 8.75%, 12/15/11 144A 75,000 77 ----- Total 214 ----- Oil Refining & Marketing (0.0%) United Refining Co., 10.50%, 8/15/12 144A 75,000 79 ----- Total 79 ----- Total Energy 421 ----- Financials (0.2%) Financials Services (0.1%) Dollar Financial Group, 9.75%, 11/15/11 75,000 81 LaBranche and Co., 11.00%, 5/15/12 63,000 68 Refco Finance Holdings, 9.00%, 8/1/12 144A 100,000 110 ----- Total 259 ----- Insurance (0.1%) Crum and Forster Holding Corp., 10.375%, 6/15/13 50,000 56
84 Asset Allocation Portfolio Asset Allocation Portfolio
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) --------------------------------------------------------- Insurance continued Fairfax Financial Holdings, 7.75%, 4/26/12 115,000 117 --- Total 173 --- Total Financials 432 --- Foods (0.4%) Food/Beverage/Tobacco (0.3%) B&G Foods, Inc., 8.00%, 10/1/11 58,000 62 Chiquita Brands International, 7.50%, 11/1/14 144A 39,000 39 Gold Kist, Inc., 10.25%, 3/15/14 39,000 46 Land O Lakes, Inc., 9.00%, 12/15/10 92,000 101 Merisant Co., 9.50%, 7/15/13 144A 75,000 67 North Atlantic Trading, 9.25%, 3/1/12 100,000 85 Pinnacle Foods Holding, 8.25%, 12/1/13 144A 65,000 62 Standard Commercial Corp., 8.00%, 4/15/12 92,000 95 (e)Tabletop Holdings, 12.25%, 5/15/14 144A 125,000 53 --- Total 610 --- Restaurants (0.1%) Buffets, Inc., 11.25%, 7/15/10 118,000 125 --- Total 125 --- Total Foods 735 --- Gaming/Leisure/Lodging (0.7%) Gaming (0.4%) American Casino & Entertainment, 7.85%, 2/1/12 50,000 53 Herbst Gaming, Inc., 7.00%, 11/15/14 144A 30,000 30 (d)Hollywood Casino Shreveport, 13.00%, 8/1/06 50,000 42 Inn of the Mountain Gods, 12.00%, 11/15/10 68,000 80 Majestic Star Casino LLC, 9.50%, 10/15/10 129,000 137 Resort Intl. Hotel/Casino, 11.50%, 3/15/09 75,000 88 River Rock Entertainment, 9.75%, 11/1/11 75,000 84 Wheeling Island Gaming, 10.125%, 12/15/09 75,000 80 Wynn Las Vegas LLC/Corp., 6.625%, 12/1/14 144A 187,000 185 --- Total 779 --- Leisure (0.3%) AMC Entertainment, Inc., 9.875%, 2/1/12 117,000 128 Intrawest Corp., 7.50%, 10/15/13 144A 53,000 56 LCE Acquisition Corp., 9.00%, 8/1/14 144A 125,000 135 Universal City Development Corp., 11.75%, 4/1/10 88,000 104
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) ----------------------------------------------------------- Leisure continued Universal City Florida, 8.375%, 5/1/10 144A 48,000 50 WMG Holdings Corp., 6.905%, 12/15/11 144A 77,000 78 ----- Total 551 ----- Total Gaming/Leisure/Lodging 1,330 ----- Health Care/Pharmaceuticals (0.5%) Alliance Imaging, Inc., 7.25%, 12/15/12 144A 78,000 79 General Nutrition Center, 8.50%, 12/1/10 150,000 142 Iasis Healthcare Corp., 8.75%, 6/15/14 104,000 113 Medcath Holdings Corp., 9.875%, 7/15/12 87,000 94 Omega Healthcare Investors, 7.00%, 4/1/14 50,000 51 Tenet Healthcare Corp., 9.875%, 7/1/14 144A 101,000 110 Universal Hospital Service, 10.125%, 11/1/11 50,000 52 US Oncology, Inc., 9.00%, 8/15/12 144A 99,000 111 Vanguard Health Holding II, 9.00%, 10/1/14 144A 145,000 156 Ventas Realty LP, 9.00%, 5/1/12 50,000 58 ----- Total Health Care/Pharmaceuticals 966 ----- Media 0.5% Broadcasting (0.0%) Sinclair Broadcast Group, 8.00%, 3/15/12 57,000 61 ----- Total 61 ----- Cable/Satellite (0.4%) Cablevision Systems Corp., 8.00%, 4/15/12 144A 125,000 134 Echostar DBS Corp., 6.625%, 10/1/14 144A 100,000 101 Insight Midwest, 9.75%, 10/1/09 50,000 52 Kabel Deutschland GMBH, 10.625%, 7/1/14 144A 100,000 115 MediaCom LLC, 9.50%, 1/15/13 75,000 75 NTL Cable PLC, 8.75%, 4/15/14 144A 50,000 56 Panamsat Corp., 9.00%, 8/15/14 144A 83,000 93 (e)Panamsat Holding Corp., 0.00%, 11/1/14 144A 58,000 40 Rogers Cable, Inc., 6.25%, 6/15/13 52,000 52 Rogers Cable, Inc., 6.75%, 3/15/15 144A 70,000 72 ----- Total 790 -----
Asset Allocation Portfolio 85 Asset Allocation Portfolio
Shares/ Value Below Investment Grade Bonds (7.2%) $ Par $ (000's) ---------------------------------------------------------- Publishing (0.1%) Dex Media, Inc., 8.00%, 11/15/13 50,000 54 WDAC Subsidiary Corp., 8.375%, 12/1/14 144A 70,000 69 --- Total 123 --- Total Media 974 --- Services (0.2%) Environmental Services (0.1%) Allied Waste North America, 7.375%, 4/15/14 162,000 155 --- Total 155 --- Services-Other (0.1%) Alderwoods Group, Inc., 7.75%, 9/15/12 144A 41,000 44 Buhrmann U.S., Inc., 8.25%, 7/1/14 63,000 64 Petro Stopping Center, 9.00%, 2/15/12 75,000 79 United Rentals NA, Inc., 6.50%, 2/15/12 122,000 119 --- Total 306 --- Total Services 461 --- Technology (0.1%) Amkor Technologies, Inc., 7.125%, 3/15/11 100,000 94 Magnachip Semiconductor, 8.00%, 12/15/14 144A 69,000 72 Stats Chippac, Inc., 6.75%, 11/15/11 144A 88,000 87 Xerox Corp., 7.20%, 4/1/16 47,000 50 --- Total Technology 303 --- Telecommunications (0.7%) Telecommunications -- Wireless (0.3%) Alamosa Delaware, Inc., 8.50%, 1/31/12 50,000 55 Centennial Communications, 8.125%, 2/1/14 133,000 137 (e)IWO Escrow Co., 0.00%, 1/15/15 144A 57,000 35 Nextel Communications, 6.875%, 10/31/13 50,000 54 Rogers Wireless, Inc., 6.375%, 3/1/14 62,000 61 Rogers Wireless, Inc., 7.25%, 12/15/12 144A 48,000 51 Rogers Wireless, Inc., 8.00%, 12/15/12 144A 29,000 31 SBA Communications Corp., 8.50%, 12/1/12 144A 82,000 84 US Unwired, Inc., 10.00%, 6/15/12 87,000 98 --- Total 606 --- Telecommunications-Wireline (0.4%) (e)AT&T Corp., 9.75%, 11/15/31 116,000 137 Citizens Communications, 9.00%, 8/15/31 116,000 133 MCI, Inc., 7.735%, 5/1/14 170,000 182 Qwest Communications International, 7.50%, 11/1/08 25,000 25
Below Investment Grade Bonds Shares/ Value (7.2%) $ Par $ (000's) ----------------------------------------------------------- Telecommunications-Wireline (continued) Qwest Communications International, 7.25%, 2/15/11 144A 75,000 77 Qwest Corp., 7.875%, 9/1/11 144A 80,000 87 Qwest Services Corp., Inc., 13.50%, 12/15/10 144A 48,000 58 Securus Technologies, Inc., 11.00%, 9/1/11 144A 63,000 63 ------ Total 762 ------ Total Telecommunications 1,368 ------ Transportation (0.2%) Horizon Lines LLC, 9.00%, 11/1/12 144A 55,000 59 Laidlaw International, Inc., 10.75%, 6/15/11 28,000 33 OMI Corp., 7.625%, 12/1/13 75,000 80 Ship Finance International, Ltd., 8.50%, 12/15/13 100,000 103 Stena AB, 7.50%, 11/1/13 50,000 52 Stena AB, 9.625%, 12/1/12 50,000 57 TFM SA DE C V, 12.50%, 6/15/12 50,000 58 ------ Total Transportation 442 ------ Utilities (0.2%) Aquila, Inc., 9.95%, 2/1/11 70,000 79 Midwest Generation LLC, 8.75%, 5/1/34 60,000 68 NRG Energy, Inc., 8.00%, 12/15/13 144A 25,000 27 Reliant Energy, Inc., 6.75%, 12/15/14 52,000 52 Sierra Pacific Resources, 8.625%, 3/15/14 75,000 85 Utilicorp Canada Finance, 7.75%, 6/15/11 58,000 60 ------ Total Utilities 371 ------ Total Below Investment Grade Bonds (Cost: $13,502) 14,082 ------ Money Market Investments (12.2%) ----------------------------------------------------------- Federal Government and Agencies (11.8%) (b)Federal Home Loan Bank, 2.24%, 1/26/05 21,800,000 21,766 Federal Home Loan Mortgage Co., 2.42%, 3/22/05 1,500,000 1,492 ------ Total Federal Government and Agencies 23,258 ------
86 Asset Allocation Portfolio Asset Allocation Portfolio
Shares/ Value Money Market Investments (12.2%) $ Par $ (000's) ----------------------------------------------------- Personal Credit Institutions (0.4%) CXC, Inc., 2.20%, 1/3/05 800,000 800 ------- Total Personal Credit Institutions 800 ------- Total Money Market Investments (Cost: $24,058) 24,058 ------- Total Investments (99.9%) (Cost $174,381)(a) 196,400 ------- Other Assets, Less Liabilities (0.1%) 168 ------- Total Net Assets (100.0%) 196,568 -------
* Non-Income Producing ADR -- American Depository Receipt RB -- Revenue Bond 144A after the name of a security represents a security exempt from registration under Rule 144A of the securities Act of 1933. These securities may be resold as transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2004, the value of these securities was 8,939, representing 4.55% of net assets. (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $174,760 and the net unrealized appreciation of investments based on that cost was $21,640 which is comprised of $22,884 aggregate gross unrealized appreciation and $1,244 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) -------------------------------------------------------- S&P 500 Index Futures 51 3/05 $428 (Total Notional Value at December 31, 2004, $15,047) US Ten Year Treasury Note 2 3/05 $ 1 (Total Notional Value at December 31, 2004, $225)
(d)Defaulted Security (e)Step bond security that presently receives no coupon payments. At the predetermined date, the stated coupon rate becomes effective. The Accompanying Notes are an Integral Part of the Financial Statements Asset Allocation Portfolio 87 Balanced Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: A high level of current income and Achieve consistent returns and low volatility by $3.0 billion capital growth with a low risk profile diversifying among assets.
The investment objective of the Balanced Portfolio is to realize as high a level of long-term total rate of return as is consistent with prudent investment risk. The Portfolio's total rate of return consists of current income, including dividends, interest and discount accruals, and capital appreciation. The assets of the Balanced Portfolio will be invested in the following three market sectors: common stock and other equity securities including the securities in which the Index 500 Stock Portfolio invests; bonds and other debt securities with maturities generally exceeding one year, including the securities in which the Select Bond Portfolio invests; and money market instruments and other debt securities with maturities generally not exceeding one year including the securities in which the Money Market Portfolio invests. The Balanced Portfolio seeks to achieve its investment objectives by adjusting the mix of investments among the three market sectors. The manager attempts to capitalize on variation in return potential produced by the interaction of changing financial markets and economic conditions. The Balanced Portfolio differs from the Asset Allocation Portfolio in several ways. It invests in just three asset classes, while the Asset Allocation Portfolio utilizes six categories of assets, including riskier securities such as small-cap stocks, foreign stocks and high yield bonds. The equity portion of the Balanced Portfolio is indexed, while the equities in the Asset Allocation Portfolio are actively managed. The Balanced Portfolio is therefore designed to be a lower risk portfolio, with less volatility than the Asset Allocation Portfolio. In a market in which riskier investments are rewarded, the Balanced Portfolio will normally underperform the Asset Allocation Portfolio. The fact that the Balanced Portfolio cannot own small cap or international stocks had a negative influence on performance in 2004, a year in which those assets classes outperformed the broad stock market. Definition of an appropriate benchmark for comparison of returns of the Balanced Portfolio is difficult because there is no index that includes both equity and debt securities. Accordingly, comparisons are provided with three different indices: the S&P 500 Index for stocks, Merrill Lynch Domestic Master Index for bonds, and the Merrill Lynch Three-Month U.S. Treasury Bill Index for short-term investments. As expected, the Balanced Portfolio's performance for the year ended December 31, 2004 was a blend of stock and bond performance. The Portfolio had a total return of 7.89%, below the return of 10.88% on the S&P 500, but above the return of the bond benchmark, the Merrill Lynch Domestic Master Index, which had a return of 4.34%, and the Merrill Lynch Three-Month U.S. Treasury Bill Index, which had a return of 1.33%. (These indices are unmanaged, cannot be invested in directly, and do not include administrative expenses or sales charges.) The Portfolio underperformed its peer group, Flexible Portfolio Funds, which had an average return of 8.25% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's slight underperformance relative to its peer group resulted mainly from its inability to own riskier assets -- particularly small cap and foreign stocks and high yield bonds -- as they moved up sharply during the fourth quarter of 2004. The Portfolio was above the peer group performance for the first nine months of the year, and then slipped in the last quarter as the riskiest, highest beta assets outperformed. In general, stocks performed nicely for the year ended December 31, 2004. The S&P 500 Index posted a gain of 10.88%, while the higher risk segments of the market posted even larger gains. Small cap stocks, as measured by the S&P SmallCap 600 Index, gained 22.65%, and mid cap stocks, as measured by the S&P MidCap 400 Index, gained 16.49% for the year. The majority of the gains across all sectors came in the fourth quarter of 2004. Earlier in the year the stock market languished, as a number of economic concerns dampened investors' spirits. A combination of rising oil prices, a weakening dollar, rising interest rates, the Iraqi war, and the upcoming presidential election put a drag on the economy and the market. But in the fourth quarter, especially following the November elections, the market experienced a dramatic turnaround. A significant drop in oil prices beginning in October also served as a catalyst for the change, and the gains made during the fourth quarter accounted for most of the gain for the year. The fourth quarter alone accounted for 9.23% of the S&P 500 Index's 2004 annual gain of 10.88%. Bonds also posted positive returns for the year and added to the Balanced Portfolio's performance. The Merrill Lynch Domestic Master Index had a return of 4.34% for the year, although the higher risk segments of the bond market -- as in the stock market -- posted much higher returns. High yield bonds, as measured by the Lehman Intermediate High Yield Index, gained 10.85% in 2004. The target asset mix for the Balanced Portfolio is established and adjusted with input from an asset valuation model designed to gauge the relative attractiveness of stocks versus bonds. Changes are at the margin, so that there are always core positions in both asset classes. During 2004, the asset mix was changed several times to take advantage of market moves. Equities were reduced in the first quarter of 2004, and remained at an average to below average weighting through the third quarter, as stocks languished. Heading into the fourth quarter of 2004, the stock weighting was increased and the Portfolio was in a good position to take advantage of the fourth quarter rally. At year end, the Portfolio's stock exposure was at an above neutral weighting of approximately 57% as the rally subsided, and investment grade bonds made up 42% of the Portfolio. 88 Balanced Portfolio [CHART] Relative Performance Balanced Merrill Lynch Domestic Merrill Lynch Three S&P 500 Portfolio Master Index Months T-Bill Index Index --------- ---------------------- -------------------- ------- 12/93 $10,000 $10,000 $10,000 $10,000 12/94 10,016 9,718 10,419 10,131 12/95 12,659 11,517 11,047 13,933 12/96 14,363 11,931 11,634 17,129 12/97 17,453 13,083 12,254 22,842 12/98 20,747 14,243 12,895 29,368 12/99 23,071 14,107 13,521 35,547 12/00 23,032 15,761 14,356 32,312 12/01 22,306 17,073 14,990 28,474 12/02 20,625 18,850 15,257 22,184 12/03 24,336 19,627 15,432 28,544 12/04 26,215 21,074 15,008 31,258 Average Annual Total Return For Period Ended December 31, 2004 1 Year 5 Years 10 Years Balanced Portfolio 7.89% 2.62% 10.12% Merrill Lynch Domestic Master Index 4.34% 7.74% 7.74% Merrill Lynch Three Months T-Bill Index 1.33% 2.95% 4.14% S&P 500 Index 10.88% -2.30% 12.07% Flexible Portfolio Funds Lipper Average 8.25% 3.44% 10.16% The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. In the graph, the Portfolio is compared against three indices representing the three major components of the Portfolio: equities, fixed income and cash equivalent investments. The indices cannot be invested in directly and do not include sales charges. The Merrill Lynch Domestic Master Index is an unmanaged market value weighted index comprised of U.S. Government, mortgage and investment-grade corporate bonds. The Index measures the income provided by, and the price changes of, the underlying securities. The Merrill Lynch Three Months T-Bill Index is comprised of a single issue purchased at the beginning of each month and held for a full month. The issue selected at each month-end rebalancing is the outstanding Treasury bill that matures closest to, but not beyond, three months from the rebalancing date. The Standard & Poor's 500 Composite Stock Price Index is an unmanaged index of 500 selected common stocks, most of which are listed on the New York Stock Exchange. As of December 31, 2004, the 500 companies in the composite had a median market capitalization of $10.6 billion and a total market value of $11.2 trillion. The S&P 500 represents approximately 60.2% of the market value of the Compustat's database of about 9,381 equities. The index cannot be invested in directly and does not include sales charges. The Lipper Variable Insurance Products (VIP) Flexible Portfolio Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that allocate investments across various asset classes, including domestic common stocks, bonds, and money market instruments with a focus on total return. Source: Lipper, Inc. Balanced Portfolio - -------------------------------------------------------------------------------- [CHART] Sector Allocation 12/31/04 Equities (including index futures) ............. 57% Corporate Bonds ................................ 19% Government and Agency Bonds .................... 16% Mortgage and Asset Backed Securities ........... 7% Short-Term Investments & Other Net Assets ...... 1% Sector allocation is based on Net Assets. Sector allocation is subject to change. No investment strategy can guarantee a profit or protect against a loss. Balanced Portfolio 89 Balanced Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,060.00 $1.55 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,023.32 $1.53 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.30%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 90 Balanced Portfolio Balanced Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Revenue Bonds (0.1%) $ Par $ (000's) ---------------------------------------------------------- Municipal Bonds - Revenue (0.1%) Nashville & Davidson County, Tennessee Health and Educational Facilities Board of The Metropolitan Government, 0.00%, 6/1/21, RB 9,800,000 4,469 ------ Total Revenue Bonds (Cost: $4,277) 4,469 ------ Corporate Bonds (18.8%) ---------------------------------------------------------- Auto Related (1.5%) American Honda Finance, 4.50%, 5/26/09 144A 6,180,000 6,287 Ford Motor Credit Co., 5.70%, 1/15/10 2,265,000 2,286 Ford Motor Credit Co., 7.375%, 10/28/09 3,485,000 3,759 General Motors Acceptance Corp., 5.625%, 5/15/09 4,500,000 4,500 General Motors Acceptance Corp., 6.75%, 12/1/14 2,420,000 2,423 Household Finance Corp., 4.125%, 11/16/09 4,400,000 4,376 Household Finance Corp., 6.50%, 1/24/06 7,108,000 7,348 Toyota Motor Credit Corp., 2.70%, 1/30/07 3,800,000 3,746 Toyota Motor Credit Corp., 5.65%, 1/15/07 9,750,000 10,167 ------ Total 44,892 ------ Automobiles And Other Motor Vehicles (0.2%) Ford Motor Co., 7.45%, 7/16/31 1,480,000 1,488 General Motors Corp., 8.375%, 7/15/33 3,535,000 3,663 ------ Total 5,151 ------ Beverages, Malt Beverages (1.0%) Anheuser-Busch Companies, Inc., 7.00%, 12/1/25 4,800,000 5,086 Anheuser-Busch Companies, Inc., 7.50%, 3/15/12 910,000 1,082 Coca-Cola Enterprises, Inc., 5.25%, 5/15/07 8,975,000 9,330 Coca-Cola Enterprises, Inc., 5.375%, 8/15/06 4,175,000 4,307 Coca-Cola Enterprises, Inc., 5.75%, 3/15/11 10,000,000 10,805 ------ Total 30,610 ------ Broad Woven Fabric Mills, Manmade (0.0%) (d)Polysindo International Finance, 11.375%, 6/15/06 6,500,000 585 ------ Total 585 ------
Shares/ Value Corporate Bonds (18.8%) $ Par $ (000's) -------------------------------------------------------- Cable and Other Pay Television Services (0.2%) Comcast Corp., 5.30%, 1/15/14 3,750,000 3,867 Time Warner Entertainment Co., 8.375%, 7/15/33 1,250,000 1,615 ------- Total 5,482 ------- Chemicals and Allied Products (0.1%) Monsanto Co., 4.00%, 5/15/08 4,240,000 4,254 ------- Total 4,254 ------- Commercial Banks (3.3%) Bank of America Corp., 5.375%, 6/15/14 4,550,000 4,748 Bank of America Corp., 7.40%, 1/15/11 2,668,000 3,091 Bank of America Corp., 7.875%, 5/16/05 2,800,000 2,852 Bank One Corp., 5.25%, 1/30/13 5,000,000 5,135 BP Capital Markets PLC, 4.00%, 4/29/05 4,500,000 4,520 Citigroup, Inc., 1.39%, 2/14/05 5,500,000 5,500 Citigroup, Inc., 4.50%, 7/29/09 5,200,000 5,255 First Union Corp., 7.55%, 8/18/05 2,800,000 2,880 HBOS Treasury Services PLC, 1.52%, 3/14/05 4,500,000 4,500 HBOS Treasury Services PLC, 4.00%, 9/15/09 144A 5,100,000 5,085 Key Bank NA, 5.80%, 7/1/14 5,630,000 5,963 PNC Bank NA, 5.25%, 1/15/17 8,475,000 8,548 Rabobank Capital Fund II, 5.26%, 12/31/13 144A 3,730,000 3,795 Royal Bank of Canada New York, 2.3425%, 1/24/05 5,500,000 5,500 Royal Bank of Scotland Group PLC, 5.05%, 1/8/15 7,980,000 8,066 UnionBanCal Corp., 5.25%, 12/16/13 800,000 811 US Bank NA, 4.95%, 10/30/14 4,725,000 4,742 Wachovia Bank NA, 4.80%, 11/1/14 2,675,000 2,658 Wells Fargo & Co., 4.20%, 1/15/10 7,500,000 7,530 Wells Fargo Bank, 6.20%, 12/1/05 4,100,000 4,201 Wells Fargo Bank, 6.45%, 2/1/11 4,850,000 5,394 ------- Total 100,774 ------- Computer and Other Data Processing Service (0.3%) Gtech Holdings Corp., 4.75%, 10/15/10 8,350,000 8,382 ------- Total 8,382 ------- Consumer Non-Cyclical (0.6%) The Clorox Co., 4.20%, 1/15/10 144A 4,240,000 4,262 The Clorox Co., 5.00%, 1/15/15 144A 2,660,000 2,706 Estee Lauder, Inc., 5.75%, 10/15/33 2,580,000 2,653 The Gillette Co., 2.50%, 6/1/08 5,000,000 4,860 Johnson & Johnson, Inc., 6.625%, 9/1/09 2,800,000 3,117 ------- Total 17,598 -------
Balanced Portfolio 91 Balanced Portfolio
Shares/ Value Corporate Bonds (18.8%) $ Par $ (000's) ----------------------------------------------------------- Crude Petroleum and Natural Gas (0.7%) Conoco Funding Co., 6.35%, 10/15/11 5,000,000 5,582 Occidental Petroleum, 4.00%, 11/30/07 2,800,000 2,818 Occidental Petroleum, 7.65%, 2/15/06 4,360,000 4,564 Occidental Petroleum, 8.45%, 2/15/29 1,900,000 2,574 Occidental Petroleum, 10.125%, 9/15/09 3,230,000 3,987 XTO Energy Inc., 5.00%, 1/31/15 144A 2,500,000 2,484 ------ Total 22,009 ------ Data Processing and Preparation (0.3%) First Data Corp., 3.90%, 10/1/09 8,400,000 8,368 ------ Total 8,368 ------ Eating Places (0.2%) McDonald's Corp., 3.875%, 8/15/07 2,900,000 2,910 McDonald's Corp., 5.375%, 4/30/07 2,250,000 2,345 ------ Total 5,255 ------ Electric Services (1.6%) FPL Group Capital, Inc., 4.086%, 2/16/07 4,390,000 4,437 Indiana Michigan Power, 5.05%, 11/15/14 3,660,000 3,658 Kiowa Power Partners LLC, 4.811%, 12/30/13 144A 1,685,000 1,689 Kiowa Power Partners LLC, 5.737%, 3/30/21 144A 4,785,000 4,804 Oncor Electric Delivery, 6.375%, 1/15/15 800,000 881 PacifiCorp, 5.45%, 9/15/13 15,540,000 16,264 Peco Energy Co., 4.75%, 10/1/12 7,925,000 8,003 PPL Electric Utilities Corp., 4.30%, 6/1/13 4,775,000 4,609 Public Service Electric & Gas Corp., 5.00%, 1/1/13 1,500,000 1,531 Virginia Electric & Power Co., 5.25%, 12/15/15 3,645,000 3,707 ------ Total 49,583 ------ Electrical and Electronic Machinery, Equip (0.3%) General Electric Co., 5.00%, 2/1/13 7,875,000 8,079 ------ Total 8,079 ------ Electrical Equipment and Supplies (0.2%) Cooper Industries, Inc., 5.50%, 11/1/09 5,100,000 5,395 ------ Total 5,395 ------ Electronic Computers (0.4%) Hewlett-Packard Co., 5.50%, 7/1/07 6,000,000 6,258 Hewlett-Packard Co., 6.50%, 7/1/12 4,800,000 5,375 ------ Total 11,633 ------ Federal Savings Institutions (0.3%) World Savings Bank FSB, 4.125%, 12/15/09 7,700,000 7,701 ------ Total 7,701 ------
Shares/ Value Corporate Bonds (18.8%) $ Par $ (000's) ---------------------------------------------------------- Fire, Marine and Casualty Insurance (0.8%) Berkley (WR) Corp., 9.875%, 5/15/08 4,310,000 5,067 Berkshire Hathaway, Inc., 4.625%, 10/15/13 9,020,000 8,992 Berkshire Hathaway, Inc., 5.10%, 7/15/14 144A 1,300,000 1,332 Berkshire Hathaway, Inc., 3.40%, 7/2/07 144A 2,500,000 2,494 Progressive Corp., 6.375%, 1/15/12 4,540,000 5,011 ------ Total 22,896 ------ Gas Transmission And Distribution (0.1%) Consolidated Natural Gas Co., 5.00%, 12/1/14 3,585,000 3,588 ------ Total 3,588 ------ Media (0.6%) Time Warner, Inc., 6.875%, 5/1/12 2,500,000 2,847 Viacom, Inc., 5.625%, 5/1/07 11,400,000 11,919 Viacom, Inc., 5.625%, 8/15/12 2,500,000 2,674 ------ Total 17,440 ------ Motors and Generators (0.3%) Emerson Electric Co., 4.50%, 5/1/13 1,570,000 1,556 Emerson Electric Co., 5.75%, 11/1/11 1,918,000 2,079 Emerson Electric Co., 5.85%, 3/15/09 4,480,000 4,805 ------ Total 8,440 ------ Personal Credit Institutions (0.3%) SLM Corp., 4.00%, 1/15/10 5,560,000 5,517 USAA Capital Corp., 7.54%, 3/30/05 3,400,000 3,437 ------ Total 8,954 ------ Petroleum Refining (0.2%) Amerada Hess Corp., 7.125%, 3/15/33 2,500,000 2,749 Valero Energy Corp., 4.75%, 6/15/13 2,500,000 2,470 ------ Total 5,219 ------ Pharmaceutical Preparations (1.2%) Abbott Laboratories, 3.75%, 3/15/11 3,750,000 3,675 Astrazeneca PLC, 5.40%, 6/1/14 5,350,000 5,625 GlaxoSmithKline Capital, Inc., 4.375%, 4/15/14 5,355,000 5,217 Merck & Co. Inc., 4.125%, 1/18/05 4,500,000 4,503 Merck & Co., Inc., 6.40%, 3/1/28 1,475,000 1,607 Merck & Co., Inc. 5.95%, 12/1/28 1,794,000 1,857 Pfizer, Inc., 4.50%, 2/15/14 2,680,000 2,650 Pfizer, Inc., 5.625%, 2/1/06 7,175,000 7,368 Pfizer, Inc., 5.625%, 4/15/09 4,125,000 4,385 ------ Total 36,887 ------ Phone Communications Except Radiophone (0.8%) BellSouth Corp., 5.20%, 9/15/14 5,010,000 5,106 SBC Communications, Inc., 5.10%, 9/15/14 5,500,000 5,551 Sprint Capital Corp., 8.375%, 3/15/12 5,000,000 6,092 Telecom Italia Capital, 4.95%, 9/30/14 144A 2,200,000 2,155 Verizon Global Funding Corp., 4.375%, 6/1/13 5,000,000 4,872 ------ Total 23,776 ------
92 Balanced Portfolio Balanced Portfolio
Shares/ Value Corporate Bonds (18.8%) $ Par $ (000's) ---------------------------------------------------------- Radio,TV Electronic Stores (0.4%) RadioShack Corp., 7.375%, 5/15/11 9,590,000 10,900 ------- Total 10,900 ------- Railroads, Line-Haul Operating (0.6%) Burlington Northern Santa Fe, 6.125%, 3/15/09 5,600,000 6,019 Union Pacific Corp., 3.875%, 2/15/09 5,600,000 5,560 Union Pacific Corp., 7.375%, 9/15/09 5,600,000 6,324 ------- Total 17,903 ------- Real Estate Investment Trusts (0.3%) ERP Operating LP, 4.75%, 6/15/09 1,870,000 1,909 ERP Operating LP, 5.25%, 9/15/14 5,000,000 5,064 First Industrial LP, 5.25%, 6/15/09 1,925,000 1,979 ------- Total 8,952 ------- Retail-Retail Stores (0.8%) Fortune Brands, Inc., 4.875%, 12/1/13 2,070,000 2,101 Home Depot, Inc., 3.75%, 9/15/09 144A 14,000,000 13,874 Limited Brands, Inc., 6.95%, 3/1/33 4,118,000 4,480 VF Corp., 6.00%, 10/15/33 4,450,000 4,542 ------- Total 24,997 ------- Savings Institutions Except Federal (0.1%) U.S. Central Credit Union, 2.75%, 5/30/08 3,950,000 3,823 ------- Total 3,823 ------- Security Brokers and Dealers (0.8%) Credit Suisse First Boston USA, Inc., 4.70%, 6/1/09 5,900,000 6,037 Goldman Sachs Group, Inc., 5.15%, 1/15/14 6,800,000 6,891 Merrill Lynch & Co., Inc., 5.00%, 1/15/15 6,700,000 6,674 Morgan Stanley, 5.30%, 3/1/13 4,000,000 4,119 ------- Total 23,721 ------- Television Broadcasting Stations (0.2%) Clear Channel Communications, 5.50%, 12/15/16 5,560,000 5,480 ------- Total 5,480 ------- Wines and Distilled Beverages (0.1%) Brown Forman Corp., 3.00%, 3/15/08 2,500,000 2,445 ------- Total 2,445 ------- Total Corporate Bonds (Cost: $561,536) 561,172 ------- Government and Agency Bonds (15.8%) ---------------------------------------------------------- Federal Government & Agencies (15.8%) Aid-Israel, 0.00%, 11/15/22 11,600,000 4,493 Aid-Israel, 0.00%, 11/15/23 11,500,000 4,208 Aid-Israel, 5.50%, 3/18/33 9,725,000 10,210 BECCS, 0.00%, 11/15/11 8,400,000 7,896
Government and Agency Bonds Shares/ Value (15.8%) $ Par $ (000's) ---------------------------------------------------------- Federal Government & Agencies continued Federal Home Loan Bank, 1.58%, 5/20/05 7,900,000 7,873 Federal Home Loan Bank, 1.875%, 1/15/05 4,500,000 4,499 Federal Home Loan Bank, 5.54%, 1/8/09 5,000,000 5,341 Federal Home Loan Bank, 7.125%, 2/15/05 4,500,000 4,523 Federal Home Loan Mortgage Corp., 5.00%, 10/1/19 4,475,641 4,548 Federal Home Loan Mortgage Corp., 6.50%, 5/1/34 4,268,133 4,480 Federal Home Loan Mortgage Corp., 4.50%, 5/1/19 4,290,994 4,279 Federal Home Loan Mortgage Corp., 5.50%, 9/1/19 1,962,921 2,029 Federal Home Loan Mortgage Corp., 6.50%, 4/1/11 1,714,980 1,818 Federal Home Loan Mortgage Corp., 7.50%, 10/1/27 960,748 1,032 Housing & Urban Development, 6.17%, 8/1/14 14,981,000 16,651 State of Israel, 7.25%, 12/15/28 5,200,000 5,859 Tennessee Valley Authority Stripped, 0.00%, 4/15/42 6,100,000 4,559 US Treasury, 2.25%, 4/30/06 109,000,000 108,098 (f)US Treasury, 2.50%, 10/31/06 77,069,000 76,349 (f)US Treasury, 2.875%, 11/30/06 76,100,000 75,862 (f)US Treasury, 3.00%, 11/15/07 36,200,000 35,977 US Treasury, 3.50%, 12/15/09 46,300,000 46,076 (f)US Treasury, 4.25%, 11/15/14 16,510,000 16,553 US Treasury, 5.375%, 2/15/31 15,525,000 16,788 ------- Total 470,001 ------- Total Government and Agency Bonds (Cost: $466,310) 470,001 ------- Mortgage and Asset Backed Securities (6.9%) ---------------------------------------------------------- Boat Dealers (0.0%) Nationscredit Grantor Trust, Series 1997-2, Class A1, 6.35%, 4/15/14 174,901 175 ------- Total 175 ------- Commercial Mortgages (2.2%) Asset Securitization Corp., Series 1997-D5, Class PS1, 1.62%, 2/14/43 IO 19,170,381 1,004 Chase Commercial Mortgage Securities Corp., Series 1997-2, Class A2, 6.60%, 11/19/07 6,921,465 7,355
Balanced Portfolio 93 Balanced Portfolio
Mortgage and Asset Backed Shares/ Value Securities (6.9%) $ Par $ (000's) --------------------------------------------------------- Commercial Mortgages continued Chase Commercial Mortgage Securities Corp., Series 1997-2, Class B, 6.60%, 11/19/07 2,500,000 2,686 Commercial Mortgage Acceptance Corp., Series 1997-ML1, Class B, 6.64%, 12/15/30 2,500,000 2,683 Credit Suisse First Boston Mortgage Securities Corp., Series 1997-C1, Class A2, 7.26%, 6/20/29 144A 2,691,501 2,878 Credit Suisse First Boston Mortgage Securities Corp., Series 1997-C1, Class B, 7.28%, 6/20/29 144A 3,250,000 3,510 Criimi Mae Commercial Mortgage Trust, Series 1998-C1, Class A1, 7.00%, 11/2/06 144A 6,162,847 6,288 Criimi Mae Commercial Mortgage Trust, Series 1998-C1, Class B, 7.00%, 11/2/11 144A 5,700,000 6,239 DLJ Commercial Mortgage Corp., Series 1998-CF1, Class S, 0.70%, 1/15/18 IO 221,807,952 6,330 DLJ Mortgage Acceptance Corp., Series 1997-CF2, Class S, 0.35%, 10/15/30 IO 144A 13,738,181 253 Enterprise Mortgage Acceptance Co., Series 1998-1, Class IO, 1.37%, 1/15/23 IO 144A 27,012,140 1,165 Midland Realty Acceptance Corp., Series 1996-C2, Class AEC, 1.35%, 1/25/29 IO 144A 12,148,245 302 Mortgage Capital Funding, Inc., Series 1997-MC1, Class A3, 7.29%, 3/20/27 7,345,990 7,595 Nomura Asset Securities Corp., Series 1998-D6, Class A2, 6.99%, 3/15/30 15,000,000 17,434 (d)RMF Commercial Mortgage Pass- Through, Series 1997-1, Class F, 7.47%, 1/15/19 144A 1,800,000 180 ------ Total 65,902 ------ Federal Government & Agencies (3.7%) Federal National Mortgage Association, 4.00%, 6/1/19 2,012,639 1,966 Federal National Mortgage Association, 4.50%, 8/1/19 2,043,235 2,038 Federal National Mortgage Association, 5.00%, 3/1/34 13,809,497 13,727 Federal National Mortgage Association, 5.50%, 9/1/34 14,748,683 14,981 Federal National Mortgage Association, 5.97%, 10/1/08 1,582,449 1,675 Federal National Mortgage Association, 6.24%, 2/1/06 4,474,769 4,549 Federal National Mortgage Association, 6.265%, 10/1/08 5,287,103 5,640
Mortgage and Asset Backed Shares/ Value Securities (6.9%) $ Par $ (000's) ---------------------------------------------------------- Federal Government & Agencies continued Federal National Mortgage Association, 6.315%, 3/1/06 4,731,754 4,823 Federal National Mortgage Association, 6.34%, 2/1/08 3,734,493 3,951 Federal National Mortgage Association, 6.75%, 11/1/07 756,708 805 Federal National Mortgage Association, 6.75%, 4/25/18 4,085,805 4,289 Federal National Mortgage Association, 6.75%, 12/25/23 1,177,308 1,196 Federal National Mortgage Association, 7.00%, 4/1/26 1,190,734 1,268 Federal National Mortgage Association, 11.00%, 12/1/12 15,981 18 Federal National Mortgage Association, 11.00%, 9/1/17 67,002 74 Federal National Mortgage Association, 11.00%, 12/1/17 12,732 14 Federal National Mortgage Association, 11.00%, 2/1/18 46,687 52 Federal National Mortgage Association, 11.50%, 4/1/18 44,876 50 Federal National Mortgage Association, 12.00%, 9/1/12 150,478 168 Federal National Mortgage Association, 12.00%, 12/1/12 54,505 61 Federal National Mortgage Association, 12.00%, 9/1/17 30,782 35 Federal National Mortgage Association, 12.00%, 10/1/17 27,985 32 Federal National Mortgage Association, 12.00%, 12/1/17 13,199 15 Federal National Mortgage Association, 12.00%, 2/1/18 44,985 51 Federal National Mortgage Association, 12.50%, 4/1/18 10,161 12 Federal National Mortgage Association, 13.00%, 11/1/12 32,816 37 Federal National Mortgage Association, 13.00%, 11/1/17 11,985 14 Federal National Mortgage Association, 13.00%, 12/1/17 8,973 10 Federal National Mortgage Association, 13.00%, 2/1/18 51,693 60 Federal National Mortgage Association, 14.00%, 12/1/17 20,092 24 Federal National Mortgage Association, TBA, 6.00%, 1/1/35 8,000,000 8,269 Government National Mortgage Association, 5.00%, 7/15/33 3,866,752 3,875 Government National Mortgage Association, 5.50%, 1/15/32 392,945 402 Government National Mortgage Association, 5.50%, 2/15/32 3,531,949 3,614 Government National Mortgage Association, 5.50%, 9/15/32 122,320 125
94 Balanced Portfolio Balanced Portfolio
Mortgage and Asset Backed Shares/ Value Securities (6.9%) $ Par $ (000's) ------------------------------------------------- Federal Government & Agencies continued Government National Mortgage Association, 7.00%, 5/15/23 1,081,349 1,157 Government National Mortgage Association, 7.00%, 6/15/23 61,375 66 Government National Mortgage Association, 7.00%, 7/15/23 166,345 177 Government National Mortgage Association, 7.00%, 8/15/23 526 1 Government National Mortgage Association, 7.00%, 9/15/23 22,826 24 Government National Mortgage Association, 7.00%, 10/15/23 38,832 42 Government National Mortgage Association, 7.00%, 11/15/23 243,985 261 Government National Mortgage Association, 7.00%, 12/15/27 72,175 77 Government National Mortgage Association, 7.00%, 1/15/28 76,154 81 Government National Mortgage Association, 7.00%, 2/15/28 11,603 12 Government National Mortgage Association, 7.00%, 4/15/28 100,992 108 Government National Mortgage Association, 7.00%, 5/15/28 138,752 148 Government National Mortgage Association, 7.00%, 6/15/28 242,004 257 Government National Mortgage Association, 7.00%, 7/15/28 373,680 398 Government National Mortgage Association, 7.50%, 1/15/23 88,167 96 Government National Mortgage Association, 7.50%, 6/15/23 45,740 49 Government National Mortgage Association, 7.50%, 6/15/24 1,355 1 Government National Mortgage Association, 7.50%, 7/15/24 30,811 33 Government National Mortgage Association, 7.50%, 8/15/25 1,349 1 Government National Mortgage Association, 7.50%, 9/15/25 7,452 8 Government National Mortgage Association, 7.50%, 12/15/25 44,210 48 Government National Mortgage Association, 7.50%, 1/15/26 1,502 2 Government National Mortgage Association, 7.50%, 3/15/26 24,146 26 Government National Mortgage Association, 7.50%, 6/15/26 57,917 63 Government National Mortgage Association, 7.50%, 9/15/26 1,552 2 Government National Mortgage Association, 7.50%, 10/15/26 5,223 6 Government National Mortgage Association, 7.50%, 12/15/26 51,231 56 Government National Mortgage Association, 7.50%, 1/15/27 1,326 1
Mortgage and Asset Backed Shares/ Value Securities (6.9%) $ Par $ (000's) ------------------------------------------------- Federal Government & Agencies continued Government National Mortgage Association, 7.50%, 2/15/27 38,042 41 Government National Mortgage Association, 7.50%, 3/15/27 3,428 4 Government National Mortgage Association, 7.50%, 4/15/27 122,627 132 Government National Mortgage Association, 7.50%, 5/15/27 40,561 44 Government National Mortgage Association, 7.50%, 7/15/27 20,636 22 Government National Mortgage Association, 8.00%, 9/15/24 68,491 75 Government National Mortgage Association, 8.00%, 5/15/26 28,021 30 Government National Mortgage Association, 8.00%, 6/15/26 29,424 32 Government National Mortgage Association, 8.00%, 7/15/26 69,347 75 Government National Mortgage Association, 8.00%, 8/15/26 28,105 31 Government National Mortgage Association, 8.00%, 9/15/26 69,110 75 Government National Mortgage Association, 8.00%, 10/15/26 101,113 111 Government National Mortgage Association, 8.00%, 12/15/26 29,255 32 Government National Mortgage Association, 8.00%, 4/15/27 92,783 101 Government National Mortgage Association, 8.00%, 6/15/27 22,409 24 Government National Mortgage Association, 8.00%, 7/15/27 21,096 23 Government National Mortgage Association, 8.00%, 7/20/28 200,787 217 Government National Mortgage Association, 8.50%, 5/15/22 545 1 Government National Mortgage Association, 8.50%, 10/15/22 8,317 9 Government National Mortgage Association, 8.50%, 12/15/22 2,851 3 Government National Mortgage Association, 8.50%, 6/15/24 661 1 Government National Mortgage Association, 8.50%, 7/15/24 8,024 9 Government National Mortgage Association, 8.50%, 12/15/24 1,043 1 Government National Mortgage Association, 8.50%, 1/15/25 1,652 2 Government National Mortgage Association, 8.50%, 2/15/25 4,221 4 Government National Mortgage Association, 8.50%, 11/15/25 1,202 1 Government National Mortgage Association, 8.50%, 1/15/26 9,634 11 Government National Mortgage Association, 8.50%, 3/15/26 4,914 6
Balanced Portfolio 95 Balanced Portfolio
Mortgage and Asset Backed Shares/ Value Securities (6.9%) $ Par $ (000's) ---------------------------------------------------------- Federal Government & Agencies continued Government National Mortgage Association, 8.50%, 4/15/26 6,574 7 Government National Mortgage Association, 8.50%, 5/15/26 850 1 Government National Mortgage Association, 11.00%, 1/15/18 1,437,291 1,610 Government National Mortgage Association, TBA, 4.50%, 1/1/35 20,513,909 20,000 Vendee Mortgage Trust, Series 1998- 3, Class E, 6.50%, 3/15/29 4,500,000 4,633 ------- Total 108,489 ------- Finance Services (0.5%) Morgan Stanley Capital, Series 1998- WF2, Class A2, 6.54%, 5/15/08 15,000,000 16,117 ------- Total 16,117 ------- Housing Programs (0.0%) Rural Housing Trust 1987-1, Series 1, Class D, 6.33%, 4/1/26 943,098 943 ------- Total 943 ------- International Affairs (0.1%) Overseas Private Investment, 4.10%, 11/15/14 4,334,720 4,319 ------- Total 4,319 ------- Retail-Retail Stores (0.4%) LB Mortgage Trust, Series 1991-2, Class A3, 8.39%, 1/20/17 9,956,872 11,357 ------- Total 11,357 ------- Total Mortgage and Asset Backed Securities (Cost: $201,267) 207,302 ------- Common Stocks (47.7%) ---------------------------------------------------------- Consumer Discretionary (5.7%) *AutoNation, Inc. 33,300 640 *AutoZone, Inc. 10,075 920 *Bed Bath & Beyond, Inc. 37,900 1,510 Best Buy Co., Inc. 40,900 2,430 *Big Lots, Inc. 14,200 172 The Black & Decker Corp. 10,200 901 Brunswick Corp. 12,100 599 Carnival Corp. 79,773 4,597 Centex Corp. 15,700 935 Circuit City Stores, Inc. 24,600 385 Clear Channel Communications, Inc. 72,250 2,420 *Coach, Inc. 23,800 1,342 *Comcast Corp. -- Class A 279,637 9,306 Cooper Tire & Rubber Co. 9,400 203 Dana Corp. 18,915 328 Darden Restaurants, Inc. 19,849 551 Delphi Automotive Systems Corp. 70,669 637 Dillard's, Inc. -- Class A 10,336 278 Dollar General Corp. 41,265 857 Dow Jones & Co., Inc. 10,280 443
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ----------------------------------------------------------- Consumer Discretionary continued Eastman Kodak Co. 36,117 1,165 *eBay, Inc. 83,500 9,709 Family Dollar Stores, Inc. 21,100 659 Federated Department Stores, Inc. 21,312 1,232 Ford Motor Co. 230,507 3,375 Fortune Brands, Inc. 18,133 1,400 Gannett Co., Inc. 32,150 2,627 The Gap, Inc. 110,425 2,332 General Motors Corp. 71,125 2,849 Genuine Parts Co. 21,975 968 *The Goodyear Tire & Rubber Co. 22,100 324 Harley-Davidson, Inc. 36,975 2,246 Harrah's Entertainment, Inc. 14,150 946 *Hasbro, Inc. 22,275 432 Hilton Hotels Corp. 48,650 1,106 The Home Depot, Inc. 276,597 11,823 International Game Technology 43,400 1,492 *The Interpublic Group of Companies, Inc. 53,300 714 J. C. Penney Co., Inc. 35,925 1,487 Johnson Controls, Inc. 24,000 1,523 Jones Apparel Group, Inc. 15,400 563 KB Home 5,800 606 Knight-Ridder, Inc. 9,650 646 *Kohl's Corp. 43,233 2,126 Leggett & Platt, Inc. 24,067 684 The Limited, Inc. 51,199 1,179 Liz Claiborne, Inc. 13,700 578 Lowe's Companies, Inc. 97,350 5,606 Marriott International, Inc. -- Class A 28,200 1,776 Mattel, Inc. 52,260 1,019 The May Department Stores Co. 36,800 1,082 Maytag Corp. 9,967 210 McDonald's Corp. 158,371 5,077 The McGraw-Hill Companies, Inc. 23,940 2,191 Meredith Corp. 6,300 341 The New York Times Co. -- Class A 18,292 746 Newell Rubbermaid, Inc. 34,611 837 News Corp., Inc. -- Class A 376,100 7,018 NIKE, Inc. -- Class B 33,100 3,002 Nordstrom, Inc. 17,633 824 *Office Depot, Inc. 39,343 683 OfficeMax, Inc. 11,800 370 Omnicom Group, Inc. 23,500 1,982 Pulte Homes, Inc. 16,100 1,027 RadioShack Corp. 19,967 657 Reebok International, Ltd. 7,300 321 Sears, Roebuck & Co. 26,050 1,329 The Sherwin-Williams Co. 17,760 793 Snap-on, Inc. 7,217 248 The Stanley Works 10,350 507 Staples, Inc. 62,750 2,115 *Starbucks Corp. 50,350 3,140 Starwood Hotels & Resorts Worldwide, Inc. 26,100 1,524 Target Corp. 112,743 5,855 Tiffany & Co. 18,333 586 *Time Warner, Inc. 576,900 11,215 The TJX Companies, Inc. 60,700 1,525
96 Balanced Portfolio Balanced Portfolio
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ---------------------------------------------------- Consumer Discretionary continued *Toys R" Us, Inc. 27,050 554 Tribune Co. 40,031 1,687 *Univision Communications, Inc. -- Class A 40,700 1,191 V. F. Corp. 13,943 772 Viacom, Inc. -- Class B 214,761 7,815 Visteon Corp. 16,312 159 The Walt Disney Co. 257,333 7,154 Wendy's International, Inc. 14,350 563 Whirlpool Corp. 8,350 578 Yum! Brands, Inc. 36,880 1,740 ------- Total 170,064 ------- Consumer Staples (5.0%) Adolph Coors Co. -- Class B 4,700 356 Alberto-Culver Co. 11,500 559 Albertson's, Inc. 46,395 1,108 Altria Group, Inc. 258,504 15,794 Anheuser-Busch Companies, Inc. 99,519 5,049 Archer-Daniels-Midland Co. 82,475 1,840 Avon Products, Inc. 59,550 2,305 Brown-Forman Corp. -- Class B 15,368 748 Campbell Soup Co. 51,854 1,550 The Clorox Co. 19,150 1,129 The Coca-Cola Co. 304,700 12,685 Coca-Cola Enterprises, Inc. 59,100 1,232 Colgate-Palmolive Co. 66,754 3,415 ConAgra Foods, Inc. 64,733 1,906 Costco Wholesale Corp. 59,052 2,859 CVS Corp. 50,433 2,273 General Mills, Inc. 45,933 2,283 The Gillette Co. 125,065 5,600 H.J. Heinz Co. 43,983 1,715 Hershey Foods Corp. 31,000 1,722 Kellogg Co. 52,043 2,324 Kimberly-Clark Corp. 61,397 4,041 *The Kroger Co. 93,073 1,633 McCormick & Co., Inc. 17,200 664 The Pepsi Bottling Group, Inc. 31,500 852 PepsiCo, Inc. 212,200 11,077 The Procter & Gamble Co. 319,546 17,600 Reynolds American, Inc. 18,600 1,462 *Safeway, Inc. 56,400 1,113 Sara Lee Corp. 98,884 2,387 SUPERVALU, Inc. 16,950 585 SYSCO Corp. 80,550 3,075 UST, Inc. 20,833 1,002 Wal-Mart Stores, Inc. 533,433 28,175 Walgreen Co. 128,754 4,940 Wm. Wrigley Jr. Co. 28,233 1,953 ------- Total 149,011 -------
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ----------------------------------------------------- Energy (3.4%) Amerada Hess Corp. 11,500 947 Anadarko Petroleum Corp. 31,177 2,021 Apache Corp. 41,130 2,080 Ashland, Inc. 9,000 525 Baker Hughes, Inc. 42,240 1,802 BJ Services Co. 20,300 945 Burlington Resources, Inc. 49,272 2,143 ChevronTexaco Corp. 266,868 14,014 ConocoPhillips 86,903 7,546 Devon Energy Corp. 61,200 2,382 El Paso Corp. 81,017 843 EOG Resources, Inc. 14,940 1,066 Exxon Mobil Corp. 812,571 41,653 Halliburton Co. 55,685 2,185 Kerr-McGee Corp. 19,057 1,101 Kinder Morgan, Inc. 15,633 1,143 Marathon Oil Corp. 43,691 1,643 *Nabors Industries, Ltd. 18,850 967 *Noble Corp. 17,050 848 Occidental Petroleum Corp. 49,680 2,899 *Rowan Companies, Inc. 13,550 351 Schlumberger, Ltd. 74,133 4,963 Sunoco, Inc. 9,250 756 *Transocean, Inc. 40,554 1,719 Unocal Corp. 33,133 1,433 Valero Energy Corp. 32,300 1,466 The Williams Companies, Inc. 70,100 1,142 ------- Total 100,583 ------- Financials (9.8%) ACE, Ltd. 35,800 1,530 AFLAC, Inc. 63,750 2,540 The Allstate Corp. 86,469 4,472 Ambac Financial Group, Inc. 13,700 1,125 American Express Co. 158,100 8,913 American International Group, Inc. 328,090 21,547 AmSouth Bancorporation 44,745 1,159 Aon Corp. 39,875 951 Apartment Investment and Management Co. -- Class A 11,900 459 Archstone-Smith Trust 24,600 942 Bank of America Corp 508,790 23,909 The Bank of New York Co., Inc. 97,820 3,269 BB&T Corp. 69,600 2,927 The Bear Stearns Companies, Inc. 13,045 1,335 Capital One Financial Corp. 30,600 2,577 The Charles Schwab Corp. 169,686 2,029 The Chubb Corp. 24,150 1,857 Cincinnati Financial Corp. 21,194 938 CIT Group, Inc. 26,500 1,214 Citigroup, Inc. 653,674 31,495 Comerica, Inc. 21,500 1,312 Compass Bancshares, Inc. 15,400 750 Countrywide Financial Corp. 73,098 2,705 *E*TRADE Group, Inc. 46,900 701 Equity Office Properties Trust 50,800 1,479 Equity Residential Properties Trust 35,600 1,288 Fannie Mae 121,929 8,684
Balanced Portfolio 97 Balanced Portfolio
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) -------------------------------------------------------- Financials continued Federated Investors, Inc. -- Class B 13,500 410 Fifth Third Bancorp 70,743 3,345 First Horizon National Corp. 15,500 668 Franklin Resources, Inc. 31,450 2,190 Freddie Mac 86,814 6,398 Golden West Financial Corp. 38,600 2,371 The Goldman Sachs Group, Inc. 61,000 6,346 The Hartford Financial Services Group, Inc. 36,950 2,561 Huntington Bancshares, Inc. 29,100 721 Janus Capital Group, Inc. 29,771 500 Jefferson-Pilot Corp. 17,153 891 JPMorgan Chase & Co. 448,709 17,505 KeyCorp 51,225 1,737 Lehman Brothers Holdings, Inc. 33,956 2,970 Lincoln National Corp. 21,960 1,025 Loews Corp. 23,333 1,640 M&T Bank Corp. 14,600 1,574 Marsh & McLennan Companies, Inc. 66,380 2,184 Marshall & Ilsley Corp. 28,100 1,242 MBIA, Inc. 17,750 1,123 MBNA Corp. 160,895 4,536 Mellon Financial Corp. 53,309 1,658 Merrill Lynch & Co., Inc. 117,300 7,011 MetLife, Inc. 93,715 3,796 MGIC Investment Corp. 12,200 841 Moody's Corp. 18,600 1,615 Morgan Stanley 137,831 7,652 National City Corp. 85,379 3,206 North Fork Bancorporation, Inc. 59,300 1,711 Northern Trust Corp. 27,650 1,343 Plum Creek Timber Co., Inc. (REIT) 23,100 888 The PNC Financial Services Group, Inc. 35,600 2,045 Principal Financial Group, Inc. 38,700 1,584 The Progressive Corp. 25,200 2,138 ProLogis 23,200 1,005 *Providian Financial Corp. 36,943 608 Prudential Financial, Inc. 64,600 3,550 Regions Financial Corp. 58,575 2,085 SAFECO Corp. 15,950 833 Simon Property Group, Inc. 27,900 1,804 SLM Corp. 54,158 2,891 Sovereign Bancorp, Inc. 43,500 981 The St. Paul Travelers Companies, Inc. 84,331 3,126 State Street Corp. 42,000 2,063 SunTrust Banks, Inc. 46,667 3,448 Synovus Financial Corp. 39,050 1,116 T. Rowe Price Group, Inc. 16,100 1,001 Torchmark Corp. 13,650 780 U.S. Bancorp 235,209 7,367 UnumProvident Corp. 37,306 669 Wachovia Corp. 201,988 10,626 Washington Mutual, Inc. 109,938 4,648 Wells Fargo & Co. 213,085 13,244 XL Capital, Ltd. -- Class A 17,500 1,359 Zions Bancorporation 11,300 769 ------- Total 293,505 -------
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) -------------------------------------------------------- Health Care (6.0%) Abbott Laboratories 196,125 9,149 Aetna, Inc. 18,579 2,318 Allergan, Inc. 16,533 1,340 AmerisourceBergen Corp. 13,200 775 *Amgen, Inc. 160,023 10,265 Applera Corp. -- Applied Biosystems Group 24,667 516 Bausch & Lomb, Inc. 6,700 432 Baxter International, Inc. 77,600 2,680 Becton, Dickinson and Co. 31,950 1,815 *Biogen Idec, Inc. 42,020 2,799 Biomet, Inc. 31,855 1,382 *Boston Scientific Corp. 106,380 3,782 Bristol-Myers Squibb Co. 245,044 6,278 C. R. Bard, Inc. 13,200 845 Cardinal Health, Inc. 54,450 3,166 *Caremark Rx, Inc. 57,300 2,259 *Chiron Corp. 23,578 786 CIGNA Corp. 16,871 1,376 Eli Lilly and Co. 142,566 8,091 *Express Scripts, Inc. 9,600 734 *Fisher Scientific International, Inc. 14,800 923 *Forest Laboratories, Inc. 46,434 2,083 *Genzyme Corp. 31,200 1,812 *Gilead Sciences, Inc. 54,500 1,907 Guidant Corp. 40,112 2,892 HCA, Inc. 53,015 2,118 Health Management Associates, Inc. -- Class A 30,700 698 *Hospira, Inc. 19,642 658 *Humana, Inc. 20,100 597 IMS Health, Inc. 29,233 678 Johnson & Johnson 373,823 23,708 *King Pharmaceuticals, Inc. 30,466 378 *Laboratory Corp. of America Holdings 17,400 867 Manor Care, Inc. 10,900 386 McKesson Corp. 36,993 1,164 *Medco Health Solutions, Inc. 34,362 1,429 *MedImmune, Inc. 31,300 849 Medtronic, Inc. 152,200 7,560 Merck & Co., Inc. 279,300 8,977 *Millipore Corp. 6,300 314 Mylan Laboratories, Inc. 33,900 599 PerkinElmer, Inc. 16,100 362 Pfizer, Inc. 948,559 25,507 Quest Diagnostics, Inc. 12,700 1,213 Schering-Plough Corp. 185,550 3,874 *St. Jude Medical, Inc. 45,000 1,887 Stryker Corp. 50,600 2,441 *Tenet Healthcare Corp. 58,750 645 *Thermo Electron Corp. 20,100 607 UnitedHealth Group, Inc. 82,328 7,247 *Waters Corp. 15,200 711 *Watson Pharmaceuticals, Inc. 13,800 453 *WellPoint, Inc. 37,200 4,278 Wyeth 168,071 7,158 *Zimmer Holdings, Inc. 30,873 2,474 ------- Total 180,242 -------
98 Balanced Portfolio Balanced Portfolio
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ---------------------------------------------------------- Industrials (5.6%) 3M Co. 98,024 8,044 *Allied Waste Industries, Inc. 40,050 372 American Power Conversion Corp. 24,050 515 *American Standard Companies, Inc. 27,000 1,116 *Apollo Group, Inc. -- Class A 23,300 1,881 Avery Dennison Corp. 13,950 837 The Boeing Co. 105,718 5,473 Burlington Northern Santa Fe Corp. 47,308 2,238 Caterpillar, Inc. 43,012 4,194 Cendant Corp. 132,573 3,100 Cintas Corp. 21,667 950 Cooper Industries, Ltd. -- Class A 11,600 788 CSX Corp. 27,050 1,084 Cummins, Inc. 5,700 478 Danaher Corp. 38,900 2,233 Deere & Co. 31,240 2,324 *Delta Air Lines, Inc. 16,333 122 Dover Corp. 25,633 1,075 Eaton Corp. 19,100 1,382 Emerson Electric Co. 52,825 3,703 Equifax, Inc. 17,000 478 FedEx Corp. 37,840 3,727 Fluor Corp. 10,600 578 General Dynamics Corp. 25,200 2,636 General Electric Co. 1,331,698 48,606 Goodrich Corp. 15,000 490 H&R Block, Inc. 20,750 1,017 Honeywell International, Inc. 108,350 3,837 Illinois Tool Works, Inc. 37,200 3,448 Ingersoll-Rand Co. -- Class A 21,670 1,740 ITT Industries, Inc. 11,600 980 L-3 Communications Holdings, Inc. 14,500 1,062 Lockheed Martin Corp. 55,722 3,095 Masco Corp. 56,400 2,060 *Monster Worldwide, Inc. 15,033 506 *Navistar International Corp. 8,820 388 Norfolk Southern Corp. 49,843 1,804 Northrop Grumman Corp. 46,362 2,520 PACCAR, Inc. 21,927 1,765 Pall Corp. 15,616 452 Parker-Hannifin Corp. 15,000 1,136 Pitney Bowes, Inc. 29,027 1,343 *Power-One, Inc. 10,600 95 R. R. Donnelley & Sons Co. 27,633 975 Raytheon Co. 56,900 2,209 Robert Half International, Inc. 21,860 643 Rockwell Automation, Inc. 23,250 1,152 Rockwell Collins, Inc. 22,250 878 Ryder System, Inc. 8,100 387 Southwest Airlines Co. 98,195 1,599 Textron, Inc. 17,350 1,280 Tyco International, Ltd. 253,383 9,055 Union Pacific Corp. 32,740 2,202 United Parcel Service, Inc. -- Class B 141,200 12,066 United Technologies Corp. 64,333 6,648 W.W. Grainger, Inc. 11,300 753 Waste Management, Inc. 72,097 2,159 ------- Total 167,678 -------
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ----------------------------------------------------------- Information Technology (7.7%) *ADC Telecommunications, Inc. 101,850 273 Adobe Systems, Inc. 30,075 1,887 *Advanced Micro Devices, Inc. 48,600 1,070 *Affiliated Computer Services, Inc. -- Class A 16,200 975 *Agilent Technologies, Inc. 61,188 1,475 *Altera Corp. 46,865 970 Analog Devices, Inc. 47,343 1,748 *Andrew Corp. 20,262 276 *Apple Computer, Inc. 50,600 3,259 *Applied Materials, Inc. 213,900 3,658 *Applied Micro Circuits Corp. 38,800 163 Autodesk, Inc. 28,932 1,098 Automatic Data Processing, Inc. 73,400 3,255 *Avaya, Inc. 57,712 993 *BMC Software, Inc. 27,940 520 *Broadcom Corp. -- Class A 41,500 1,340 *CIENA Corp. 72,000 240 *Cisco Systems, Inc. 829,367 16,007 *Citrix Systems, Inc. 21,380 524 Computer Associates International, Inc. 73,732 2,290 *Computer Sciences Corp. 23,850 1,344 *Compuware Corp. 48,743 315 *Comverse Technology, Inc. 24,900 609 *Convergys Corp. 17,850 268 *Corning, Inc. 176,600 2,079 *Dell, Inc. 312,967 13,188 *Electronic Arts, Inc. 38,500 2,375 Electronic Data Systems Corp. 64,700 1,495 *EMC Corp. 301,786 4,488 First Data Corp. 104,547 4,447 *Fiserv, Inc. 24,625 990 *Freescale Semiconductor Inc. 49,106 902 *Gateway, Inc. 47,050 283 Hewlett-Packard Co. 380,367 7,976 Intel Corp. 796,443 18,628 International Business Machines Corp. 209,710 20,672 *Intuit, Inc. 23,600 1,039 *Jabil Circuit, Inc. 25,333 648 *JDS Uniphase Corp. 181,900 577 *KLA-Tencor Corp. 24,600 1,146 *Lexmark International, Inc. -- Class A 16,300 1,386 Linear Technology Corp. 38,650 1,498 *LSI Logic Corp. 48,500 266 *Lucent Technologies, Inc. 556,862 2,094 Maxim Integrated Products, Inc. 41,000 1,738 *Mercury Interactive Corp. 10,600 483 *Micron Technology, Inc. 77,150 953 Microsoft Corp. 1,369,400 36,576 Molex, Inc. 23,775 713 Motorola, Inc. 306,619 5,274 National Semiconductor Corp. 45,086 809 *NCR Corp. 11,700 810 *Network Appliance, Inc. 45,200 1,502 *Novell, Inc. 47,300 319 *Novellus Systems, Inc. 17,600 491 *NVIDIA Corp. 20,900 492 *Oracle Corp. 645,950 8,862
Balanced Portfolio 99 Balanced Portfolio
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ---------------------------------------------------------- Information Technology continued *Parametric Technology Corp. 33,920 200 Paychex, Inc. 47,640 1,624 *PMC-Sierra, Inc. 22,400 252 *QLogic Corp. 11,650 428 QUALCOMM, Inc. 206,466 8,754 Sabre Holdings Corp. -- Class A 17,109 379 *Sanmina-SCI Corp. 65,600 556 Scientific-Atlanta, Inc. 19,300 637 *Siebel Systems, Inc. 64,000 672 *Solectron Corp. 122,300 652 *Sun Microsystems, Inc. 423,654 2,279 *SunGard Data Systems, Inc. 36,400 1,031 *Symantec Corp. 79,900 2,058 Symbol Technologies, Inc. 30,350 525 Tektronix, Inc. 11,340 343 *Tellabs, Inc. 58,208 500 *Teradyne, Inc. 24,450 417 Texas Instruments, Inc. 217,675 5,359 *Unisys Corp. 42,350 431 *VERITAS Software Corp. 53,201 1,519 *Xerox Corp. 120,100 2,043 Xilinx, Inc. 43,900 1,302 *Yahoo!, Inc. 173,200 6,526 ------- Total 228,243 ------- Materials (1.5%) Air Products and Chemicals, Inc. 28,633 1,660 Alcoa, Inc. 109,643 3,445 Allegheny Technologies, Inc. 12,031 261 Ball Corp. 14,168 623 Bemis Co., Inc. 13,500 393 The Dow Chemical Co. 118,824 5,883 E. I. du Pont de Nemours and Co. 125,145 6,137 Eastman Chemical Co. 9,775 564 Ecolab, Inc. 32,500 1,142 Engelhard Corp. 15,400 472 Freeport-McMoRan Copper & Gold, Inc. -- Class B 22,519 861 Georgia-Pacific Corp. 32,458 1,217 Great Lakes Chemical Corp. 6,400 182 *Hercules, Inc. 14,100 209 International Flavors & Fragrances, Inc. 11,875 509 International Paper Co. 61,324 2,576 Louisiana-Pacific Corp. 13,900 372 MeadWestvaco Corp. 25,514 865 Monsanto Co. 33,278 1,849 Newmont Mining Corp. 55,930 2,484 Nucor Corp. 20,034 1,049 *Pactiv Corp. 18,700 473 Phelps Dodge Corp. 12,010 1,188 PPG Industries, Inc. 21,633 1,475 Praxair, Inc. 40,900 1,806 Rohm and Haas Co. 28,334 1,253 *Sealed Air Corp. 10,536 561 Sigma-Aldrich Corp. 8,700 526 Temple-Inland, Inc. 7,100 486 United States Steel Corp. 14,350 735 Vulcan Materials Co. 12,900 704 Weyerhaeuser Co. 30,220 2,031 ------- Total 43,991 -------
Shares/ Value Common Stocks (47.7%) $ Par $ (000's) ---------------------------------------------------------- Telecommunication Services (1.6%) ALLTEL Corp. 38,243 2,247 AT&T Corp. 100,274 1,911 BellSouth Corp. 230,735 6,412 CenturyTel, Inc. 17,000 603 Citizens Communications Co. 42,300 583 *Nextel Communications, Inc. -- Class A 139,933 4,198 *Qwest Communications International, Inc. 228,720 1,016 SBC Communications, Inc. 417,633 10,762 Sprint Corp. 185,311 4,605 Verizon Communications, Inc. 348,738 14,128 --------- Total 46,465 --------- Utilities (1.4%) *The AES Corp. 81,675 1,116 *Allegheny Energy, Inc. 17,300 341 Ameren Corp. 24,533 1,230 American Electric Power Co., Inc. 49,820 1,711 *Calpine Corp. 67,340 265 Centerpoint Energy, Inc. 38,726 438 Cinergy Corp. 22,838 951 *CMS Energy Corp. 24,500 256 Consolidated Edison, Inc. 30,525 1,335 Constellation Energy Group, Inc. 22,200 970 Dominion Resources, Inc. 41,725 2,826 DTE Energy Co. 21,950 947 Duke Energy Corp. 120,542 3,053 *Dynegy, Inc. -- Class A 47,900 221 Edison International 41,080 1,316 Entergy Corp. 28,191 1,905 Exelon Corp. 83,424 3,676 FirstEnergy Corp. 41,574 1,643 FPL Group, Inc. 23,343 1,745 KeySpan Corp. 20,200 797 Nicor, Inc. 5,550 205 NiSource, Inc. 34,084 776 Peoples Energy Corp. 4,700 207 *PG&E Corp. 50,775 1,690 Pinnacle West Capital Corp. 11,500 511 PPL Corp. 23,833 1,270 Progress Energy, Inc. 31,079 1,406 Public Service Enterprise Group, Inc. 29,940 1,550 Sempra Energy 29,359 1,077 The Southern Co. 93,200 3,124 TECO Energy, Inc. 25,200 387 TXU Corp. 30,215 1,951 Xcel Energy, Inc. 50,470 919 --------- Total 41,815 --------- Total Common Stocks (Cost: $759,069) 1,421,597 --------- Money Market Investments (17.1%) ---------------------------------------------------------- Autos (5.1%) (b)BMW U.S. Capital Corp., 2.30%, 1/14/05 30,000,000 29,974 (b)Daimler Chrysler Auto, 2.25%, 1/12/05 15,000,000 14,990
100 Balanced Portfolio Balanced Portfolio
Shares/ Value Money Market Investments (17.1%) $ Par $ (000's) ------------------------------------------------------------ Autos continued (b)Daimler Chrysler Auto, 2.31%, 1/6/05 15,000,000 14,995 (b)Fcar Owner Trust I, 2.25%, 1/5/05 15,000,000 14,996 (b)Fcar Owner Trust I, 2.28%, 1/7/05 15,000,000 14,994 (b)New Center Asset Trust, 2.31%, 1/18/05 15,000,000 14,984 (b)New Center Asset Trust, 2.36%, 2/10/05 15,000,000 14,961 (b)Toyota Motor Credit Corp., 2.28%, 1/24/05 15,000,000 14,978 (b)Toyota Motor Credit Corp., 2.30%, 1/18/05 15,000,000 14,984 ------- Total 149,856 ------- Federal Government & Agencies (1.1%) (b)Federal Home Loan Mortgage Co., 2.42%, 3/22/05 34,200,000 34,027 ------- Total 34,027 ------- Finance Lessors (3.0%) (b)Delaware Funding, 2.29%, 2/2/05 15,000,000 14,969 Ranger Funding Co., LLC, 2.23%, 1/10/05 15,000,000 14,992 Ranger Funding Co., LLC, 2.33%, 1/18/05 15,000,000 14,983 Thunder Bay Funding, Inc, 2.27%, 1/20/05 15,000,000 14,982 Thunder Bay Funding, Inc, 2.34%, 1/24/05 15,000,000 14,978 Windmill Funding Corp., 2.33%, 2/3/05 15,000,000 14,968 ------- Total 89,872 ------- Finance Services (1.9%) (b)Ciesco LP, 2.20%, 1/3/05 10,740,000 10,739 (b)Citicorp, 2.27%, 1/20/05 15,000,000 14,982 Preferred Receivable Funding, 2.25%, 1/12/05 15,000,000 14,989 Preferred Receivable Funding, 2.27%, 1/13/05 15,000,000 14,989 ------- Total 55,699 ------- Flavoring Extracts and Syrups (0.5%) (b)Coca-Cola Co., 2.31%, 1/20/05 15,000,000 14,982 ------- Total 14,982 ------- Personal Credit Institutions (1.0%) (b)American General, 2.37%, 1/28/05 15,000,000 14,973 (b)Household Finance Corp., 2.28%, 2/4/05 15,000,000 14,968 ------- Total 29,941 ------- Petroleum Refining (0.5%) Chevrontexaco Funding Corp, 2.25%, 1/5/05 15,000,000 14,996 ------- Total 14,996 -------
Shares/ Value Money Market Investments (17.1%) $ Par $ (000's) --------------------------------------------------------- Pharmaceutical Preparations (0.5%) Pfizer, Inc., 2.00%, 1/4/05 15,000,000 14,998 --------- Total 14,998 --------- Security Brokers and Dealers (1.0%) (b)Merrill Lynch, 2.28%, 1/24/05 15,000,000 14,978 Morgan Stanley Dean Witter, 2.32%, 1/18/05 15,000,000 14,984 --------- Total 29,962 --------- Short Term Business Credit (1.5%) American Express Credit, 2.26%, 1/6/05 15,000,000 14,995 Old Line Funding Corp., 2.32%, 1/20/05 15,000,000 14,982 USAA Cap Corp, 2.28%, 1/5/05 15,000,000 14,996 --------- Total 44,973 --------- Utilities (1.0%) (b)National Rural Utility, 2.27%, 1/11/05 15,000,000 14,990 (b)National Rural Utility, 2.32%, 1/19/05 15,000,000 14,983 --------- Total 29,973 --------- Total Money Market Investments (Cost: $509,269) 509,279 --------- Total Investments (106.4%) (Cost $2,501,728)(a) 3,173,820 --------- Other Assets, Less Liabilities (-6.4%) (190,641) --------- Total Net Assets (100.0%) 2,983,179 ---------
* Non-Income Producing 144A after the name of a security represents a security exempt from registration under Rule 144A of the securities Act of 1933. These securities may be resold as transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2004, the value of these securities was $71,782, representing 2.41% of net assets. IO -- Interest Only Security RB -- Revenue Bond (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $2,506,806 and the net unrealized appreciation of investments based on that cost was $667,014 which is comprised of $782,266 aggregate gross unrealized appreciation and $115,252 aggregate gross unrealized depreciation. Balanced Portfolio 101 Balanced Portfolio (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) -------------------------------------------------------- S&P 500 Index Futures 899 3/05 $7,540 (Total Notional Value at December 31, 2004, $265,239) US Ten Year Treasury Note 100 3/05 $ 55 (Total Notional Value at December 31, 2004, $11,248)
(d)Defaulted Security (f)All or a portion of the securities have been loaned. See Note 6. The Accompanying Notes are an Integral Part of the Financial Statements 102 Balanced Portfolio High Yield Bond Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: High current income and capital Generate superior performance by investing in a diversified $229 million appreciation with moderate risk. mix of fixed income securities rated below investment grade.
The investment objective of the High Yield Bond Portfolio is to achieve high current income and capital appreciation. The Portfolio invests primarily in debt securities that are rated below investment grade by at least one major rating agency. High yield debt securities are often called "junk bonds." For the year ended December 31, 2004, the Portfolio had a total return of 12.76%, outperforming its benchmark, the Lehman High Yield Intermediate Index, which returned 10.85%. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The average return for the Portfolio's peer group, High Current Yield Funds, was 9.84% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The High Yield Bond Portfolio has performed better than the Index since inception (May 3, 1994). The Portfolio's outperformance during 2004 can be attributed to a combination of quality mix, industry sector exposure and individual credit selections. Following an exceptional year in 2003, the High Yield Bond Portfolio once again reported double digit returns in 2004. During the first half of 2004, the Federal Reserve Board outlined a measured approach to raising interest rates; high yield credit spreads tightened and high yield bonds performed well in an environment of rising interest rates. For the year overall, high yield bonds benefited from a strengthening economy, which is positive for earnings and cash flow of the leveraged companies that issue high yield bonds. Technical factors also supported the high yield market, as investors seeking yield in a low interest rate environment demonstrated a willingness to take on more risk. Although the expectation for high yield bonds in 2004 was good, gains were even better than expected. Overall, the high yield sector was the best performing domestic fixed income sector for the year. The reason lies in good fundamentals. High yield bonds perform best when things are going well in the economy. That was true in 2004, when we experienced good growth, good corporate earnings, and good cash flow. Very low default rates (less than 3%, according to Moody's) also helped, with more positive credit rating changes reported for the year than negative. The Portfolio's outperformance in 2004 was the result of three factors: a moderately aggressive quality mix, industry sector selection and individual credit selection. The Portfolio's emphasis on B-rated, rather than higher quality, bonds helped its performance as lower quality bonds outperformed. The Portfolio also had good exposure to several industry sectors that turned in good performance for the year, including Telecom-Wireline, Financial Services, Cable TV and Satellite, and Chemicals. In addition, very few bonds in the Portfolio disappointed, as there were relatively few credit problems during 2004. Individual credit selections that performed particularly well during 2004 included AT&T, Huntsman Chemical, Appleton Papers, Playtex Products and Kabel Deutschland. In 2003, and again in 2004, high yield bonds produced above-average returns. That level of return should not be anticipated for future periods. As we enter 2005, we will look for long-term interest rates to rise moderately with continued growth in the economy, and we also expect that high yield credit spreads will be maintained, given the strong fundamentals in the corporate sector. We will continue to look for opportunities to achieve the Portfolio's primary investment strategy of achieving high current income and capital appreciation by investing in industries and individual companies that are attractively priced relative to the overall high yield market. 103 High Yield Bond Portfolio High Yield Bond Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Lehman Brothers High Yield High Yield Intermediate Citigroup Bond Portfolio Market Index High Yield -------------- ----------------------- ---------- 31-Dec-1994 $10,000 $10,000 $10,000 31-Dec-1995 11,678 11,732 11,923 31-Dec-1996 13,987 13,162 13,217 31-Dec-1997 16,204 14,743 14,949 31-Dec-1998 15,908 14,962 15,611 31-Dec-1999 15,836 15,357 15,741 31-Dec-2000 15,107 14,365 15,047 31-Dec-2001 15,866 14,908 16,089 31-Dec-2002 15,408 14,705 15,996 31-Dec-2003 19,885 18,741 20,693 31-Dec-2004 22,424 20,774 22,867 - ------------------------------------------------------------------------- Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------ High Yield Bond Portfolio 12.76% 7.21% 8.41% Lehman Brothers High Yield Intermediate Market Index 10.85% 6.23% 7.59% Citigroup High Yield Cash Pay Index 10.51% 7.75% 8.62% High Current Yield Funds Lipper Average 9.84% 4.95% 7.14% - ------------------------------------------------------------------------------ The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. Bonds and other debt obligations are affected by changes in interest rates, inflation risk and the creditworthiness of their issuers. High yield bonds generally have greater price swings and higher default risks than investment grade bonds. Return of principal is not guaranteed. In contrast to owning individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds. The total return performance for the High Yield Bond Portfolio has been shown in comparison with the Lehman Brothers High Yield Intermediate Market Index. The Lehman Brothers index is one of several appropriate measures of portfolio performance since it has a quality and maturity profile that resembles the High Yield Bond Portfolio. The index cannot be invested in directly and does not include sales charges. The Lehman Brothers High Yield Intermediate Market Index is made up of dollar-denominated, nonconvertible, SEC publicly registered fixed rate noninvestment grade issues. The bonds will have remaining maturities of between one and ten years and have an outstanding par value of at least $100 million. Yankee and global bonds (SEC registered) of issuers in G-7 countries are included. Original issue zero coupon bonds and step-up coupon structures are also included; however, the index excludes pay-in-kind (PIK) bonds. Each bond must be rated Ba1 or lower by Moody's Investor Service. If a Moody's rating is unavailable, the bonds must be rated BB+ or lower by Standard & Poor's, or by Fitch if an S&P rating is unavailable. A few unrated bonds are included in the index; to be eligible they must have previously held a high yield rating or have been associated with a high yield issuer. The index is an unmanaged market value weighted index and measures the income provided by, and the price changes of, the underlying securities. The Citigroup High Yield Cash Pay Index captures the performance of below-investment-grade debt issued by corporations domiciled in the United States or Canada. The index includes only cash-pay bonds (both registered and Rule 144A) with maturities of at least one year and a minimum amount outstanding of US$100 million. The fund is changing its benchmark index from the Lehman Brothers High Yield Intermediate Market Index to the Citigroup High Yield Cash Pay Index because the Citigroup Index provides greater transparency as to the composition and characteristics of the index than does the Lehman Brothers Index. The greater transparency allows the fund to enhance its analysis of performance relative to the benchmark. The Lipper Variable Insurance Products (VIP) High Current Yield Funds Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that aim at high (relative) current yields from fixed income securities, have no quality or maturity restrictions, and tend to invest in lower grade debt issues. Source: Lipper, Inc. [CHART] Sector Allocation 12/31/04 Basic Material/Capital Goods .................... 20% Consumer Products ............................... 14% Gaming/Lodging/Leisure .......................... 9% Telecommunications .............................. 9% Media ........................................... 7% Health Care/Pharmaceuticals ..................... 6% Auto Related .................................... 5% Foods ........................................... 5% Short-Term Investments and Other Net Assets ..... 5% Builders ........................................ 4% Financials ...................................... 3% Services ........................................ 3% Transportation .................................. 3% Utilities ....................................... 3% Energy .......................................... 2% Technology ...................................... 2% Sector Allocation is based on Net Assets. Sector Allocation is subject to change. There are greater risks inherent in a fund that primarily invests in high yield bonds. 104 High Yield Bond Portfolio High Yield Bond Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,096.80 $2.58 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,022.37 $2.49 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.49%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). 105 High Yield Bond Portfolio High Yield Bond Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Bonds (95.0%) $ Par $ (000's) --------------------------------------------------------- Autos/Vehicle Parts (4.7%) Affinia Group, Inc., 9.00%, 11/30/14 144A 557,000 581 Collins & Aikman Products, 10.75%, 12/31/11 1,325,000 1,352 Cooper Tire & Rubber Co., 8.375%, 12/15/14 144A 1,875,000 1,870 Delco Remy International, Inc., 9.375%, 4/15/12 937,000 960 HLI Operating Co., 10.50%, 6/15/10 1,495,000 1,603 The Pep Boys -- Manny, Moe & Jack, 7.50%, 12/15/14 750,000 760 (e)Standadyne Corp., 0.00%, 2/15/15 144A 2,530,000 1,496 Tenneco Automotive, Inc., 8.625% 11/15/14 144A 1,000,000 1,040 Visteon Corp., 7.00%, 3/10/14 1,111,000 1,061 ------ Total Autos/Vehicle Parts 10,723 ------ Basic Materials (12.5%) Chemicals (6.0%) BCP Caylux Holding, 9.625%, 6/15/14 144A 1,889,000 2,130 Borden US Fin/Nova Scot, 9.00%, 7/15/14 144A 562,000 624 Crompton Corp., 9.875%, 8/1/12 144A 937,000 1,073 Huntsman International, LLC, 7.375%, 1/1/15 144A 1,125,000 1,128 Huntsman LLC, 11.50%, 7/15/12 144A 1,125,000 1,330 Huntsman LLC, 11.625%, 10/15/10 750,000 887 Invista, 9.25%, 5/1/12 144A 2,000,000 2,229 (e)KI Holdings, Inc., 0.00%, 11/15/14 144A 2,250,000 1,440 Rockwood Specialties Group, Inc., 10.265%, 5/15/11 1,725,000 1,984 Terra Capital Corp., 11.50%, 6/1/10 682,000 777 ------ Total 13,602 ------ Metals/Mining (1.4%) Asia Aluminum Holdings, Ltd., 8.00%, 12/23/11 144A 610,000 616 IMCO Recycling Escrow, 9.00%, 11/15/14 144A 1,250,000 1,300 Ispat Inland ULC, 9.75%, 4/1/14 255,000 315 Ryerson Tull, Inc., 8.25%, 12/15/11 144A 1,025,000 1,035 ------ Total 3,266 ------ Packaging/Containers (3.0%) Anchor Glass Container, 11.00%, 2/15/13 940,000 1,006 (e)Consolidated Container Co., 9.00%, 6/15/09 1,125,000 945 Graham Packaging Co., 9.875%, 10/15/14 144A 2,001,000 2,135
Shares/ Value Bonds (95.0%) $ Par $ (000's) ------------------------------------------------------------ Packaging/Containers continued Owens-Brockway Glass Containers, 6.75%, 12/1/14 144A 1,064,000 1,075 Pliant Corp., 11.125%, 9/1/09 1,617,000 1,763 ------ Total 6,924 ------ Paper & Forest Products (2.1%) Abitibi-Consolidated, Inc., 7.75%, 6/15/11 1,297,000 1,362 Ainsworth Lumber Co., Ltd., 7.25%, 10/1/12 144A 1,062,000 1,081 Appleton Papers, Inc., 8.125%, 6/15/11 656,000 707 Appleton Papers, Inc., 9.75%, 6/15/14 750,000 829 Neenah Paper, Inc., 7.375%, 11/15/14 144A 751,000 762 ------ Total 4,741 ------ Total Basic Materials 28,533 ------ Builders/Building Materials (4.3%) Building Materials (2.8%) Goodman Global Holdings, 7.875%, 12/15/12 144A 1,877,000 1,858 Integrated Electrical Services, Inc., 9.375%, 2/1/09 1,450,000 1,363 Ply Gem Industries, Inc., 9.00%, 2/15/12 144A 1,485,000 1,507 RMCC Acquisition Co., 9.50%, 11/1/12 144A 862,000 860 THL BuildCo, Inc., 8.50%, 9/1/14 144A 755,000 789 ------ Total 6,377 ------ Home Builders (1.5%) William Lyon Homes, 7.50%, 2/15/14 1,125,000 1,080 William Lyon Homes, 7.625%, 12/15/12 144A 525,000 513 Technical Olympic USA, Inc., 7.50%, 3/15/11 1,125,000 1,133 Technical Olympic USA, Inc., 9.00%, 7/1/10 750,000 803 ------ Total 3,529 ------ Total Builders/Building Materials 9,906 ------ Capital Goods (7.2%) Ames True Temper, Inc., 10.00%, 7/15/12 1,876,000 1,923 Amsted Industries, Inc., 10.25%, 10/15/11 144A 1,825,000 2,061 Bombardier Recreational, 8.375%, 12/15/13 1,350,000 1,441 Coleman Cable, Inc., 9.875%, 10/1/12 144A 1,125,000 1,195
106 High Yield Bond Portfolio High Yield Bond Portfolio
Shares/ Value Bonds (95.0%) $ Par $ (000's) ------------------------------------------------------------- Capital Goods continued Columbus McKinnon Corp., 10.00%, 8/1/10 925,000 1,041 DA-Lite Screen Co., Inc., 9.50%, 5/15/11 1,800,000 1,980 Douglas Dynamics LLC, 7.75%, 1/15/12 144A 875,000 887 ITRON, Inc., 7.75%, 5/15/12 144A 1,125,000 1,145 Park-Ohio Industries, Inc., 8.375%, 11/15/14 144A 1,502,000 1,502 Rexnord Corp., 10.125%, 12/15/12 750,000 848 Sup Essx Com & Essx Group, 9.00%, 4/15/12 1,439,000 1,482 Trimas Corp., 9.875%, 6/15/12 975,000 1,034 ------ Total Capital Goods 16,539 ------ Consumer Products/Retailing (13.6%) Consumer Products (6.8%) American Achievement Corp., 8.25%, 4/1/12 875,000 908 Amscan Holdings, Inc., 8.75%, 5/1/14 1,688,000 1,688 Coinmach Corp., 9.00%, 2/1/10 1,297,000 1,355 Hines Nurseries, Inc., 10.25%, 10/1/11 1,314,000 1,436 Jafra Cosmetics, 10.75%, 5/15/11 1,100,000 1,243 (e)Jostens Holding Corp., 10.25%, 12/1/13 925,000 657 Jostens IH Corp., 7.625%, 10/1/12 144A 844,000 878 Playtex Products, Inc., 9.375%, 6/1/11 2,061,000 2,201 Samsonite Corp., 8.875%, 6/1/11 1,807,000 1,956 Sealy Mattress Co., 8.25%, 6/15/14 1,119,000 1,186 (e)Simmons Co., 0.00%, 12/15/14 144A 2,925,000 1,784 ------ Total 15,292 ------ Retail Food & Drug (2.3%) Jean Coutu Group, Inc., 8.50%, 8/1/14 144A 1,625,000 1,666 Rite Aid Corp., 9.25%, 6/1/13 1,914,000 1,933 Stater Brothers Holdings, 8.125%, 6/15/12 1,640,000 1,734 ------ Total 5,333 ------ Retail Stores (1.2%) Blockbuster, Inc., 9.00%, 9/1/12 144A 1,689,000 1,668 Finlay Fine Jewelry Corp., 8.375%, 6/1/12 1,062,000 1,147 ------ Total 2,815 ------ Textile/Apparel (3.3%) Levi Strauss & Co., 9.75%, 1/15/15 144A 1,375,000 1,361 Oxford Industries, Inc., 8.875%, 6/1/11 1,693,000 1,818 Perry Ellis International, Inc., 8.875%, 9/15/13 750,000 788 Phillips Van Heusen, 7.25%, 2/15/11 1,500,000 1,575 Propex Fabrics, Inc., 10.00%, 12/1/12 144A 1,878,000 1,948 ------ Total 7,490 ------ Total Consumer Products/Retailing 30,930 ------
Shares/ Value Bonds (95.0%) $ Par $ (000's) ----------------------------------------------------------- Energy (2.6%) Gas Pipelines/Oil Field Services (0.8%) Hanover Equipment Trust 01 A, 0.00%, 3/31/07 750,000 653 Parker Drilling Co., 9.625%, 10/1/13 1,125,000 1,262 ----- Total 1,915 ----- Oil & Gas Exploration/Production (1.3%) Chesapeake Energy Corp., 6.375%, 6/15/15 144A 938,000 964 Harvest Operations Corp., 7.875%, 10/15/11 144A 470,000 474 Stone Energy Corp., 6.75%, 12/15/14 144A 500,000 499 Venoco, Inc., 8.75%, 12/15/11 144A 938,000 966 ----- Total 2,903 ----- Oil Refining & Marketing (0.5%) United Refining Co., 10.50%, 8/15/12 144A 1,125,000 1,189 ----- Total 1,189 ----- Total Energy 6,007 ----- Financials (3.0%) Financials Services (1.7%) Dollar Financial Group, 9.75%, 11/15/11 1,125,000 1,221 LaBranche and Co., 11.00%, 5/15/12 936,000 1,006 Refco Finance Holdings, 9.00%, 8/1/12 144A 1,500,000 1,643 ----- Total 3,870 ----- Insurance (1.3%) Crum and Forster Holding Corp., 10.375%, 6/15/13 925,000 1,031 Fairfax Financial Holdings, 7.75%, 4/26/12 1,877,000 1,914 ----- Total 2,945 ----- Total Financials 6,815 ----- Foods (5.2%) Food/Beverage/Tobacco (4.3%) B&G Foods, Inc., 8.00%, 10/1/11 939,000 1,000 Chiquita Brands International, 7.50%, 11/1/14 144A 628,000 636 Gold Kist, Inc., 10.25%, 3/15/14 604,000 707 Land O Lakes, Inc., 9.00%, 12/15/10 1,503,000 1,646 Merisant Co., 9.50%, 7/15/13 144A 1,125,000 1,001 North Atlantic Trading, 9.25%, 3/1/12 1,500,000 1,268 Pinnacle Foods Holding, 8.25%, 12/1/13 144A 1,539,000 1,466 Standard Commercial Corp., 8.00%, 4/15/12 1,375,000 1,413 (e)Tabletop Holdings, 12.25%, 5/15/14 144A 1,875,000 797 ----- Total 9,934 -----
107 High Yield Bond Portfolio High Yield Bond Portfolio
Shares/ Value Bonds (95.0%) $ Par $ (000's) ----------------------------------------------------------- Restaurants (0.9%) Buffets, Inc., 11.25%, 7/15/10 1,916,000 2,049 ------ Total 2,049 ------ Total Foods 11,983 ------ Gaming/Leisure/Lodging (8.7%) Gaming (4.8%) American Casino & Entertainment, 7.85%, 2/1/12 975,000 1,036 Herbst Gaming, Inc., 7.00%, 11/15/14 144A 450,000 456 (d)Hollywood Casino Shreveport, 13.00%, 8/1/06 700,000 592 Inn of the Mountain Gods, 12.00%, 11/15/10 743,000 869 Majestic Star Casino LLC, 9.50%, 10/15/10 1,460,000 1,548 Resort Intl. Hotel/Casino, 11.50%, 3/15/09 1,000,000 1,175 River Rock Entertainment, 9.75%, 11/1/11 1,125,000 1,261 Wheeling Island Gaming, 10.125%, 12/15/09 1,125,000 1,198 Wynn Las Vegas LLC/Corp., 6.625%, 12/1/14 144A 3,005,000 2,976 ------ Total 11,111 ------ Leisure (3.9%) AMC Entertainment, Inc., 9.875%, 2/1/12 1,879,000 2,048 Intrawest Corp., 7.50%, 10/15/13 144A 853,000 907 LCE Acquisition Corp., 9.00%, 8/1/14 144A 1,625,000 1,759 Universal City Development Corp., 11.75%, 4/1/10 1,813,000 2,142 Universal City Florida, 8.375%, 5/1/10 144A 750,000 778 WMG Holdings Corp., 6.905%, 12/15/11 144A 1,250,000 1,259 ------ Total 8,893 ------ Total Gaming/Leisure/Lodging 20,004 ------ Health Care/Pharmaceuticals (6.1%) Alliance Imaging, Inc., 7.25%, 12/15/12 144A 1,250,000 1,272 General Nutrition Center, 8.5%, 12/1/10 1,875,000 1,772 Iasis Healthcare Corp., 8.75%, 6/15/14 1,547,000 1,686 Medcath Holdings Corp., 9.875%, 7/15/12 1,312,000 1,424 Omega Healthcare Investors, 7.00%, 4/1/14 750,000 771 Tenet Healthcare Corp., 9.875%, 7/1/14 144A 1,499,000 1,634 Universal Hospital Service, 10.125%, 11/1/11 750,000 780
Shares/ Value Bonds (95.0%) $ Par $ (000's) ------------------------------------------------------------ Health Care/Pharmaceuticals continued US Oncology, Inc., 9.00%, 8/15/12 144A 1,501,000 1,677 Vanguard Health Holding II, 9.00%, 10/1/14 144A 2,002,000 2,141 Ventas Realty, Ltd. Partnership, 9.00%, 5/1/12 750,000 875 ------ Total Health Care/Pharmaceuticals 14,032 ------ Media (6.9%) Broadcasting (0.5%) Sinclair Broadcast Group, 8.00%, 3/15/12 1,132,000 1,203 ------ Total 1,203 ------ Cable/Satellite (5.6%) Cablevision Systems Corp., 8.00%, 4/15/12 144A 1,875,000 2,001 Echostar DBS Corp., 6.625%, 10/1/14 144A 1,250,000 1,266 Insight Midwest, 9.75%, 10/1/09 950,000 995 Kabel Deutschland GMBH, 10.625%, 7/1/14 144A 1,500,000 1,725 MediaCom LLC, 9.50%, 1/15/13 1,875,000 1,882 NTL Cable PLC, 8.75%, 4/15/14 144A 750,000 846 Panamsat Corp., 9.00%, 8/15/14 144A 1,250,000 1,395 (e)Panamsat Holding Corp., 0.00%, 11/1/14 144A 938,000 645 Roger's Cable, Inc., 6.25%, 6/15/13 776,000 778 Rogers Cable, Inc., 6.75%, 3/15/15 144A 1,127,000 1,152 ------ Total 12,685 ------ Publishing (0.8%) Dex Media, Inc., 8.00%, 11/15/13 750,000 812 WDAC Subsidiary Corp., 8.375%, 12/1/14 144A 1,126,000 1,111 ------ Total 1,923 ------ Total Media 15,811 ------ Services (3.0%) Environmental Services (1.1%) Allied Waste North America, 7.375%, 4/15/14 2,629,000 2,516 ------ Total 2,516 ------ Services -- Other (1.9%) Alderwoods Group, Inc., 7.75%, 9/15/12 144A 619,000 669 Buhrmann U.S., Inc., 8.25%, 7/1/14 937,000 948 Petro Stopping Center, 9.00%, 2/15/12 1,125,000 1,190 United Rentals NA, Inc., 6.50%, 2/15/12 1,626,000 1,585 ------ Total 4,392 ------ Total Services 6,908 ------ Technology (1.9%) Amkor Technologies, Inc., 7.125%, 3/15/11 1,500,000 1,410
108 High Yield Bond Portfolio High Yield Bond Portfolio
Shares/ Value Bonds (95.0%) $ Par $ (000's) ----------------------------------------------------------- Technology continued Magnachip Semiconductor, 8.00%, 12/15/14 144A 1,125,000 1,173 Stats Chippac, Inc., 6.75%, 11/15/11 144A 1,062,000 1,051 Xerox Corp., 7.20%, 4/1/16 751,000 804 ------ Total Technology 4,438 ------ Telecommunications (9.4%) Telecommunications -- Wireless (4.0%) Alamosa Delaware, Inc., 8.50%, 1/31/12 750,000 819 Centennial Communications, 8.125%, 2/1/14 2,000,000 2,055 (e)IWO Escrow Co., 0.00%, 1/15/15 144A 938,000 582 Nextel Communications, 6.875%, 10/31/13 835,000 906 Rogers Wireless, Inc., 6.375%, 3/1/14 938,000 929 Rogers Wireless, Inc., 7.25%, 12/15/12 144A 501,000 531 Rogers Wireless, Inc., 8.00%, 12/15/12 144A 470,000 497 SBA Communications Corp., 8.50%, 12/1/12 144A 1,313,000 1,339 US Unwired, Inc., 10.00%, 6/15/12 1,312,000 1,479 ------ Total 9,137 ------ Telecommunications -- Wireline (5.4%) (e)AT&T Corp., 9.75%, 11/15/31 1,876,000 2,239 Citizens Communications, 9.00% 8/15/31 1,879,000 2,147 MCI, Inc., 7.735%, 5/1/14 2,820,000 3,032 Qwest Communications International, 7.25%, 2/15/11 144A 1,125,000 1,153 Qwest Communications International, 7.50%, 11/1/08 B 375,000 371 Qwest Corp., 7.875%, 9/1/11 144A 1,562,000 1,695 Qwest Services Corp., Inc., 12/15/10, 13.50% 144A 795,000 956 Securus Technologies, Inc., 11.00%, 9/1/11 144A 937,000 937 ------ Total 12,530 ------ Total Telecommunications 21,667 ------ Transportation (3.1%) Horizon Lines LLC, 9.00%, 11/1/12 144A 845,000 908 Laidlaw International, Inc., 10.75%, 6/15/11 708,000 827 OMI Corp., 7.625%, 12/1/13 1,125,000 1,204 Ship Finance International, Ltd., 8.50%, 12/15/13 1,225,000 1,261 Stena AB, 9.625%, 12/1/12 1,075,000 1,214 Stena AB, 7.50%, 11/1/13 750,000 786 TFM SA DE C V, 12.50%, 6/15/12 750,000 876 ------ Total Transportation 7,076 ------
Shares/ Value Bonds (95.0%) $ Par $ (000's) --------------------------------------------------------- Utilities (2.8%) Aquila, Inc., 9.95%, 2/1/11 1,125,000 1,275 Midwest Generation LLC, 8.75%, 5/1/34 935,000 1,061 NRG Energy, Inc., 8.00%, 12/15/13 144A 900,000 981 Reliant Energy, Inc., 6.75%, 12/15/14 844,000 839 Sierra Pacific Resources, 8.625%, 3/15/14 1,125,000 1,271 Utilicorp Canada Finance, 7.75% 6/15/11 940,000 976 ------- Total Utilities 6,403 ------- Total Bonds (Cost: $208,462) 217,775 ------- Preferred Stocks (0.0%) --------------------------------------------------------- Media (0.0%) PTV Inc. 23 0 ------- Total Preferred Stocks (Cost: $0) 0 ------- Common Stocks and Warrants (0.5%) --------------------------------------------------------- Foods (0.5%) B&G Foods, Inc. -- EIS 62,623 938 ------- Total Foods 938 ------- Media (0.0%) NTL, Inc. 12 0 ------- Total Media 0 ------- Telecommunications (0.0%) American Tower Corp. -- Warrants 2,900 67 Horizon PCS, Inc. -- Warrant 144A 2,000 0 IWO Holdings, Inc. 144A 1,150 0 ------- Total Telecommunications 67 ------- Transportation (0.0%) RailAmerica Transportation Corp. 1,400 102 ------- Total Transportation 102 ------- Total Common Stocks and Warrants (Cost: $1,344) 1,107 -------
109 High Yield Bond Portfolio High Yield Bond Portfolio
Shares/ Value Money Market Investments (3.1%) $ Par $ (000's) ---------------------------------------------------------------- Personal Credit Institutions (3.1%) (b)CXC, Inc., 2.20%, 1/3/05 7,200,000 7,199 -------- Total Money Market Investments (Cost: $7,199) 7,199 -------- Total Investments (98.6%) (Cost $217,005)(a) 226,081 -------- Other Assets, Less Liabilities (1.4%) 3,231 -------- Total Net Assets (100.0%) $229,312 --------
144A after the name of a security represents a security exempt from registration under Rule 144A of the securities Act of 1933. These securities may be resold as transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2004, the value of these securities was $91,674, representing 39.98% of net assets. (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $217,005 and the net unrealized appreciation of investments based on that cost was $9,076 which is comprised of $10,806 aggregate gross unrealized appreciation and $1,730 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures or when-issued securities. (d)Defaulted Security (e)Step bond security that presently receives no coupon payment. At the predetermined date, the stated coupon rate becomes effective. The Accompanying Notes are an Integral Part of the Financial Statements 110 High Yield Bond Portfolio Select Bond Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: A stable and relatively high level of long- Invest in high grade corporate bonds, U.S. government $661 million term total return and preservation of bonds and bonds of government agencies. capital
The primary investment objective of the Select Bond Portfolio is to realize as high a level of total return as is consistent with prudent investment risk. A secondary objective is to seek preservation of shareholders' capital. The Select Bond Portfolio's assets are invested primarily in debt securities that are rated investment grade by at least one major rating agency. For the year ended December 31, 2004, the Select Bond Portfolio had a total return of 4.75%, outperforming the Merrill Lynch Domestic Master Index (a broadly-based bond index), which returned 4.34% for the year. (This Index is unmanaged, cannot be invested in directly and does not include administrative expenses or sales charges.) The average return for the Portfolio's peer group, Corporate Debt Funds A Rated, was 4.22% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The bond market posted positive returns in 2004, and high yield bonds significantly outperformed investment grade bonds for a second year in a row. However, there were significant fluctuations in bond returns during the course of the year. Beginning in April of 2004, short-term interest rates began to rise after a sustained period in which they had remained at 45-year lows. With rates on the rise, the second quarter of 2004 was the worst quarter for bond returns since 1980. Bonds reversed course in the third quarter -- an unusual time in which bond prices rose while short-term interest rates were moving up - -- and after delivering negative returns the previous quarter, bonds had their best quarter in two years. The fourth quarter of 2004 was typified by generally rising yields, with the rise most acute at the front end of the yield curve, and the yield curve continued to flatten. With the economy seemingly on stable footing -- growing not too fast and not too slow -- the incremental yields of both high grade corporates and high yield bonds looked appealing. Overall for the year, the Treasury yield curve flattened and corporate credit spreads tightened as bond investors looking for higher yields took on more credit risk rather than locking in longer term bonds. The Select Bond Portfolio's outperformance compared to the Index can be attributed in large part to maintaining a more favorable bias in favor of lower interest rates. Early in 2004, the consensus expectation was for higher interest rates. While the bond market experienced volatility during the year, rates ended the year slightly lower from the beginning of the year. Consequently, the Portfolio's longer duration added value this year. The Portfolio's favorable interest rate positioning was slightly offset by its underweight to corporate bonds which outperformed during 2004. Within the corporate sector, the Portfolio was positioned in higher quality corporates at a time when lower quality bonds performed better. Being underweight mortgage-backed securities also negatively impacted the performance of the Portfolio, but individual security selections in the mortgage-backed sector outperformed. At year end 2004, the Portfolio had a higher weighting in corporate bonds and mortgage-backed securities, a slightly more aggressive quality mix of corporate bonds and a slightly shorter duration. As of December 31, 2004, 36% of the Select Bond Portfolio's assets were in Government and Government Agency securities, 42% in Corporate Bonds, 4% in Short-term Investments and Other Assets, and 18% in Mortgage-Backed and Asset-Backed securities. Heading into 2005, we see the fundamentals in the economy as sound, and the major sectors of the fixed income market appear to be fully valued on a spread basis. Corporate earnings are good and the default risk is low, and we believe spreads will be maintained and interest rates will rise only modestly in the early part of the year. We will continue to look for opportunities to effectuate the Portfolio's primary investment strategy -- to actively manage the Portfolio to take advantage of changes in interest rates and sector, quality, and maturity spread differentials of fixed income securities as we seek as high a level of total return as is consistent with prudent investment risk. Select Bond Portfolio 111 Select Bond Portfolio - -------------------------------------------------------------------------------- [CHART] Relative Performance Select Bond Merrill Lynch Domestic Portfolio Master Index ----------- ---------------------- 12/93 $10,000 $10,000 12/94 9,772 9,718 12/95 11,638 11,517 12/96 12,024 11,931 12/97 13,162 13,083 12/98 14,092 14,243 12/99 13,948 14,107 12/00 15,372 15,761 12/01 16,966 17,073 12/02 19,017 18,850 12/03 20,061 19,627 Citigroup BIG 10,000 11,853 12,282 13,466 14,639 14,517 16,200 17,580 19,354 20,167 21,070 Average Annual Total Return For Periods Ended December 31, 2004 1 Year 5 Years 10 Years Select Bond Portfolio 4.75% 8.54% 7.96% Merrill Lynch Domestic Master Index 4.34% 7.74% 7.74% Citigroup Broad Investment Grade Index 4.48% 7.73% 7.74% Corporate Debt Funds A Rated Funds Lipper Average 4.22% 7.06% 7.22% The performance data quoted represents past performance. Past performance is historical and does not guarantee future performance. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance information, visit www.nmfn.com. This chart assumes an initial investment of $10,000 made on 12/31/94. Returns shown include deductions for management and other portfolio expenses, and reinvestment of all dividends. Returns exclude deductions for separate account sales loads and account fees. Total returns, which reflect deduction of charges for the separate account are shown beginning on page iv of the Performance Summary of the Separate Account report. Bonds and other debt obligations are affected by changes in interest rates, inflation risk and the creditworthiness of their issuers. High yield bonds generally have greater price swings and higher default risks than investment grade bonds. Return of principal is not guaranteed. In contrast to owning individual bonds, there are ongoing fees and expenses associated with owning shares of bond funds. Since the Portfolio invests broadly in U.S. Government, mortgage and corporate bonds, a useful basis for comparing returns has been the Merrill Lynch Domestic Master Index. The Merrill Lynch Domestic Master Index is an unmanaged market value weighted index comprised of U.S. Government, mortgage and investment-grade corporate bonds. The Index measures the income provided by, and the price changes of, the underlying securities. The Index cannot be invested in directly and does not include sales charges. The fund is changing its benchmark index from the Merrill Lynch Domestic Master Index to the Citigroup U.S. Broad Investment Grade Bond Index because the Citigroup Index provides greater transparency as to the composition and characteristics of the index than does the Merrill Lynch Index. The greater transparency allows the fund to enhance its analysis of performance relative to the benchmark. The Citigroup U.S. Broad Investment Grade Bond Index is designed to track the performance of bonds issued in the U.S. investment-grade bond market. The index is market-capitalization-weighted and includes fixed-rate Treasury, government-sponsored, mortgage, asset-backed, and investment-grade (BBB-/Baa3) issues with a maturity of one year or longer and a minimum amount outstanding of US$1 billion for Treasuries, US$5 billion for mortgages, and US$200 million for credit, asset-backed, and government-sponsored issues. The Lipper Variable Insurance Products (VIP) Corporate Debt Funds A Rated Average is calculated by Lipper Analytical Services, Inc. and reflects the average investment return of portfolios underlying variable life and annuity products. The category consists of Funds that invest primarily in corporate debt issues rated "A" or better or government issues. Source: Lipper, Inc. [CHART] Percentage Holdings 12/31/04 Corporate Bonds .................................. 42% Government and Agency Bonds ............... 36% Mortgage and Asset Backed Securities ...... 18% Short-Term Investments & Other Net Assets ........ 4% Percentage Holdings are based on Net Assets. Percentage Holdings are subject to change. The Corporate Bonds sector includes bonds of companies headquartered outside the United States. The Government and Government Agencies category includes taxable bonds of domestic and foreign governments. Consistent with the Portfolio's stated parameters, no more than 10% of the Portfolio is invested in foreign securities, and no more than 10% is invested in high-yield securities. 112 Select Bond Portfolio Select Bond Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December December 2004 31, 2004 31, 2004* ------------------------------------------------------- Actual $1,000.00 $1,046.00 $1.54 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,023.32 $1.53 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.30%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Select Bond Portfolio 113 Select Bond Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Revenue Bonds (0.4%) $ Par $ (000's) ---------------------------------------------------------- Municipal Bonds -- Revenue (0.4%) Nashville & Davidson County, Tennessee Health and Educational Facilities Board of The Metropolitan Government, 0.00%, 6/1/21, RB 6,500,000 2,964 ------ Total Revenue Bonds (Cost: $2,837) 2,964 ------ Corporate Bonds (42.1%) ---------------------------------------------------------- Auto Related (3.0%) American Honda Finance, 4.50%, 5/26/09 144A 4,120,000 4,192 Ford Motor Credit Co., 5.70%, 1/15/10 1,230,000 1,241 Ford Motor Credit Co., 7.375%, 10/28/09 1,900,000 2,049 General Motors Acceptance Corp., 5.625%, 5/15/09 2,450,000 2,450 General Motors Acceptance Corp., 6.75%, 12/1/14 1,275,000 1,277 Household Finance Corp., 4.125%, 11/16/09 2,330,000 2,317 Toyota Motor Credit Corp., 2.70%, 1/30/07 2,500,000 2,464 Toyota Motor Credit Corp., 5.65%, 1/15/07 4,000,000 4,172 ------ Total 20,162 ------ Automobiles And Other Motor Vehicles (0.6%) Ford Motor Co., 7.45%, 7/16/31 800,000 805 General Motors Corp., 8.375%, 7/15/33 2,800,000 2,901 ------ Total 3,706 ------ Beverages, Malt Beverages (2.4%) Anheuser-Busch Companies, Inc., 7.00%, 12/1/25 4,200,000 4,450 Anheuser-Busch Companies, Inc., 7.50%, 3/15/12 378,000 450 Coca-Cola Enterprises, Inc., 5.25%, 5/15/07 5,000,000 5,197 Coca-Cola Enterprises, Inc., 5.375%, 8/15/06 1,500,000 1,548 Coca-Cola Enterprises, Inc., 5.75%, 3/15/11 4,000,000 4,322 ------ Total 15,967 ------ Broad Woven Fabric Mills, Manmade (0.1%) (d)Polysindo International Finance, 11.375%, 6/15/06 4,200,000 378 ------ Total 378 ------ Cable and Other Pay Television Services (0.6%) Comcast Corp., 5.30%, 1/15/14 2,500,000 2,579 Time Warner Entertainment Co., 8.375%, 7/15/33 830,000 1,072 ------ Total 3,651 ------
Shares/ Value Corporate Bonds (42.1%) $ Par $ (000's) ----------------------------------------------------------- Chemicals and Allied Products (0.3%) Monsanto Co., 4.00%, 5/15/08 2,275,000 2,282 ------ Total 2,282 ------ Commercial Banks (5.8%) Bank of America Corp., 5.375%, 6/15/14 740,000 772 Bank of America Corp., 7.40%, 1/15/11 1,133,000 1,312 Bank One Corp., 5.25%, 1/30/13 4,000,000 4,108 Citigroup, Inc., 4.50%, 7/29/09 3,450,000 3,487 HBOS Treasury Services PLC, 4.00%, 9/15/09 144A 3,400,000 3,390 Key Bank NA, 5.80%, 7/1/14 2,970,000 3,145 PNC Bank NA, 5.25%, 1/15/17 4,400,000 4,439 Rabobank Capital Fund II, 5.26%, 12/31/13 144A 2,470,000 2,513 Royal Bank of Scotland Group PLC, 5.05%, 1/8/15 5,320,000 5,378 UnionBanCal Corp., 5.25%, 12/16/13 500,000 507 US Bank NA, 4.95%, 10/30/14 3,065,000 3,076 Wachovia Bank NA, 4.80%, 11/1/14 1,725,000 1,714 Wells Fargo & Co., 4.20%, 1/15/10 5,000,000 5,020 ------ Total 38,861 ------ Computer and Other Data Processing Service (0.8%) Gtech Holdings Corp., 4.75%, 10/15/10 5,510,000 5,531 ------ Total 5,531 ------ Consumer Non-Cyclical (1.8%) The Clorox Co., 4.20%, 1/15/10 144A 2,200,000 2,211 The Clorox Co., 5.00%, 1/15/15 144A 1,380,000 1,404 Estee Lauder, Inc., 5.75%, 10/15/33 1,800,000 1,851 The Gillette Co., 2.50%, 6/1/08 3,300,000 3,208 Johnson & Johnson, Inc., 6.625%, 9/1/09 2,750,000 3,061 ------ Total 11,735 ------ Crude Petroleum and Natural Gas (1.9%) Conoco Funding Co., 6.35%, 10/15/11 3,330,000 3,717 Occidental Petroleum, 4.00%, 11/30/07 1,500,000 1,510 Occidental Petroleum, 7.65%, 2/15/06 2,330,000 2,439 Occidental Petroleum, 8.45%, 2/15/29 1,430,000 1,937 Occidental Petroleum, 10.125%, 9/15/09 1,000,000 1,234 XTO Energy Inc., 5.00%, 1/31/15 144A 1,670,000 1,660 ------ Total 12,497 ------ Data Processing and Preparation (0.7%) First Data Corp., 3.90%, 10/1/09 4,500,000 4,483 ------ Total 4,483 ------ Eating Places (0.4%) McDonald's Corp., 3.875%, 8/15/07 1,550,000 1,555 McDonald's Corp., 5.375%, 4/30/07 1,200,000 1,251 ------ Total 2,806 ------
114 Select Bond Portfolio Select Bond Portfolio
Shares/ Value Corporate Bonds (42.1%) $ Par $ (000's) ----------------------------------------------------------- Electric Services (2.8%) FPL Group Capital, Inc., 4.086%, 2/16/07 1,870,000 1,890 Indiana Michigan Power, 5.05%, 11/15/14 1,560,000 1,559 Kiowa Power Partners LLC, 4.811%, 12/30/13 144A 890,000 892 Kiowa Power Partners LLC, 5.737%, 3/30/21 144A 2,525,000 2,535 Oncor Electric Delivery, 6.375%, 1/15/15 810,000 892 PacifiCorp, 5.45%, 9/15/13 3,000,000 3,140 PPL Electric Utilities Corp., 4.30%, 6/1/13 4,900,000 4,730 Public Service Electric & Gas Corp., 5.00%, 1/1/13 1,000,000 1,021 Virginia Electric & Power Co., 5.25%, 12/15/15 2,275,000 2,313 ------ Total 18,972 ------ Electrical Equipment and Supplies (0.6%) Cooper Industries, Inc., 5.50%, 11/1/09 4,000,000 4,232 ------ Total 4,232 ------ Federal Savings Institutions (0.6%) World Savings Bank FSB, 4.125%, 12/15/09 4,000,000 4,001 ------ Total 4,001 ------ Fire, Marine and Casualty Insurance (2.0%) Berkley (WR) Corp., 9.875%, 5/15/08 2,860,000 3,362 Berkshire Hathaway, Inc., 4.625%, 10/15/13 5,980,000 5,962 Berkshire Hathaway, Inc., 5.10%, 7/15/14 144A 900,000 922 Berkshire Hathaway, Inc., 3.40%, 7/2/07 144A 1,500,000 1,496 Progressive Corp., 6.375%, 1/15/12 1,415,000 1,562 ------ Total 13,304 ------ Gas Transmission And Distribution (0.4%) Consolidated Natural Gas Co., 5.00%, 12/1/14 2,345,000 2,347 ------ Total 2,347 ------ Media (0.6%) Time Warner, Inc., 6.875%, 5/1/12 1,670,000 1,902 Viacom, Inc., 5.625%, 8/15/12 1,670,000 1,786 ------ Total 3,688 ------ Miscellaneous Business Credit Institutions (0.2%) Textron Financial Corp., 2.75%, 6/1/06 1,300,000 1,284 ------ Total 1,284 ------ Motors and Generators (0.7%) Emerson Electric Co., 4.50%, 5/1/13 1,055,000 1,046 Emerson Electric Co., 5.75%, 11/1/11 796,000 863 Emerson Electric Co., 5.85%, 3/15/09 2,400,000 2,574 ------ Total 4,483 ------
Shares/ Value Corporate Bonds (42.1%) $ Par $ (000's) ---------------------------------------------------------- Personal Credit Institutions (0.5%) SLM Corp., 4.00%, 1/15/10 3,020,000 2,997 ------ Total 2,997 ------ Petroleum Refining (0.5%) Amerada Hess Corp., 7.125%, 3/15/33 1,670,000 1,836 Valero Energy Corp., 4.75%, 6/15/13 1,670,000 1,650 ------ Total 3,486 ------ Pharmaceutical Preparations (2.6%) Abbott Laboratories, 3.75%, 3/15/11 2,480,000 2,430 Astrazeneca PLC, 5.40%, 6/1/14 3,570,000 3,754 GlaxoSmithKline Capital, Inc., 4.375%, 4/15/14 3,530,000 3,439 Merck & Co., Inc., 6.40%, 3/1/28 315,000 343 Merck & Co., Inc. 5.95%, 12/1/28 2,306,000 2,387 Pfizer, Inc., 4.50%, 2/15/14 1,750,000 1,731 Pfizer, Inc., 5.625%, 2/1/06 1,875,000 1,925 Pfizer, Inc., 5.625%, 4/15/09 1,100,000 1,169 ------ Total 17,178 ------ Phone Communications Except Radiophone (2.3%) BellSouth Corp., 5.20%, 9/15/14 3,330,000 3,394 SBC Communications, Inc., 5.10%, 9/15/14 3,250,000 3,280 Sprint Capital Corp., 8.375%, 3/15/12 3,330,000 4,056 Telecom Italia Capital, 4.95%, 9/30/14 144A 1,300,000 1,274 Verizon Global Funding Corp., 4.375%, 6/1/13 3,330,000 3,245 ------ Total 15,249 ------ Radio,TV Electronic Stores (1.1%) RadioShack Corp., 6.95%, 9/1/07 1,500,000 1,623 RadioShack Corp., 7.375%, 5/15/11 4,885,000 5,552 ------ Total 7,175 ------ Railroads, Line-Haul Operating (1.5%) Burlington Northern Santa Fe, 6.125%, 3/15/09 3,000,000 3,224 Union Pacific Corp., 3.875%, 2/15/09 3,000,000 2,978 Union Pacific Corp., 7.375%, 9/15/09 3,000,000 3,389 ------ Total 9,591 ------ Real Estate Investment Trusts (0.9%) ERP Operating LP, 4.75%, 6/15/09 1,250,000 1,276 ERP Operating LP, 5.25%, 9/15/14 3,400,000 3,444 First Industrial LP, 5.25%, 6/15/09 1,275,000 1,311 ------ Total 6,031 ------ Retail-Retail Stores (2.2%) Fortune Brands, Inc., 4.875%, 12/1/13 1,370,000 1,390 Home Depot, Inc., 3.75%, 9/15/09 144A 7,500,000 7,433 Limited Brands, Inc., 6.95%, 3/1/33 2,706,000 2,944 VF Corp., 6.00%, 10/15/33 2,850,000 2,909 ------ Total 14,676 ------
Select Bond Portfolio 115 Select Bond Portfolio
Shares/ Value Corporate Bonds (42.1%) $ Par $ (000's) ---------------------------------------------------------- Savings Institutions Except Federal (0.4%) U.S. Central Credit Union, 2.75%, 5/30/08 2,600,000 2,517 ------- Total 2,517 ------- Security Brokers and Dealers (2.5%) Credit Suisse First Boston USA, Inc., 4.70%, 6/1/09 3,900,000 3,991 Goldman Sachs Group, Inc., 5.15%, 1/15/14 4,500,000 4,560 Merrill Lynch & Co., Inc., 5.00%, 1/15/15 3,540,000 3,526 Morgan Stanley, 5.30%, 3/1/13 4,075,000 4,196 ------- Total 16,273 ------- Steel Wire and Related Products (0.5%) Hubbell, Inc., 6.375%, 5/15/12 3,200,000 3,487 ------- Total 3,487 ------- Television Broadcasting Stations (0.5%) Clear Channel Communications, 5.50%, 12/15/16 3,020,000 2,977 ------- Total 2,977 ------- Wines and Distilled Beverages (0.3%) Brown Forman Corp., 3.00%, 3/15/08 1,750,000 1,711 ------- Total 1,711 ------- Total Corporate Bonds (Cost: $277,333) 277,718 ------- Government and Agency Bonds (36.0%) ---------------------------------------------------------- Federal Government & Agencies (36.0%) Aid-Israel, 5.50%, 3/18/33 1,890,000 1,984 BECCS, 0.00%, 11/15/11 5,600,000 5,264 Federal Home Loan Bank, 5.54%, 1/8/09 3,700,000 3,952 Federal Home Loan Mortgage Corp., 6.50%, 5/1/34 2,560,715 2,688 Federal Home Loan Mortgage Corp., 4.50%, 5/1/19 2,947,111 2,939 Federal Home Loan Mortgage Corp., 5.00%, 10/1/19 4,070,133 4,135 Federal Home Loan Mortgage Corp., 5.50%, 9/1/19 1,484,160 1,534 Federal Home Loan Mortgage Corp., 7.50%, 10/1/27 562,389 604 Housing & Urban Development, 6.08%, 8/1/13 4,000,000 4,408 Housing & Urban Development, 6.17%, 8/1/14 3,000,000 3,334 State of Israel, 7.25%, 12/15/28 3,465,000 3,904 Tennessee Valley Authority Stripped, 0.00%, 4/15/42 3,600,000 2,690 US Treasury, 2.25%, 4/30/06 71,475,000 70,884 (f)US Treasury, 2.50%, 10/31/06 25,950,000 25,708 (f)US Treasury, 2.875%, 11/30/06 25,000,000 24,922 (f)US Treasury, 3.00%, 11/15/07 27,900,000 27,729
Government and Agency Bonds Shares/ Value (36.0%) $ Par $ (000's) --------------------------------------------------------- Federal Government & Agencies continued US Treasury, 3.50%, 12/15/09 24,410,000 24,292 (f)US Treasury, 4.25%, 11/15/14 8,244,000 8,266 US Treasury, 5.375%, 2/15/31 16,886,000 18,259 ------- Total Government and Agency Bonds (Cost: $236,898) 237,496 ------- Mortgage and Asset Backed Securities (17.7%) --------------------------------------------------------- Boat Dealers (0.0%) Nationscredit Grantor Trust, Series 1997-2, Class A1, 6.35%, 4/15/14 174,901 175 ------- Total 175 ------- Commercial Mortgages (5.1%) Asset Securitization Corp., Series 1997-D5, Class PS1, 1.62%, 2/14/43 IO 10,322,513 540 Chase Commercial Mortgage Securities Corp., Series 1997-1, Class B, 7.37%, 4/19/07 1,000,000 1,075 Chase Commercial Mortgage Securities Corp., Series 1997-2, Class A2, 6.60%, 11/19/07 4,071,450 4,327 Chase Commercial Mortgage Securities Corp., Series 1997-2, Class B, 6.60%, 11/19/07 2,000,000 2,149 Commercial Mortgage Acceptance Corp., Series 1997-ML1, Class B, 6.64%, 12/15/30 2,000,000 2,147 Credit Suisse First Boston Mortgage Securities Corp., Series 1997-C1, Class A2, 7.26%, 6/20/29 144A 1,242,231 1,328 Credit Suisse First Boston Mortgage Securities Corp., Series 1997-C1, Class B, 7.28%, 6/20/29 144A 1,500,000 1,620 Criimi Mae Commercial Mortgage Trust, Series 1998-C1, Class A1, 7.00%, 11/2/06 144A 2,844,391 2,902 Criimi Mae Commercial Mortgage Trust, Series 1998-C1, Class B, 7.00%, 11/2/11 144A 4,000,000 4,379 DLJ Commercial Mortgage Corp., Series 1998-CF1, Class S, 0.70%, 1/15/18 IO 104,776,208 2,990 DLJ Mortgage Acceptance Corp., Series 1997-CF2, Class S, 0.35%, 10/15/30 IO 144A 76,645,402 1,411 Enterprise Mortgage Acceptance Co., Series 1998-1, Class IO, 1.37%, 1/15/23 IO 144A 21,178,658 913 The Equitable Life Assurance Society, Series 174, Class C1, 7.52%, 5/15/06 144A 2,000,000 2,099 Midland Realty Acceptance Corp., Series 1996-C2, Class AEC, 1.35%, 1/25/29 IO 144A 6,074,123 151
116 Select Bond Portfolio Select Bond Portfolio
Mortgage and Asset Backed Shares/ Value Securities (17.7%) $ Par $ (000's) ----------------------------------------------------------- Commercial Mortgages continued Mortgage Capital Funding, Inc., Series 1997-MC1, Class A3, 7.29%, 3/20/27 2,058,037 2,128 Nomura Asset Securities Corp., Series 1998-D6, Class A2, 6.99%, 3/15/30 2,800,000 3,254 (d)RMF Commercial Mortgage Pass- Through, Series 1997-1, Class F, 7.47%, 1/15/19 144A 1,800,000 180 ------ Total 33,593 ------ Federal Government & Agencies (11.1%) Federal National Mortgage Association, 4.00%, 6/1/19 1,509,479 1,474 Federal National Mortgage Association, 4.50%, 8/1/19 1,570,130 1,566 Federal National Mortgage Association, 5.00%, 3/1/34 9,958,739 9,900 Federal National Mortgage Association, 5.50%, 9/1/34 10,569,889 10,736 Federal National Mortgage Association, 5.97%, 10/1/08 3,516,554 3,722 Federal National Mortgage Association, 6.22%, 2/1/06 1,748,315 1,781 Federal National Mortgage Association, 6.265%, 10/1/08 2,758,489 2,943 Federal National Mortgage Association, 6.36%, 4/1/08 3,417,338 3,628 Federal National Mortgage Association, 6.75%, 4/25/18 1,751,059 1,838 Federal National Mortgage Association, 6.75%, 12/25/23 633,935 644 Federal National Mortgage Association, 7.36%, 4/1/11 2,769,868 3,134 Federal National Mortgage Association, 11.00%, 12/1/12 12,716 14 Federal National Mortgage Association, 11.00%, 9/1/17 53,538 59 Federal National Mortgage Association, 11.00%, 12/1/17 18,280 20 Federal National Mortgage Association, 11.00%, 2/1/18 37,283 42 Federal National Mortgage Association, 11.50%, 4/1/18 22,444 25 Federal National Mortgage Association, 12.00%, 9/1/12 120,534 134 Federal National Mortgage Association, 12.00%, 12/1/12 43,636 49 Federal National Mortgage Association, 12.00%, 9/1/17 24,625 28 Federal National Mortgage Association, 12.00%, 10/1/17 22,321 25 Federal National Mortgage Association, 12.00%, 12/1/17 10,557 12 Federal National Mortgage Association, 12.00%, 2/1/18 35,966 41 Federal National Mortgage Association, 12.25%, 1/1/18 18,946 22
Mortgage and Asset Backed Shares/ Value Securities (17.7%) $ Par $ (000's) ---------------------------------------------------------- Federal Government & Agencies continued Federal National Mortgage Association, 12.50%, 4/1/18 5,068 6 Federal National Mortgage Association, 13.00%, 11/1/12 26,212 30 Federal National Mortgage Association, 13.00%, 11/1/17 9,591 11 Federal National Mortgage Association, 13.00%, 12/1/17 7,186 8 Federal National Mortgage Association, 13.00%, 2/1/18 41,354 48 Federal National Mortgage Association, 14.00%, 12/1/17 16,073 19 Federal National Mortgage Association, TBA, 6.00%, 1/1/35 5,000,000 5,169 Government National Mortgage Association, 5.50%, 10/15/31 97,424 100 Government National Mortgage Association, 5.50%, 11/15/31 20,312 21 Government National Mortgage Association, 5.50%, 12/15/31 475,132 486 Government National Mortgage Association, 5.50%, 1/15/32 635,821 651 Government National Mortgage Association, 5.50%, 2/15/32 286,791 293 Government National Mortgage Association, 5.50%, 3/15/32 381,508 391 Government National Mortgage Association, 5.50%, 4/15/32 27,691 28 Government National Mortgage Association, 5.50%, 7/15/32 42,127 43 Government National Mortgage Association, 5.50%, 9/15/32 7,790,719 7,970 Government National Mortgage Association, 7.00%, 5/15/23 37,828 40 Government National Mortgage Association, 7.50%, 4/15/22 20,593 22 Government National Mortgage Association, 7.50%, 10/15/23 62,543 68 Government National Mortgage Association, 7.50%, 11/15/25 1,046 1 Government National Mortgage Association, 7.50%, 5/15/26 1,620 2 Government National Mortgage Association, 7.50%, 1/15/27 14,677 16 Government National Mortgage Association, 7.50%, 2/15/27 31,381 34 Government National Mortgage Association, 7.50%, 3/15/27 8,456 9 Government National Mortgage Association, 7.50%, 4/15/27 7,084 8 Government National Mortgage Association, 7.50%, 8/15/27 871 1 Government National Mortgage Association, 7.50%, 6/15/28 29,653 32 Government National Mortgage Association, 8.00%, 1/15/26 36,534 40
Select Bond Portfolio 117 Select Bond Portfolio
Mortgage and Asset Backed Shares/ Value Securities (17.7%) $ Par $ (000's) ---------------------------------------------------------- Federal Government & Agencies continued Government National Mortgage Association, 8.00%, 2/15/26 33,272 36 Government National Mortgage Association, 8.00%, 8/15/26 67,701 74 Government National Mortgage Association, 8.00%, 9/15/26 21,819 24 Government National Mortgage Association, 8.00%, 12/15/26 9,979 11 Government National Mortgage Association, 8.00%, 3/15/27 43,926 48 Government National Mortgage Association, 8.00%, 4/15/27 164,597 179 Government National Mortgage Association, 8.00%, 6/15/27 33,145 36 Government National Mortgage Association, 8.00%, 7/15/27 19,299 21 Government National Mortgage Association, 8.00%, 9/15/27 20,834 23 Government National Mortgage Association, 8.50%, 3/15/23 381 0 Government National Mortgage Association, 8.50%, 6/15/24 18,166 20 Government National Mortgage Association, 8.50%, 7/15/24 11,491 13 Government National Mortgage Association, 8.50%, 11/15/24 65,652 73 Government National Mortgage Association, 8.50%, 2/15/25 15,102 17 Government National Mortgage Association, 11.00%, 1/15/18 919,980 1,030 Government National Mortgage Association, TBA, 4.50%, 1/1/35 14,730,455 14,361 ------- Total 73,350 ------- Housing Programs (0.0%) Rural Housing Trust 1987-1, Series 1, Class D, 6.33%, 4/1/26 254,487 255 ------- Total 255 ------- International Affairs (0.4%) Overseas Private Investment, 4.10%, 11/15/14 2,875,920 2,865 ------- Total 2,865 ------- Mobil Home Dealers (0.1%) Mid-State Trust, Series 6, Class A3, 7.54%, 7/1/35 587,218 636 ------- Total 636 ------- Retail-Retail Stores (1.0%) LB Mortgage Trust, Series 1991-2, Class A3, 8.39%, 1/20/17 5,620,815 6,411 ------- Total 6,411 ------- Total Mortgage and Asset Backed Securities (Cost: $115,759) 117,285 -------
Shares/ Value Money Market Investment (15.3%) $ Par $ (000's) ----------------------------------------------------------- Autos (2.9%) BMW U.S. Capital Corp., 2.30%, 1/14/05 5,000,000 4,996 Daimler Chrysler Auto, 2.24%, 1/11/05 5,000,000 4,997 Fcar Owner Trust I, 2.25%, 1/5/05 5,000,000 4,998 New Center Asset Trust, 2.31%, 1/18/05 5,000,000 4,995 ------ Total 19,986 ------ Federal Government & Agencies (0.3%) Federal Home Loan Mortgage Co., 2.42%, 3/22/05 1,800,000 1,791 ------ Total 1,791 ------ Finance Lessors (2.2%) Ranger Funding Co. LLC, 2.25%, 1/14/05 5,000,000 4,996 Thunder Bay Funding, Inc, 2.27%, 1/20/05 5,000,000 4,994 Windmill Funding Corp., 2.20%, 1/4/05 5,000,000 4,999 ------ Total 14,989 ------ Finance Services (1.1%) Ciesco LP, 2.20%, 1/3/05 1,970,000 1,970 Preferred Receivable Funding, 2.22%, 1/4/05 5,000,000 4,999 ------ Total 6,969 ------ Flavoring Extracts and Syrups (0.8%) Coca-Cola Co., 2.31%, 1/20/05 5,000,000 4,994 ------ Total 4,994 ------ Miscellaneous Business Credit Institutions (0.8%) Catepillar Financial, 2.30%, 1/19/05 5,000,000 4,994 ------ Total 4,994 ------ Petroleum Refining (0.4%) Chevrontexaco Funding Corp, 2.25%, 1/5/05 2,700,000 2,699 ------ Total 2,699 ------ Security Brokers and Dealers (2.3%) The Goldman Sachs Group, 2.33%, 1/27/05 5,000,000 4,992 Merrill Lynch, 2.28%, 1/24/05 5,000,000 4,992 Morgan Stanley Dean Witter, 2.34%, 1/26/05 5,000,000 4,992 ------ Total 14,976 ------
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Shares/ Value Money Market Investment (15.3%) $ Par $ (000's) ------------------------------------------------------------ Short Term Business Credit (3.7%) (b)American Express Credit, 2.26%, 1/6/05 5,000,000 4,999 (b)American General Financial Corp., 2.38%, 1/21/05 5,000,000 4,993 (b)Old Line Funding Corp., 2.24%, 1/11/05 5,000,000 4,997 (b)Sheffield Receivables, 2.26%, 1/18/05 5,000,000 4,995 (b)USAA Cap Corp., 2.27%, 1/10/05 5,000,000 4,997 ------- Total 24,981 ------- Utilities (0.8%) National Rural Utility, 2.33%, 1/25/05 5,000,000 4,992 ------- Total 4,992 ------- Total Money Market Investment (Cost: $101,371) 101,371 ------- Total Investments (111.5%) (Cost $734,198)(a) 736,834 ------- Other Assets, Less Liabilities (-11.5%) (75,807) ------- Total Net Assets (100.0%) 661,027 -------
144A after the name of a security represents a security exempt from registration under Rule 144A of the securities Act of 1933. These securities may be resold as transactions exempt from registration, normally to qualified institutional buyers. At December 31, 2004, the value of these securities was $44,905, representing 6.79% of net assets. IO -- Interest Only Security RB -- Revenue Bond (a)At December 31, 2004 the aggregate cost of securities for federal tax purposes (in thousands) was $738,383 and the net unrealized depreciation of investments based on that cost was $1,549 which is comprised of $10,951 aggregate gross unrealized appreciation and $12,500 aggregate gross unrealized depreciation. (b)All or a portion of the securities have been committed as collateral for open futures positions or when-issued securities. Information regarding open futures contracts as of period end is summarized below.
Unrealized Appreciation/ Number of Expiration Depreciation Issuer (000's) Contracts Date (000's) ---------------------------------------------------- US Ten Year Treasury Note 45 3/05 $24 (Total Notional Value at December 31, 2004, $5,062)
(d)Defaulted Security (f)All or a portion of the securities have been loaned. See Note 6. The Accompanying Notes are an Integral Part of the Financial Statements Select Bond Portfolio 119 Money Market Portfolio - -------------------------------------------------------------------------------- Objective: Portfolio Strategy: Net Assets: Maximum current income consistent Achieve stability of capital by investing in short-term debt $344 million with liquidity and stability of capital securities.
The Money Market Portfolio's investment objective is to generate maximum current income consistent with liquidity and stability of capital. The Money Market Portfolio, which invests only in high quality commercial paper and other short-term debt securities with maturities generally not exceeding one year, is the least risky of the Portfolios, providing a moderate return in line with prevailing short-term interest rates. The Portfolio will attempt to maximize its return by trading to take advantage of changing money market conditions and trends. The Money Market Portfolio will also trade to take advantage of what are believed to be disparities in yield relationships between different money market instruments. This procedure may increase or decrease the Portfolio's yield depending upon management's ability to correctly time and execute such transactions. The Money Market Portfolio intends to purchase only securities that mature within a year except for securities which are subject to repurchase agreements. Accordingly, the level of purchases will be relatively high. However, as transaction costs on Money Market Portfolio investments are generally not substantial, the high level of purchases will not adversely affect the Portfolio's net asset value or net income. The main determinant of returns from the Money Market Portfolio is short-term interest rates in general. For the year ended December 31, 2004, the return on the Portfolio was 1.43%. The Portfolio outperformed its peer group, Money Market Funds, which had an average return of 0.83% for the same period, according to Lipper Analytical Services, Inc. ("Lipper"), an independent mutual fund ranking agency. The Portfolio's outperformance relative to the Index resulted mainly from a management fee waiver of 30 basis points during all of 2004, which ended on December 31, 2004. Throughout the first five months of 2004, short-term interest rates remained at their lowest levels in many years. But in an effort to moderate economic growth, the Federal Reserve began increasing short-term rates in June, when it raised the federal funds rate by 25 basis points. By year end, the Federal Reserve had raised rates a total of five times, and the fed funds rate, which stood at 1.00% in January, ended the year at 2.25%. The Federal Reserve governors believe short-term rates are at a level that encourages above average economic activity. They have been methodically raising these short-term interest rates to bring them to a level consistent with moderate economic growth and thereby reducing inflationary pressures. The increase in short-term rates has not impacted the supply of money market eligible securities. Rather, stability in long-term interest rates has had a larger effect as companies have been able to extend the maturities of their debt to take advantage of the low rate environment, thereby reducing their short-term debt. Compared to its benchmark, the Money Market Portfolio had a slightly longer average maturity earlier in 2004. The Portfolio's barbell composition (with a large portion of assets invested very short-term) provided the liquidity to reinvest in higher yielding securities as rates were on the rise, which allowed the Portfolio returns to keep pace with the increase in short-term interest rates. At the end of 2004, the average maturity of the Portfolio was in line with its benchmark. Anticipating more rate increases going forward, we are slowly increasing the Portfolio's average maturity to take advantage of the steepness of the yield curve. AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE PORTFOLIO SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE SO IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE PORTFOLIO. 120 Money Market Portfolio Money Market Portfolio - -------------------------------------------------------------------------------- Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2004 to December 31, 2004). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Beginning Paid During Account Ending Period July 1, Value Account Value 2004 to July 1, December 31, December 31, 2004 2004 2004* ------------------------------------------------------- Actual $1,000.00 $1,008.70 $0.00 ------------------------------------------------------- Hypothetical (5% return before expenses) $1,000.00 $1,024.83 $0.00 -------------------------------------------------------
*Expenses are equal to the Fund's annualized expense ratio of 0.00%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). For periods after December 31, 2004, the Fund's Investment Adviser is no longer waiving its 0.30% management fee. In the absence of such fee waiver, the ending account value and expenses paid during the period would have been $1,008.70 and $1.51, respectively, for the actual expense example and $1,023.32 and $1.53, respectively, for the hypothetical expense example. Money Market Portfolio 121 Money Market Portfolio Northwestern Mutual Series Fund, Inc. Schedule of Investments December 31, 2004
Shares/ Value Money Market Investments (80.6%) $ Par $ (000's) ----------------------------------------------------------- Agricultural Services (2.3%) Cargill, Inc., 2.30%, 1/20/05 8,000,000 $ 7,990 ------- Total 7,990 ------- Autos (17.6%) Daimler Chrysler Auto, 2.09%, 1/3/05 5,000,000 4,999 Daimler Chrysler Auto, 2.25%, 1/12/05 8,000,000 7,995 Fcar Owner Trust I, 2.18%, 1/6/05 8,500,000 8,496 Fcar Owner Trust I, 2.34%, 1/24/05 7,500,000 7,489 New Center Asset Trust, 2.19%, 1/12/05 8,000,000 7,995 New Center Asset Trust, 2.25%, 1/28/05 8,000,000 7,987 Toyota Motor Credit Corp., 2.21%, 1/28/05 8,000,000 7,987 Toyota Motor Credit Corp., 2.30%, 2/7/05 8,000,000 7,981 ------- Total 60,929 ------- Finance Lessors (14.1%) Delaware Funding, 2.29%, 2/2/05 8,000,000 7,984 Ranger Funding Co. LLC, 2.25%, 1/14/05 8,000,000 7,994 Ranger Funding Co. LLC, 2.33%, 1/24/05 8,000,000 7,988 Thunder Bay Funding, Inc., 2.15%, 1/18/05 8,500,000 8,491 Thunder Bay Funding, Inc., 2.34%, 2/1/05 7,500,000 7,485 Windmill Funding Corp., 2.04%, 1/3/05 8,500,000 8,499 ------- Total 48,441 ------- Finance Services (4.5%) Ciesco LP, 2.20%, 1/3/05 4,410,000 4,409 Preferred Receivable Funding, 2.21%, 1/18/05 7,000,000 6,993 Preferred Receivable Funding, 2.34%, 2/1/05 4,000,000 3,992 ------- Total 15,394 ------- Flavoring Extracts and Syrups (2.3%) Coca-Cola Co., 2.31%, 1/20/05 8,000,000 7,990 ------- Total 7,990 ------- Miscellaneous Business Credit Institutions (5.8%) Catepillar Financial Services, 2.20%, 1/11/05 6,000,000 5,997 Catepillar Financial Services, 2.55%, 6/1/05 4,000,000 4,000 General Electric Capital Corp., 2.00%, 1/4/05 5,000,000 4,999 General Electric Capital Corp., 2.46%, 7/9/07 5,000,000 5,000 ------- Total 19,996 -------
Shares/ Value Money Market Investments (80.6%) $ Par $ (000's) ---------------------------------------------------------- Personal Credit Institutions (6.8%) American General, 2.11%, 1/3/05 5,500,000 5,499 American General, 2.37%, 1/28/05 5,500,000 5,490 Associates Corp., 2.64875%, 6/27/05 5,000,000 5,000 Household Finance Corp., 2.28%, 2/4/05 7,500,000 7,484 ------- Total 23,473 ------- Pharmaceutical Preparations (2.5%) Pfizer, Inc., 2.00%, 1/4/05 8,500,000 8,499 ------- Total 8,499 ------- Security Brokers and Dealers (8.5%) Citigroup Global Markets, 2.04%, 1/11/05 5,200,000 5,197 The Goldman Sachs Group, 2.33%, 1/27/05 8,000,000 7,987 The Goldman Sachs Group, 2.33%, 1/31/05 8,000,000 7,984 Morgan Stanley Dean Witter, 2.34%, 1/26/05 8,000,000 7,987 ------- Total 29,155 ------- Short Term Business Credit (11.6%) CXC, Inc., 2.15%, 1/11/05 8,000,000 7,995 Old Line Funding Corp., 2.32%, 1/24/05 8,000,000 7,988 Old Line Funding Corp., 2.35%, 2/7/05 8,000,000 7,981 Sheffield Receivables, 2.26%, 1/18/05 8,000,000 7,991 Sheffield Receivables, 2.28%, 1/25/05 8,000,000 7,988 ------- Total 39,943 ------- Utilities (4.6%) National Rural Utility, 2.23%, 1/10/05 7,800,000 7,796 National Rural Utility, 2.32%, 1/18/05 8,000,000 7,991 ------- Total 15,787 ------- Total Money Market Investments (Cost: $277,597) 277,597 ------- Corporate Bonds (15.2%) ---------------------------------------------------------- Banks (6.1%) Bank of America Corp., 7.875%, 5/16/05 2,200,000 2,248 Citigroup, Inc., 2.56%, 2/14/05 4,500,000 4,501 First Union Corp., 7.55%, 8/18/05 2,200,000 2,271 HBOS Treasury Services PLC, 2.53%, 3/14/05 3,500,000 3,501 Royal Bank of Canada New York, 2.3425%, 1/24/05 4,500,000 4,500 Wells Fargo Bank, 6.20%, 12/1/05 3,500,000 3,607 ------- Total 20,628 -------
122 Money Market Portfolio Money Market Portfolio
Shares/ Value Corporate Bonds (15.2%) $ Par $ (000's) ----------------------------------------------------------- Miscellaneous Business Credit Institutions (2.9%) BP Capital Markets PLC, 4.00%, 4/29/05 3,500,000 3,525 General Electric Capital Corp., 7.50%, 5/15/05 3,500,000 3,574 Newcourt Credit Group, 6.875%, 2/16/05 3,000,000 3,020 ------ Total 10,119 ------ Personal Credit Institutions (3.7%) Associates Corp., 6.10%, 1/15/05 4,000,000 4,008 Household Finance Corp., 6.50%, 1/24/06 6,050,000 6,261 USAA Capital Corp., 7.54%, 3/30/05 2,600,000 2,637 ------ Total 12,906 ------ Pharmaceutical Preparations (1.0%) Merck & Co., Inc., 4.125%, 1/18/05 3,500,000 3,505 ------ Total 3,505 ------ Security Brokers and Dealers (1.5%) Morgan Stanley Dean Witter, 7.75%, 6/15/05 3,500,000 3,588 Salomon Smith Barney, 6.25%, 1/15/05 1,500,000 1,503 ------ Total 5,091 ------ Total Corporate Bonds (Cost: $52,249) 52,249 ------
Shares/ Value Government and Agency Bonds (5.9%) $ Par $ (000's) ------------------------------------------------------ Federal Government & Agencies (5.9%) Federal Home Loan Bank, 7.125%, 2/15/05 3,500,000 3,524 Federal Home Loan Bank, 1.45%, 3/11/05 6,000,000 6,000 Federal Home Loan Bank, 1.58%, 5/20/05 7,450,000 7,450 Federal Home Loan Mortgage Corp., 1.875%, 1/15/05 3,500,000 3,501 ------- Total Government and Agency Bonds (Cost: $20,475) 20,475 ------- Total Investments (101.7%) (Cost $350,321) 350,321 ------- Other Assets, Less Liabilities (-1.7%) (5,853) ------- Total Net Assets (100.0%) 344,468 -------
The Accompanying Notes are an Integral Part of the Financial Statements Money Market Portfolio 123 Statements of Assets and Liabilities Northwestern Mutual Series Fund, Inc. December 31, 2004 (in thousands, except per share data)
Franklin Templeton Small Cap T. Rowe Price Aggressive International International AllianceBernstein Growth Stock Small Cap Value Growth Stock Growth Equity Mid Cap Value Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------------------ Assets Investments, at value (1).......... $ 442,635 $ 201,121 $1,283,572 $ 109,673 $ 979,796 $ 71,963 Cash............................... 64 75 11 247 60 99 Due From Sale of Fund Shares....... 162 173 366 135 390 81 Due From Sale of Securities........ -- 118 -- 614 -- -- Due From Sale of Foreign Currency.......................... -- -- -- 688 117 -- Futures Variation Margin........... 11 -- 16 -- -- -- Dividends and Interest Receivables. 36 305 272 84 1,568 77 ---------- ---------- ---------- ---------- ---------- ---------- Total Assets...................... 442,908 201,792 1,284,237 111,441 981,931 72,220 ---------- ---------- ---------- ---------- ---------- ---------- Liabilities Due on Purchase of Securities and Securities Lending Collateral..... 20 1,427 4,609 65 -- -- Due on Purchase of Foreign Currency.......................... -- -- -- 738 -- -- Due on Redemption of Fund Shares............................ 241 49 561 38 360 24 Due to Investment Advisor.......... 202 141 554 68 536 50 Accrued Expenses................... 25 32 18 34 58 15 Futures Variation Margin........... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Total Liabilities................. 488 1,649 5,742 943 954 89 ---------- ---------- ---------- ---------- ---------- ---------- Net Assets........................ $ 442,420 $ 200,143 $1,278,495 $ 110,498 $ 980,977 $ 72,131 ========== ========== ========== ========== ========== ========== Represented By: Aggregate Paid in Capital (2), (3). $ 345,867 $ 144,196 $1,134,824 $ 83,087 $ 804,157 $ 57,504 Undistributed Net Investment Income (Loss)..................... -- 702 635 (16) 18,101 6 Undistributed Accumulated Net Realized Gain (Loss) on Investments....................... 3,731 5,788 (112,367) (803) (68,791) 320 Net Unrealized Appreciation (Depreciation) of: Investment Securities............. 92,325 49,457 255,277 28,222 227,457 14,301 Futures Contracts................. 497 -- 126 -- -- -- Foreign Currency Transactions..... -- -- -- 8 53 -- ---------- ---------- ---------- ---------- ---------- ---------- Net Assets for Shares Outstanding (2)................... $ 442,420 $ 200,143 $1,278,495 $ 110,498 $ 980,977 $ 72,131 ========== ========== ========== ========== ========== ========== Net Asset Value, Offering and Redemption Price per Share........ $ 2.30 $ 1.58 $ 3.11 $ 1.32 $ 1.65 $ 1.45 ========== ========== ========== ========== ========== ========== (1) Investments, at cost............. $ 350,310 $ 151,664 $1,028,295 $ 81,451 $ 752,339 $ 57,662 (2) Shares Outstanding............... 192,363 126,789 411,284 83,781 592,894 49,575 (3) Shares authorized, $.01 par value 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
Index 400 Stock Portfolio - ------------------------------------------------ Assets Investments, at value (1).......... $ 426,266 Cash............................... 57 Due From Sale of Fund Shares....... 368 Due From Sale of Securities........ -- Due From Sale of Foreign Currency.......................... -- Futures Variation Margin........... 116 Dividends and Interest Receivables. 265 ---------- Total Assets...................... 427,072 ---------- Liabilities Due on Purchase of Securities and Securities Lending Collateral..... -- Due on Purchase of Foreign Currency.......................... -- Due on Redemption of Fund Shares............................ 121 Due to Investment Advisor.......... 89 Accrued Expenses................... 35 Futures Variation Margin........... -- ---------- Total Liabilities................. 245 ---------- Net Assets........................ $ 426,827 ========== Represented By: Aggregate Paid in Capital (2), (3). $ 326,641 Undistributed Net Investment Income (Loss)..................... 3,406 Undistributed Accumulated Net Realized Gain (Loss) on Investments....................... 17,244 Net Unrealized Appreciation (Depreciation) of: Investment Securities............. 78,124 Futures Contracts................. 1,412 Foreign Currency Transactions..... -- ---------- Net Assets for Shares Outstanding (2)................... $ 426,827 ========== Net Asset Value, Offering and Redemption Price per Share........ $ 1.46 ========== (1) Investments, at cost............. $ 348,142 (2) Shares Outstanding............... 291,839 (3) Shares authorized, $.01 par value 2,000,000
The Accompanying Notes are an Integral Part of the Financial Statements 124 Statements of Assets and Liabilities
Capital T. Rowe Janus Guardian Price Capital Growth Large Cap Domestic Equity Index 500 Asset High Yield Money Appreciation Stock Core Stock Equity Income Stock Allocation Balanced Bond Select Bond Market Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio - ------------------------------------------------------------------------------------------------------------------------------ $ 56,474 $ 686,596 $ 469,620 $ 211,516 $ 90,147 $1,901,752 $ 196,400 $3,173,820 $ 226,081 $ 736,834 $ 350,321 184 78 52 227 -- 38 83 100 93 205 10 81 185 266 166 107 795 245 679 80 379 200 -- -- -- -- 44 -- -- -- 102 -- -- -- -- -- -- -- -- 188 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 20 563 484 312 158 2,467 732 12,508 3,723 5,196 907 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 56,759 687,422 470,422 212,221 90,456 1,905,052 197,648 3,187,107 230,079 742,614 351,438 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -- -- -- 88 577 -- 908 201,938 554 81,221 6,436 -- -- -- -- -- -- -- -- -- -- -- 18 289 290 35 66 551 9 988 94 187 534 37 244 170 105 47 320 90 756 90 167 -- 14 25 23 16 19 35 60 -- 29 -- -- -- 15 4 -- -- 24 13 246 -- 12 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 69 573 487 244 709 930 1,080 203,928 767 81,587 6,970 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- $ 56,690 $ 686,849 $ 469,935 $ 211,977 $ 89,747 $1,904,122 $ 196,568 $2,983,179 $ 229,312 $ 661,027 $ 344,468 ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== $ 42,635 $ 659,693 $ 562,655 $ 174,602 $ 75,770 $1,354,468 $ 168,309 $2,197,100 $ 270,125 $ 634,653 $ 344,468 -- 7,067 6,146 59 11 32,479 3,070 76,800 15,509 24,741 -- (565) (65,699) (166,528) 4,738 732 28,047 2,737 29,592 (65,398) (1,028) -- 14,620 85,285 67,545 32,578 13,234 488,656 22,019 672,092 9,076 2,637 -- -- 503 117 -- -- 472 429 7,595 -- 24 -- -- -- -- -- -- -- 4 -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- $ 56,690 $ 686,849 $ 469,935 $ 211,977 $ 89,747 $1,904,122 $ 196,568 $2,983,179 $ 229,312 $ 661,027 $ 344,468 ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== $ 1.43 $ 1.98 $ 1.14 $ 1.14 $ 1.35 $ 2.94 $ 1.12 $ 1.87 $ 0.76 $ 1.23 $ 1.00 ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== ========== $ 41,854 $ 601,311 $ 402,075 $ 178,938 $ 76,913 $1,413,096 $ 174,381 $2,501,728 $ 217,005 $ 734,198 $ 350,321 39,640 346,265 411,485 185,285 66,486 647,107 175,490 1,592,535 302,130 538,415 344,481 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 3,000,000 2,000,000 1,000,000 2,000,000
The Accompanying Notes are an Integral Part of the Financial Statements Statements of Assets and Liabilities 125 Statements of Operations Northwestern Mutual Series Fund, Inc. For the Year Ended December 31, 2004 (in thousands)
Franklin Templeton Small Cap T. Rowe Price Aggressive International International AllianceBernstein Growth Stock Small Cap Value Growth Stock Growth Equity Mid Cap Value Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio - -------------------------------------------------------------------------------------------------------------------------------- Investment Income Income Interest............................ $ 236 $ 87 $ 568 $ 58 $ 610 $ 43 Dividends (1)....................... 810 2,495 6,279 1,435 24,448 992 ------- ------- -------- ------- -------- ------- Total Income..................... 1,046 2,582 6,847 1,493 25,058 1,035 ------- ------- -------- ------- -------- ------- Expenses Management Fees..................... 2,170 1,301 6,185 625 5,621 465 Custodian Fees...................... 19 28 13 176 455 9 Audit Fees.......................... 16 14 17 17 24 10 Other Expenses...................... 1 1 1 1 1 1 ------- ------- -------- ------- -------- ------- Total Expenses................... 2,206 1,344 6,216 819 6,101 485 ------- ------- -------- ------- -------- ------- Less Waived Fees: Waived by Affiliate.............. -- -- -- -- -- -- Paid Indirectly.................. (1) (1) (4) -- -- (1) ------- ------- -------- ------- -------- ------- Total Net Expenses............... 2,205 1,343 6,212 819 6,101 484 ------- ------- -------- ------- -------- ------- Net Investment Income (Loss)........ (1,159) 1,239 635 674 18,957 551 Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies Net Realized Gain (Loss) on: Investment Securities............... 31,123 5,350 102,964 4,719 53,548 4,460 Futures Contracts................... 263 -- 516 -- -- -- Foreign Currency Transactions....... -- -- -- (16) (651) -- ------- ------- -------- ------- -------- ------- Net Realized Gain (Loss) on Investments and Foreign Currencies...................... 31,386 5,350 103,480 4,703 52,897 4,460 ------- ------- -------- ------- -------- ------- Net Unrealized Appreciation (Depreciation) of: Investment Securities............... 38,651 28,984 57,173 12,642 86,049 5,278 Futures Contracts................... 576 -- 126 -- -- -- Foreign Currency Transactions....... -- -- -- 3 (54) -- ------- ------- -------- ------- -------- ------- Net Change in Unrealized Appreciation (Depreciation) of Investments.................. 39,227 28,984 57,299 12,645 85,995 5,278 ------- ------- -------- ------- -------- ------- Net Gain (Loss) on Investments....... 70,613 34,334 160,779 17,348 138,892 9,738 ------- ------- -------- ------- -------- ------- Net Increase (Decrease) in Net Assets Resulting from Operations............. $69,454 $35,573 $161,414 $18,022 $157,849 $10,289 ======= ======= ======== ======= ======== ======= (1) Less Foreign Dividend Tax........ $ -- $ 1 $ 17 $ 58 $ 954 $ 2
Index 400 Stock Portfolio - ------------------------------------------------- Investment Income Income Interest............................ $ 425 Dividends (1)....................... 4,165 ------- Total Income..................... 4,590 ------- Expenses Management Fees..................... 939 Custodian Fees...................... 32 Audit Fees.......................... 16 Other Expenses...................... 1 ------- Total Expenses................... 988 ------- Less Waived Fees: Waived by Affiliate.............. -- Paid Indirectly.................. (1) ------- Total Net Expenses............... 987 ------- Net Investment Income (Loss)........ 3,603 Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies Net Realized Gain (Loss) on: Investment Securities............... 17,166 Futures Contracts................... 3,254 Foreign Currency Transactions....... -- ------- Net Realized Gain (Loss) on Investments and Foreign Currencies...................... 20,420 ------- Net Unrealized Appreciation (Depreciation) of: Investment Securities............... 33,436 Futures Contracts................... 976 Foreign Currency Transactions....... -- ------- Net Change in Unrealized Appreciation (Depreciation) of Investments.................. 34,412 ------- Net Gain (Loss) on Investments....... 54,832 ------- Net Increase (Decrease) in Net Assets Resulting from Operations............. $58,435 ======= (1) Less Foreign Dividend Tax........ $ --
The Accompanying Notes are an Integral Part of the Financial Statements 126 Statements of Operations
Capital T. Rowe Janus Guardian Price Capital Growth Large Cap Domestic Equity Index 500 Asset High Yield Money Appreciation Stock Core Stock Equity Income Stock Allocation Balanced Bond Select Bond Market Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio - --------------------------------------------------------------------------------------------------------------------- $ 75 $ 448 $ 270 $ 156 $ 58 $ 439 $ 2,991 $ 60,071 $16,507 $26,979 $ 5,155 278 9,444 7,979 3,582 1,541 35,954 1,152 27,066 97 -- -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 353 9,892 8,249 3,738 1,599 36,393 4,143 87,137 16,604 26,979 5,155 ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 346 2,786 1,933 1,014 428 3,577 917 8,689 990 1,887 1,094 8 22 18 12 13 32 107 -- 27 -- -- 10 17 17 12 10 18 16 -- 21 -- -- -- 1 1 1 1 1 3 -- 1 -- -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 364 2,826 1,969 1,039 452 3,628 1,043 8,689 1,039 1,887 1,094 ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- -- -- -- -- -- -- -- -- -- -- (1,094) -- (1) (1) (1) -- -- (1) -- (3) -- -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 364 2,825 1,968 1,038 452 3,628 1,042 8,689 1,036 1,887 -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- (11) 7,067 6,281 2,700 1,147 32,765 3,101 78,448 15,568 25,092 5,155 (454) 29,026 (661) 11,200 2,719 30,187 2,536 13,176 11,051 3,161 -- -- 1,385 181 -- -- 2,758 1,518 40,988 -- 4,891 -- -- -- -- -- -- -- 1 -- -- -- -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- (454) 30,411 (480) 11,200 2,719 32,945 4,055 54,164 11,051 8,052 -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 8,982 5,558 29,519 14,404 6,583 119,833 9,662 97,694 (1,107) (2,909) -- -- 177 117 -- -- (619) -- (8,234) -- (1,204) -- -- -- -- -- -- -- 1 -- -- -- -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 8,982 5,735 29,636 14,404 6,583 119,214 9,663 89,460 (1,107) (4,113) -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- 8,528 36,146 29,156 25,604 9,302 152,159 13,718 143,624 9,944 3,939 -- ------ ------- ------- ------- ------- -------- ------- -------- ------- ------- ------- $8,517 $43,213 $35,437 $28,304 $10,449 $184,924 $16,819 $222,072 $25,512 $29,031 $ 5,155 ====== ======= ======= ======= ======= ======== ======= ======== ======= ======= ======= $ 2 $ 42 $ (8) $ 38 $ 7 $ -- $ 52 $ -- $ -- $ -- $ --
The Accompanying Notes are an Integral Part of the Financial Statements Statements of Operations 127 Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Small Cap Growth Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ (1,159) $ (1,036) Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 31,386 18,249 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 39,227 69,720 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 69,454 86,933 -------- -------- Distributions to Shareholders from: Net Investment Income............................. -- -- Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. -- -- -------- -------- Fund Share Transactions: Proceeds from Sale of 28,670 and 35,064 Shares.... 58,058 58,399 Proceeds from Shares Issued on Reinvestments of Distributions Paid........................... -- -- Payments for 25,634 and 20,868 Shares Redeemed.... (51,704) (33,600) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 6,354 24,799 -------- -------- Total Increase (Decrease) in Net Assets............. 75,808 111,732 Net Assets Beginning of Period............................... 366,612 254,880 -------- -------- End of Period..................................... $442,420 $366,612 ======== ========
For the For the Year Ended Year Ended December 31, December 31, T. Rowe Price Small Cap Value Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 1,239 $ 562 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 5,350 2,029 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 28,984 24,642 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 35,573 27,233 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (331) -- Net Realized Gain on Investments.................. (1,925) -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (2,256) -- -------- -------- Fund Share Transactions: Proceeds from Sale of 41,747 and 38,564 Shares.... 58,312 42,482 Proceeds from Shares Issued on Reinvestments of Distributions Paid (1,702 and 0 Shares, respectively)................................... 2,256 -- Payments for 11,364 and 10,062 Shares Redeemed.... (15,686) (10,854) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 44,882 31,628 -------- -------- Total Increase (Decrease) in Net Assets............. 78,199 58,861 Net Assets Beginning of Period............................... 121,944 63,083 -------- -------- End of Period..................................... $200,143 $121,944 ======== ========
The Accompanying Notes are an Integral Part of the Financial Statements 128 Statements of Changes in Net Assets Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Aggressive Growth Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 635 $ (1,043) Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 103,480 1,043 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 57,299 238,195 ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 161,414 238,195 ---------- ---------- Distributions to Shareholders from: Net Investment Income............................. -- -- Net Realized Gain on Investments.................. -- -- ---------- ---------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. -- -- ---------- ---------- Fund Share Transactions: Proceeds from Sale of 25,228 and 33,086 Shares.... 70,609 78,472 Proceeds from Shares Issued on Reinvestments of Distributions Paid........................... -- -- Payments for 50,196 and 52,230 Shares Redeemed.... (141,070) (123,200) ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... (70,461) (44,728) ---------- ---------- Total Increase (Decrease) in Net Assets............. 90,953 193,467 Net Assets Beginning of Period............................... 1,187,542 994,075 ---------- ---------- End of Period..................................... $1,278,495 $1,187,542 ========== ==========
For the For the Year Ended Year Ended December 31, December 31, International Growth Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 674 $ 381 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 4,703 (902) Net Change in Unrealized Appreciation (Depreciation) of Investments................... 12,645 17,919 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 18,022 17,398 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (625) (420) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (625) (420) -------- -------- Fund Share Transactions: Proceeds from Sale of 33,565 and 30,332 Shares.... 39,016 27,066 Proceeds from Shares Issued on Reinvestments of Distributions Paid (475 and 388 Shares, respectively)................................... 625 420 Payments for 11,379 and 14,368 Shares Redeemed.... (13,230) (13,147) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 26,411 14,339 -------- -------- Total Increase (Decrease) in Net Assets............. 43,808 31,317 Net Assets Beginning of Period............................... 66,690 35,373 -------- -------- End of Period..................................... $110,498 $ 66,690 ======== ========
The Accompanying Notes are an Integral Part of the Financial Statements Statements of Changes in Net Assets 129 Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Franklin Templeton International Equity Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 18,957 $ 14,871 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 52,897 (47,810) Net Change in Unrealized Appreciation (Depreciation) of Investments................... 85,995 260,519 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 157,849 227,580 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (14,573) (11,039) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (14,573) (11,039) -------- -------- Fund Share Transactions: Proceeds from Sale of 71,383 and 306,456 Shares... 104,132 326,386 Proceeds from Shares Issued on Reinvestments of Distributions Paid (10,380 and 10,594 Shares, respectively)........................... 14,574 11,039 Payments for 52,582 and 303,227 Shares Redeemed... (76,712) (321,361) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 41,994 16,064 -------- -------- Total Increase (Decrease) in Net Assets............. 185,270 232,605 Net Assets Beginning of Period............................... 795,707 563,102 -------- -------- End of Period..................................... $980,977 $795,707 ======== ========
For the For the Period May 1, Year Ended 2003(a) December 31, through AllianceBernstein Mid Cap Value Portfolio 2004 December 31, 2003 - ------------------------------------------------------------------------------------ (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 551 $ 156 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 4,460 485 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 5,278 9,007 ------- ------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 10,289 9,648 ------- ------- Distributions to Shareholders from: Net Investment Income............................. (543) (160) Net Realized Gain on Investments.................. (4,226) (381) ------- ------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (4,769) (541) ------- ------- Fund Share Transactions: Proceeds from Sale of 16,224 and 33,540 Shares.... 22,455 34,956 Proceeds from Shares Issued on Reinvestments of Distributions Paid (3,307 and 415 Shares, respectively)................................... 4,769 541 Payments for 3,477 and 435 Shares Redeemed........ (4,704) (513) ------- ------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 22,520 34,984 ------- ------- Total Increase (Decrease) in Net Assets............. 28,040 44,091 Net Assets Beginning of Period............................... 44,091 -- ------- ------- End of Period..................................... $72,131 $44,091 ======= =======
(a)Portfolio commenced operations on May 1, 2003. The Accompanying Notes are an Integral Part of the Financial Statements 130 Statements of Changes in Net Assets Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Index 400 Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 3,603 $ 2,461 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 20,420 3,452 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 34,412 78,087 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 58,435 84,000 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (2,524) (1,934) Net Realized Gain on Investments.................. (2,268) -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (4,792) (1,934) -------- -------- Fund Share Transactions: Proceeds from Sale of 48,930 and 57,250 Shares.... 64,564 61,744 Proceeds from Shares Issued on Reinvestments of Distributions Paid (3,734 and 1,962 Shares, respectively)........................... 4,792 1,934 Payments for 29,428 and 27,449 Shares Redeemed.... (38,672) (28,654) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 30,684 35,024 -------- -------- Total Increase (Decrease) in Net Assets............. 84,327 117,090 Net Assets Beginning of Period............................... 342,500 225,410 -------- -------- End of Period..................................... $426,827 $342,500 ======== ========
For the For the Period May 1, Year Ended 2003(a) December 31, through Janus Capital Appreciation Portfolio 2004 December 31, 2003 - ------------------------------------------------------------------------------------ (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ (11) $ 14 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. (454) (34) Net Change in Unrealized Appreciation (Depreciation) of Investments................... 8,982 5,638 ------- ------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 8,517 5,618 ------- ------- Distributions to Shareholders from: Net Investment Income............................. (51) (14) Net Realized Gain on Investments.................. -- (77) ------- ------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (51) (91) ------- ------- Fund Share Transactions: Proceeds from Sale of 11,304 and 31,143 Shares.... 14,424 31,680 Proceeds from Shares Issued on Reinvestments of Distributions Paid (36 and 77 Shares, respectively)................................... 51 91 Payments for 2,404 and 515 Shares Redeemed........ (2,981) (568) ------- ------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 11,494 31,203 ------- ------- Total Increase (Decrease) in Net Assets............. 19,960 36,730 Net Assets Beginning of Period............................... 36,730 -- ------- ------- End of Period..................................... $56,690 $36,730 ======= =======
(a)Portfolio commenced operations on May 1, 2003. The Accompanying Notes are an Integral Part of the Financial Statements Statements of Changes in Net Assets 131 Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Growth Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 7,067 $ 4,542 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 30,411 22,011 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 5,735 78,208 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 43,213 104,761 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (4,542) (4,774) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (4,542) (4,774) -------- -------- Fund Share Transactions: Proceeds from Sale of 29,901 and 46,115 Shares.... 55,981 76,995 Proceeds from Shares Issued on Reinvestments of Distributions Paid (2,470 and 2,934 Shares, respectively)........................... 4,542 4,774 Payments for 41,710 and 40,664 Shares Redeemed.... (78,216) (67,306) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... (17,693) 14,463 -------- -------- Total Increase (Decrease) in Net Assets............. 20,978 114,450 Net Assets Beginning of Period............................... 665,871 551,421 -------- -------- End of Period..................................... $686,849 $665,871 ======== ========
For the For the Year Ended Year Ended December 31, December 31, Large Cap Core Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 6,281 $ 4,201 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. (480) (84,731) Net Change in Unrealized Appreciation (Depreciation) of Investments................... 29,636 167,352 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 35,437 86,822 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (4,200) (3,770) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (4,200) (3,770) -------- -------- Fund Share Transactions: Proceeds from Sale of 37,334 and 44,876 Shares.... 39,932 42,265 Proceeds from Shares Issued on Reinvestments of Distributions Paid (4,015 and 4,194 Shares, respectively)........................... 4,200 3,770 Payments for 49,534 and 51,025 Shares Redeemed.... (52,988) (47,477) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... (8,856) (1,442) -------- -------- Total Increase (Decrease) in Net Assets............. 22,381 81,610 Net Assets Beginning of Period............................... 447,554 365,944 -------- -------- End of Period..................................... $469,935 $447,554 ======== ========
The Accompanying Notes are an Integral Part of the Financial Statements 132 Statements of Changes in Net Assets Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Capital Guardian Domestic Equity Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 2,700 $ 1,807 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 11,200 215 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 14,404 29,182 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 28,304 31,204 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (2,660) (1,804) Net Realized Gain on Investments.................. (2,783) -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (5,443) (1,804) -------- -------- Fund Share Transactions: Proceeds from Sale of 55,988 and 46,482 Shares.... 59,051 39,838 Proceeds from Shares Issued on Reinvestments of Distributions Paid (4,768 and 1,826 Shares, respectively)........................... 5,443 1,804 Payments for 10,950 and 10,806 Shares Redeemed.... (11,477) (9,217) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 53,017 32,425 -------- -------- Total Increase (Decrease) in Net Assets............. 75,878 61,825 Net Assets Beginning of Period............................... 136,099 74,274 -------- -------- End of Period..................................... $211,977 $136,099 ======== ========
For the For the Period May 1, Year Ended 2003(a) December 31, through T. Rowe Price Equity Income Portfolio 2004 December 31, 2003 - ------------------------------------------------------------------------------------ (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 1,147 $ 439 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 2,719 408 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 6,583 6,651 ------- ------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 10,449 7,498 ------- ------- Distributions to Shareholders from: Net Investment Income............................. (1,138) (435) Net Realized Gain on Investments.................. (2,181) (216) ------- ------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (3,319) (651) ------- ------- Fund Share Transactions: Proceeds from Sale of 27,239 and 39,054 Shares.... 34,607 40,714 Proceeds from Shares Issued on Reinvestments of Distributions Paid (2,475 and 543 Shares, respectively)................................... 3,319 651 Payments for 2,336 and 489 Shares Redeemed........ (2,973) (548) ------- ------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 34,953 40,817 ------- ------- Total Increase (Decrease) in Net Assets............. 42,083 47,664 Net Assets Beginning of Period............................... 47,664 -- ------- ------- End of Period..................................... $89,747 $47,664 ======= =======
(a)Portfolio commenced operations on May 1, 2003. The Accompanying Notes are an Integral Part of the Financial Statements Statements of Changes in Net Assets 133 Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Index 500 Stock Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 32,765 $ 23,881 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 32,945 17,414 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 119,214 344,408 ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 184,924 385,703 ---------- ---------- Distributions to Shareholders from: Net Investment Income............................. (23,734) (21,914) Net Realized Gain on Investments.................. (19,343) (8,037) ---------- ---------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (43,077) (29,951) ---------- ---------- Fund Share Transactions: Proceeds from Sale of 53,590 and 64,442 Shares.... 147,360 153,657 Proceeds from Shares Issued on Reinvestments of Distributions Paid (16,097 and 13,329 Shares, respectively)........................... 43,077 29,951 Payments for 67,111 and 62,305 Shares Redeemed.... (184,282) (146,121) ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 6,155 37,487 ---------- ---------- Total Increase (Decrease) in Net Assets............. 148,002 393,239 Net Assets Beginning of Period............................... 1,756,120 1,362,881 ---------- ---------- End of Period..................................... $1,904,122 $1,756,120 ========== ==========
For the For the Year Ended Year Ended December 31, December 31, Asset Allocation Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 3,101 $ 2,087 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 4,055 3,511 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 9,663 16,774 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 16,819 22,372 -------- -------- Distributions to Shareholders from: Net Investment Income............................. -- (2,122) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. -- (2,122) -------- -------- Fund Share Transactions: Proceeds from Sale of 62,501 and 60,300 Shares.... 65,021 55,946 Proceeds from Shares Issued on Reinvestments of Distributions Paid (0 and 2,087 Shares, respectively)................................... -- 2,122 Payments for 15,192 and 35,897 Shares Redeemed.... (15,750) (35,100) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 49,271 22,968 -------- -------- Total Increase (Decrease) in Net Assets............. 66,090 43,218 Net Assets Beginning of Period............................... 130,478 87,260 -------- -------- End of Period..................................... $196,568 $130,478 ======== ========
The Accompanying Notes are an Integral Part of the Financial Statements 134 Statements of Changes in Net Assets Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Balanced Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 78,448 $ 73,405 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 54,164 138,458 Net Change in Unrealized Appreciation (Depreciation) of Investments................... 89,460 233,710 ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 222,072 445,573 ---------- ---------- Distributions to Shareholders from: Net Investment Income............................. (73,596) (85,974) Net Realized Gain on Investments.................. (103,896) -- ---------- ---------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (177,492) (85,974) ---------- ---------- Fund Share Transactions: Proceeds from Sale of 95,815 and 98,048 Shares.... 174,463 167,389 Proceeds from Shares Issued on Reinvestments of Distributions Paid (102,300 and 52,328 Shares, respectively)........................... 177,492 85,974 Payments for 167,929 and 167,140 Shares Redeemed........................................ (304,844) (283,003) ---------- ---------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 47,111 (29,640) ---------- ---------- Total Increase (Decrease) in Net Assets............. 91,691 329,959 Net Assets Beginning of Period............................... 2,891,488 2,561,529 ---------- ---------- End of Period..................................... $2,983,179 $2,891,488 ========== ==========
For the For the Year Ended Year Ended December 31, December 31, High Yield Bond Portfolio 2004 2003 - ------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss)...................... $ 15,568 $ 14,601 Net Realized Gain (Loss) on Investments and Foreign Currencies.............................. 11,051 7,972 Net Change in Unrealized Appreciation (Depreciation) of Investments................... (1,107) 20,079 -------- -------- Net Increase (Decrease) in Net Assets Resulting from Operations...................... 25,512 42,652 -------- -------- Distributions to Shareholders from: Net Investment Income............................. (14,554) (362) Net Realized Gain on Investments.................. -- -- -------- -------- Net Decrease in Net Assets Resulting from Distributions to Shareholders.................. (14,554) (362) -------- -------- Fund Share Transactions: Proceeds from Sale of 49,668 and 80,917 Shares.... 35,967 52,808 Proceeds from Shares Issued on Reinvestments of Distributions Paid (21,213 and 572 Shares, respectively)........................... 14,554 362 Payments for 43,729 and 50,808 Shares Redeemed.... (31,538) (33,642) -------- -------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions......... 18,983 19,528 -------- -------- Total Increase (Decrease) in Net Assets............. 29,941 61,818 Net Assets Beginning of Period............................... 199,371 137,553 -------- -------- End of Period..................................... $229,312 $199,371 ======== ========
The Accompanying Notes are an Integral Part of the Financial Statements Statements of Changes in Net Assets 135 Statements of Changes in Net Assets Northwestern Mutual Series Fund, Inc.
For the For the Year Ended Year Ended December 31, December 31, Select Bond Portfolio 2004 2003 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands) Change in Net Assets Operations Net Investment Income (Loss).................................................................... $ 25,092 $ 25,481 Net Realized Gain (Loss) on Investments and Foreign Currencies.................................. 8,052 17,559 Net Change in Unrealized Appreciation (Depreciation) of Investments............................. (4,113) (10,035) -------- --------- Net Increase (Decrease) in Net Assets Resulting from Operations................................ 29,031 33,005 -------- --------- Distributions to Shareholders from: Net Investment Income........................................................................... (25,605) (24,369) Net Realized Gain on Investments................................................................ (17,701) (13,905) -------- --------- Net Decrease in Net Assets Resulting from Distributions to Shareholders........................ (43,306) (38,274) -------- --------- Fund Share Transactions: Proceeds from Sale of 88,198 and 106,806 Shares................................................. 108,312 135,872 Proceeds from Shares Issued on Reinvestments of Distributions Paid (37,204 and 31,067 Shares, respectively).................................................................................. 43,306 38,274 Payments for 79,381 and 105,045 Shares Redeemed................................................. (97,641) (131,570) -------- --------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions................... 53,977 42,576 -------- --------- Total Increase (Decrease) in Net Assets........................................................... 39,702 37,307 Net Assets Beginning of Period............................................................................. 621,325 584,018 -------- --------- End of Period................................................................................... $661,027 $ 621,325 ======== =========
For the For the Year Ended Year Ended December 31, December 31, Money Market Portfolio 2004 2003 - ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Change in Net Assets Operations Net Investment Income (Loss).................................................................. $ 5,155 $ 5,837 Net Realized Gain (Loss) on Investments and Foreign Currencies................................ -- -- Net Change in Unrealized Appreciation (Depreciation) of Investments........................... -- -- --------- --------- Net Increase (Decrease) in Net Assets Resulting from Operations.............................. 5,155 5,837 --------- --------- Distributions to Shareholders from: Net Investment Income......................................................................... (5,155) (5,836) Net Realized Gain on Investments.............................................................. -- -- --------- --------- Net Decrease in Net Assets Resulting from Distributions to Shareholders...................... (5,155) (5,836) --------- --------- Fund Share Transactions: Proceeds from Sale of 156,221 and 420,450 Shares.............................................. 156,229 420,450 Proceeds from Shares Issued on Reinvestments of Distributions Paid (5,155 and 5,836 Shares, respectively)................................................................................ 5,155 5,836 Payments for 216,789 and 527,727 Shares Redeemed.............................................. (216,789) (527,727) --------- --------- Net Increase (Decrease) in Net Assets Resulting from Fund Share Transactions................. (55,405) (101,441) --------- --------- Total Increase (Decrease) in Net Assets......................................................... (55,405) (101,440) Net Assets Beginning of Period........................................................................... 399,873 501,313 --------- --------- End of Period................................................................................. $ 344,468 $ 399,873 ========= =========
The Accompanying Notes are an Integral Part of the Financial Statements 136 Statements of Changes in Net Assets Financial Highlights Northwestern Mutual Series Fund, Inc.
Small Cap Growth Stock Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.94 $ 1.46 $ 1.79 $ 1.86 $ 1.79 Income from Investment Operations: Net Investment Income....................................... (0.01) -- -- -- -- Net Realized and Unrealized Gains (Losses) on Investments... 0.37 0.48 (0.33) (0.07) 0.13 -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.36 0.48 (0.33) (0.07) 0.13 -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... -- -- -- -- -- Distributions from Realized Gains on Investments............ -- -- -- -- (0.06) -------- -------- -------- -------- -------- Total Distributions........................................ -- -- -- -- (0.06) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 2.30 $ 1.94 $ 1.46 $ 1.79 $ 1.86 ======== ======== ======== ======== ======== Total Return(d)................................................. 18.80% 33.06% (18.42%) (3.76%) 6.71% ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $442,420 $366,612 $254,880 $291,448 $250,314 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.57% 0.59% 0.60% 0.60% 0.67% ======== ======== ======== ======== ======== Ratio of Net Investment Income (Loss) to Average Net Assets..... (0.30%) (0.35%) (0.26%) 0.17% 0.19% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 87.74% 84.20% 41.87% 70.58% 86.13% ======== ======== ======== ======== ========
For the Period July 31, 2001(a) T. Rowe Price Small Cap Value Portfolio For the Year Ended December 31, through -------------------------------- December 31, (For a share outstanding throughout the period) 2004 2003 2002 2001 - ---------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period......................... $ 1.29 $ 0.95 $ 1.02 $ 1.00 Income from Investment Operations: Net Investment Income.................................... 0.01 0.01 0.01 -- Net Realized and Unrealized Gains on Investments......... 0.30 0.33 (0.07) 0.02 -------- -------- ------- ------- Total from Investment Operations........................ 0.31 0.34 (0.06) 0.02 -------- -------- ------- ------- Less Distributions: Distributions from Net Investment Income................. -- -- (0.01) -- Distributions from Realized Gains on Investments......... (0.02) -- -- -- -------- -------- ------- ------- Total Distributions..................................... (0.02) -- (0.01) -- -------- -------- ------- ------- Net Asset Value, End of Period............................... $ 1.58 $ 1.29 $ 0.95 $ 1.02 ======== ======== ======= ======= Total Return(d).............................................. 24.57% 35.15% (5.58%) 1.76% ======== ======== ======= ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)..................... $200,143 $121,944 $63,083 $21,003 ======== ======== ======= ======= Ratio of Gross Expenses to Average Net Assets................ 0.88% 0.90% 1.02% 1.36%(c) ======== ======== ======= ======= Ratio of Net Expenses to Average Net Assets.................. 0.88% 0.90% 1.00% 1.00%(c) ======== ======== ======= ======= Ratio of Net Investment Income (Losses) to Average Net Assets 0.81% 0.65% 0.54% 1.03%(c) ======== ======== ======= ======= Portfolio Turnover Rate...................................... 19.22% 33.78% 28.26% 49.70% ======== ======== ======= =======
(a)Portfolio commenced operations July 31, 2001. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. The Accompanying Notes are an Integral Part of the Financial Statements. Financial Highlights 137 Financial Highlights Northwestern Mutual Series Fund, Inc.
Aggressive Growth Stock Portfolio For the Year Ended December 31, ----------------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 2.72 $ 2.18 $ 2.82 $ 4.47 $ 4.81 Income from Investment Operations: Net Investment Income....................................... 0.0(e) -- -- -- -- Net Realized and Unrealized Gains (Losses) on Investments... 0.39 0.54 (0.59) (0.83) 0.29 ---------- ---------- -------- ---------- ---------- Total from Investment Operations........................... 0.39 0.54 (0.59) (0.83) 0.29 ---------- ---------- -------- ---------- ---------- Less Distributions: Distributions from Net Investment Income.................... -- -- -- -- -- Distributions from Realized Gains on Investments............ -- -- (0.05) (0.82) (0.63) ---------- ---------- -------- ---------- ---------- Total Distributions........................................ -- -- (0.05) (0.82) (0.63) ---------- ---------- -------- ---------- ---------- Net Asset Value, End of Period.................................. $ 3.11 $ 2.72 $ 2.18 $ 2.82 $ 4.47 ========== ========== ======== ========== ========== Total Return(d)................................................. 14.22% 24.69% (21.15%) (19.87%) 6.18% ========== ========== ======== ========== ========== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $1,278,495 $1,187,542 $994,075 $1,341,876 $1,696,013 ========== ========== ======== ========== ========== Ratio of Expenses to Average Net Assets......................... 0.52% 0.52% 0.52% 0.52% 0.52% ========== ========== ======== ========== ========== Ratio of Net Investment Income (Loss) to Average Net Assets..... 0.05% (0.10%) (0.11%) 0.08% 0.09% ========== ========== ======== ========== ========== Portfolio Turnover Rate......................................... 71.24% 63.21% 43.37% 70.40% 63.18% ========== ========== ======== ========== ==========
For the Period July 31, 2001(a) International Growth Portfolio For the Year Ended December 31, through -------------------------------- December 31, (For a share outstanding throughout the period) 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.09 $ 0.79 $ 0.91 $ 1.00 Income from Investment Operations: Net Investment Income....................................... 0.01 0.01 -- -- Net Realized and Unrealized Gains (Losses) on Investments... 0.23 0.30 (0.12) (0.09) -------- ------- -------- ------- Total from Investment Operations........................... 0.24 0.31 (0.12) (0.09) -------- ------- -------- ------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.01) -- -- Distributions from Realized Gains on Investments............ -- -- -- -- -------- ------- -------- ------- Total Distributions........................................ (0.01) (0.01) -- -- -------- ------- -------- ------- Net Asset Value, End of Period.................................. $ 1.32 $ 1.09 $ 0.79 $ 0.91 ======== ======= ======== ======= Total Return(d)................................................. 21.59% 38.99% (12.34%) (9.40%) ======== ======= ======== ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $110,498 $66,690 $ 35,373 $26,900 ======== ======= ======== ======= Ratio of Gross Expenses to Average Net Assets................... 0.98% 1.25% 1.15% 1.25%(c) ======== ======= ======== ======= Ratio of Net Expenses to Average Net Assets..................... 0.98% 1.10% 1.10% 1.10%(c) ======== ======= ======== ======= Ratio of Net Investment Income (Loss) to Average Net Assets..... 0.81% 0.79% 0.62% 0.05%(c) ======== ======= ======== ======= Portfolio Turnover Rate......................................... 70.84% 58.09% 27.28% 18.45% ======== ======= ======== =======
(a)Portfolio commenced operations July 31, 2001. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. (e)Amount is less than $0.005. The Accompanying Notes are an Integral Part of the Financial Statements. 138 Financial Highlights Financial Highlights Northwestern Mutual Series Fund, Inc.
Franklin Templeton International Equity For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.41 $ 1.02 $ 1.26 $ 1.63 $ 1.78 Income from Investment Operations: Net Investment Income....................................... 0.03 0.03 0.02 0.02 0.02 Net Realized and Unrealized Gains (Losses) on Investments... 0.24 0.38 (0.24) (0.23) (0.04) -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.27 0.41 (0.22) (0.21) (0.02) -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.03) (0.02) (0.02) (0.03) (0.04) Distributions from Realized Gains on Investments............ -- -- -- (0.13) (0.09) -------- -------- -------- -------- -------- Total Distributions........................................ (0.03) (0.02) (0.02) (0.16) (0.13) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 1.65 $ 1.41 $ 1.02 $ 1.26 $ 1.63 ======== ======== ======== ======== ======== Total Return(d)................................................. 19.33% 40.46% (17.40%) (14.00%) (0.79%) ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $980,977 $795,707 $563,102 $716,413 $809,617 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.72% 0.74% 0.74% 0.74% 0.73% ======== ======== ======== ======== ======== Ratio of Net Investment Income (Loss) to Average Net Assets..... 2.23% 2.33% 1.72% 1.99% 1.77% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 18.65% 24.87% 30.94% 34.52% 26.95% ======== ======== ======== ======== ========
For the For the Period Year Ended May 1, 2003(b) AllianceBernstein Mid Cap Value Portfolio December 31, through (For a share outstanding throughout the period) 2004 December 31, - ------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.32 $ 1.00 Income from Investment Operations: Net Investment Income....................................... 0.01 0.01 Net Realized and Unrealized Gains (Losses) on Investments... 0.22 0.32 ------- ------- Total from Investment Operations........................... 0.23 0.33 ------- ------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.00)(e) Distributions from Realized Gains on Investments............ (0.09) (0.01) ------- ------- Total Distributions........................................ (0.10) (0.01) ------- ------- Net Asset Value, End of Period.................................. $ 1.45 $ 1.32 ======= ======= Total Return(d)................................................. 18.67% 33.16% ======= ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $72,131 $44,091 ======= ======= Ratio of Gross Expenses to Average Net Assets................... 0.89% 0.94%(c) ======= ======= Ratio of Net Expenses to Average Net Assets..................... 0.89% 0.93%(c) ======= ======= Ratio of Net Investment Income (Loss) to Average Net Assets..... 1.00% 0.70%(c) ======= ======= Portfolio Turnover Rate......................................... 33.05% 9.68% ======= =======
(b)Portfolio commenced operations on May 1, 2003. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. (e)Amount is less than $0.005. The Accompanying Notes are an Integral Part of the Financial Statements. Financial Highlights 139 Financial Highlights Northwestern Mutual Series Fund, Inc.
Index 400 Stock Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.28 $ 0.95 $ 1.12 $ 1.14 $ 1.11 Income from Investment Operations: Net Investment Income (Loss)................................ 0.01 0.01 0.01 -- 0.02 Net Realized and Unrealized Gains (Losses) on Investments... 0.19 0.33 (0.17) (0.01) 0.16 -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.20 0.34 (0.16) (0.01) 0.18 -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.01) (0.01) -- (0.02) Distributions from Realized Gains on Investments............ (0.01) -- -- (0.01) (0.13) -------- -------- -------- -------- -------- Total Distributions........................................ (0.02) (0.01) (0.01) (0.01) (0.15) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 1.46 $ 1.28 $ 0.95 $ 1.12 $ 1.14 ======== ======== ======== ======== ======== Total Return(d)................................................. 16.26% 35.01% (14.54%) (0.65%) 17.21% ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $426,827 $342,500 $225,410 $210,734 $137,616 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.26% 0.27% 0.28% 0.31% 0.32% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets............ 0.96% 0.92% 0.86% 1.06% 1.71% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 16.46% 9.74% 15.60% 19.06% 54.60% ======== ======== ======== ======== ========
For the For the Period Year Ended May 1, 2003(b) Janus Capital Appreciation Portfolio December 31, through (For a share outstanding throughout the period) 2004 December 31, - ------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.20 $ 1.00 Income from Investment Operations: 0.00(e) Net Investment Income (Loss)................................ -- -- Net Realized and Unrealized Gains (Losses) on Investments... 0.23 0.20 ------- ------- Total from Investment Operations........................... 0.23 0.20 ------- ------- Less Distributions: Distributions from Net Investment Income.................... -- (0.00)(e) Distributions from Realized Gains on Investments............ -- (0.00)(e) ------- ------- Total Distributions........................................ -- (0.00)(e) ------- ------- Net Asset Value, End of Period.................................. $ 1.43 $ 1.20 ======= ======= Total Return(d)................................................. 19.67% 19.90% ======= ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $56,690 $36,730 ======= ======= Ratio of Expenses to Average Net Assets......................... 0.84% 0.90%(c) ======= ======= Ratio of Net Investment Income to Average Net Assets............ (0.03%) 0.07%(c) ======= ======= Portfolio Turnover Rate......................................... 25.42% 33.68% ======= =======
(b)Portfolio commenced operations on May 1, 2003. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. (e)Amount is less than $0.005. The Accompanying Notes are an Integral Part of the Financial Statements. 140 Financial Highlights Financial Highlights Northwestern Mutual Series Fund, Inc.
Growth Stock Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.87 $ 1.59 $ 2.03 $ 2.47 $ 2.66 Income from Investment Operations: Net Investment Income (Loss)................................ 0.02 0.01 0.01 0.02 0.03 Net Realized and Unrealized Gains (Losses) on Investments... 0.10 0.28 (0.43) (0.36) (0.09) -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.12 0.29 (0.42) (0.34) (0.06) -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.01) (0.02) (0.02) (0.02) Distributions from Realized Gains on Investments............ -- -- -- (0.08) (0.11) -------- -------- -------- -------- -------- Total Distributions........................................ (0.01) (0.01) (0.02) (0.10) (0.13) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 1.98 $ 1.87 $ 1.59 $ 2.03 $ 2.47 ======== ======== ======== ======== ======== Total Return(d)................................................. 6.67% 18.94% (20.83%) (14.22%) (2.49%) ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $686,849 $665,871 $551,421 $696,578 $770,816 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.43% 0.43% 0.43% 0.43% 0.43% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets............ 1.07% 0.77% 0.76% 1.01% 1.12% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 34.53% 40.89% 28.06% 27.98% 28.01% ======== ======== ======== ======== ========
Large Cap Core Stock Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.07 $ 0.87 $ 1.22 $ 1.37 $ 1.56 Income from Investment Operations: Net Investment Income (Loss)................................ 0.02 0.01 0.01 0.01 0.01 Net Realized and Unrealized Gains (Losses) on Investments... 0.06 0.20 (0.35) (0.11) (0.11) -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.08 0.21 (0.34) (0.10) (0.10) -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.01) (0.01) (0.01) (0.01) Distributions from Realized Gains on Investments............ -- -- -- (0.04) (0.08) -------- -------- -------- -------- -------- Total Distributions........................................ (0.01) (0.01) (0.01) (0.05) (0.09) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 1.14 $ 1.07 $ 0.87 $ 1.22 $ 1.37 ======== ======== ======== ======== ======== Total Return(d)................................................. 8.16% 24.05% (28.20%) (7.77%) (6.97%) ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $469,935 $447,554 $365,944 $548,672 $579,981 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.44% 0.46% 0.58% 0.58% 0.57% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets............ 1.41% 1.07% 0.85% 0.75% 0.68% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 33.64% 58.90% 29.20% 44.37% 47.67% ======== ======== ======== ======== ========
(d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. The Accompanying Notes are an Integral Part of the Financial Statements. Financial Highlights 141 Financial Highlights Northwestern Mutual Series Fund, Inc.
For the Period July 31, 2001(a) Capital Guardian Domestic Equity Portfolio For the Year Ended December 31, through -------------------------------- December 31, (For a share outstanding throughout the period) 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.00 $ 0.76 $ 0.97 $ 1.00 Income from Investment Operations: Net Investment Income....................................... 0.02 0.01 0.01 -- Net Realized and Unrealized Gains (Losses) on Investments... 0.15 0.24 (0.21) (0.03) -------- -------- -------- ------- Total from Investment Operations........................... 0.17 0.25 (0.20) (0.03) -------- -------- -------- ------- Less Distributions: Distributions from Net Investment Income.................... (0.01) (0.01) (0.01) -- Distributions from Realized Gains on Investments............ (0.02) -- -- -- -------- -------- -------- ------- Total Distributions........................................ (0.03) (0.01) (0.01) -- -------- -------- -------- ------- Net Asset Value, End of Period.................................. $ 1.14 $ 1.00 $ 0.76 $ 0.97 ======== ======== ======== ======= Total Return(d)................................................. 16.85% 34.41% (21.24%) (2.19%) ======== ======== ======== ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $211,977 $136,099 $ 74,274 $40,722 ======== ======== ======== ======= Ratio of Gross Expenses to Average Net Assets................... 0.62% 0.67% 0.70% 0.90%(c) ======== ======== ======== ======= Ratio of Net Expenses to Average Net Assets..................... 0.62% 0.67% 0.70% 0.75%(c) ======== ======== ======== ======= Ratio of Net Investment Income to Average Net Assets............ 1.63% 1.84% 1.54% 1.32%(c) ======== ======== ======== ======= Portfolio Turnover Rate......................................... 32.97% 29.20% 22.42% 18.98% ======== ======== ======== =======
For the For the Period Year Ended May 1, 2003(b) T. Rowe Price Equity Income Portfolio December 31, through (For a share outstanding throughout the period) 2004 December 31, - ------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.22 $ 1.00 Income from Investment Operations: Net Investment Income....................................... 0.02 0.01 Net Realized and Unrealized Gains (Losses) on Investments... 0.17 0.23 ------- ------- Total from Investment Operations........................... 0.19 0.24 ------- ------- Less Distributions: Distributions from Net Investment Income.................... (0.02) (0.01) Distributions from Realized Gains on Investments............ (0.04) (0.01) ------- ------- Total Distributions........................................ (0.06) (0.02) ------- ------- Net Asset Value, End of Period.................................. $ 1.35 $ 1.22 ======= ======= Total Return(d)................................................. 15.16% 23.64% ======= ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $89,747 $47,664 ======= ======= Ratio of Gross Expenses to Average Net Assets................... 0.69% 0.77%(c) ======= ======= Ratio of Net Expenses to Average Net Assets..................... 0.69% 0.75%(c) ======= ======= Ratio of Net Investment Income to Average Net Assets............ 1.74% 1.88%(c) ======= ======= Portfolio Turnover Rate......................................... 15.21% 27.27% ======= =======
(a)Portfolio commenced operations July 31, 2001. (b)Portfolio commenced operations on May 1, 2003. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. The Accompanying Notes are an Integral Part of the Financial Statements. 142 Financial Highlights Financial Highlights Northwestern Mutual Series Fund, Inc.
Index 500 Stock Portfolio For the Year Ended December 31, ----------------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 2.72 $ 2.17 $ 2.87 $ 3.41 $ 3.89 Income from Investment Operations: Net Investment Income (Loss)................................ 0.05 0.04 0.03 0.03 0.04 Net Realized and Unrealized Gains (Losses) on Investments... 0.24 0.56 (0.64) (0.43) (0.37) ---------- ---------- ---------- ---------- ---------- Total from Investment Operations........................... 0.29 0.60 (0.61) (0.40) (0.33) ---------- ---------- ---------- ---------- ---------- Less Distributions: Distributions from Net Investment Income.................... (0.04) (0.04) (0.03) (0.04) (0.04) Distributions from Realized Gains on Investments............ (0.03) (0.01) (0.06) (0.10) (0.11) ---------- ---------- ---------- ---------- ---------- Total Distributions........................................ (0.07) (0.05) (0.09) (0.14) (0.15) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period.................................. $ 2.94 $ 2.72 $ 2.17 $ 2.87 $ 3.41 ========== ========== ========== ========== ========== Total Return(d)................................................. 10.70% 28.43% (22.07%) (11.88%) (8.75%) ========== ========== ========== ========== ========== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $1,904,122 $1,756,120 $1,362,881 $1,821,875 $2,072,937 ========== ========== ========== ========== ========== Ratio of Expenses to Average Net Assets......................... 0.20% 0.20% 0.21% 0.21% 0.20% ========== ========== ========== ========== ========== Ratio of Net Investment Income to Average Net Assets............ 1.83% 1.59% 1.40% 1.13% 1.08% ========== ========== ========== ========== ========== Portfolio Turnover Rate......................................... 3.45% 2.44% 6.55% 2.92% 6.47% ========== ========== ========== ========== ==========
For the Period July 31, 2001(a) Asset Allocation Portfolio For the Year Ended December 31, through -------------------------------- December 31, (For a share outstanding throughout the period) 2004 2003 2002 2001 - ------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.02 $ 0.86 $ 0.97 $ 1.00 Income from Investment Operations: Net Investment Income....................................... 0.02 0.02 0.01 0.01 Net Realized and Unrealized Gains (Losses) on Investments... 0.08 0.16 (0.11) (0.03) -------- -------- -------- ------- Total from Investment Operations........................... 0.10 0.18 (0.10) (0.02) -------- -------- -------- ------- Less Distributions: Distributions from Net Investment Income.................... -- (0.02) (0.01) (0.01) Distributions from Realized Gains on Investments............ -- -- -- -- -------- -------- -------- ------- Total Distributions........................................ -- (0.02) (0.01) (0.01) -------- -------- -------- ------- Net Asset Value, End of Period.................................. $ 1.12 $ 1.02 $ 0.86 $ 0.97 ======== ======== ======== ======= Total Return(d)................................................. 10.02% 20.63% (10.26%) (2.10%) ======== ======== ======== ======= Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $196,568 $130,478 $ 87,260 $40,116 ======== ======== ======== ======= Ratio of Gross Expenses to Average Net Assets................... 0.64% 0.73% 0.87% 0.92%(c) ======== ======== ======== ======= Ratio of Net Expenses to Average Net Assets..................... 0.64% 0.73% 0.75% 0.75%(c) ======== ======== ======== ======= Ratio of Net Investment Income to Average Net Assets............ 1.90% 1.83% 2.18% 2.19%(c) ======== ======== ======== ======= Portfolio Turnover Rate......................................... 116.65% 103.77% 112.73% 55.88% ======== ======== ======== =======
(a)Portfolio commenced operations July 31, 2001. (c)Computed on an annualized basis. (d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. The Accompanying Notes are an Integral Part of the Financial Statements. Financial Highlights 143 Financial Highlights Northwestern Mutual Series Fund, Inc.
Balanced Portfolio For the Year Ended December 31, ----------------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.85 $ 1.62 $ 1.82 $ 2.03 $ 2.22 Income from Investment Operations: Net Investment Income (Loss)................................ 0.05 0.05 0.06 0.08 0.08 Net Realized and Unrealized Gains (Losses) on Investments... 0.09 0.24 (0.20) (0.13) (0.09) ---------- ---------- ---------- ---------- ---------- Total from Investment Operations........................... 0.14 0.29 (0.14) (0.05) (0.01) ---------- ---------- ---------- ---------- ---------- Less Distributions: Distributions from Net Investment Income.................... (0.05) (0.06) (0.06) (0.08) (0.07) Distributions from Realized Gains on Investments............ (0.07) -- -- (0.08) (0.11) ---------- ---------- ---------- ---------- ---------- Total Distributions........................................ (0.12) (0.06) (0.06) (0.16) (0.18) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period.................................. $ 1.87 $ 1.85 $ 1.62 $ 1.82 $ 2.03 ========== ========== ========== ========== ========== Total Return(d)................................................. 7.89% 17.99% (7.54%) (3.15%) (0.17%) ========== ========== ========== ========== ========== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $2,983,179 $2,891,488 $2,561,529 $3,011,137 $3,253,199 ========== ========== ========== ========== ========== Ratio of Expenses to Average Net Assets......................... 0.30% 0.30% 0.30% 0.30% 0.30% ========== ========== ========== ========== ========== Ratio of Net Investment Income to Average Net Assets............ 2.71% 2.74% 3.08% 3.75% 3.47% ========== ========== ========== ========== ========== Portfolio Turnover Rate......................................... 100.02% 69.56% 53.12% 50.37% 24.36% ========== ========== ========== ========== ==========
High Yield Bond Portfolio For the Year Ended December 31, ---------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 0.73 $ 0.56 $ 0.65 $ 0.69 $ 0.82 Income from Investment Operations: Net Investment Income....................................... 0.05 0.05 0.07 0.08 0.09 Net Realized and Unrealized Gains (Losses) on Investments... 0.03 0.12 (0.09) (0.04) (0.13) -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.08 0.17 (0.02) 0.04 (0.04) -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.05) (0.00)(e) (0.07) (0.08) (0.09) Distributions from Realized Gains on Investments............ -- -- -- -- -- -------- -------- -------- -------- -------- Total Distributions........................................ (0.05) -- (0.07) (0.08) (0.09) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 0.76 $ 0.73 $ 0.56 $ 0.65 $ 0.69 ======== ======== ======== ======== ======== Total Return(d)................................................. 12.76% 29.06% (2.89%) 5.03% (4.60%) ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $229,312 $199,371 $137,553 $147,670 $138,207 ======== ======== ======== ======== ======== Ratio of Gross Expenses to Average Net Assets................... 0.50% 0.52% 0.54% 0.53% 0.53% ======== ======== ======== ======== ======== Ratio of Net Expenses to Average Net Assets..................... 0.50% 0.52% 0.54% 0.53% 0.52% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets............ 7.42% 8.66% 10.37% 10.48% 10.90% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 162.00% 182.10% 89.20% 96.41% 124.91% ======== ======== ======== ======== ========
(d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. (e)Amount is less than $0.005. The Accompanying Notes are an Integral Part of the Financial Statements. 144 Financial Highlights Financial Highlights Northwestern Mutual Series Fund, Inc.
Select Bond Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period............................ $ 1.26 $ 1.27 $ 1.20 $ 1.16 $ 1.13 Income from Investment Operations: Net Investment Income....................................... 0.05 0.05 0.05 0.06 0.08 Net Realized and Unrealized Gains (Losses) on Investments... 0.01 0.02 0.09 0.05 0.03 -------- -------- -------- -------- -------- Total from Investment Operations........................... 0.06 0.07 0.14 0.11 0.11 -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income.................... (0.05) (0.05) (0.06) (0.07) (0.08) Distributions from Realized Gains on Investments............ (0.04) (0.03) (0.01) -- -- -------- -------- -------- -------- -------- Total Distributions........................................ (0.09) (0.08) (0.07) (0.07) (0.08) -------- -------- -------- -------- -------- Net Asset Value, End of Period.................................. $ 1.23 $ 1.26 $ 1.27 $ 1.20 $ 1.16 ======== ======== ======== ======== ======== Total Return(d)................................................. 4.75% 5.49% 12.09% 10.37% 10.21% ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)........................ $661,027 $621,325 $584,018 $405,406 $291,678 ======== ======== ======== ======== ======== Ratio of Expenses to Average Net Assets......................... 0.30% 0.30% 0.30% 0.30% 0.30% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets............ 3.99% 4.03% 5.01% 6.15% 6.84% ======== ======== ======== ======== ======== Portfolio Turnover Rate......................................... 213.87% 137.05% 184.37% 151.27% 139.89% ======== ======== ======== ======== ========
Money Market Portfolio For the Year Ended December 31, ------------------------------------------------- (For a share outstanding throughout the period) 2004 2003 2002 2001 2000 - ------------------------------------------------------------------------------------------------------ Selected Per Share Data Net Asset Value, Beginning of Period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Income from Investment Operations: Net Investment Income........................... 0.01 0.01 0.02 0.04 0.06 -------- -------- -------- -------- -------- Total from Investment Operations............... 0.01 0.01 0.02 0.04 0.06 -------- -------- -------- -------- -------- Less Distributions: Distributions from Net Investment Income........ (0.01) (0.01) (0.02) (0.04) (0.06) -------- -------- -------- -------- -------- Total Distributions............................ (0.01) (0.01) (0.02) (0.04) (0.06) -------- -------- -------- -------- -------- Net Asset Value, End of Period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total Return(d)..................................... 1.43% 1.23% 1.65% 3.91% 6.28% ======== ======== ======== ======== ======== Ratios and Supplemental Data Net Assets, End of Period (in thousands)............ $344,468 $399,873 $501,313 $458,689 $384,455 ======== ======== ======== ======== ======== Ratio of Gross Expenses to Average Net Assets(f).... 0.30% 0.30% 0.30% 0.30% 0.30% ======== ======== ======== ======== ======== Ratio of Net Expenses to Average Net Assets(f)...... 0.00% 0.00% 0.27% 0.30% 0.30% ======== ======== ======== ======== ======== Ratio of Net Investment Income to Average Net Assets 1.41% 1.23% 1.63% 3.76% 6.08% ======== ======== ======== ======== ========
(d)Total Return includes deductions for management and other fund expenses; excludes deductions for sales loads and account fees, not annualized for period less than one year. For the Money Market Portfolio, total return includes the effect of a management fee waiver from December 2, 2002 through December 31, 2004, which ended on December 31, 2004. In the absence of such fee waiver, the total return would be less. (f)For the Money Market Portfolio, expense ratios reflect total expenses before a management fee waiver in effect for the period December 2, 2002 through December 31, 2004 ("Gross Expense Ratio") and after such waiver ("Net Expense Ratio"). The fee waiver ended on December 31, 2004. The Accompanying Notes are an Integral Part of the Financial Statements. Financial Highlights 145 Notes to Financial Statements Northwestern Mutual Series Fund, Inc. December 31, 2004 Note 1 -- Northwestern Mutual Series Fund, Inc. (the "Series Fund") is registered as a diversified open-end investment company under the Investment Company Act of 1940. The Series Fund consists of the Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Portfolio, Franklin Templeton International Equity Portfolio, AllianceBernstein Mid Cap Value Portfolio, Index 400 Stock Portfolio, Janus Capital Appreciation Portfolio, Growth Stock Portfolio, Large Cap Core Stock Portfolio, Capital Guardian Domestic Equity Portfolio, T. Rowe Price Equity Income Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and the Money Market Portfolio (the "Portfolios"). Shares are presently offered only to The Northwestern Mutual Life Insurance Company ("Northwestern Mutual") and its segregated asset accounts. Note 2 -- The preparation of the 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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below. Note 3 -- Stocks listed on a national or foreign stock exchange are generally valued at the last sale price on the exchange on which the security is principally traded. Stocks listed on the NASDAQ Stock Market, Inc. ("NASDAQ") for which a NASDAQ Official Closing Price ("NOCP") is available are valued at the NOCP. If there has been no sale on such exchange or on NASDAQ, the security is valued at the prior day's price. Stocks traded only in the over-the-counter market and not on a securities exchange or NASDAQ are valued at the latest bid price. Bonds are valued on the basis of prices furnished by a service which determines prices for normal institutional-size trading units of bonds. Securities for which current market quotations are not readily available are valued at fair value determined by procedures approved by the Board of Directors. The fair value procedure is used if a significant event that is likely to have affected the value of the securities takes place after the time of the most recent market quotations or the market quotations for other reasons do not reflect information material to the value of those securities. Generally, money market investments, other than in the Money Market Portfolio, with maturities exceeding sixty days are valued by marking to market on the basis of an average of the most recent bid prices or yields. Generally, money market investments with maturities of sixty days or less and all securities in the Money Market Portfolio are valued on an amortized cost basis or, if the current market value differs substantially from the amortized cost, by marking to market. Note 4 -- Certain of the Portfolios may have securities and other assets and liabilities denominated in foreign currencies which are translated into U.S. dollar amounts on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. When the Portfolios purchase or sell a foreign security they may enter into a foreign currency exchange contract to minimize market risk from the trade date to the settlement date of such transaction. Such foreign currency exchange contracts are marked to market daily. The Portfolios may enter into forward foreign currency contracts to hedge against exchange rate risk arising from investments in securities denominated in foreign currencies. Contracts are valued at the contractual forward rate and are marked to market daily, with the change in market value recorded as an unrealized gain or loss. When the contracts are closed, a realized gain or loss is recorded. Risks may arise from changes in market value of the underlying instruments and from the possible inability of counterparties to meet the terms of their contracts. The Portfolios do not separately report the results of operations due to changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized or unrealized gain or loss from investments. Net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade date and the settlement date on security transactions, and the differences between the amounts of dividends and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent of the amounts actually received or paid. Note 5 -- The Small Cap Growth Stock, Aggressive Growth Stock, Index 400 Stock, Growth Stock, Index 500 Stock, Asset Allocation, Balanced and Select Bond Portfolios invest in futures contracts as an alternative to investing in individual securities and could be exposed to market risk due to changes in the value of the underlying securities or due to an illiquid secondary market. Futures contracts are marked to market daily based upon quoted settlement prices. The Portfolios receive from or pay to brokers an amount of cash equal to the daily fluctuation in the value of the contracts. Such receipts or payments, known as the "variation margin", are recorded by the Portfolios as unrealized gains or losses. When a contract is closed, the Portfolios record a realized gain or loss 146 Notes to Financial Statements Notes to Financial Statements equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. For federal income tax purposes, net unrealized appreciation (depreciation) on open futures contracts is generally required to be treated as realized gains (losses). Note 6 -- The Series Fund has a securities lending program that enables each Portfolio, except the Money Market Portfolio, to loan securities to approved broker-dealers. The Portfolio receives cash (U.S. currency), U.S. Government or U.S. Government agency obligations as collateral against the loaned securities. To the extent that a loan is collateralized by cash, such collateral shall be invested by the Portfolio to earn interest in accordance with the Portfolio's investment policies. For the year ended December 31, 2004, the Balanced and Select Bond Portfolios earned $668,836 and $237,170, respectively, in interest from securities lending activity. The collateral received under the securities lending program is recorded on the Portfolio's statement of assets and liabilities along with the related obligation to return the collateral. Income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs, is recorded as income for the Portfolio. All collateral received will be in an amount at least equal to 102% (for loans of U.S. securities) or 105% (for non-U.S. securities) of the market value of the loaned securities at the inception of each loan. Thereafter, each loan must be continuously secured by collateral at least equal at all times to the value of the securities lent. In addition, the Portfolio is entitled to terminate a securities loan at any time. As of December 31, 2004, the value of outstanding securities on loan and the value of collateral amounted to the following:
Value of Value of Portfolio Securities on Loan Collateral --------- ------------------ ------------ Balanced... $165,690,223 $169,514,375 Select Bond 60,110,744 61,538,750
As of December 31, 2004, collateral received for securities on loan is invested in money market instruments and included in Investments on the Portfolio's Statement of Assets and Liabilities. Note 7 -- The Asset Allocation, Balanced and Select Bond Portfolios have entered into mortgage dollar rolls. Dollar roll transactions consist of the sale by a portfolio to a bank or broker/dealer (the "counterparty") of mortgage-backed securities together with a commitment to purchase from the counterparty similar, but not identical, securities at a future date, at a similar price. As of December 31, 2004, the following mortgage dollar rolls were outstanding:
Obligation Portfolio Cost Value Liability --------- ----------- ----------- ----------- Asset Allocation $ 832,344 $ 829,520 $ 834,235 Balanced........ 28,369,720 28,271,061 28,434,401 Select Bond..... 19,601,555 19,530,944 19,646,540
The obligation liability is included in Due on Purchase of Securities and Securities Lending Collateral on the Portfolio's Statement of Assets and Liabilities. Securities subject to these agreements had a contractual maturity of 1/1/35. The weighted average interest rate was 5.04% for the Asset Allocation Portfolio, 5.01% for the Balanced Portfolio, and 4.97% for the Select Bond Portfolio. Note 8 -- Interest income is recorded daily on the accrual basis and dividend income is recorded on the ex-dividend date or as soon as information from foreign issuers is available. Where applicable, dividends are recorded net of foreign dividend tax. Discounts and premiums on securities purchased are amortized over the life of the respective securities using the effective interest method. Securities transactions are accounted for on trade date. The basis for determining cost on sale of securities is identified cost. For the year ended December 31, 2004, transactions in securities other than money market investments were:
U.S. Total U.S. Govt. Total Govt. Security Security Security Security Sales/ Sales/ Portfolio Purchases Purchases Maturities Maturities - --------- ---------- ---------- ---------- ---------- (Amounts in thousands) Small Cap Growth Stock................. $ 327,093 $ -- $ 327,606 $ -- T. Rowe Price Small Cap Value.......... 70,599 -- 28,459 -- Aggressive Growth Stock................ 823,943 -- 883,547 -- International Growth................... 79,845 -- 56,396 -- Franklin Templeton International Equity 186,334 -- 151,580 -- AllianceBernstein Mid Cap Value........ 34,268 -- 17,203 -- Index 400 Stock........................ 65,804 -- 57,144 -- Janus Capital Appreciation............. 14,908 -- 9,657 -- Growth Stock........................... 217,166 -- 243,022 -- Large Cap Core Stock................... 146,925 -- 155,679 -- Capital Guardian Domestic Equity....... 94,874 -- 51,359 -- T. Rowe Price Equity Income............ 40,085 -- 9,582 -- Index 500 Stock........................ 60,801 -- 66,318 Asset Allocation....................... 138,761 75,970 93,814 75,446 Balanced............................... 1,317,032 1,399,087 1,062,984 1,470,018 High Yield Bond........................ 339,832 -- 316,609 -- Select Bond............................ 806,314 545,150 686,775 599,409
Notes to Financial Statements 147 Notes to Financial Statements Note 9 -- The Series Fund and its Portfolios are parties to annually renewable contracts pursuant to which each Portfolio pays a charge for investment management and administrative services. Certain Portfolios, listed below, pay at a fixed annual rate based on the average daily net asset values of the Portfolio.
Portfolio Fee --------- ---- T. Rowe Price Small Cap Value.. .85% AllianceBernstein Mid Cap Value .85% Index 400 Stock................ .25% Index 500 Stock................ .20% Balanced....................... .30% Select Bond.................... .30% Money Market................... .30%
For the other Portfolios the rate for the investment advisory fee is graded by the asset size of the Portfolio according to the following schedules:
First Next $50 $50 Portfolio Million Million Excess --------- ------- ------- ------ Small Cap Growth Stock................. .80% .65% .50% Aggressive Growth Stock................ .80% .65% .50% Franklin Templeton International Equity .85% .65% .65% Growth Stock........................... .60% .50% .40% Large Cap Core Stock................... .60% .50% .40% High Yield Bond........................ .60% .50% .40% First Next $100 $150 Portfolio Million Million Excess --------- ------- ------- ------ International Growth................... .75% .65% .55% Capital Guardian Domestic Equity....... .65% .55% .50% Asset Allocation....................... .60% .50% .40% First $500 Portfolio Million Excess --------- ------- ------- T. Rowe Price Equity Income............ .65% .60% First Next $100 $400 Portfolio Million Million Excess --------- ------- ------- ------ Janus Capital Appreciation............. .80% .75% .70%
Mason Street Advisors, LLC ("MSA"), a wholly owned subsidiary of Northwestern Mutual and the manager and investment adviser of the Series Fund, contractually agreed to waive the management fee and absorb certain other operating expenses to the extent necessary so that Total Operating Expenses will not exceed the following amounts:
Portfolio Experation --------- ----------------- T. Rowe Price Small Cap Value... 1.00% December 31, 2006 International Growth............ 1.10% December 31, 2006 AllianceBernstein Mid Cap Value. 1.00% December 31, 2008 Janus Capital Appreciation...... 0.90% December 31, 2008 Capital Guardian Domestic Equity 0.75% December 31, 2006 T. Rowe Price Equity Income..... 0.75% December 31, 2008 Asset Allocation................ 0.75% December 31, 2006
MSA voluntarily waived its management fee from December 2, 2002 to December 31, 2004 for the Money Market Portfolio. The investment advisory fee is paid to MSA. Other costs for each Portfolio are paid either by the Portfolios or MSA depending upon the applicable agreement in place. All of the Portfolios, except for the Balanced, Select Bond and Money Market Portfolios, pay their own custodian fees. Certain Portfolios, listed below, pay a portion of their custodian fees indirectly through expense offset arrangements. Custodian fees are reduced for Portfolios that maintain compensating balances in non-interest bearing accounts. These Portfolios could have invested the assets used to pay for the custodian fees, had the assets not been used in the expense offset arrangements. For the year ended December 31, 2004, the amounts paid through expense offset arrangements were as follows:
Portfolio Amount --------- ------ Small Cap Growth Stock.......... $1,098 T. Rowe Price Small Cap Value... 646 Aggressive Growth Stock......... 4,204 AllianceBernstein Mid Cap Value. 610 Index 400 Stock................. 904 Janus Capital Appreciation...... 343 Growth Stock.................... 610 Large Cap Core Stock............ 834 Capital Guardian Domestic Equity 834 T. Rowe Price Equity Income..... 198 Index 500 Stock................. 454 Asset Allocation................ 905 High Yield Bond................. 2,535
T. Rowe Price Associates, Inc. ("T. Rowe Price"), Templeton Investment Counsel, LLC. ("Templeton Counsel"), Alliance Capital Management L.P., ("Alliance Capital Management"), Janus Capital Management, LLC ("Janus Capital") and Capital Guardian Trust Company ("Capital Guardian") have been retained under investment subadvisory agreements to provide investment advice and, in general, to conduct the management investment programs of the T. Rowe Price Small Cap Value and T. Rowe Price Equity Income Portfolios, the Franklin Templeton International Equity Portfolio, the AllianceBernstein Mid Cap Value Portfolio, the Janus Capital Appreciation Portfolio and the Capital Guardian Domestic Equity Portfolio, respectively. MSA pays T. Rowe Price an annual rate of .60% of the T. Rowe Price Small Cap Value Portfolio's average daily net assets. MSA pays Templeton Counsel .50% on the first $100 million of combined net assets for all funds managed for Northwestern Mutual by Templeton Counsel and .40% in excess of $100 million. MSA pays Alliance Capital Management .72% on the first $25 million of the Portfolio's assets, .54% on the next $225 million, and .50% in excess of $250 million, with a minimum amount of $16,000. MSA pays Janus Capital .55% on the first $100 million of the Portfolio's assets, .50% on the next $400 million, and .45% on assets in excess of $500 million. MSA pays Capital Guardian a flat annual fee of $375,000 on the Portfolio's assets of $100 million or less and .275% on net assets in excess of $100 million. For the 148 Notes to Financial Statements Notes to Financial Statements T. Rowe Price Equity Income Portfolio, MSA pays T. Rowe Price .40% of the Portfolio's assets, reduced to .35% on assets in excess of $500 million. Commissions paid on Portfolio transactions to an affiliated broker for the year ended December 31, 2004, were as follows:
Portfolio Amount --------- ------- Small Cap Growth Stock......... $19,510 T. Rowe Small Cap Value........ 165 Aggressive Growth Stock........ 61,610 AllianceBernstein Mid Cap Value 30,068 T. Rowe Price Equity Income.... 440
Note 10 -- Each of the Portfolios of the Series Fund has elected to be taxed as a regulated investment company meeting certain requirements under the Internal Revenue Code. Since each expects to distribute all net investment income and net realized capital gains, the Portfolios anticipate incurring no federal income taxes. Taxable distributions from net investment income and realized capital gains in the Portfolios may differ from book amounts earned during the period due to differences in the timing of capital gains recognition and due to the reclassification of certain gains or losses between capital and income. The differences between cost amounts for book purposes and tax purposes are primarily due to treatment of deferred losses. It is the policy of the Portfolios to reclassify the net effect of permanent differences between book and taxable income to capital accounts on the Statements of Assets and Liabilities. Certain losses incurred by the Portfolios after October 31st are deferred and deemed to have occurred in the next fiscal year for income tax purposes. Net realized capital losses for federal income tax purposes are carried forward to offset future net realized gains. A summary of the Portfolios' post-October losses and capital loss carryovers as of December 31, 2004 is provided below:
Post-October Losses Capital Loss Carryovers ---------------- ---------------------------- Foreign Utilized Portfolio Capital Currency Amount Expiration in 2004 - --------- ------- -------- -------- ---------- -------- (Amounts in Thousands) Small Cap Growth Stock................. $ -- $-- $ -- -- $25,605 T. Rowe Price Small Cap Value.......... -- -- -- -- -- Aggressive Growth Stock................ -- -- 108,215 2010-2011 95,296 International Growth................... -- -- 597 2011 4,716 Franklin Templeton International Equity -- 24 66,733 2010-2011 53,475 AllianceBernstein Mid Cap Value........ -- -- -- -- -- Index 400 Stock........................ -- -- -- -- -- Janus Capital Appreciation............. 40 -- 507 2012 -- Growth Stock........................... -- -- 65,078 2009-2010 30,055 Large Cap Core Stock................... -- -- 165,188 2009-2012 -- Capital Guardian Domestic Equity....... -- -- -- -- 3,619 T. Rowe Price Equity Income............ -- -- -- -- -- Index 500 Stock........................ -- -- -- -- -- Asset Allocation....................... -- -- -- -- 556 Balanced............................... -- -- -- -- -- High Yield Bond........................ -- -- 65,399 2007-2010 11,029 Select Bond............................ 1,092 -- -- -- --
Note 11 -- Dividends from net investment income and net realized capital gains are declared each business day for the Money Market Portfolio and at least annually for the remaining portfolios of the Series Fund when applicable. Note 12 -- Northwestern Mutual voluntarily reimburses the Franklin Templeton International Equity and International Growth Portfolios for the benefit Northwestern Mutual receives from foreign dividend taxes charged against the Portfolios. The amounts reimbursed represent approximately 65% of the foreign dividend taxes withheld from the Portfolios. Reimbursements are recorded when foreign dividend taxes are accrued. Voluntary reimbursements for the year ended December 31, 2004 and the year ended December 31, 2003 are summarized below:
2004 2003 Portfolio Reimbursements Reimbursements --------- -------------- -------------- International Growth............ $ 101,251 $ 68,922 Franklin Templeton International Equity......................... 1,778,426 1,469,313
Notes to Financial Statements 149 Notes to Financial Statements Note 13 -- Distributions to Shareholders When applicable, each of the Portfolios made distributions during the year of ordinary income and long-term capital gains.The tax character of distributions paid for the periods ended December 31, 2004 and December 31, 2003 were as follows:
2004 Distributions Paid From: 2003 Distributions Paid From: ----------------------------- ----------------------------- Ordinary Long-term Ordinary Long-term Portfolio Income Capital Gain Income Capital Gain - --------- -------- ------------ -------- ------------ (Amounts in Thousands) Small Cap Growth Stock............................ $ -- $ -- $ -- $ -- T. Rowe Price Small Cap Value..................... 902 1,354 -- -- Aggressive Growth Stock........................... -- -- -- -- International Growth.............................. 625 -- 420 -- Franklin Templeton International Equity........... 14,573 -- 11,039 -- AllianceBernstein Mid Cap Value................... 2,223 2,546 541 -- Index 400 Stock................................... 2,523 2,269 1,934 -- Janus Capital Appreciation........................ 51 -- 91 -- Growth Stock...................................... 4,542 -- 4,774 -- Large Cap Core Stock.............................. 4,200 -- 3,770 -- Capital Guardian Domestic Equity.................. 2,660 2,783 1,804 -- T. Rowe Price Equity Income....................... 2,041 1,278 651 -- Index 500 Stock................................... 27,018 16,059 21,914 8,037 Asset Allocation.................................. -- -- 2,122 -- Balanced.......................................... 79,236 98,256 85,974 -- High Yield Bond................................... 14,554 -- 362 -- Select Bond....................................... 39,008 4,298 38,274 -- Money Market...................................... 5,155 -- 5,836 --
As of December 31 2004, the tax basis amounts were as follows:
Undistributed Undistributed Unrealized Ordinary Long-term Accumulated Appreciation Portfolio Income Gains Losses (Depreciation) - --------- ------------- ------------- ----------- -------------- (Amounts in Thousands) Small Cap Growth Stock............................ $ -- $ 4,453 $ -- $ 92,100 T. Rowe Price Small Cap Value..................... 3,947 2,533 -- 49,467 Aggressive Growth Stock........................... 634 -- (108,215) 251,252 International Growth.............................. 77 -- (597) 27,931 Franklin Templeton International Equity........... 18,202 -- (66,757) 225,375 AllianceBernstein Mid Cap Value................... 72 260 -- 14,295 Index 400 Stock................................... 6,204 18,537 -- 75,445 Janus Capital Appreciation........................ -- -- (547) 14,602 Growth Stock...................................... 7,067 -- (65,078) 85,167 Large Cap Core Stock.............................. 6,146 -- (165,188) 66,322 Capital Guardian Domestic Equity.................. 59 4,773 -- 32,543 T. Rowe Price Equity Income....................... 165 583 -- 13,229 Index 500 Stock................................... 33,494 31,634 -- 484,526 Asset Allocation.................................. 3,233 3,390 -- 21,636 Balanced.......................................... 103,513 15,994 -- 666,572 High Yield Bond................................... 15,558 -- (65,399) 9,028 Select Bond....................................... 29,345 -- (1,092) (1,879)
150 Notes to Financial Statements Report of Independent Registered Public Accounting Firm [GRAPHIC] PricewaterhouseCoopers PricewaterhouseCoopers LLP 100 E. Wisconsin Ave. Suite 1500 Milwaukee WI 53202 Telephone (414) 212-1600 Facsimile (414) 212-1880 To the Shareholders and Board of Directors of Northwestern Mutual Series Fund, Inc. In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Small Cap Growth Stock Portfolio, T. Rowe Price Small Cap Value Portfolio, Aggressive Growth Stock Portfolio, International Growth Portfolio, Franklin Templeton International Equity Portfolio, AllianceBernstein Mid Cap Value Portfolio, Index 400 Stock Portfolio, Janus Capital Appreciation Portfolio, Growth Stock Portfolio, Large Cap Core Stock Portfolio, Capital Guardian Domestic Equity Portfolio, T. Rowe Price Equity Income Portfolio, Index 500 Stock Portfolio, Asset Allocation Portfolio, Balanced Portfolio, High Yield Bond Portfolio, Select Bond Portfolio and Money Market Portfolio (constituting Northwestern Mutual Series Fund, Inc., hereafter referred to as the "Fund") at December 31, 2004, the results of each of their operations, the changes in each of their net assets and their financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with standards set forth by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodians and brokers, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Milwaukee, Wisconsin January 31, 2005 151 Report of Independent Registered Public Accounting Firm Proxy Voting and Portfolio Holdings Proxy Voting Guidelines A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling toll free 1-888-455-2232. It is also available on the Securities and Exchange Commission's website at http://www.sec.gov. Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge, upon request, by calling toll free 1-888-455-2232. It is also available on the Securities and Exchange Commission's website at http://www.sec.gov. Quarterly Filing of Portfolio Holdings The Fund files its complete schedule of portfolio holdings with the Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Q filings are available (i) on the Commission's website at http://www.sec.gov and (ii) at the Commission's Public Reference Room. Proxy Voting and Portfolio Holdings 152 Director and Officer Information (Unaudited) Northwestern Mutual Series Fund, Inc. The name, age and address of the directors, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and the number of portfolios overseen in the Northwestern Mutual fund complex, are shown below as of February 1, 2005. Effective May 1, 2003, each director shall serve for a twelve-year term commencing May 1, 2003 or until their earlier death, resignation, retirement or removal from office and election and qualification of their successors. The statement of additional information contains additional information about Fund directors and is available without charge, upon request, by calling 1-888-627-6678. Independent Directors Number of Portfolios Length of in Fund Complex Name Age and Address Position Time Served Overseen by Director Other Directorships Held - ---------------------------------------------------------------------------------------------------- Louis A. Holland (63) Director Since 2003 29 Packaging Corporation of Suite 700 America; 1 North Wacker Drive Lou Holland Growth Fund Chicago, IL 60606 Principal Occupation During Past 5 Years: Managing Partner and Chief Investment Officer, Holland Capital Management, L.P.; Portfolio Manager, Lou Holland Growth Fund - ---------------------------------------------------------------------------------------------------- Elizabeth L. Majers (46) Director Since 2003 29 None 370 Shadowood Lane Northfield, IL 60093 Principal Occupation During Past 5 Years: Partner, McDermott, Will & Emery (international law firm) - ---------------------------------------------------------------------------------------------------- William A. McIntosh (65) Director Since 1997 29 MGIC Investment Corporation; 525 Sheridan Road Comdisco Holding Company, Kenilworth, IL 60043 Inc. Principal Occupation During Past 5 Years: Financial consulting since 1998; Adjunct Faculty Member, Howard University - ---------------------------------------------------------------------------------------------------- Michael G. Smith (60) Director Since 2003 29 Trustee of Ivy Fund 221 North Adams Hinsdale, IL 60521 Principal Occupation During Past 5 Years: Private investor; retired since 1999. From 1987 to 1999, Managing Director, Corporate and Institutional Client Group, Central Region, Merrill Lynch and Co., Inc. - ---------------------------------------------------------------------------------------------------- Martin F. Stein (67) Director Since 1995 29 Koss Corporation 1800 East Capitol Drive Milwaukee, WI 53211 Principal Occupation During Past 5 Years: Former Chairman of Eyecare One, Inc., which includes Stein Optical and Eye Q optical centers (retail sales of eyewear) - ---------------------------------------------------------------------------------------------------- Other Directors Number of Portfolios Length of in Fund Complex Name Age and Address Position Time Served Overseen by Director Other Directorships Held - ---------------------------------------------------------------------------------------------------- Edward J. Zore (59) Chairman Since 2000 29 Manpower, Inc.; 720 East Wisconsin Avenue and Director Trustee of Northwestern Milwaukee, WI 53202 Mutual Principal Occupation During Past 5 Years: President and Chief Executive Officer of Northwestern Mutual since 2001; President, 2000-2001; prior thereto, Executive Vice President - ---------------------------------------------------------------------------------------------------- Officers Mark G. Doll........................................................... President Walter M. Givler....................................................... Chief Financial Officer Michael W. Zielinski................................................... Secretary Barbara E. Courtney.................................................... Controller
153 Director and Officer Information Fidelity(R) Variable Insurance Products: Mid Cap Portfolio [GRAPHIC] Annual Report December 31, 2004 [LOGO] Fidelity(R) INVESTMENTS Contents Performance 3 How the fund has done over time. Management's Discussion 4 The manager's review of fund performance, strategy and outlook. Shareholder Expense Example 5 An example of shareholder expenses. Investment Summary 6 A summary of the fund's investments at period end. Investments 7 A complete list of the fund's investments with their market values. Financial Statements 19 Statements of assets and liabilities, operations, and changes in net assets, as well as financial highlights. Notes 23 Notes to the financial statements. Report of Independent Registered Public 27 Accounting Firm Trustees and Officers 28 Distributions 33 Proxy Voting Results 34
To view a fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30, visit www.fidelity.com/proxyvotingresults or visit the Securities and Exchange Commission's (SEC) web site at www.sec.gov. You may also call 1-800-544-5429 to request a free copy of the proxy voting guidelines. Fidelity Variable Insurance Products are separate account options which are purchased through a variable insurance contract. Standard & Poor's, S&P and S&P 500 are registered service marks of The McGraw-Hill Companies, Inc. and have been licensed for use by Fidelity Distributors Corporation. Other third party marks appearing herein are the property of their respective owners. All other marks appearing herein are registered or unregistered trademarks or service marks of FMR Corp. or an affiliated company. This report and the financial statements contained herein are submitted for the general information of the shareholders of the fund. This report is not authorized for distribution to prospective investors in the fund unless preceded or accompanied by an effective prospectus. A fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. A fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of a fund's portfolio holdings, view the most recent quarterly holdings report, semiannual report, or annual report on Fidelity's web site at http://www.advisor.fidelity.com. NOT FDIC INSURED . MAY LOSE VALUE . NO BANK GUARANTEE Neither the fund nor Fidelity Distributors Corporation is a bank. - -------------------------------------------------------------------------------- Mid Cap Portfolio 2 - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products: Mid Cap Portfolio Performance: The Bottom Line Average annual total return reflects the change in the value of an investment, assuming reinvestment of the class' dividend income and capital gains (the profits earned upon the sale of securities that have grown in value) and assuming a constant rate of performance each year. During periods of reimbursement by Fidelity, a fund's total return will be greater than it would be had the reimbursement not occurred. Performance numbers are net of all underlying fund operating expenses, but do not include any insurance charges imposed by your insurance company's separate account. If performance information included the effect of these additional charges, the total returns would have been lower. How a fund did yesterday is no guarantee of how it will do tomorrow. - -------------------------------------------------------------------------------- Average Annual Total Returns - --------------------------------------------------------------------------------
Past 1 Past 5 Life of Periods ended December 31, 2004 year years fund/A/ ------ ------ ------- Fidelity (R) VIP: Mid Cap Portfolio - Initial Class 24.92% 15.11% 20.74% Fidelity VIP: Mid Cap Portfolio - Service Class/B/ 24.77% 14.98% 20.61% Fidelity VIP: Mid Cap Portfolio - Service Class 2/C/ 24.60% 14.81% 20.46%
/A/ From December 28, 1998. /B/ Performance for Service Class shares reflects an asset based distribution fee (12b-1). /C/ The initial offering of Service Class 2 shares took place January 12, 2000. Performance for Service Class 2 shares reflects an asset based distribution fee (12b-1 fee). Returns from December 28, 1998 to January 12, 2000 are those of Service Class which reflect a different 12b-1 fee. Had Service Class 2's 12b-1 fee been reflected, returns prior to January 12, 2000 would have been lower. - -------------------------------------------------------------------------------- $10,000 Over Life of Fund - -------------------------------------------------------------------------------- Let's say hypothetically that $10,000 was invested in Fidelity(R) Variable Insurance Products: Mid Cap Portfolio -- Initial Class on December 28, 1998, when the fund started. The chart shows how the value of your investment would have changed, and also shows how the S&P(R) MidCap 400 Index performed the same period. [GRAPHIC APPEARS HERE] - -------------------------------------------------------------------------------- 3 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products: Mid Cap Portfolio Management's Discussion of Fund Performance Comments from Thomas Allen, Portfolio Manager of Fidelity(R) Variable Insurance Products: Mid Cap Portfolio The year ending December 31, 2004, generally was positive for equity investors, as many stock market benchmarks produced double-digit gains. Broad-based themes included the continued dominance of small-cap stocks, which outperformed large-caps for the sixth consecutive year. The small-cap Russell 2000(R) Index was up 18.33% in 2004, while the larger-cap Standard & Poor's 500(SM) Index rose 10.88%. Value stocks ended the year well ahead of growth stocks: The Russell 3000(R) Value Index advanced 16.94%, compared to 6.93% for the Russell 3000 Growth Index. Energy and basic materials stocks led the market upward. Energy stocks were boosted by record-high oil prices, while strong demand from China helped support commodity prices. The health care sector was among the market's weakest performers. Technology also fell off the pace, though it was helped by a rally late in the year. The tech-heavy NASDAQ Composite(R) Index returned 9.15%, thanks primarily to a 14.87% jump in the fourth quarter. Elsewhere, the Dow Jones Industrial Average(SM) gained 5.37% for the year. For the 12-month period that ended December 31, 2004, the fund solidly outperformed both the Standard & Poor's(R) MidCap 400 Index, which gained 16.48%, and the Lipper(SM) Variable Annuity Mid-Cap Funds Average, which rose 15.30%. Rising oil prices helped boost many energy stocks during the period, and the fund was fortunate to own some of those that rose more than others, including Southwestern Energy and PetroKazakhstan, based in the former Soviet Union. Favorable stock selection in health care equipment and services companies, such as pharmacy benefits manager Caremark Rx, also helped the fund beat its index, as did an underweighting in the weak semiconductor group. The fund's overweighting in materials turned out to be a double-edged sword: Steel stocks worked very well, driven by tight supply, increasing demand from emerging markets and a moderately weaker U.S. dollar, while our gold-related holdings performed poorly, including such names as Newmont Mining, Buenaventura Mining and Harmony Gold. The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. - -------------------------------------------------------------------------------- Mid Cap Portfolio 4 - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products: Mid Cap Portfolio Shareholder Expense Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees, distribution and/or service (12b-l) fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1,2004 to December 31, 2004). Actual Expenses The first line of the table below for each class of the Fund provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000.00 (for example, an $8,600 account value divided by $1,000.00 = 8.6), then multiply the result by the number in the first line for a class of the Fund under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. The estimate of expenses does not include any fees or other expenses of any variable annuity or variable life insurance product. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value would be lower. Hypothetical Example for Comparison Purposes The second line of the table below for each class of the Fund provides information about hypothetical account values and hypothetical expenses based on a Class' actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Class' actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. The estimate of expenses does not include any fees or other expenses of any variable annuity or variable life insurance product. If they were, the estimate of expenses you paid during the period would be higher, and your ending account value would be lower. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. Expenses Paid Beginning Ending During Period* Account Value Account Value July 1, 2004 July 1, 2004 December 31, 2004 to December 31, 2004 ------------- ----------------- -------------------- Initial Class Actual ............ $1,000.00 $1,176.60 $3.94 Hypothetical/A/ ... $1,000.00 $1,021.52 $3.66 Service Class Actual ............ $1,000.00 $1,175.50 $4.48 Hypothetical/A/ ... $1,000.00 $1,021.01 $4.17 Service Class 2 Actual ............ $1,000.00 $1,175.00 $5.30 Hypothetical/A/ ... $1,000.00 $1,020.26 $4.93 /A/ 5% return per year before expenses * Expenses are equal to each Class' annualized expense ratio (shown in the table below); multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Annualized Expense Ratio ------------- Initial Class................................................... .72% Service Class................................................... .82% Service Class 2................................................. .97% - -------------------------------------------------------------------------------- 5 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investment Summary - -------------------------------------------------------------------------------- Top Five Stocks as of December 31, 2004 - -------------------------------------------------------------------------------- % of fund's net assets ----------- Newmont Mining Corp. 2.5 Nucor Corp. 2.4 Invitrogen Corp. 2.4 Steel Dynamics, Inc. 1.6 Charles River Laboratories International, Inc. 1.6 ----------- 10.5 ----------- - -------------------------------------------------------------------------------- Top Five Market Sectors as of December 31, 2004 - -------------------------------------------------------------------------------- % of fund's net assets ----------- Materials 18.4 Health Care 15.9 Energy 13.5 Industrials 11.2 Consumer Discretionary 11.0 - -------------------------------------------------------------------------------- Asset Allocation as of December 31, 2004 - -------------------------------------------------------------------------------- % of fund's net assets* [CHART] (Pie Chart) Stocks 96.7% Short-Term Investments and Net Other Assets 3.3% * Foreign investments 27.3% - -------------------------------------------------------------------------------- Mid Cap Portfolio 6 - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments December 31, 2004 Showing Percentage of Net Assets - -------------------------------------------------------------------------------- Common Stocks -- 96.7% - -------------------------------------------------------------------------------- Shares Value (Note 1) ---------- -------------- CONSUMER DISCRETIONARY - 11.0% Auto Components - 1.7% Amerigon, Inc. (a) ............................... 100 $ 374 Autoliv, Inc. .................................... 144,100 6,960,030 Bharat Forge Ltd. ................................ 55,244 1,373,947 BorgWarner, Inc. ................................. 146,100 7,914,237 China Yuchai International Ltd. (a) .............. 100 1,328 Continental AG ................................... 100 6,339 Gentex Corp. ..................................... 532,100 19,698,342 IMPCO Technologies, Inc. (a)(e) .................. 1,506,400 11,373,320 Johnson Controls, Inc. ........................... 200 12,688 LKQ Corp. (a) .................................... 315,337 6,328,814 Nokian Tyres Ltd. ................................ 96,700 14,665,743 Starcraft Corp. (a) .............................. 105 1,469 ------------ 68,336,631 ------------ Automobiles - 0.1% Bajaj Auto Ltd. .................................. 35,300 923,268 Denway Motors Ltd. ............................... 4,000 1,428 Fiat Spa sponsord ADR (a) ........................ 100 798 Harley-Davidson, Inc. ............................ 100 6,075 Hero Honda Motors Ltd. ........................... 221,071 2,925,549 Mahindra & Mahindra Ltd. ......................... 100 1,261 Maruti Udyog Ltd. ................................ 100 1,068 Tata Motors Ltd. ................................. 100 1,168 Thor Industries, Inc. ............................ 200 7,410 ------------ 3,868,025 ------------ Distributors - 0.0% Educational Development Corp. .................... 100 1,044 Li & Fung Ltd. ................................... 2,000 3,371 ------------ 4,415 ------------ Hotels, Restaurants & Leisure - 3.1% Accor SA ......................................... 100 4,369 AFC Enterprises, Inc. (a) ........................ 100 2,365 Applebee's International, Inc. ................... 150 3,968 BJ's Restaurants, Inc. (a) ....................... 100 1,400 Buffalo Wild Wings, Inc. (a) ..................... 208,000 7,240,480 Jack in the Box, Inc. (a) ........................ 23,600 870,132 Jurys Doyle Hotel Group PLC (Ireland) ............ 100 1,671 Krispy Kreme Doughnuts, Inc. (a) ................. 100 1,260 Kuoni Reisen Holding AG Class B (Reg.) ........... 100 43,881 Outback Steakhouse, Inc. ......................... 773,700 35,419,986 P.F. Chang's China Bistro, Inc. (a) .............. 100 5,635 Red Robin Gourmet Burgers, Inc. (a) .............. 198,000 10,587,060 Royal Caribbean Cruises Ltd. ..................... 511,000 27,818,840 Sonic Corp. (a) .................................. 1,372,825 41,871,163 Total Entertainment Restaurant Corp. (a) ......... 100 1,192 ------------ 123,873,402 ------------ Household Durables - 1.3% Alba PLC ......................................... 581,101 7,137,036 Arcelik AS (a) ................................... 100 1 Fedders Corp. .................................... 100 362 Garmin Ltd. ...................................... 51 3,103 George Wimpey PLC ................................ 100 $ 776 Harman International Industries, Inc. ............ 118,400 15,036,800 Hovnanian Enterprises, Inc. Class A (a) .......... 200 9,904 LG Electronics, Inc. ............................. 167,270 10,357,427 Makita Corp. sponsored ADR ....................... 100 1,775 Rational AG ...................................... 39,471 3,665,649 Sekisui House Ltd. ............................... 877,000 10,222,962 Skyworth Digital Holdings Ltd. ................... 2,052 306 Toll Brothers, Inc. (a) .......................... 105,000 7,204,050 William Lyon Homes, Inc. (a) ..................... 100 7,024 ------------ 53,647,175 ------------ Internet & Catalog Retail - 0.2% 1-800-FLOWERS.com, Inc. Class A (a) .............. 200 1,682 Alloy, Inc. (a) .................................. 100 807 Audible, Inc. (a) ................................ 100 2,605 GSI Commerce, Inc. (a) ........................... 100 1,778 Overstock.com, Inc. (a) .......................... 100 6,900 Provide Commerce, Inc. ........................... 65,200 2,422,180 Rakuten, Inc. (d) ................................ 301 343,815 Rakuten, Inc. New (a)(d) ......................... 2,709 3,094,338 ValueVision Media, Inc. Class A (a) .............. 100 1,391 ------------ 5,875,496 ------------ Leisure Equipment & Products - 0.1% Arctic Cat, Inc. ................................. 100 2,652 Asia Optical Co., Inc. ........................... 28,718 159,896 Jumbo SA ......................................... 295,690 2,302,419 Mega Bloks, Inc. (a) ............................. 100 1,588 Oakley, Inc. ..................................... 100 1,275 Polaris Industries, Inc. ......................... 200 13,604 SCP Pool Corp. ................................... 225 7,178 SHIMANO, Inc. .................................... 100 2,856 ------------ 2,491,468 ------------ Media - 0.6% Astral Media, Inc. Class A (non-vtg.) ............ 365,800 9,931,470 Chum Ltd. Class B (non-vtg.) ..................... 200 4,958 Clear Media Ltd. (a) ............................. 243,000 226,656 Cumulus Media, Inc. Class A (a) .................. 100 1,508 E.W. Scripps Co. Class A ......................... 100 4,828 Fox Entertainment Group, Inc. Class A (a) ........ 100 3,126 Gemstar-TV Guide International, Inc. (a) ......... 100 592 Getty Images, Inc. (a) ........................... 100 6,885 Grupo Televisa SA de CV sponsored ADR ............ 100 6,050 Harris Interactive, Inc. (a) ..................... 100 790 Impresa SGPS (a) ................................. 100 787 Insignia Systems, Inc. (a) ....................... 100 218 JC Decaux SA (a) ................................. 100 2,914 Modern Times Group AB (MTG) (B Shares) (a) ....... 100 2,724 Padmalaya Telefilms Ltd. (a) ..................... 100 122 Saga Communications, Inc. Class A (a) ............ 100 1,685 Salem Communications Corp. Class A (a) ........... 48,300 1,205,085 SBS Broadcasting SA (a) .......................... 100 4,023 Scholastic Corp. (a) ............................. 100 3,696 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 7 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued - -------------------------------------------------------------------------------- Common Stocks -- continued - -------------------------------------------------------------------------------- Shares Value (Note 1) ---------- -------------- CONSUMER DISCRETIONARY - continued Media - continued SKY Perfect Communications, Inc. ................. 5,512 $ 5,973,172 Sogecable SA (a) ................................. 100 4,430 Spanish Broadcasting System, Inc. Class A (a) .... 100 1,056 TiVo, Inc. (a) ................................... 100 587 Trader Classified Media NV (A Shares) ............ 100 1,384 Zee Telefilms Ltd. ............................... 1,820,140 7,219,538 ------------ 24,608,284 ------------ Multiline Retail - 0.1% 99 Cents Only Stores (a) ......................... 100 1,616 Dollar General Corp. ............................. 100 2,077 Dollar Tree Stores, Inc. (a) ..................... 100 2,868 Don Quijote Co. Ltd. (d) ......................... 113,100 5,774,802 Family Dollar Stores, Inc. ....................... 100 3,123 ------------ 5,784,486 ------------ Specialty Retail - 2.7% Abercrombie & Fitch Co. Class A .................. 100 4,695 AC Moore Arts & Crafts, Inc. (a) ................. 705,100 20,313,931 Advance Auto Parts, Inc. (a) ..................... 200 8,736 Aeropostale, Inc. (a) ............................ 100 2,943 Best Buy Co., Inc. ............................... 200 11,884 CarMax, Inc. (a) ................................. 622,400 19,325,520 Chico's FAS, Inc. (a) ............................ 100 4,553 Cost Plus, Inc. (a) .............................. 142,700 4,584,951 Esprit Holdings Ltd. ............................. 500 3,023 French Connection Group PLC ...................... 100 471 Genesco, Inc. (a) ................................ 100 3,114 Guitar Center, Inc. (a) .......................... 100 5,269 Hot Topic, Inc. (a) .............................. 323,883 5,567,549 KOMERI Co. Ltd. (d) .............................. 672,100 18,306,737 Michaels Stores, Inc. ............................ 200 5,994 Nitori Co. Ltd. (d) .............................. 233,050 15,221,171 O'Reilly Automotive, Inc. (a) .................... 100 4,505 Pacific Sunwear of California, Inc. (a) .......... 305,000 6,789,300 Pantaloon Retail India Ltd. ...................... 100 1,689 Peacock Group PLC ................................ 1,271,844 6,638,792 PETsMART, Inc. ................................... 24,000 852,720 Pier 1 Imports, Inc. ............................. 100 1,970 RONA, Inc. (a) ................................... 100,000 3,400,000 Ross Stores, Inc. ................................ 43,900 1,267,393 Sa Sa International Holdings Ltd. ................ 2,000 1,074 Select Comfort Corp. (a) ......................... 100 1,794 Sharper Image Corp. (a) .......................... 100 1,885 Shimamura Co. Ltd. ............................... 100 7,303 TBC Corp. New (a) ................................ 100 2,780 The Bombay Company, Inc. (a) ..................... 100 553 Tiffany & Co., Inc. .............................. 57,100 1,825,487 Tractor Supply Co. (a) ........................... 100 3,721 Urban Outfitters, Inc. (a) ....................... 400 $ 17,760 Williams-Sonoma, Inc. (a) ........................ 54,700 1,916,688 ------------ 106,105,955 ------------ Textiles, Apparel & Luxury Goods - 1.1% Columbia Sportswear Co. (a) ...................... 579,600 34,549,956 Compagnie Financiere Richemont unit .............. 100 3,322 Folli Follie SA .................................. 42,980 1,259,378 Gildan Activewear, Inc. Class A (sub. vtg.) (a) .. 100 3,399 K-Swiss, Inc. Class A ............................ 200 5,824 Kenneth Cole Productions, Inc. Class A (sub. vtg.) ................................... 100 3,086 NIKE, Inc. Class B ............................... 100 9,069 Polo Ralph Lauren Corp. Class A .................. 100 4,260 Quiksilver, Inc. (a) ............................. 200 5,958 Ted Baker PLC .................................... 945,208 8,761,144 The Swatch Group AG (Bearer) ..................... 100 14,647 Timberland Co. Class A (a) ....................... 100 6,267 Weyco Group, Inc. ................................ 100 4,429 Wolverine World Wide, Inc. ....................... 100 3,142 ------------ 44,633,881 ------------ TOTAL CONSUMER DISCRETIONARY .................. 439,229,218 ------------ CONSUMER STAPLES - 7.4% Beverages - 0.0% Boston Beer Co., Inc. Class A (a) ................ 100 2,127 Companhia de Bebidas das Americas (AmBev) sponsored ADR ................................. 100 2,833 Fomento Economico Mexicano SA de CV sponsored ADR ................................. 100 5,261 Grupo Modelo SA de CV Series C ................... 100 275 Hansen Natural Corp. (a) ......................... 100 3,641 Jones Soda Co. (a) ............................... 95,700 330,165 MGP Ingredients, Inc. ............................ 200 1,728 Pernod-Ricard .................................... 100 15,288 Tsingtao Brewery Co. Ltd. (H Shares) ............. 1,000 1,010 ------------ 362,328 ------------ Food & Staples Retailing - 0.4% Central European Distribution Corp. (a) .......... 150 4,431 Massmart Holdings Ltd. ........................... 847,869 6,778,342 Plant Co. Ltd. ................................... 120,300 1,820,414 Shinsegae Co. Ltd. ............................... 1,390 382,008 Whole Foods Market, Inc. ......................... 74,600 7,113,110 ------------ 16,098,305 ------------ Food Products - 6.3% Archer-Daniels-Midland Co. ....................... 2,678,000 59,746,180 Barry Callebaut AG ............................... 23,513 5,839,817 Bunge Ltd. ....................................... 638,200 36,383,782 Corn Products International, Inc. ................ 713,400 38,209,704 Fresh Del Monte Produce, Inc. .................... 100 2,961 Glanbia PLC ...................................... 784,887 2,981,268 Green Mountain Coffee Roasters, Inc. (a) ......... 47,993 1,204,624 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) ---------- -------------- CONSUMER STAPLES - continued Food Products - continued Hershey Foods Corp. .............................. 504,300 $ 28,008,822 Hormel Foods Corp. ............................... 100 3,135 IAWS Group PLC (Ireland) ......................... 25,450 421,195 Lindt & Spruengli AG ............................. 400 5,844,925 Lindt & Spruengli AG (participation certificate) .................................. 2,770 3,933,354 McCormick & Co., Inc. (non-vtg.) ................. 496,000 19,145,600 Peet's Coffee & Tea, Inc. (a) .................... 100 2,647 People's Food Holdings Ltd. ...................... 10,068,165 9,253,261 PT Indofood Sukses Makmur Tbk .................... 56,655,500 4,889,370 Smithfield Foods, Inc. (a) ....................... 1,230,200 36,401,618 SunOpta, Inc. (a) ................................ 39,000 279,825 Wimm-Bill-Dann Foods OJSC ADR (a) ................ 65,400 935,874 Wm. Wrigley Jr. Co. .............................. 100 6,919 ------------ 253,494,881 ------------ Household Products - 0.1% Central Garden & Pet Co. Class A (a) ............. 100 4,174 Godrej Consumer Products Ltd. .................... 178,876 1,237,657 Hindustan Lever Ltd. ............................. 104,300 345,818 Kao Corp. ........................................ 1,000 25,578 Reckitt Benckiser PLC ............................ 300 9,062 ------------ 1,622,289 ------------ Personal Products - 0.6% Alberto-Culver Co. ............................... 150 7,286 Estee Lauder Companies, Inc. Class A ............. 63,300 2,897,241 Hengan International Group Co. Ltd. .............. 12,932,600 8,485,521 Kose Corp. ....................................... 100 4,393 Natura Cosmeticos SA ............................. 166,500 4,858,340 Shiseido Co. Ltd. ADR ............................ 459,900 6,645,555 USANA Health Sciences, Inc. (a) .................. 200 6,840 ------------ 22,905,176 ------------ TOTAL CONSUMER STAPLES ........................ 294,482,979 ------------ ENERGY - 13.5% Energy Equipment & Services - 9.7% BJ Services Co. .................................. 648,610 30,186,309 Cal Dive International, Inc. (a) ................. 467,400 19,046,550 Carbo Ceramics, Inc. ............................. 100 6,900 Compagnie Generale de Geophysique SA (a) ......... 100 6,884 Cooper Cameron Corp. (a) ......................... 317,000 17,057,770 Core Laboratories NV (a) ......................... 230,700 5,386,845 FMC Technologies, Inc. (a) ....................... 307,500 9,901,500 Global Industries Ltd. (a) ....................... 1,530,489 12,687,754 GlobalSantaFe Corp. .............................. 692,450 22,927,020 Gulf Island Fabrication, Inc. .................... 211,200 4,610,496 Helmerich & Payne, Inc. .......................... 195,600 6,658,224 Hydril Co. (a) ................................... 100 4,551 Input/Output, Inc. (a) ........................... 1,327,000 11,730,680 Nabors Industries Ltd. (a) ....................... 688,800 35,328,552 National-Oilwell, Inc. (a) ....................... 235,300 $ 8,303,737 Noble Corp. (a) .................................. 345,300 17,175,222 NS Group, Inc. (a) ............................... 100 2,780 Oceaneering International, Inc. (a) .............. 360,086 13,438,410 Parker Drilling Co. (a) .......................... 1,996,800 7,847,424 Pason Systems, Inc. .............................. 756,300 23,319,250 Patterson-UTI Energy, Inc. ....................... 204,300 3,973,635 Pioneer Drilling Co. (a) ......................... 1,190,100 12,008,109 Precision Drilling Corp. (a) ..................... 153,300 9,647,680 Pride International, Inc. (a) .................... 565,700 11,619,478 Rowan Companies, Inc. (a) ........................ 345,600 8,951,040 Smith International, Inc. (a) .................... 251,090 13,661,807 Superior Energy Services, Inc. (a) ............... 316,900 4,883,429 Transocean, Inc. (a) ............................. 524,800 22,246,272 Unit Corp. (a) ................................... 356,000 13,602,760 Varco International, Inc. (a) .................... 1,153,848 33,634,655 Veritas DGC, Inc. (a) ............................ 100 2,241 Weatherford International Ltd. (a) ............... 139,800 7,171,740 ------------ 387,029,704 ------------ Oil & Gas - 3.8% Ashland, Inc. .................................... 25,900 1,512,042 Caltex Australia Ltd. ............................ 1,004,943 8,538,864 China Petroleum & Chemical Corp. sponsored ADR ... 100 4,099 Comstock Resources, Inc. (a) ..................... 93,100 2,052,855 Golar LNG Ltd. (a) ............................... 515,700 7,501,323 Golar LNG Ltd. (Nasdaq) (a) ...................... 21,393 318,542 JKX Oil & Gas .................................... 91 202 Niko Resources Ltd. .............................. 138,000 5,804,050 PetroChina Co. Ltd. sponsored ADR ................ 100 5,369 PetroKazakhstan, Inc. Class A .................... 594,600 22,064,615 Petroleo Brasileiro SA Petrobras sponsored: ADR ........................................... 100 3,978 ADR (non-vtg.) ................................ 100 3,621 Premcor, Inc. .................................... 293,300 12,368,461 Southwestern Energy Co. (a) ...................... 780,200 39,548,338 Surgutneftegaz JSC sponsored ADR ................. 100 3,740 Talisman Energy, Inc. ............................ 194,500 5,243,396 Tesoro Petroleum Corp. (a) ....................... 465,900 14,843,574 Valero Energy Corp. .............................. 718,500 32,619,900 World Fuel Services Corp. ........................ 31,500 1,568,700 XTO Energy, Inc. ................................. 125 4,423 ------------ 154,010,092 ------------ TOTAL ENERGY .................................. 541,039,796 ------------ FINANCIALS - 8.3% Capital Markets - 0.5% BlackRock, Inc. Class A .......................... 100 7,726 Deutsche Bank AG (NY Shares) ..................... 13,000 1,157,130 E*TRADE Financial Corp. (a) ...................... 100 1,495 Eaton Vance Corp. (non-vtg.) ..................... 100 5,215 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 9 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- FINANCIALS - continued Capital Markets - continued Federated Investors, Inc. Class B (non-vtg.) ...... 100 $ 3,040 International Assets Holding Corp. (a) ............ 100 757 Investors Financial Services Corp. ................ 49,700 2,484,006 Kotak Mahindra Bank Ltd. .......................... 439,734 2,912,920 Matsui Securities Co. Ltd. ........................ 208,800 7,277,321 Mitsubishi Securities Co. Ltd. .................... 511,700 5,605,071 Nuveen Investments, Inc. Class A .................. 100 3,947 T. Rowe Price Group, Inc. ......................... 200 12,440 ------------ 19,471,068 ------------ Commercial Banks - 3.4% Banco Itau Holding Financeira SA: (PN) ........................................... 900 134,864 sponsored ADR (non-vtg.) ....................... 33,900 2,548,263 Bank Austria Creditanstalt AG ..................... 201,075 18,139,091 Bank of Baroda .................................... 1,220,572 6,874,431 Bank of Fukuoka Ltd. (d) .......................... 2,110,000 13,904,618 Bank of India ..................................... 6,393,456 13,939,951 Bank of Yokohama Ltd. ............................. 2,431,000 15,331,700 BOK Financial Corp. (a) ........................... 103 5,022 Boston Private Financial Holdings, Inc. ........... 106,100 2,988,837 Canara Bank ....................................... 401,535 1,973,788 Capitalia Spa ..................................... 9,229,479 42,205,762 Cathay General Bancorp ............................ 20 750 Center Financial Corp., California ................ 20,600 412,412 Commerce Bancorp, Inc., New Jersey ................ 68,400 4,404,960 CVB Financial Corp. ............................... 110 2,922 East West Bancorp, Inc. ........................... 200 8,392 First Horizon National Corp. ...................... 100 4,311 Fulton Financial Corp. ............................ 11 256 HDFC Bank Ltd. sponsored ADR ...................... 18,100 821,016 Hiroshima Bank Ltd. ............................... 389,000 2,058,362 ICICI Bank Ltd. sponsored ADR ..................... 5,000 100,750 Irwin Financial Corp. ............................. 100 2,839 Lakeland Financial Corp. .......................... 100 3,970 M&T Bank Corp. .................................... 100 10,784 OTP Bank Rt. ...................................... 100 3,082 Popular, Inc. ..................................... 200 5,766 PrivateBancorp, Inc. .............................. 200 6,446 State Bancorp, Inc., New York ..................... 5 138 State Bank of India ............................... 448,533 7,333,644 Sumitomo Trust & Banking Co. Ltd. ................. 1,000 7,234 SunTrust Banks, Inc. .............................. 49 3,620 TCF Financial Corp. ............................... 200 6,428 Texas Regional Bancshares, Inc. Class A ........... 150 4,902 UCBH Holdings, Inc. ............................... 100 4,582 UnionBanCal Corp. ................................. 100 6,448 Valley National Bancorp ........................... 105 2,903 Westcorp .......................................... 100 $ 4,593 Wintrust Financial Corp. .......................... 48,000 2,734,080 ------------ 136,001,917 ------------ Consumer Finance - 0.0% American Express Co. .............................. 100 5,637 Capital One Financial Corp. ....................... 100 8,421 First Cash Financial Services, Inc. (a) ........... 150 4,007 STB Leasing Co. Ltd. .............................. 100 1,874 ------------ 19,939 ------------ Diversified Financial Services - 0.4% eSpeed, Inc. Class A (a) .......................... 100 1,237 Moody's Corp. ..................................... 54,100 4,698,585 Power Financial Corp. ............................. 100 2,666 Principal Financial Group, Inc. ................... 100 4,094 TSX Group, Inc. ................................... 244,800 10,952,760 ------------ 15,659,342 ------------ Insurance - 2.7% ACE Ltd. .......................................... 100 4,275 AFLAC, Inc. ....................................... 2,800 111,552 Arthur J. Gallagher& Co. .......................... 100 3,250 Assurant, Inc. .................................... 1,232,500 37,652,875 Brown & Brown, Inc. ............................... 38,000 1,654,900 Erie Indemnity Co. Class A ........................ 100 5,257 Genworth Financial, Inc. Class A .................. 100 2,700 Hilb Rogal & Hobbs Co. ............................ 200 7,248 Horace Mann Educators Corp. ....................... 100 1,908 MBIA, Inc. ........................................ 54,600 3,455,088 Mercury General Corp. ............................. 28,100 1,683,752 Ohio Casualty Corp. (a) ........................... 122,800 2,850,188 Old Republic International Corp. .................. 150 3,795 Progressive Corp. ................................. 67,100 5,692,764 Reinsurance Group of America, Inc. ................ 486,100 23,551,545 Scottish Re Group Ltd. ............................ 8,100 209,790 StanCorp Financial Group, Inc. .................... 100 8,250 Triad Guaranty, Inc. (a) .......................... 100 6,048 UnumProvident Corp. ............................... 100 1,794 USI Holdings Corp. (a) ............................ 187,500 2,169,375 W.R. Berkley Corp. ................................ 618,575 29,178,183 Zenith National Insurance Corp. ................... 300 14,952 ------------ 108,269,489 ------------ Real Estate - 1.0% CBL & Associates Properties, Inc. ................. 17,300 1,320,855 Corporate Office Properties Trust (SBI) ........... 147,100 4,317,385 Equity Lifestyle Properties, Inc. ................. 100 3,575 Equity Residential (SBI) .......................... 100 3,618 General Growth Properties, Inc. ................... 167,100 6,042,336 Kimco Really Corp. ................................ 226,000 13,105,740 Pan Pacific Retail Properties, Inc. ............... 114,400 7,172,880 Plum Creek Timber Co., Inc. ....................... 141,300 5,431,572 United Dominion Realty Trust, Inc. (SBI) .......... 29,200 724,160 Weingarten Really Investors (SBI) ................. 100 4,010 ------------ 38,126,131 ------------ See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- FINANCIALS - continued Thrifts & Mortgage Finance - 0.3% Doral Financial Corp. ............................. 147,800 $ 7,279,150 Golden West Financial Corp., Delaware ............. 79,940 4,909,915 MGIC Investment Corp. ............................. 100 6,891 Radian Group, Inc. ................................ 100 5,324 Sterling Financial Corp., Washington (a) .......... 110 4,319 W Holding Co., Inc. ............................... 156 3,579 Washington Federal, Inc. .......................... 110 2,919 ------------ 12,212,097 ------------ TOTAL FINANCIALS ............................... 329,759,983 ------------ HEALTH CARE -15.9% Biotechnology - 6.5% Affymetrix, Inc. (a) .............................. 190,600 6,966,430 Albany Molecular Research, Inc. (a) ............... 100 1,114 Alnylam Pharmaceuticals, Inc. ..................... 100 738 Applera Corp. - Celera Genomics Group (a) ......... 100 1,375 Bachem Holding AG (B Shares) ...................... 100 5,744 Celgene Corp. (a) ................................. 200 5,306 Charles River Laboratories International, Inc. (a) ....................................... 1,389,204 63,917,276 Ciphergen Biosystems, Inc. (a) .................... 100 430 CSL Ltd. .......................................... 19,483 445,872 CytRx Corp. (a) ................................... 100 141 deCODE genetics, Inc. (a) ......................... 100 781 Dendreon Corp. (a) ................................ 100 1,078 Digene Corp. (a) .................................. 100 2,615 Exact Sciences Corp. (a) .......................... 100 382 Exelixis, Inc. (a) ................................ 100 950 Gen-Probe, Inc. (a) ............................... 31,900 1,442,199 Genencor International, Inc. (a) .................. 100 1,640 Genentech, Inc. (a) ............................... 24,800 1,350,112 Global Bio-Chem Technology Group Co. Ltd. ......... 9,232,000 6,057,431 Harvard Bioscience, Inc. (a)(e) ................... 3,023,047 13,996,708 ImmunoGen, Inc. (a) ............................... 139,700 1,234,948 Invitrogen Corp. (a) .............................. 1,435,200 96,344,976 Lexicon Genetics, Inc. (a) ........................ 100 776 Luminex Corp. (a) ................................. 100 888 Martek Biosciences (a) ............................ 106,100 5,432,320 Myriad Genetics, Inc. (a) ......................... 100 2,251 Neogen Corp. (a) .................................. 49,663 1,124,873 Northfield Laboratories, Inc. (a) ................. 100 2,255 ONYX Pharmaceuticals, Inc. (a) .................... 100 3,239 QIAGEN NV (a) ..................................... 4,857,800 53,192,910 Renovis, Inc. ..................................... 100 1,438 Sangamo Biosciences, Inc. (a) ..................... 100 600 Seattle Genetics, Inc. (a) ........................ 100 653 Serologicals Corp. (a) ............................ 100 2,212 Sirna Therapeutics, Inc. (a) ...................... 100 316 Stratagene Corp. (a) .............................. 849,600 $ 6,584,400 Strategic Diagnostics, Inc. (a) ................... 792,300 2,773,050 Tanox, Inc. (a) ................................... 100 1,520 Telik, Inc. (a) ................................... 100 1,914 ------------ 260,903,861 ------------ Health Care Equipment & Supplies - 2.3% Advanced Medical Optics, Inc. (a) ................. 100 4,114 Arthrocare Corp. (a) .............................. 100 3,206 Bio-Rad Laboratories, Inc. Class A (a) ............ 100 5,737 BioLase Technology, Inc. .......................... 100 1,087 Bruker BioSciences Corp. (a) ...................... 163 657 Cardiodynamics International Corp. (a) ............ 100 517 Chromavision Medical Systems, Inc. (a) ............ 100 216 Cooper Companies, Inc. ............................ 100 7,059 Cyberonics, Inc. (a) .............................. 200 4,144 Cytyc Corp. (a) ................................... 100 2,757 Diagnostic Products Corp. ......................... 100 5,505 Edwards Lifesciences Corp. (a) .................... 307,700 12,695,702 Epix Pharmaceuticals, Inc. (a) .................... 122,400 2,192,184 IDEXX Laboratories, Inc. (a) ...................... 100 5,459 Illumina, Inc. (a) ................................ 356,400 3,378,672 INAMED Corp. (a) .................................. 150 9,488 Integra LifeSciences Holdings Corp. (a) ........... 64,700 2,389,371 Intuitive Surgical, Inc. (a) ...................... 47,800 1,912,956 Kinetic Concepts, Inc. ............................ 20,300 1,548,890 Matthews International Corp. Class A .............. 100 3,680 Meridian Bioscience, Inc. ......................... 135,350 2,353,737 Merit Medical Systems, Inc. (a) ................... 133 2,037 Millipore Corp. (a) ............................... 255,900 12,746,379 Mine Safety Appliances Co. ........................ 300 15,210 Molecular Devices Corp. (a) ....................... 74,580 1,499,058 Ocular Sciences, Inc. (a) ......................... 46,300 2,269,163 Orthologic Corp. (a) .............................. 100,600 628,750 Osteotech, Inc. (a) ............................... 100 550 PolyMedica Corp. .................................. 200 7,458 Possis Medical, Inc. (a) .......................... 100 1,348 Sonic Innovations, Inc. (a) ....................... 151,300 630,921 SonoSight, Inc. (a) ............................... 100 3,395 Synovis Life Technologies, Inc. (a) ............... 100 1,081 Synthes, Inc. ..................................... 100 11,190 Thermo Electron Corp. (a) ......................... 265,200 8,006,388 Thoratec Corp. (a) ................................ 100 1,042 Varian, Inc. (a) .................................. 100 4,101 Ventana Medical Systems, Inc. (a) ................. 19,200 1,228,608 Waters Corp. (a) .................................. 851,120 39,823,905 Wilson Greatbatch Technologies, Inc. (a) .......... 800 17,936 Young Innovations, Inc. ........................... 100 3,373 Zimmer Holdings, Inc. (a) ......................... 100 8,012 Zoll Medical Corp. (a) ............................ 100 3,440 ------------ 93,438,483 ------------ Health Care Providers & Services - 5.6% Advisory Board Co. (a) ............................ 100 3,688 Aetna, Inc. ....................................... 216,200 26,970,950 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 11 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- HEALTH CARE-continued Health Care Providers & Services - continued AMERIGROUP Corp. (a) .............................. 100 $ 7,566 Andrx Corp. (a) ................................... 100 2,183 Caremark Rx, Inc. (a) ............................. 1,133,806 44,705,971 Centene Corp. (a) ................................. 100 2,835 Cerner Corp. (a)(d) ............................... 67,717 3,600,513 Community Health Systems, Inc. (a) ................ 275,200 7,672,576 Covance, Inc. (a) ................................. 631,900 24,486,125 Coventry Health Care, Inc. (a) .................... 50 2,654 Dynacq Healthcare, Inc. (a)(d) .................... 100 480 Edipsys Corp. (a) ................................. 100 2,043 Evotec OAIAG (a) .................................. 100 357 Gambro AB (A Shares) .............................. 100 1,426 Health Management Associates, Inc. Class A ........ 100 2,272 HealthExtras, Inc. (a) ............................ 203,200 3,312,160 Humana, Inc. (a) .................................. 255,300 7,579,857 ICON PLC sponsored ADR (a) ........................ 335,326 12,960,350 IDX Systems Corp. (a) ............................. 100 3,446 IMS Health, Inc. .................................. 1,303,600 30,256,556 iSoft Group PLC ................................... 35 232 Lifeline Systems, Inc. (a) ........................ 155,900 4,015,984 Merge Technologies, Inc. (a) ...................... 100 2,225 Molina Healthcare, Inc. (a) ....................... 150,857 6,996,748 NDCHealth Corp. ................................... 100 1,859 OCA, Inc. (a) ..................................... 100 635 Odyssey Healthcare, Inc. (a) ...................... 200 2,736 Omnicare, Inc. .................................... 138,650 4,800,063 PAREXEL International Corp. (a) ................... 411,300 8,349,390 Pediatrix Medical Group, Inc. (a) ................. 100 6,405 Pharmaceutical Product Development, Inc. (a) ...... 438,700 18,113,923 ProxyMed, Inc. (a) ................................ 181,142 1,778,814 Quest Diagnostics, Inc. ........................... 200 19,110 Renal Care Group, Inc. (a) ........................ 150 5,399 ResCare, Inc. (a) ................................. 1,188,803 18,093,582 TriZetto Group, Inc. (a) .......................... 100 950 VCA Antech, Inc. (a) .............................. 80,900 1,585,640 WebMD Corp. (a) ................................... 100 816 WellPoint, Inc. (a) ............................... 200 23,000 ------------ 225,371,519 ------------ Pharmaceuticals - 1.5% Able Laboratories, Inc. (a) ....................... 100 2,275 Allergan, Inc. .................................... 100 8,107 American Pharmaceutical Partners, Inc. (a) ........ 150 5,612 Bentley Pharmaceuticals, Inc. (a) ................. 9,200 98,900 Caraco Pharmaceutical Laboratories Ltd. (a) ....... 100 955 Cipla Ltd. ........................................ 50,500 371,073 Connetics Corp. (a) ............................... 416,700 10,121,643 Dr. Reddy's Laboratories Ltd. ADR ................. 186,900 3,706,227 Endo Pharmaceuticals Holdings, Inc. (a) ........... 200 $ 4,204 Hi-Tech Pharmacol Co., Inc. (a) ................... 100 1,844 Impax Laboratories, Inc. (a) ...................... 100 1,588 KV Pharmaceutical Co. Class A (a) ................. 150 3,308 Merck KGaA ........................................ 293,321 20,141,931 Nektar Therapeutics (a) ........................... 100 2,024 Ranbaxy Laboratories Ltd. sponsored GDR ........... 270,300 7,868,433 Roche Holding AG: ADR (a) ........................................ 10,600 1,217,728 (participation certificate) .................... 60,543 6,917,986 Salix Pharmaceuticals Ltd. (a) .................... 150 2,639 Schering-Plough Corp. ............................. 344,000 7,182,720 SuperGen, Inc. (a) ................................ 100 705 Warner Chilcott PLC ADR ........................... 100 6,531 ------------ 57,666,433 ------------ TOTAL HEALTH CARE .............................. 637,380,296 ------------ INDUSTRIALS-11.2% Aerospace & Defense - 1.3% Ceradyne, Inc. (a) ................................ 150 8,582 Cubic Corp. ....................................... 100 2,517 DRS Technologies, Inc. (a) ........................ 230,000 9,823,300 EDO Corp. ......................................... 180,400 5,727,700 Embraer - Empresa Brasileira de Aeronautica SA sponsored ADR ................... 100 3,344 General Dynamics Corp. ............................ 100 10,460 L-3 Communications Holdings, Inc. ................. 478,800 35,067,312 Rockwell Collins, Inc. ............................ 100 3,944 ------------ 50,647,159 ------------ Air Freight & Logistics - 0.4% Business Post Group PLC ........................... 100 1,195 C.H. Robinson Worldwide, Inc. ..................... 44,950 2,495,624 CNF, Inc. ......................................... 100 5,010 Dynamex, Inc. (a) ................................. 80 1,482 Expeditors International of Washington, Inc. ...... 33,700 1,883,156 Forward Air Corp. (a) ............................. 100 4,470 Hub Group, Inc. Class A (a) ....................... 193,420 10,100,392 ------------ 14,491,329 ------------ Airlines - 0.0% Southwest Airlines Co. ............................ 100 1,628 ------------ Building Products - 0.2% American Woodmark Corp. ........................... 200 8,736 Quixote Corp. ..................................... 100 2,033 Simpson Manufacturing Co. Ltd. .................... 78,800 2,750,120 Trex Co., Inc. (a) ................................ 69,800 3,660,312 Wienerberger AG ................................... 100 4,768 ------------ 6,425,969 ------------ Commercial Services & Supplies - 2.8% Apollo Group, Inc. Class A (a) .................... 311 25,101 Benesse Corp. ..................................... 100 3,505 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 12 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- INDUSTRIALS - continued Commercial Services & Supplies - continued Bennett Environmental, Inc. (a) ................... 167,100 $ 593,205 Bright Horizons Family Solutions, Inc. (a) ........ 613,097 39,704,162 Bunzl PLC ......................................... 101 842 Career Education Corp. (a) ........................ 100 4,000 ChoicePoint, Inc. (a) ............................. 350,500 16,119,495 Coinstar, Inc. (a) ................................ 100 2,683 Concorde Career Colleges, Inc. (a) ................ 100 2,030 Corporate Executive Board Co. ..................... 100 6,694 CoStar Group, Inc. (a) ............................ 100 4,618 Dun & Bradstreet Corp. (a) ........................ 100 5,965 Education Management Corp. (a) .................... 47,300 1,561,373 Fullcast Co. Ltd. (d) ............................. 5,184 14,828,781 Gevity HR, Inc. ................................... 100 2,056 GFK AG ............................................ 20 777 Intertek Group PLC ................................ 100 1,353 Ionics, Inc. (a)(d) ............................... 666,900 28,903,446 ITE Group PLC ..................................... 100 166 ITT Educational Services, Inc. (a) ................ 100 4,755 Labor Ready, Inc. (a) ............................. 100 1,692 National Research Corp. (a) ....................... 100 1,615 PICO Holdings, Inc. (a) ........................... 100 2,077 Princeton Review, Inc. (a) ........................ 609,587 3,748,960 Ritchie Brothers Auctioneers, Inc. ................ 200 6,612 Robert Half International, Inc. ................... 100 2,943 Societe Generale de Surveillance Holding SA (SGS) (Reg.) ......................................... 91 63,611 Stericycle, Inc. (a) .............................. 100 4,595 Tele Atlas NV (a) ................................. 100 1,205 Tetra Tech, Inc. (a) .............................. 74 1,239 The Brink's Co. ................................... 54,600 2,157,792 Universal Technical Institute, Inc. ............... 85,900 3,274,508 ------------ 111,041,856 ------------ Construction & Engineering - 1.6% Arcadis NV ........................................ 9,700 180,272 Arcadis NV ........................................ 6,600 121,559 Chicago Bridge & Iron Co. NV (NY Shares) .......... 302,800 12,112,000 Dycom Industries, Inc. (a) ........................ 591,900 18,064,788 EMCOR Group, Inc. (a) ............................. 100 4,518 Fluor Corp. ....................................... 301,500 16,434,765 Foster Wheeler Ltd. (a) ........................... 294,331 4,671,033 Jacobs Engineering Group, Inc. (a) ................ 288,800 13,801,752 ------------ 65,390,687 ------------ Electrical Equipment - 0.5% AstroPower, Inc. (a) .............................. 100 1 Baldor Electric Co. ............................... 80,900 2,227,177 BYD Co. Ltd. (H Shares) ........................... 174,500 462,472 Crompton Greaves Ltd. ............................. 144,396 995,414 Fujikura Ltd. ..................................... 1,000 4,608 II-VI, Inc. (a) ................................... 100 4,249 Rockwell Automation, Inc. ......................... 306,900 $ 15,206,895 Roper Industries, Inc. ............................ 38,700 2,351,799 ------------ 21,252,615 ------------ Industrial Conglomerates - 0.1% Teleflex, Inc. .................................... 77,700 4,035,738 ------------ Machinery - 3.6% AGCO Corp. (a) .................................... 2,106,400 46,109,096 CNH Global NV ..................................... 512,000 9,917,440 CUNO, Inc. (a) .................................... 117,600 6,985,440 Donaldson Co., Inc. ............................... 200 6,516 Dover Corp. ....................................... 14,600 612,324 Flowserve Corp. (a) ............................... 962,700 26,512,758 Gardner Denver, Inc. (a) .......................... 64,400 2,337,076 Graco, Inc. ....................................... 668,700 24,975,945 Harsco Corp. ...................................... 177,200 9,877,128 Heidelberger Druckmaschinen AG (a) ................ 124,900 4,235,827 Illinois Tool Works, Inc. ......................... 100 9,268 Koyo Seiko Co. Ltd. ............................... 1,000 14,078 Middleby Corp. .................................... 100 5,072 PACCAR, Inc. ...................................... 150 12,072 Toshiba Machine Co. Ltd. .......................... 1,000 4,383 Trinity Industries, Inc. .......................... 4,900 166,992 Wabash National Corp. (a) ......................... 100 2,693 Wabtec Corp. ...................................... 198,700 4,236,284 Watts Water Technologies, Inc. Class A ............ 105,800 3,410,992 Zenon Environmental, Inc. (a) ..................... 345,300 6,747,738 ------------ 146,179,122 ------------ Marine - 0.1% Alexander & Baldwin, Inc. ......................... 90,349 3,832,605 ------------ Road & Rail - 0.4% Burlington Northern Santa Fe Corp. ................ 207,700 9,826,287 Guangshen Railway Co. Ltd. sponsored ADR .......... 100 2,047 Heartland Express, Inc. ........................... 150 3,371 Knight Transportation, Inc. ....................... 150 3,720 Landstar System, Inc. (a) ......................... 22,100 1,627,444 Norfolk Southern Corp. ............................ 124,900 4,520,131 Old Dominion Freight Lines, Inc. (a) .............. 150 5,220 ------------ 15,988,220 ------------ Trading Companies & Distributors - 0.2% Fastenal Co. ...................................... 200 12,312 MSC Industrial Direct Co., Inc. Class A ........... 267,300 9,617,454 Richelieu Hardware Ltd. ........................... 100 1,831 ------------ 9,631,597 ------------ Transportation Infrastructure - 0.0% Sea Containers Ltd. Class B ....................... 7,900 153,260 ------------ TOTAL INDUSTRIALS .............................. 449,071,785 ------------ INFORMATION TECHNOLOGY - 9.1% Communications Equipment - 0.8% Arris Group, Inc. (a) ............................. 100 704 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 13 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- INFORMATION TECHNOLOGY - continued Communications Equipment - continued Avaya, Inc. (a) ................................... 2,900 $ 49,880 Black Box Corp. ................................... 100 4,802 Comtech Telecommunications Corp. (a) .............. 100 3,761 NETGEAR, Inc. (a)(d) .............................. 548,100 9,969,939 Option NV (a) ..................................... 90 3,229 Plantronics, Inc. ................................. 139,900 5,801,653 Polycom, Inc. (a) ................................. 200 4,664 Research In Motion Ltd. (a) ....................... 53,200 4,379,247 SafeNet, Inc. (a) ................................. 86,601 3,181,721 Tandberg ASA ...................................... 681,000 8,446,555 ------------ 31,846,155 ------------ Computers & Peripherals - 0.0% Applied Films Corp. (a) ........................... 100 2,156 Compal Electronics, Inc. .......................... 1,072 1,069 Gemplus International SA ADR (a) .................. 100 466 iCAD, Inc. (a) .................................... 100 447 Intergraph Corp. (a) .............................. 100 2,693 M-Systems Flash Disk Pioneers Ltd. (a) ............ 900 17,748 Moser-Baer India Ltd. ............................. 200 1,083 Network Appliance, Inc. (a) ....................... 100 3,322 Overland Storage, Inc. (a) ........................ 100 1,669 Psion PLC ......................................... 100 103 Stratasys, Inc. (a) ............................... 150 5,034 Synaptics, Inc. (a) ............................... 100 3,058 ------------ 38,848 ------------ Electronic Equipment & Instruments - 3.2% Brightpoint, Inc. (a) ............................. 150 2,931 CDW Corp. ......................................... 173,492 11,511,194 CellStar Corp. (a) ................................ 100 445 Cogent, Inc. ...................................... 200 6,600 Cognex Corp. ...................................... 100 2,790 Dionex Corp. (a) .................................. 108,200 6,131,694 Elec & Eltek International Co. Ltd. ............... 1,613,000 4,580,920 Excel Technology, Inc. (a) ........................ 100 2,600 Fargo Electronics, Inc. (a) ....................... 100 1,499 FLIR Systems, Inc. (a) ............................ 89,245 5,692,939 Global Imaging Systems, Inc. (a) .................. 100 3,950 Hon Hai Precision Industries Co. Ltd. ............. 8,750,800 40,464,536 I. D. Systems Inc. (a) ............................ 100 1,866 Iteris, Inc. (a) .................................. 100 345 Itron, Inc. (a) ................................... 100 2,391 Keyence Corp. ..................................... 19,700 4,415,816 Landauer, Inc. .................................... 100 4,570 Measurement Specialties, Inc. (a) ................. 100 2,546 Metrologic Instruments, Inc. (a) .................. 200 4,250 Mettler-Toledo International, Inc. (a) ............ 259,800 13,330,338 MTS Systems Corp. ................................. 100 3,381 National Instruments Corp. ........................ 100 2,725 Robotic Vision Systems, Inc. (a) .................. 100 77 ScanSource, Inc. (a) .............................. 100 $ 6,216 Symbol Technologies, Inc. ......................... 2,551,600 44,142,680 Universal Display Corp. (a) ....................... 100 900 Yageo Corp. sponsored GDR (a) ..................... 100 170 ------------ 130,320,369 ------------ Internet Software & Services - 1.0% Akamai Technologies, Inc. (a) ..................... 100 1,303 aQuantive, Inc. (a) ............................... 218,811 1,956,170 Ask Jeeves, Inc. (a) .............................. 100 2,675 Bankrate, Inc. (a) ................................ 100 1,385 Blue Coat Systems, Inc. (a) ....................... 100 1,861 Digital Impact, Inc. (a) .......................... 100 142 Digital River, Inc. (a) ........................... 101,802 4,235,981 DoubleClick, Inc. (a) ............................. 100 778 EarthLink, Inc. (a) ............................... 100 1,152 FindWhat.com (a) .................................. 100 1,773 Homestore, Inc. (a) ............................... 100 303 InfoSpace, Inc. (a) ............................... 100 4,755 iPass, Inc. (a) ................................... 100 740 iVillage, Inc. (a) ................................ 100 618 LookSmart Ltd. (a) ................................ 100 219 Neoforma, Inc. (a) ................................ 100 769 Net2Phone, Inc. (a) ............................... 100 340 Netease.com, Inc. sponsored ADR (a) ............... 100 5,283 NIC, Inc. (a) ..................................... 10 51 Open Text Corp. (a) ............................... 100 2,008 RealNetworks, Inc. (a) ............................ 1,440,109 9,533,522 Sina Corp. (a) .................................... 100 3,206 Sohu.com, Inc. (a)(d) ............................. 39,000 690,690 SonicWALL, Inc. (a) ............................... 100 632 ValueClick, Inc. (a) .............................. 100 1,333 VeriSign, Inc. (a) ................................ 686,300 23,004,776 WebEx Communications, Inc. (a) .................... 100 2,378 Websense, Inc. (a) ................................ 27,400 1,389,728 ------------ 40,844,571 ------------ IT Services - 1.1% Affiliated Computer Services, Inc. Class A (a) .... 623,900 37,552,541 Alliance Data Systems Corp. (a) ................... 100 4,748 Anteon International Corp. (a) .................... 100 4,186 DST Systems, Inc. (a) ............................. 600 31,272 Global Payments, Inc. ............................. 100 5,854 Hewitt Associates, Inc. Class A (a) ............... 100 3,201 iGate Corp. (a) ................................... 100 405 Infocrossing, Inc. (a) ............................ 100 1,693 Infosys Technologies Ltd. sponsored ADR ........... 200 13,862 infoUSA, Inc. (a) ................................. 100 1,119 Lionbridge Technologies, Inc. (a) ................. 874,300 5,875,296 Maximus, Inc. (a) ................................. 100 3,112 Satyam Computer Services Ltd. ..................... 100 949 StarTek, Inc. ..................................... 100 2,845 SunGard Data Systems, Inc. (a) .................... 200 5,666 Syntel, Inc. ...................................... 100 1,754 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 14 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- INFORMATION TECHNOLOGY - continued IT Services - continued The BISYS Group, Inc. (a) ......................... 100 $ 1,645 TietoEnator Oyj ................................... 100 3,174 Total System Services, Inc. ....................... 100 2,430 Tyler Technologies, Inc. (a) ...................... 100 836 ------------ 43,516,588 ------------ Office Electronics - 0.3% Neopost SA ........................................ 2,200 170,708 Zebra Technologies Corp. Class A (a) .............. 218,125 12,276,075 ------------ 12,446,783 ------------ Semiconductors & Semiconductor Equipment - 1.3% Agere Systems, Inc. Class A (a) ................... 100 137 Analog Devices, Inc. .............................. 49,700 1,834,924 ARM Holdings PLC sponsored ADR .................... 100 617 ASM Pacific Technology Ltd. ....................... 500 1,801 Cabot Microelectronics Corp. (a) .................. 289,900 11,610,495 Cree, Inc. (a) .................................... 46,100 1,847,688 Hi/fn, Inc. (a) ................................... 8 74 International Rectifier Corp. (a) ................. 15,700 699,749 KLA-Tencor Corp. (a) .............................. 31,500 1,467,270 Linear Technology Corp. ........................... 100 3,876 Marvell Technology Group Ltd. (a) ................. 200 7,094 NVIDIA Corp. (a) .................................. 917,300 21,611,588 Omnivision Technologies, Inc. (a) ................. 400 7,340 Pixelworks, Inc. (a) .............................. 100 1,134 PLX Technology, Inc. (a) .......................... 100 1,040 Silicon Image, Inc. (a) ........................... 100 1,646 Skyworks Solutions, Inc. (a) ...................... 389,700 3,674,871 Varian Semiconductor Equipment Associates, Inc. (a) ............................................ 206,900 7,624,265 Zoran Corp. (a) ................................... 100 1,158 ------------ 50,396,767 ------------ Software - 1.4% Adobe Systems, Inc. ............................... 75,300 4,724,322 Altiris, Inc. (a) ................................. 100 3,543 Bottomline Technologies, Inc. (a) ................. 11 159 Cadence Design Systems, Inc. (a) .................. 100 1,381 CCC Information Services Group, Inc. (a) .......... 100 2,221 Citrix Systems, Inc. (a) .......................... 100 2,453 DATATRAK International, Inc. (a) .................. 100 1,113 Digimarc Corp. (a) ................................ 100 932 Electronic Arts, Inc. (a) ......................... 100 6,168 FactSet Research Systems, Inc. .................... 100 5,844 FileNET Corp. (a) ................................. 100 2,576 Hyperion Solutions Corp. (a) ...................... 100 4,662 Informatica Corp. (a) ............................. 100 812 Intuit, Inc. (a) .................................. 132,800 5,844,528 JAMDAT Mobile, Inc. ............................... 100 2,065 Macromedia, Inc. (a) .............................. 100 3,112 Macrovision Corp. (a) ............................. 389,944 10,029,360 Manhattan Associates, Inc. (a) .................... 100 2,388 MRO Software, Inc. (a) 100 $ 1,302 Napster, Inc. (a) 100 940 NAVTEQ Corp. ...................................... 100 4,636 NDS Group PLC sponsored ADR (a) ................... 100 3,408 Open Solutions, Inc. (a) .......................... 437,209 11,349,946 Plato Learning, Inc. (a) .......................... 100 745 Quality Systems, Inc. (a) ......................... 100 5,980 Renaissance Learning, Inc. ........................ 70 1,299 RSA Security, Inc. (a) ............................ 100,687 2,019,781 Salesforce.com, Inc. .............................. 60,000 1,016,400 ScanSoft, Inc. (a) ................................ 100 419 SERENA Software, Inc. (a) ......................... 100 2,164 Symantec Corp. (a) ................................ 100 2,576 Synopsys, Inc. (a) ................................ 325,800 6,392,196 TALX Corp. ........................................ 83,200 2,145,728 Temenos Group AG (a) .............................. 100 922 THQ, Inc. (a) ..................................... 313,900 7,200,866 TIBCO Software, Inc. (a) .......................... 100 1,334 Vastera, Inc. (a) ................................. 667,400 1,755,262 Visual Networks, Inc. (a) ......................... 767,308 2,670,232 WatchGuard Technologies, Inc. (a) ................. 10 44 ------------ 55,213,819 ------------ TOTAL INFORMATION TECHNOLOGY ................... 364,623,900 ------------ MATERIALS - 18.4% Chemicals - 1.9% American Vanguard Corp. ........................... 150 5,517 Asian Paints India Ltd. ........................... 45,800 338,920 Balchem Corp. ..................................... 100 3,469 Cambrex Corp. ..................................... 100 2,710 Ecolab, Inc. (d) .................................. 509,300 17,891,709 Headwaters, Inc. (a) .............................. 100 2,850 K&S AG ............................................ 59,500 3,155,946 Lonza Group AG .................................... 10 562 Minerals Technologies, Inc. ....................... 34,200 2,281,140 Monsanto Co. ...................................... 178,300 9,904,565 Mosaic Co. (a) .................................... 117,900 1,924,128 Nitto Denko Corp. ................................. 181,200 9,941,853 NOVA Chemicals Corp. .............................. 251,500 11,883,375 Novozymes AS Series B ............................. 100 5,071 Olin Corp. ........................................ 104,900 2,309,898 Potash Corp. of Saskatchewan ...................... 100 8,313 Praxair, Inc. ..................................... 47,000 2,075,050 Quaker Chemical Corp. ............................. 100 2,484 Sasa Dupont Sabanci Polyester Sanayi AS (a) ....... 1,000 1 Sinopec Beijing Yanhua Petrochemical Co. Ltd. sponsored ADR .................................. 100 2,337 Sinopec Shanghai Petrochemical Co. Ltd.: (H Shares) ..................................... 2,000 746 See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 15 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- MATERIALS - continued Chemicals - continued Sinopec Shanghai Petrochemical Co. Ltd.: - continued sponsored ADR (d) .............................. 125,400 $ 4,677,420 Tosoh Corp. ....................................... 1,859,500 8,368,930 ------------ 74,786,994 ------------ Construction Materials - 0.0% Cemex SA de CV sponsored ADR ...................... 104 3,788 Florida Rock Industries, Inc. ..................... 150 8,930 Vulcan Materials Co. .............................. 13,000 709,930 ------------ 722,648 ------------ Containers & Packaging - 0.4% Essel Propack Ltd. ................................ 13,700 84,069 Packaging Corp. of America ........................ 565,300 13,312,815 Silgan Holdings, Inc. ............................. 40,500 2,468,880 ------------ 15,865,764 ------------ Metals & Mining - 15.8% Agnico-Eagle Mines Ltd. ........................... 1,180,230 16,247,833 Agnico-Eagle Mines Ltd. warrants 11/14/07 (a) ..... 23,350 64,446 Aleris International, Inc. (a) .................... 100 1,692 Arch Coal, Inc. ................................... 365,400 12,986,316 Barrick Gold Corp. ................................ 100 2,417 BHP Billiton Ltd. sponsored ADR ................... 15,500 372,310 BlueScope Steel Ltd. .............................. 1,037,200 6,694,919 Brush Engineered Materials, Inc. (a) .............. 100 1,850 Compania de Minas Buenaventura SA sponsored ADR ... 1,105,300 25,311,370 CONSOL Energy, Inc. ............................... 763,900 31,358,095 Dofasco, Inc. ..................................... 100 3,783 Falconbridge Ltd. ................................. 225,900 5,854,575 FNX Mining Co., Inc. (a) .......................... 164,300 709,228 Freeport-McMoRan Copper & Gold, Inc. Class B ...... 1,273,800 48,697,374 Gibraltar Industries, Inc. ........................ 106,400 2,513,168 Glamis Gold Ltd. (a) .............................. 129,400 2,217,053 Goldcorp, Inc. .................................... 50,000 752,500 Golden Star Resources Ltd. (a) .................... 250,000 1,004,167 Harmony Gold Mining Co. Ltd. ...................... 1,049,100 9,725,158 High River Gold Mines Ltd. (a) .................... 1,989,600 3,034,140 Inco Ltd. (a) ..................................... 100 3,667 Inmet Mining Corp. (a) ............................ 712,800 12,794,760 International Steel Group, Inc. ................... 2,500 101,400 IPSCO, Inc. ....................................... 1,165,900 55,681,441 Ivanhoe Mines Ltd. (a) ............................ 90,500 652,354 Kinross Gold Corp. (a) ............................ 4,204,866 29,609,265 Massey Energy Co. ................................. 289,794 10,128,300 Meridian Gold, Inc. (a) ........................... 100 1,895 Newmont Mining Corp. .............................. 2,267,580 100,703,207 Nippon Steel Corp. ................................ 3,401,000 8,333,994 Noranda, Inc. ..................................... 100 $ 1,755 Nucor Corp. (d) ................................... 1,866,700 97,703,078 Peabody Energy Corp. .............................. 233,400 18,884,394 Phelps Dodge Corp. ................................ 89,200 8,823,664 Placer Dome, Inc. ................................. 100 1,882 POSCO sponsored ADR ............................... 100 4,453 Ryerson Tull, Inc. ................................ 100 1,575 Schnitzer Steel Industries, Inc. Class A .......... 150 5,090 Steel Dynamics, Inc. .............................. 1,728,994 65,494,293 Teck Cominco Ltd. Class B (sub. vtg.) (d) ......... 1,118,800 34,421,747 United States Steel Corp. ......................... 354,300 18,157,875 Usinas Siderurgicas de Minas Gerais SA (Usiminas) (PN-A) ......................................... 203,000 4,115,030 Worthington Industries, Inc. ...................... 3,200 62,656 Xstrata PLC ....................................... 100 1,789 ------------ 633,241,958 ------------ Paper & Forest Products - 0.3% International Forest Products (Interfor) Class A (a) .................................... 9,100 52,325 Lee & Man Paper Manufacturing Ltd. ................ 6,792,000 5,548,734 MAXXAM, Inc. (a) .................................. 100 3,260 Sino-Forest Corp. (a) ............................. 2,545,700 7,276,459 Votorantim Celulose e Papel SA sponsored ADR (non-vtg.) ....................... 250 4,050 ------------ 12,884,828 ------------ TOTAL MATERIALS ................................ 737,502,192 ------------ TELECOMMUNICATION SERVICES - 1.9% Diversified Telecommunication Services - 0.8% Covad Communications Group, Inc. (a) .............. 2,491,761 5,357,286 General Communications, Inc. Class A (a) .......... 100 1,104 Golden Telecom, Inc. .............................. 100 2,642 Hungarian Telephone & Cable Corp. (a) ............. 100 1,440 Philippine Long Distance Telephone Co. (a) ........ 100 2,421 Philippine Long Distance Telephone Co. sponsored ADR (a)(d) ........................... 425,600 10,610,208 PT Indosat Tbk sponsored ADR ...................... 100 3,118 PT Telkomunikasi Indonesia Tbk sponsored ADR ...... 722,300 15,182,746 ------------ 31,160,965 ------------ Wireless Telecommunication Services - 1.1% America Movil SA de CV sponsored ADR .............. 224,300 11,742,105 Boston Communications Group, Inc. (a).............. 100 924 MTN Group Ltd. .................................... 2,253,716 17,305,369 Nextel Communications, Inc. Class A (a) ........... 100 3,000 Nextel Partners, Inc. Class A (a) ................. 100 1,954 NII Holdings, Inc. (a) ............................ 349,008 16,560,430 Telemig Celular Participacoes SA ADR .............. 100 2,823 ------------ 45,616,605 ------------ TOTAL TELECOMMUNICATION SERVICES ............... 76,777,570 ------------ See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stocks - continued - -------------------------------------------------------------------------------- Shares Value (Note 1) --------- -------------- UTILITIES - 0.0% Electric Utilities - 0.0% FPL Group, Inc. ................................... 100 $ 7,475 PPL Corp. ......................................... 100 5,328 -------------- 12,803 -------------- Multi-Utilities & Unregulated Power - 0.0% Public Service Enterprise Group, Inc. ............. 100 5,177 -------------- TOTAL UTILITIES ................................ 17,980 -------------- TOTAL COMMON STOCKS (Cost $2,720,027,228) .......................... 3,869,885,699 -------------- - -------------------------------------------------------------------------------- Nonconvertible Preferred Stocks - 0.0% - -------------------------------------------------------------------------------- CONSUMER DISCRETIONARY - 0.0% Automobiles - 0.0% Porsche AG (non-vtg.) ........................... 100 63,690 -------------- Household Durables - 0.0% Fedders Corp. Series A, 8.60% ................... 5 120 -------------- TOTAL NONCONVERTIBLE PREFERRED STOCKS (Cost $58,459) ............................... 63,810 -------------- - -------------------------------------------------------------------------------- MONEY MARKET FUNDS - 4.0% - -------------------------------------------------------------------------------- Fidelity Cash Central Fund, 2.24% (b) .................................... 99,587,186 99,587,186 Fidelity Securities Lending Cash Central Fund, 2.23% (b)(c) .................. 59,013,966 59,013,966 -------------- TOTAL MONEY MARKET FUNDS (Cost $158,601,152) ........................... 158,601,152 -------------- TOTAL INVESTMENT PORTFOLIO - 100.7% (Cost $2,878,686,839) ........................ 4,028,550,661 NET OTHER ASSETS - (0.7)% ....................... (28,308,362) -------------- NET ASSETS - 100% ............................... $4,000,242,299 ============== Legend (a) Non-income producing (b) Affiliated fund that is available only to investment companies and other accounts managed by Fidelity Investments. The rate quoted is the annualized seven-day yield of the fund at period end. A complete listing of the fund's holdings as of its most recent fiscal year end is available upon request. (c) Includes investment made with cash collateral received from securities on loan. (d) Security or a portion of the security is on loan at period end. (e) Affiliated company Other Information Distribution of investments by country of issue, as a percentage of total net assets, is as follows: United States of America .............................................. 72.7% Canada ................................................................ 7.1% Japan ................................................................. 3.9% Netherlands ........................................................... 1.9% India ................................................................. 1.5% Bermuda ............................................................... 1.2% Cayman Islands ........................................................ 1.1% Italy ................................................................. 1.1% Taiwan ................................................................ 1.0% Others (individually less than 1%) .................................... 8.5% ----- 100.0% ===== See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 17 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Investments - continued An affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Companies which are affiliates of the fund at period-end are noted in the fund's Schedule of Investments. Transactions during the period with companies which are or were affiliates are as follows:
Value Value, beginning of Sales Dividend end of Affiliates period Purchases Proceeds Income period - ---------- ------------ ----------- ---------- -------- ----------- Bright Horizons Family Solutions, Inc. .. $28,782,600 $ -- $4,594,980 $-- $ -- Foster Wheeler Ltd. ..................... -- 3,915,209 -- -- -- Harvard Bioscience, Inc. ................ 24,939,580 1,612,609 1,104,712 -- 13,996,708 IMPCO Technologies, Inc. ................ 1,771,032 8,777,717 791,283 -- 11,373,320 ----------- ----------- ---------- --- ----------- Total ................................... $55,493,212 $14,305,535 $6,490,975 $-- $25,370,028 =========== =========== ========== === ===========
Income Tax Information The fund hereby designates as capital gain dividends: For dividends with respect to the taxable year ended December 31, 2004, $68,763,000 or, if different, the net capital gain of such year. See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 18 - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Financial Statements - -------------------------------------------------------------------------------- Statement of Assets and Liabilities - -------------------------------------------------------------------------------- December 31, 2004 ----------------- Assets Investment in securities, at value (including securities loaned of $57,253,994) (cost $2,878,686,839) - See accompanying schedule .................................. $4,028,550,661 Cash ......................................... 118,202 Foreign currency held at value (cost $9,142,039) ......................... 9,609,981 Receivable for investments sold .............. 41,707,554 Receivable for fund shares sold .............. 2,072,663 Dividends receivable ......................... 2,016,209 Interest receivable .......................... 213,204 Prepaid expenses ............................. 11,603 Other receivables ............................ 214,767 -------------- Total assets .............................. 4,084,514,844 Liabilities Payable for investments purchased ............ $19,788,804 Payable for fund shares redeemed ............. 1,032,969 Accrued management fee ....................... 1,840,389 Distribution fees payable .................... 506,394 Other affiliated payables .................... 310,760 Other payables and accrued expenses .......... 1,779,263 Collateral on securities loaned, at value .... 59,013,966 ----------- Total liabilities ......................... 84,272,545 -------------- Net Assets ................................... $4,000,242,299 ============== Net Assets consist of: Paid in capital ........................... $2,787,744,560 Undistributed net investment income .......... 68,191 Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions ......... 63,335,377 Net unrealized appreciation (depreciation) on investments and assets and liabilities in foreign currencies ..................... 1,149,094,171 -------------- Net Assets ................................... $4,000,242,299 ============== Initial Class: Net Asset Value, offering price and redemption price per share ($979,532,916 / 32,457,007 shares) ..... $ 30.18 ============== Service Class: Net Asset Value, offering price and redemption price per share ($819,411,575 / 27,246,677 shares) ..... $ 30.07 ============== Service Class 2: Net Asset Value, offering price and redemption price per share ($2,201,297,808 / 73,675,095 shares) ... $ 29.88 ============== - -------------------------------------------------------------------------------- Statement of Operations - -------------------------------------------------------------------------------- Year ended December 31, 2004 ---------------------------- Investment Income Dividends .................................... $ 19,986,604 Interest ..................................... 811,862 Security lending ............................. 749,362 ------------ Total income .............................. 21,547,828 Expenses Management fee ............................... $ 17,263,105 Transfer agent fees .......................... 2,044,982 Distribution fees ............................ 4,605,289 Accounting and security lending fees ......... 941,481 Non-interested trustees' compensation ........ 15,949 Custodian fees and expenses .................. 426,013 Audit ........................................ 52,412 Legal ........................................ 6,596 Interest ..................................... 709 Miscellaneous ................................ 576,544 ------------ Total expenses before reductions .......... 25,933,080 Expense reductions ........................ (742,557) 25,190,523 ------------ ------------ Net investment income (loss) ................. (3,642,695) ------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investment securities (Including realized gain of $2,737,245 from affiliated issuers) ............... 195,588,243 Foreign currency transactions ............. (153,730) ------------ Total net realized gain (loss) ............... 195,434,513 Change in net unrealized appreciation (depreciation) on: Investment securities (net of increase in deferred foreign taxes of $918,145) ..................... 535,771,834 Assets and liabilities in foreign currencies ............................. 481,551 ------------ Total change in net unrealized appreciation (depreciation) ............... 536,253,385 ------------ Net gain (loss) .............................. 731,687,898 ------------ Net increase (decrease) in net assets resulting from operations ................. $728,045,203 ------------ See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 19 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Financial Statements - continued - -------------------------------------------------------------------------------- Statement of Changes in Net Assets - --------------------------------------------------------------------------------
Year ended Year ended December 31, December 31, 2004 2003/A/ -------------- -------------- Increase (Decrease) in Net Assets Operations Net investment income (loss) ............................................. $ (3,642,695) $ (2,294,177) Net realized gain (loss) ................................................. 195,434,513 29,542,718 Change in net unrealized appreciation (depreciation) ..................... 536,253,385 575,223,419 -------------- -------------- Net increase (decrease) in net assets resulting from operations .......... 728,045,203 602,471,960 -------------- -------------- Distributions to shareholders from net investment income .................... -- (5,082,393) -------------- -------------- Share transactions - net increase (decrease) ................................ 835,964,194 440,089,337 -------------- -------------- Total increase (decrease) in net assets .................................. 1,564,009,397 1,037,478,904 Net Assets Beginning of period ...................................................... 2,436,232,902 1,398,753,998 -------------- -------------- End of period (including undistributed net investment income of $68,191 and undistributed net investment income of $76,412, respectively) ..... $4,000,242,299 $2,436,232,902 ============== ==============
Other Information: Share Transactions Year ended December 31, 2004 ----------------------------------------------- Initial Class Service Class Service Class 2 ------------- ------------- --------------- Shares Sold ...................... 7,712,308 4,751,291 29,867,543 Reinvested ................ -- -- -- Redeemed .................. (3,341,075) (1,581,671) (5,307,215) ------------ ------------ ------------- Net increase (decrease) ... 4,371,233 3,169,620 24,560,328 ============ ============ ============= Dollars Sold ...................... $203,215,754 $122,478,823 $ 766,867,153 Reinvested ................ -- -- -- Redeemed .................. (83,674,683) (40,224,756) (132,698,097) ------------ ------------ ------------- Net increase (decrease) ... $119,541,071 $ 82,254,067 $ 634,169,056 ============ ============ ============= Share Transactions Year ended December 31, 2003 ----------------------------------------------- Initial Class Service Class Service Class 2 ------------- ------------- --------------- Shares Sold ...................... 4,434,612 4,691,539 24,537,608 Reinvested ................ 131,528 76,717 95,288 Redeemed .................. (5,011,471) (2,353,097) (5,472,778) ------------ ------------ ------------- Net increase (decrease) ... (445,331) 2,415,159 19,160,118 ============ ============ ============= Dollars Sold ...................... $ 95,795,053 $ 94,175,028 $ 482,784,357 Reinvested ................ 2,207,036 1,285,007 1,590,350 Redeemed .................. (89,867,137) (43,168,976) (104,711,381) ------------ ------------ ------------- Net increase (decrease) ... $ 8,134,952 $ 52,291,059 $ 379,663,326 ============ ============ ============= Distributions Year ended December 31, 2003 ----------------------------------------------- Initial Class Service Class Service Class 2 ------------- ------------- --------------- From net investment income.... $2,207,036 $1,285,007 $1,590,350 ========== ========== ========== /A/ Certain amounts have been reclassified. See Note 1 of Notes to Financial Statements. See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 20 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Financial Highlights - Initial Class - --------------------------------------------------------------------------------
Years ended December 31, Selected Per-Share Data 2004 2003/F/ 2002 2001 2000 -------- -------- -------- -------- -------- Net asset value, beginning of period ........... $ 24.16 $ 17.51 $ 19.60 $ 20.26 $ 15.25 -------- -------- -------- -------- -------- Income from Investment Operations Net investment income (loss)/C/ ............. .01 --/E/ .09 .20 .19 Net realized and unrealized gain (loss) ..... 6.01 6.73 (2.00) (.86) 4.95 -------- -------- -------- -------- -------- Total from investment operations ............... 6.02 6.73 (1.91) (.66) 5.14 -------- -------- -------- -------- -------- Distributions from net investment income ....... -- (.08) (.18) -- (.08) Distributions in excess of net realized gain ... -- -- -- -- (.05) -------- -------- -------- -------- -------- Total distributions ......................... -- (.08) (.18) -- (.13) -------- -------- -------- -------- -------- Net asset value, end of period ................. $ 30.18 $ 24.16 $ 17.51 $ 19.60 $ 20.26 ======== ======== ======== ======== ======== Total Return/A, B/ ............................. 24.92% 38.64% (9.82)% (3.26)% 33.78% Ratios to Average Net Assets/D/ Expenses before expense reductions .......... .71% .70% .70% .69% .74% Expenses net of voluntary waivers, if any ... .71% .70% .70% .69% .74% Expenses net of all reductions .............. .68% .68% .63% .62% .69% Net investment income (loss) ................ .03% --% .51% 1.06% 1.01% Supplemental Data Net assets, end of period (000 omitted) ..... $979,533 $678,480 $499,557 $574,934 $589,026 Portfolio turnover rate ..................... 55% 51% 135% 144% 245%
/A/ Total returns do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. /B/ Total returns would have been lower had certain expenses not been reduced during the periods shown. /C/ Calculated based on average shares outstanding during the period. /D/ Expense ratios reflect operating expenses of the class. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or other expense offset arrangements and do not represent the amount paid by the class during periods when reimbursements or reductions occur. Expenses net of any voluntary waivers reflect expenses after reimbursement by the investment adviser but prior to reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the class. /E/ Amount represents less than $.01 per share. /F/ As the result of a correction made in the classification of distributions received on securities representing realized gains for the year ended December 31, 2003, amounts previously reported have been reclassified. The impact of this correction was a decrease in net investment loss of $0.01 per share and a corresponding decrease in net realized and unrealized gain (loss). The ratio of net investment loss to average net assets decreased from (0.04)% to 0.00%. The classification had no impact on total net assets or total return of the class. - -------------------------------------------------------------------------------- Financial Highlights - Service Class - --------------------------------------------------------------------------------
Years ended December 31, Selected Per-Share Data 2004 2003/E/ 2002 2001 2000 -------- -------- -------- -------- -------- Net asset value, beginning of period .......... $ 24.10 $ 17.46 $ 19.54 $ 20.22 $ 15.24 -------- -------- -------- -------- -------- Income from Investment Operations Net investment income (loss)/C/ ............ (.02) (.02) .08 .18 .17 Net realized and unrealized gain (loss) .... 5.99 6.72 (2.00) (.86) 4.93 -------- -------- -------- -------- -------- Total from investment operations .............. 5.97 6.70 (1.92) (.68) 5.10 -------- -------- -------- -------- -------- Distributions from net investment income ...... -- (.06) (.16) -- (.07) Distributions in excess of net realized gain .. -- -- -- -- (.05) -------- -------- -------- -------- -------- Total distributions ........................ -- (.06) (.16) -- (.12) -------- -------- -------- -------- -------- Net asset value, end of period ................ $ 30.07 $ 24.10 $ 17.46 $ 19.54 $ 20.22 ======== ======== ======== ======== ======== Total Return/A, B/ ............................ 24.77% 38.52% (9.90)% (3.36)% 33.54% Ratios to Average Net Assets/D/ Expenses before expense reductions ......... .81% .80% .80% .79% .84% Expenses net of voluntary waivers, if any .. .81% .80% .80% .79% .84% Expenses net of all reductions ............. .78% .78% .73% .72% .79% Net investment income (loss) ............... (.07)% (.10)% .41% .96% .92% Supplemental Data Net assets, end of period (000 omitted) .... $819,412 $580,179 $378,264 $366,665 $282,941 Portfolio turnover rate .................... 55% 51% 135% 144% 245%
/A/ Total returns do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. /B/ Total returns would have been lower had certain expenses not been reduced during the periods shown. /C/ Calculated based on average shares outstanding during the period. /D/ Expense ratios reflect operating expenses of the class. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or other expense offset arrangements and do not represent the amount paid by the class during periods when reimbursements or reductions occur. Expenses net of any voluntary waivers reflect expenses after reimbursement by the investment adviser but prior to reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the class. /E/ As the result of a correction made in the classification of distributions received on securities representing realized gains for the year ended December 31, 2003, amounts previously reported have been reclassified. The impact of this correction was a decrease in net investment loss of $0.01 per share and a corresponding decrease in net realized and unrealized gain (loss). The ratio of net investment loss to average net assets decreased from (0.14)% to (0.10)%. The relassification had no impact on total net assets or total return of the class. See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- 21 Annual Report - -------------------------------------------------------------------------------- Fidelity Variable Insurance Products Fund: Mid Cap Portfolio Financial Statements - continued - -------------------------------------------------------------------------------- Financial Highlights -- Service Class 2 - --------------------------------------------------------------------------------
2004 2003/F/ 2002 2001 2000/D/ ---------- ---------- -------- -------- ------- Years ended December 31, Selected Per-Share Data Net asset value, beginning of period .......... $ 23.98 $ 17.39 $ 19.49 $ 20.20 $ 14.82 ---------- ---------- -------- -------- ------- Income from Investment Operations Net investment income (loss)/C/ ............. (.06) (.05) .05 .15 .14 Net realized and unrealized gain (loss) ..... 5.96 6.69 (1.99) (.86) 5.35 ---------- ---------- -------- -------- ------- Total from investment operations ............... 5.90 6.64 (1.94) (.71) 5.49 ---------- ---------- -------- -------- ------- Distributions from net investment income ....... -- (.05) (.16) -- (.06) Distributions in excess of net realized gain ... -- -- -- -- (.05) ---------- ---------- -------- -------- ------- Total distributions ......................... -- (.05) (.16) -- (.11) ---------- ---------- -------- -------- ------- Net asset value, end of period ................. $ 29.88 $ 23.98 $ 17.39 $ 19.49 $ 20.20 ========== ========== ======== ======== ======= Total Return/A, B/ ............................. 24.60% 38.31% (10.02)% (3.51)% 37.12% Ratios to Average Net Assets/E/ Expenses before expense reductions .......... .96% .95% .95% .94% .99%/A/ Expenses net of voluntary waivers, if any ... .96% .95% .95% .94% .99%/A/ Expenses net of all reductions .............. .93% .93% .88% .88% .94%/A/ Net investment income (loss) ................ (.22)% (.25)% .25% .81% .76%/A/ Supplemental Data Net assets, end of period (000 omitted) ..... $2,201,298 $1,177,574 $520,933 $210,356 $73,039 Portfolio turnover rate ..................... 55% 51% 135% 144% 245%
/A/ Total returns do not reflect charges attributable to your insurance company's separate account. Inclusion of these charges would reduce the total returns shown. /B/ Total returns would have been lower had certain expenses not been reduced during the periods shown. /C/ Calculated based on average shares outstanding during the period. /D/ For the period January 12, 2000 (commencement of operations) to December 31, 2000. /E/ Expense ratios reflect operating expenses of the class. Expenses before reductions do not reflect amounts reimbursed by the investment adviser or reductions from brokerage service arrangements or other expense offset arrangements and do not represent the amount paid by the class during periods when reimbursements or reductions occur. Expense ratios before reductions for start-up periods may not be representative of longer-term operating periods. Expenses net of any voluntary waivers reflect expenses after reimbursement by the investment adviser but prior to reductions from brokerage service arrangements or other expense offset arrangements. Expenses net of all reductions represent the net expenses paid by the class. /F/ As the result of a correction made in the classification of distributions received on securities representing realized gains for the year ended December 31, 2003, amounts previously reported have been reclassified. The impact of this correction was a decrease in net investment loss of $0.01 per share and a corresponding decrease in net realized and unrealized gain (loss). The ratio of net investment loss to average net assets decreased from (0.29)% to (0.25)%. The reclassification had no impact on total net assets or total return of the class. See accompanying notes which are an integral part of the financial statements. - -------------------------------------------------------------------------------- Mid Cap Portfolio 22 - -------------------------------------------------------------------------------- Notes to Financial Statements For the period ended December 31, 2004 1. Significant Accounting Policies. Mid Cap Portfolio (the fund) is a fund of Variable Insurance Products Fund III (the trust) (referred to in this report as Fidelity Variable Insurance Products: Mid Cap Portfolio) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. Shares of the fund may only be purchased by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. The fund offers the following classes of shares: Initial Class shares, Service Class shares and Service Class 2 shares. All classes have equal rights and voting privileges, except for matters affecting a single class. Investment income, realized and unrealized capital gains and losses, the common expenses of the fund, and certain fund-level expense reductions, if any, are allocated on a pro rata basis to each class based on the relative net assets of each class to the total net assets of the fund. Each class differs with respect to distribution and service plan fees incurred. Certain expense reductions also differ by class. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: Security Valuation. Net asset value per share (NAV calculation) is calculated as of the close of business of the New York Stock Exchange, normally 4:00 p.m. Eastern time. Equity securities, including restricted securities, for which market quotations are available are valued at the last sale price or official closing price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade. If prices are not readily available or do not accurately reflect fair value for a security, or if a security's value has been materially affected by events occurring after the close of the exchange or market on which the security is principally traded, that security may be valued by another method that the Board of Trustees believes accurately reflects fair value. A security's valuation may differ depending on the method used for determining value. Price movements in futures contracts and ADRs, market and trading trends, the bid/ask quotes of brokers and off-exchange institutional trading may be reviewed in the course of making a good faith determination of a security's fair value. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued on the basis of amortized cost. Investments in open-end investment companies are valued at their net asset value each business day. Foreign Currency. The fund uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses from these transactions may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. Foreign-denominated assets, including investment securities, and liabilities are translated into U.S. dollars at the exchange rate at period end. Purchases and sales of investment securities, income and dividends received and expenses denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The effects of exchange rate fluctuations on investments are included with the net realized and unrealized gain (loss) on investment securities. Other foreign currency transactions resulting in realized and unrealized gain (loss) are disclosed separately. Investment Transactions and Income. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost and may include proceeds received from litigation. Dividend income is recorded on the ex-dividend date, except for certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Distributions received on securities that represent a return of capital or capital gain are recorded as a reduction of cost of investments and/or as a realized gain. The fund estimates the components of distributions received that may be considered return of capital distributions or capital gain distributions. Interest income is accrued as earned. Interest income includes coupon interest and amortization of premium and accretion of discount on debt securities. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. Reclassification of Financial Information. As the result of a correction made in the classification of distributions received on securities representing realized gains for the year ended December 31, 2003, amounts previously reported have been reclassified. Net investment loss for the fund decreased by $669,090, with a corresponding decrease to net realized gain. The reclassification has no impact on total net assets or total return of the fund. Expenses. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. Income Tax Information and Distributions to Shareholders. Each year, the fund intends to qualify as a regulated investment company by distributing all of its taxable income and realized gains under Subchapter M of the Internal Revenue Code. As a result, no provision for income taxes is required in the accompanying financial statements. Foreign taxes are provided for based on the fund's understanding of the tax rules and rates that exist in the foreign markets in which it invests. Distributions are recorded on the ex-dividend date. - -------------------------------------------------------------------------------- 23 Annual Report - -------------------------------------------------------------------------------- Notes to Financial Statements - continued 1. Significant Accounting Policies - continued Income Tax Information and Distributions to Shareholders - continued Income dividends and capital gain distributions are declared separately for each class. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Capital accounts within the financial statements are adjusted for permanent book-tax differences. These adjustments have no impact on net assets or the results of operations. Temporary book-tax differences will reverse in a subsequent period. Book-tax differences are primarily due to foreign currency transactions, passive foreign investment companies (PFIC), partnerships, net operating losses, capital loss carryforwards and losses deferred due to wash sales. The tax-basis components of distributable earnings and the federal tax cost as of period end were as follows: Unrealized appreciation ...................................... $1,164,223,599 Unrealized depreciation ...................................... (20,489,077) -------------- Net unrealized appreciation (depreciation) ................... 1,143,734,522 Undistributed long-term capital gain ......................... 68,763,219 Cost for federal income tax purposes ......................... $2,884,816,139 The tax character of distributions paid was as follows: December 31, 2004 December 31, 2003 ----------------- ----------------- Ordinary Income ........................ $-- $5,082,393 2. Operating Policies. Repurchase Agreements. Fidelity Management & Research Company (FMR) has received an Exemptive Order from the Securities and Exchange Commission (the SEC) which permits the fund and other affiliated entities of FMR to transfer uninvested cash balances into joint trading accounts. These accounts are then invested in repurchase agreements that are collateralized by U.S. Treasury or Government obligations. The fund may also invest directly with institutions, in repurchase agreements that are collateralized by commercial paper obligations and corporate obligations. Collateral is held in segregated accounts with custodian banks and may be obtained in the event of a default of the counterparty. Collateral is marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). 3. Purchases and Sales of Investments. Purchases and sales of securities, other than short-term securities and U.S. government securities, aggregated $2,400,817,321 and $1,622,172,637, respectively. 4. Fees and Other Transactions with Affiliates. Management Fee. FMR and its affiliates provide the fund with investment management related services for which the fund pays a monthly management fee. The management fee is the sum of an individual fund fee rate that is based on an annual rate of .30% of the fund's average net assets and a group fee rate that averaged .28% during the period. The group fee rate is based upon the average net assets of all the mutual funds advised by FMR. The group fee rate decreases as assets under management increase and increases as assets under management decrease. For the period, the total annual management fee rate was .57% of the fund's average net assets. Distribution and Service Plan. In accordance with Rule 12b-l of the 1940 Act, the fund has adopted separate 12b-l Plans for each Service Class of shares. Each Service Class pays Fidelity Distributors Corporation (FDC), an affiliate of FMR, a service fee. For the period, the service fee is based on an annual rate of ..10% of Service Class' average net assets and .25% of Service Class 2's average net assets. For the period, each class paid FDC the following amounts, all of which were re-allowed to insurance companies for the distribution of shares and providing shareholder support services: Service Class ..................................................... $ 665,057 Service Class 2 ................................................... 3,940,232 ---------- $4,605,289 ========== - -------------------------------------------------------------------------------- Mid Cap Portfolio 24 - -------------------------------------------------------------------------------- 4. Fees and Other Transactions with Affiliates - continued Transfer Agent Fees. Fidelity Investments Institutional Operations Company, Inc. (FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing, and shareholder servicing agent. FIIOC receives an asset-based fee with respect to each account. FIIOC pays a portion of the expenses related to the typesetting, printing and mailing of shareholder reports, except proxy statements. Each class pays a transfer agent fee, excluding out of pocket expenses, equal to an annual rate of .07% of their month end net assets. For the period, the total transfer agent fees paid by each class to FIIOC, including out of pocket expenses, were as follows: Initial Class ..................................................... $ 517,432 Service Class ..................................................... 449,572 Service Class 2 ................................................... 1,077,978 ---------- $2,044,982 ========== Accounting and Security Lending Fees. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, maintains the fund's accounting records. The accounting fee is based on the level of average net assets for the month. Under a separate contract, FSC administers the security lending program. The security lending fee is based on the number and duration of lending transactions. Central Funds. The fund may invest in affiliated Central Funds managed by Fidelity Investments Money Management, Inc. (FIMM), an affiliate of FMR. The Central Funds are open-end investment companies available only to investment companies and other accounts managed by FMR and its affiliates. The Central Funds seek preservation of capital and current income and do not pay a management fee. Income distributions earned by the fund are recorded as income in the accompanying financial statements and totaled $803,656 for the period. Brokerage Commissions. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of the investment adviser. The commissions paid to these affiliated firms were $171,170 for the period. Interfund Lending Program. Pursuant to an Exemptive Order issued by the SEC, the fund, along with other registered investment companies having management contracts with FMR, may participate in an interfund lending program. This program provides an alternative credit facility allowing the funds to borrow from, or lend money to, other participating funds. The fund's activity in this program during the period was as follows:
Interest Earned Average Daily Weighted Average (included in Interest Loan Balance Interest Rate interest income) Expense ------------- ---------------- ---------------- -------- Borrower or Lender Borrower ............................................. $11,369,500 1.12% -- $709
5. Committed Line of Credit. The fund participates with other funds managed by FMR in a $4.2 billion credit facility (the "line of credit") to be utilized for temporary or emergency purposes to fund shareholder redemptions or for other short-term liquidity purposes. The fund has agreed to pay commitment fees on its pro rata portion of the line of credit. During the period, there were no borrowings on this line of credit. 6. Security Lending. The fund lends portfolio securities from time to time in order to earn additional income. The fund receives collateral (in the form of U.S. Treasury obligations, letters of credit and/or cash) against the loaned securities and maintains collateral in an amount not less than 100% of the market value of the loaned securities during the period of the loan. The market value of the loaned securities is determined at the close of business of the fund and any additional required collateral is delivered to the fund on the next business day. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. Cash collateral is invested in cash equivalents. The value of loaned securities and cash collateral at period end are disclosed on the fund's Statement of Assets and Liabilities. 7. Expense Reductions. Many of the brokers with whom FMR places trades on behalf of the fund provided services to the fund in addition to trade execution. These services included payments of certain expenses on behalf of the fund totaling $739,274 for the period. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances were used to reduce the fund's expenses. During the period, these credits reduced the fund's custody expenses by $3,283. - -------------------------------------------------------------------------------- 25 Annual Report - -------------------------------------------------------------------------------- Notes to Financial Statements - continued 8. Other Information At the end of the period, FMR or its affiliates were the owners of record of 19% of the total outstanding shares of the fund and two otherwise unaffiliated shareholders were the owners of record of 42% of the total outstanding shares of the fund. - -------------------------------------------------------------------------------- Mid Cap Portfolio 26 - -------------------------------------------------------------------------------- Report of Independent Registered Public Accounting Firm To the Trustees of Variable Insurance Products Fund III and the Shareholders of Mid Cap Portfolio: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Mid Cap Portfolio (a fund of Variable Insurance Products Fund III) at December 31, 2004 and the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Mid Cap Portfolio's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 10, 2005 - -------------------------------------------------------------------------------- 27 Annual Report - -------------------------------------------------------------------------------- Trustees and Officers The Trustees, Member of the Advisory Board, and executive officers of the trust and fund, as applicable, are listed below. The Board of Trustees governs the fund and is responsible for protecting the interests of shareholders. The Trustees are experienced executives who meet periodically throughout the year to oversee the fund's activities, review contractual arrangements with companies that provide services to the fund, and review the fund's performance. Except for William O. McCoy, Dennis J. Dirks, and Kenneth L. Wolfe, each of the Trustees oversees 301 funds advised by FMR or an affiliate. Mr. McCoy oversees 303 funds advised by FMR or an affiliate. Mr. Dirks and Mr. Wolfe oversee 233 funds advised by FMR or an affiliate. The Trustees hold office without limit in time except that (a) any Trustee may resign; (b) any Trustee may be removed by written instrument, signed by at least two-thirds of the number of Trustees prior to such removal; (c) any Trustee who requests to be retired or who has become incapacitated by illness or injury may be retired by written instrument signed by a majority of the other Trustees; and (d) any Trustee may be removed at any special meeting of shareholders by a two-thirds vote of the outstanding voting securities of the trust. In any event, each non-interested Trustee shall retire not later than the last day of the calendar year in which his or her 72nd birthday occurs. The executive officers and Advisory Board Member hold office without limit in time, except that any officer and Advisory Board Member may resign or may be removed by a vote of a majority of the Trustees at any regular meeting or any special meeting of the Trustees. Except as indicated, each individual has held the office shown or other offices in the same company for the past five years. The fund's Statement of Additional Information (SAI) includes more information about the Trustees. To request a free copy, call Fidelity at 1-800-544-5429. Interested Trustees*: Correspondence intended for each Trustee who is an "interested person" (as defined in the 1940 Act) may be sent to Fidelity Investments, 82 Devonshire Street, Boston, Massachusetts 02109. Name, Age; Principal Occupation Edward C. Johnson 3d (74)** Year of Election or Appointment: 1994 Mr. Johnson is Chairman of the Board of Trustees. Mr. Johnson serves as Chief Executive Officer, Chairman, and a Director of FMR Corp.; a Director and Chairman of the Board and of the Executive Committee of FMR; Chairman and a Director of Fidelity Management & Research (Far East) Inc.; Chairman (1998) and a Director of Fidelity Investments Money Management, Inc.; and Chairman (2001) and a Director (2000) of FMR Co., Inc. Abigail P. Johnson (43)** Year of Election or Appointment: 2001 Senior Vice President of VIP Mid Cap (2001). Ms. Johnson also serves as Senior Vice President of other Fidelity funds (2001). She is President and a Director of FMR (2001), Fidelity Investments Money Management, Inc. (2001), FMR Co., Inc. (2001), and a Director of FMR Corp. Previously, Ms. Johnson managed a number of Fidelity funds. Laura B. Cronin (50) Year of Election or Appointment: 2003 Ms. Cronin is an Executive Vice President (2002) and Chief Financial Officer (2002) of FMR Corp. and is a member of the Fidelity Management Committee (2003). Previously, Ms. Cronin served as Vice President of Finance of FMR (1997-1999), and Chief Financial Officer of FMR (1999-2001), Fidelity Personal Investments (2001), and Fidelity Brokerage Company (2001-2002). Robert L. Reynolds (52) Year of Election or Appointment: 2003 Mr. Reynolds is a Director (2003) and Chief Operating Officer (2002) of FMR Corp. and is the head of the Fidelity Management Committee (2003). He also serves on the Board at Fidelity Investments Canada, Ltd. (2000). Previously, Mr. Reynolds served as President of Fidelity Investments Institutional Retirement Group (1996-2000). * Trustees have been determined to be "Interested Trustees" by virtue of, among other things, their affiliation with the trust or various entities under common control with FMR. ** Edward C. Johnson 3d, Trustee, is Abigail P. Johnson's father. - -------------------------------------------------------------------------------- Mid Cap Portfolio 28 - -------------------------------------------------------------------------------- Non-Interested Trustees: Correspondence intended for each non-interested Trustee (that is, the Trustees other than the Interested Trustees) may be sent to Fidelity Investments, P.O. Box 55235, Boston, Massachusetts 02205-5235. Name, Age; Principal Occupation Dennis J. Dirks (56) Year of Election or Appointment: 2005 Mr. Dirks also serves as a Trustee (2005) or Member of the Advisory Board (2004) of other investment companies advised by FMR. Prior to his retirement in May 2003, Mr. Dirks was Chief Operating Officer and a member of the Board of The Depository Trust & Clearing Corporation (DTCC) (1999-2003). He also served as President, Chief Operating Officer, and Board member of The Depository Trust Company (DTC) (1999-2003) and President and Board member of the National Securities Clearing Corporation (NSCC) (1999-2003). In addition, Mr. Dirks served as Chief Executive Officer and Board member of the Government Securities Clearing Corporation (2001-2003) and Chief Executive Officer and Board member of the Mortgage-Backed Securities Clearing Corporation (2001-2003). Robert M. Gates (61) Year of Election or Appointment: 1997 Dr. Gates is Vice Chairman of the non-interested Trustees (2005). Dr. Gates is President of Texas A&M University (2002). He was Director of the Central Intelligence Agency (CIA) from 1991 to 1993. From 1989 to 1991, Dr. Gates served as Assistant to the President of the United States and Deputy National Security Advisor. Dr. Gates is a Director of NACCO Industries, Inc. (mining and manufacturing), Parker Drilling Co., Inc. (drilling and rental tools for the energy industry, 2001), and Brinker International (restaurant management, 2003). He also serves as a member of the Advisory Board of VoteHere.net (secure Internet voting, 2001). Previously, Dr. Gates served as a Director of LucasVarity PLC (automotive components and diesel engines), a Director of TRW Inc. (automotive, space, defense, and information technology), and Dean of the George Bush School of Government and Public Service at Texas A&M University (1999-2001). Dr. Gates also is a Trustee of the Forum for International Policy. George H. Heilmeier (68) Year of Election or Appointment: 2004 Dr. Heilmeier is Chairman Emeritus of Telcordia Technologies (communication software and systems), where prior to his retirement, he served as company Chairman and Chief Executive Officer. He currently serves on the Boards of Directors of The Mitre Corporation (systems engineering and information technology support for the government), INET Technologies Inc. (telecommunications network surveillance, 2001), Teletech Holdings (customer management services), and HRL Laboratories (private research and development, 2004). He is Chairman of the General Motors Technology Advisory Committee and a Life Fellow of the Institute of Electrical and Electronics Engineers (IEEE) (2000). Dr. Heilmeier is a member of the Defense Science Board and the National Security Agency Advisory Board. He is also a member of the National Academy of Engineering, the American Academy of Arts and Sciences, and the Board of Overseers of the School of Engineering and Applied Science of the University of Pennsylvania. Previously, Dr. Heilmeier served as a Director of TRW Inc. (automotive, space, defense, and information technology, 1992-2002), Compaq (1994-2002), and Automatic Data Processing, Inc. (ADP) (technology-based business outsourcing, 1995-2002). Marie L. Knowles (58) Year of Election or Appointment: 2001 Prior to Ms. Knowles' retirement in June 2000, she served as Executive Vice President and Chief Financial Officer of Atlantic Richfield Company (ARCO) (diversified energy, 1996-2000). From 1993 to 1996, she was a Senior Vice President of ARCO and President of ARCO Transportation Company. She served as a Director of ARCO from 1996 to 1998. She currently serves as a Director of Phelps Dodge Corporation (copper mining and manufacturing) and McKesson Corporation (healthcare service, 2002). Ms. Knowles is a Trustee of the Brookings Institution and the Catalina Island Conservancy and also serves as a member of the Advisory Board for the School of Engineering of the University of Southern California. Ned C. Lautenbach (60) Year of Election or Appointment: 2000 Mr. Lautenbach has been a partner of Clayton, Dubilier & Rice, Inc. (private equity investment firm) since September 1998. Previously, Mr. Lautenbach was with the International Business Machines Corporation (IBM) from 1968 until his retirement in 1998. He was most recently Senior Vice President and Group Executive of Worldwide Sales and Services. From 1993 to 1995, he was Chairman of IBM World Trade Corporation, and from 1994 to 1998 was a member of IBM's Corporate Executive Committee. Mr. Lautenbach serves as Co-Chairman and a Director of Covansys, Inc. (global provider of business and technology solutions, 2000). In addition, he is a Director of Italtel Holding S.p.A. (telecommunications (Milan, Italy), 2004) and Eaton Corporation (diversified industrial) as well as the Philharmonic Center for the Arts in Naples, Florida (1999). He also is a member of the Council on Foreign Relations. - -------------------------------------------------------------------------------- 29 Annual Report - -------------------------------------------------------------------------------- Trustees and Officers - continued Name, Age; Principal Occupation Marvin L. Mann (71) Year of Election or Appointment: 1994 Mr. Mann is Chairman of the non-interested Trustees (2001). He is Chairman Emeritus of Lexmark International, Inc. (computer peripherals), where he served as CEO until April 1998, retired as Chairman May 1999, and remains a member of the Board. Prior to 1991, he held the positions of Vice President of International Business Machines Corporation (IBM) and President and General Manager of various IBM divisions and subsidiaries. He is a member of the Executive Committee of the Independent Director's Council of the Investment Company Institute. In addition, Mr. Mann is a member of the President's Cabinet at the University of Alabama and the Board of Visitors of the Culverhouse College of Commerce and Business Administration at the University of Alabama. William O. McCoy (71) Year of Election or Appointment: 1997 Prior to his retirement in December 1994, Mr. McCoy was Vice Chairman of the Board of BellSouth Corporation (telecommunications) and President of BellSouth Enterprises. He is currently a Director of Liberty Corporation (holding company), Duke Realty Corporation (real estate), and Progress Energy, Inc. (electric utility). He is also a partner of Franklin Street Partners (private investment management firm) and a member of the Research Triangle Foundation Board. In addition, Mr. McCoy served as the Interim Chancellor (1999-2000) and a member of the Board of Visitors (1994-1998) for the University of North Carolina at Chapel Hill and currently serves on the Board of Directors of the University of North Carolina Health Care System and the Board of Visitors of the Kenan-Flagler Business School (University of North Carolina at Chapel Hill). He also served as Vice President of Finance for the University of North Carolina (16-school system, 1995-1998). Cornelia M. Small (60) Year of Election or Appointment: 2005 Ms. Small is a member (2000) and Chairperson (2002) of the Investment Committee, and a member (2002) of the Board of Trustees of Smith College. Previously, she served as Chief Investment Officer (1999-2000), Director of Global Equity Investments (1996-1999), and a member of the Board of Directors of Scudder, Stevens & Clark (1990-1997) and Scudder Kemper Investments (1997-1998). In addition, Ms. Small served as Co-Chair (2000-2003) of the Annual Fund for the Fletcher School of Law and Diplomacy. William S. Stavropoulos (65) Year of Election or Appointment: 2002 Mr. Stavropoulos is Chairman of the Board (2000), CEO (2002), a position he previously held from 1995-2000, Chairman of the Executive Committee (2000), and a Member of the Board of Directors of The Dow Chemical Company. Since joining The Dow Chemical Company in 1967, Mr. Stavropoulos served in numerous senior management positions, including President (1993-2000; 2002-2003). Currently, he is a Director of NCR Corporation (data warehousing and technology solutions), BellSouth Corporation (telecommunications), Chemical Financial Corporation, and Maersk Inc. (industrial conglomerate, 2002). He also serves as a member of the Board of Trustees of the American Enterprise Institute for Public Policy Research. In addition, Mr. Stavropoulos is a member of The Business Council, J.P. Morgan International Council and the University of Notre Dame Advisory Council for the College of Science. Kenneth L. Wolfe (65) Year of Election or Appointment: 2005 Mr. Wolfe also serves as a Trustee (2005) or Member of the Advisory Board (2004) of other investment companies advised by FMR. Prior to his retirement in 2001, Mr. Wolfe was Chairman and Chief Executive Officer of Hershey Foods Corporation (1993-2001). He currently serves as a member of the boards of Adelphia Communications Corporation (2003), Bausch & Lomb, Inc., and Revlon Inc. (2004). - -------------------------------------------------------------------------------- Mid Cap Portfolio 30 - -------------------------------------------------------------------------------- Advisory Board Member and Executive Officers: Correspondence intended for each executive officer and Mr. Lynch may be sent to Fidelity Investments, 82 Devonshire Street, Boston, Massachusetts 02109. Name, Age; Principal Occupation Peter S. Lynch (61) Year of Election or Appointment: 2003 Member of the Advisory Board of Variable Insurance Products Fund III. Vice Chairman and a Director of FMR, and Vice Chairman (2001) and a Director (2000) of FMR Co., Inc. Previously, Mr. Lynch served as a Trustee of the Fidelity funds (1990-2003). Prior to May 31, 1990, he was a Director of FMR and Executive Vice President of FMR (a position he held until March 31, 1991), Vice President of Fidelity(R) Magellan(R) Fund and FMR Growth Group Leader, and Managing Director of FMR Corp. Mr. Lynch was also Vice President of Fidelity Investments Corporate Services. In addition, he serves as a Trustee of Boston College, Massachusetts Eye & Ear Infirmary, Historic Deerfield, John F. Kennedy Library, and the Museum of Fine Arts of Boston. John B. McDowell (46) Year of Election or Appointment: 2002 Vice President of VIP Mid Cap. Mr. McDowell also serves as Vice President of certain Equity Funds (2002). He is Senior Vice President of FMR (1999), FMR Co., Inc. (2001), and Fidelity Management Trust Company (FMTC). Since joining Fidelity Investments in 1985, Mr. McDowell has worked as a research analyst and manager. Thomas J. Allen (44) Year of Election or Appointment: 2003 Vice President of VIP Mid Cap. Mr. Allen also serves as Vice President of other funds advised by FMR. Prior to assuming his current responsibilities, Mr. Allen managed a variety of Fidelity funds. Eric D. Roiter (56) Year of Election or Appointment: 1998 Secretary of VIP Mid Cap. He also serves as Secretary of other Fidelity funds; Vice President, General Counsel, and Secretary of FMR Co., Inc. (2001 -present) and FMR; Vice President and Secretary of FDC; Assistant Secretary of Fidelity Management & Research (U.K.) Inc. (2001 -present), Fidelity Management & Research (Far East) Inc. (2001 -present), and Fidelity Investments Money Management, Inc. (2001 -present). Mr. Roiter is an Adjunct Member, Faculty of Law, at Boston College Law School (2003-present). Stuart Fross (45) Year of Election or Appointment: 2003 Assistant Secretary of VIP Mid Cap. Mr. Fross also serves as Assistant Secretary of other Fidelity funds (2003) and is an employee of FMR. Christine Reynolds (46) Year of Election or Appointment: 2004 President, Treasurer, and Anti-Money Laundering (AML) officer of VIP Mid Cap. Ms. Reynolds also serves as President, Treasurer, and AML officer of other Fidelity funds (2004) and is a Vice President (2003) and an employee (2002) of FMR. Before joining Fidelity Investments, Ms. Reynolds worked at PricewaterhouseCoopers LLP (PwC) (1980-2002), where she was most recently an audit partner with PwC's investment management practice. Timothy F. Hayes (54) Year of Election or Appointment: 2002 Chief Financial Officer of VIP Mid Cap. Mr. Hayes also serves as Chief Financial Officer of other Fidelity funds (2002). Recently he was appointed President of Fidelity Service Company (2003) where he also serves as a Director. Mr. Hayes also serves as President of Fidelity Investments Operations Group (FIOG, 2002), which includes Fidelity Pricing and Cash Management Services Group (FPCMS), where he was appointed President in 1998. Previously, Mr. Hayes served as Chief Financial Officer of Fidelity Investments Corporate Systems and Service Group (1998) and Fidelity Systems Company (1997-1998). Kenneth A. Rathgeber (57) Year of Election or Appointment: 2004 Chief Compliance Officer of VIP Mid Cap. Mr. Rathgeber also serves as Chief Compliance Officer of other Fidelity funds (2004) and Executive Vice President of Risk Oversight for Fidelity Investments (2002). Previously, he served as Executive Vice President and Chief Operating Officer for Fidelity Investments Institutional Services Company, Inc. (1998-2002). - -------------------------------------------------------------------------------- 31 Annual Report - -------------------------------------------------------------------------------- Trustees and Officers - continued Name, Age; Principal Occupation John R. Hebble (46) Year of Election or Appointment: 2003 Deputy Treasurer of VIP Mid Cap. Mr. Hebble also serves as Deputy Treasurer of other Fidelity funds (2003), and is an employee of FMR. Before joining Fidelity Investments, Mr. Hebble worked at Deutsche Asset Management where he served as Director of Fund Accounting (2002-2003) and Assistant Treasurer of the Scudder Funds (1998-2003). Kimberley H. Monasterio (41) Year of Election or Appointment: 2004 Deputy Treasurer of VIP Mid Cap. Ms. Monasterio also serves as Deputy Treasurer of other Fidelity funds (2004) and is an employee of FMR (2004). Before joining Fidelity Investments, Ms. Monasterio served as Treasurer (2000-2004) and Chief Financial Officer (2002-2004) of the Franklin Templeton Funds and Senior Vice President of Franklin Templeton Services, LLC (2000-2004). John H. Costello (58) Year of Election or Appointment: 1998 Assistant Treasurer of VIP Mid Cap. Mr. Costello also serves as Assistant Treasurer of other Fidelity funds and is an employee of FMR. Peter L. Lydecker (50) Year of Election or Appointment: 2004 Assistant Treasurer of VIP Mid Cap. Mr. Lydecker also serves as Assistant Treasurer of other Fidelity funds (2004) and is an employee of FMR. Mark Osterheld (49) Year of Election or Appointment: 2002 Assistant Treasurer of VIP Mid Cap. Mr. Osterheld also serves as Assistant Treasurer of other Fidelity funds (2002) and is an employee of FMR. Kenneth B. Robins (35) Year of Election or Appointment: 2004 Assistant Treasurer of VIP Mid Cap. Mr. Robins also serves as Assistant Treasurer of other Fidelity funds (2004) and is an employee of FMR (2004). Before joining Fidelity Investments, Mr. Robins worked at KPMG LLP, where he was a partner in KPMG's department of professional practice (2002-2004) and a Senior Manager (1999-2000). In addition, Mr. Robins served as Assistant Chief Accountant, United States Securities and Exchange Commission (2000-2002). - -------------------------------------------------------------------------------- Mid Cap Portfolio 32 - -------------------------------------------------------------------------------- Distributions The Board of Trustees of VIP III: Mid Cap Portfolio voted to pay to shareholders of record at the opening of business on record date, the following distributions per share derived from capital gains realized from sales of portfolio securities. Fund Pay Date Record Date Capital Gains - --------------- -------- ----------- ------------- Initial Class 2/11/05 2/11/05 $.51 Service Class 2/11/05 2/11/05 $.51 Service Class 2 2/11/05 2/11/05 $.51 - -------------------------------------------------------------------------------- 33 Annual Report - -------------------------------------------------------------------------------- Proxy Voting Results A special meeting of the fund's shareholders was held on December 14, 2004. The results of votes taken among shareholders on proposals before them are reported below. Each vote reported represents one dollar of net asset value held on the record date for the meeting. PROPOSAL 1 To amend the Declaration of Trust to allow the Board of Trustees, if permitted by applicable law, to authorize fund mergers without shareholder approval./A/ # of % of Votes Votes ---------------- ------- Affirmative ....................................... 4,465,365,699.61 80.317 Against ........................................... 820,718,849.73 14.762 Abstain ........................................... 273,620,539.56 4.921 TOTAL .......................................... 5,559,705,088.90 100.000 PROPOSAL 2 To elect a Board of Trustees./A/ # of % of Votes Votes ---------------- ------- J. Michael Cook Affirmative ....................................... 5,275,527,318.06 94.889 Withheld .......................................... 284,177,770.84 5.111 TOTAL .......................................... 5,559,705,088.90 100.000 Ralph F. Cox Affirmative ....................................... 5,260,941,793.66 94.626 Withheld .......................................... 298,763,295.24 5.374 TOTAL .......................................... 5,559,705,088.90 100.000 Laura B. Cronin Affirmative ....................................... 5,275,571,233.79 94.889 Withheld .......................................... 284,133,855.11 5.111 TOTAL .......................................... 5,559,705,088.90 100.000 Dennis J. Dirks/B/ Affirmative ....................................... 5,277,234,059.51 94.919 Withheld .......................................... 282,471,029.39 5.081 TOTAL .......................................... 5,559,705,088.90 100.000 Robert M. Gates Affirmative ....................................... 5,271,693,384.06 94.820 Withheld .......................................... 288,011,704.84 5.180 TOTAL .......................................... 5,559,705,088.90 100.000 George H. Heilmeier Affirmative ....................................... 5,276,712,546.15 94.910 Withheld .......................................... 282,992,542.75 5.090 TOTAL .......................................... 5,559,705,088.90 100.000 Abigail P. Johnson Affirmative ....................................... 5,265,412,678.20 94.707 Withheld .......................................... 294,292,410.70 5.293 TOTAL .......................................... 5,559,705,088.90 100.000 Edward C. Johnson 3d Affirmative ....................................... 5,252,813,997.03 94.480 Withheld .......................................... 306,891,091.87 5.520 TOTAL .......................................... 5,559,705,088.90 100.000 Donald J. Kirk Affirmative ....................................... 5,268,337,458.03 94.759 Withheld .......................................... 291,367,630.87 5.241 TOTAL .......................................... 5,559,705,088.90 100.000 Marie L. Knowles Affirmative ....................................... 5,278,993,264.93 94.951 Withheld .......................................... 280,711,823.97 5.049 TOTAL .......................................... 5,559,705,088.90 100.000 Ned C. Lautenbach Affirmative ....................................... 5,280,591,428.18 94.980 Withheld .......................................... 279,113,660.72 5.020 TOTAL .......................................... 5,559,705,088.90 100.000 Marvin L. Mann Affirmative ....................................... 5,266,769,335.50 94.731 Withheld .......................................... 292,935,753.40 5.269 TOTAL .......................................... 5,559,705,088.90 100.000 William O. McCoy Affirmative ....................................... 5,270,804,685.62 94.804 Withheld .......................................... 288,900,403.28 5.196 TOTAL .......................................... 5,559,705,088.90 100.000 Robert L. Reynolds Affirmative ....................................... 5,279,190,479.65 94.955 Withheld .......................................... 280,514,609.25 5.045 TOTAL .......................................... 5,559,705,088.90 100.000 Cornelia M. Small/B/ Affirmative ....................................... 5,276,074,654.01 94.898 Withheld .......................................... 283,630,434.89 5.102 TOTAL .......................................... 5,559,705,088.90 100.000 William S. Stavropoulos Affirmative ....................................... 5,278,183,775.21 94.936 Withheld .......................................... 281,521,313.69 5.064 TOTAL .......................................... 5,559,705,088.90 100.000 /A/ Denotes trust-wide proposals and voting results. /B/ Effective January 1, 2005. - -------------------------------------------------------------------------------- Mid Cap Portfolio 34 - -------------------------------------------------------------------------------- Investment Adviser Fidelity Management & Research Company Boston, MA Investment Sub-Advisers FMR Co., Inc. Fidelity Management & Research (U.K.) Inc. Fidelity Management & Research (Far East) Inc. Fidelity Investments Japan Limited Fidelity International Investment Advisors Fidelity International Investment Advisors (U.K.) Limited General Distributor Fidelity Distributors Corporation Boston, MA Transfer and Shareholder Servicing Agent Fidelity Investments Institutional Operations Company, Inc. Boston, MA Custodian Brown Brothers Harriman & Co. Boston, MA INVESTMENT FUNDS RUSSELL INVESTMENT FUNDS 2004 Annual Report MULTI-STYLE EQUITY FUND AGGRESSIVE EQUITY FUND NON-U.S. FUND REAL ESTATE SECURITIES FUND CORE BOND FUND DECEMBER 31, 2004 [LOGO] Russell Russell Investment Funds Russell Investment Funds is a "series mutual fund" with five different investment portfolios. These financial statements report on the Funds, each of which has distinct investment objectives and strategies. Frank Russell Investment Management Company Responsible for overall management and administration of the Funds. Frank Russell Company Consultant to Frank Russell Investment Management Company. Russell Investment Funds Annual Report December 31, 2004 Table of Contents Page ---- Letter to Our Clients ................................................... 3 Market Summary .......................................................... 4 Multi-Style Equity Fund ................................................. 7 Aggressive Equity Fund .................................................. 17 Non-U.S. Fund ........................................................... 33 Real Estate Securities Fund ............................................. 50 Core Bond Fund .......................................................... 55 Notes to Schedules of Investments ....................................... 71 Statement of Assets and Liabilities ..................................... 72 Statement of Operations ................................................. 76 Statement of Changes in Net Assets ...................................... 78 Financial Highlights .................................................... 80 Notes to Financial Statements ........................................... 82 Report of Independent Registered Public Accounting Firm ................. 93 Tax Information ......................................................... 94 Shareholder Requests for Other Information .............................. 95 Disclosure of Information about Fund Directors .......................... 96 Manager, Money Managers and Service Providers ........................... 100 Russell Investment Funds Copyright (C) Frank Russell Company 2004. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Frank Russell Company. It is delivered on an "as is" basis without warranty. The Russell logo is a trademark and service mark of Frank Russell Company. Frank Russell Company is the owner of the trademarks, service marks, and copyrights related to their respective indexes. This material must be accompanied or preceded by a current Russell Investment Funds' Prospectus containing complete information concerning the investment objectives and operations of the Funds, charges and expenses, and the applicable variable insurance policy Prospectus. The Prospectus should be read carefully before an investment is made. The performance quoted represents past performance and the investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. International markets entail different risks than those typically associated with domestic markets, including currency fluctuations, political and economic instability, accounting changes and foreign taxation. Securities may be less liquid and more volatile. Please see the Prospectus for further detail. Russell Fund Distributors, Inc., is the distributor of Russell Investment Funds. To Our Clients: Thank you for selecting Russell to help provide for your financial security. As you read Russell Investment Funds' 2004 Annual Report, we ask that you take this opportunity to review the value Russell's investment approach provides. Today, as well as tomorrow, our approach remains consistent. We continue to maintain our long-term focus, strategic diversification, active management, and goal-oriented planning. In 2005, and beyond, our commitment to you remains the same. Our mutual funds offer the Russell approach to investors of all types. Our purpose is to be one of the reasons that you and your family view the future with confidence. Thank you for your continued support and for choosing Russell, GLOBAL LEADERS IN MULTI-MANAGER(TM) INVESTING. Letter to Our Clients 3 Russell Investment Funds Market Summary as of December 31, 2004 U.S. Equity Markets Stock prices were largely unchanged during the first nine months of the year but rose significantly following the election to finish the year with solid gains. The Russell 3000(R) Index returned 11.95% for the year ended December 31, 2004. Investors remained on the sidelines for much of the year, pending the outcome of the election and waiting for clarity on the direction of oil prices, and the war in Iraq. Economic growth remained impressive and corporate profits rose sharply. Falling oil prices and conclusion of the election led investors to become increasingly confident in the strength of the economy and the outlook for corporate profits. In this environment, investors responded by purchasing stocks. There were several noteworthy themes to market performance in 2004. Smaller capitalization companies substantially outperformed larger capitalization companies, as measured by the 18.33% return of the Russell 2000(R) Index versus the 11.41% return for the Russell 1000(R) Index for the year ended December 31, 2004. Smaller capitalization companies benefited from the continued narrowing of credit spreads in the bond market. Narrower credit spreads allow small capitalization companies to borrow money at more favorable rates than when the credit spreads are greater. Style also played an important role in equity returns. Value stocks outperformed growth stocks with the Russell 1000(R) Value Index returning 16.49% versus the 6.30% return of the Russell 1000(R) Growth Index for the year ended December 31, 2004. The market's preference for value stocks resulted from investor caution throughout the year, declining interest rates and strength in commodities such as oil and metals. This created a favorable environment for utilities, REITs and financial stocks. Meanwhile, growth stocks were hurt by disappointing results from the technology and pharmaceutical sectors. The year 2004 was challenging for active managers, especially those following core or value investment strategies. The Lipper(R) Large-Cap Core Funds Average trailed the Russell 1000(R) Index by 3.59% and the Lipper(R) Large-Cap Value Funds Average lagged the Russell 1000(R) Value Index by 4.63%. The market environment was more favorable for active growth strategies, with the Lipper(R) Large-Cap Growth Funds Average outperforming the Russell 1000(R) Growth Index by 0.88%. The Lipper returns are net of fees while the index returns are gross of fees. U.S. Real Estate Markets The public real estate investment trust (REIT) market continued its strong advance in 2004. The NAREIT Equity REIT Index returned 31.57% for the year. This was the second consecutive year that the Index returned over 30%. Cash flow into REITs from both retail and institutional investors was strong during the year and was driven largely by yield-oriented investors. The REIT market was subject to higher than normal volatility during 2004. While the performance of the REIT market has not historically been highly correlated to interest rates, the direction and magnitude of long-term interest rate movements contributed to short-term variability in share prices. REIT prices tended to move inversely with interest rates during the year. A sharp increase in long-term interest rates in early-April 4 Market Summary Russell Investment Funds resulted in a correction in the REIT market. However, the REIT market resumed its upward trend in May. This upward trend continued for the balance of the year as long-term interest rates moderated. Improvements in real estate supply and demand fundamentals resulted in generally higher occupancy rates and rents which contributed to modest growth in REIT earnings. The regional malls sector was the strongest performing property type in 2004. This sector benefited from strong earnings growth supported by positive retail sales and occupancy trends. Other sectors that outperformed the benchmark included shopping centers, industrial, apartments and lodging. The weakest performing sectors were manufactured homes, health care, office and specialty. The market generally favored larger capitalization REITs during 2004. The NAREIT Real Estate 50, a benchmark of larger and more frequently traded REITs, outperformed the broader NAREIT Equity REIT Index by 3.43%. These larger capitalization companies tend to be favored by active managers due to their liquidity, stronger balance sheets and perceived stronger earnings growth prospects. Global Equity Markets Global equity markets made significant gains in 2004 despite an abundance of potentially problematic trends. While market returns were good in absolute terms, the underlying investment environment was characterized by quite narrow leadership. There were several threats to market stability. Negative market sentiment prevailed over much of the year with concerns over terrorism, election-year uncertainty, sporadic indications of both weak and strong economic growth and a rather extreme increase in the price of oil having a strong influence on investors' expectations for market trends. Consequently, the global equity markets favored stocks with more defensive attributes, particularly those with higher dividend yields and highly visible earnings. Style influences were dominant with value-oriented investment strategies faring well, while growth-oriented investment strategies faced a challenging environment. Non U.S. value stocks, as measured by the MSCI EAFE Value Index, outperformed non U.S. growth stocks as measured by the MSCI EAFE Growth Index by 9.89% over the 12 month period. Smaller capitalization companies continued to perform well. It was a challenging environment for trend following investment strategies given frequent changes in market leadership. These leadership changes were directly tied to sentiment swings in response to economic or geopolitical news rather than to changes in underlying earnings prospects. Regionally, strong currencies often dominated local market stock performance, making currency strategies just as critical, if not more critical, than stock or country selection. While Pacific market stocks outperformed European counterparts, the gains of the Euro and the British pound resulted in stronger gains to European stocks if measured in local currencies. The MSCI EAFE Index gained 13.09% if measured in local currencies and 20.70% if measured in U.S. dollars with much of the tailwind of foreign currency appreciation occurring in the fourth quarter. Sector performance paralleled the U.S. market for much of the year. Higher yielding utility stocks were the best performers in the MSCI EAFE Index; with the energy sector a close second. Strong gains to commodity cyclicals, including materials, were another noteworthy trend for most of the year. Trends changed in the fourth quarter as falling energy prices and slower economic activity slowed growth in the cyclical sectors. At this point, telecommunications and financial services stocks assumed market leadership. U.S. Fixed Income Markets Over the year, interest rates were volatile as bond markets reacted to erratic employment numbers, election uncertainties, commodity price increases, geopolitical risk in Iraq and a generally mixed economy that provided no clear direction on where rates were headed. The ten year Treasury bond started and ended the Market Summary 5 Russell Investment Funds year with virtually the same yield, but its yield ranged widely over the course of the year. Yields on the ten year Treasury bond started the year at 4.25%, moved lower in the first quarter in response to weaker payroll numbers and reached its lowest point of 3.68% in March. Yields on the ten year Treasury bond reversed in April, May and June on news of stronger payrolls, resulting in a peak in yields of 4.87%. Over the second half of the year, yields on the ten year Treasury bond were more stable but steadily declined to end at 4.22%. Short term interest rates moved over the year in response to the tightening cycle initiated by the Federal Reserve. After cutting the overnight federal funds rate aggressively from 6.50% in 2001 to 1.00% in 2003, in 2004, the Federal Reserve reversed course and began raising the federal funds overnight rate in June. At the end of the year, overnight rates had moved up from 1.00% to 2.25% and the market, as represented by trading in futures contracts, anticipated further increases in the overnight rate by the Federal Reserve in 2005. Intermediate and long term interest rates were nearly flat over the year and, with short term rates increasing, the yield curve flattened from a historically steep level. Within sectors, riskier bonds outperformed as a result of better fundamentals and large investor appetite for yield. Despite a 28% return in the high yield bond sector in 2003, the high yield sector also delivered good results in 2004 as defaults declined due to better economic growth which allowed companies to pay down debt. The high yield bond sector, as represented by the Lehman Brothers U.S. Corporate High Yield Index, returned 11.13% over the year, which compared to Treasuries returning 3.5% over the year, as represented by the Lehman U.S. Treasury Index. Investment grade corporate bonds also did well as a result of the same factors driving the high yield market. For the year, the Lehman U.S. Credit Index returned 5.5%. Mortgages performed well over the year despite volatility, returning 4.7%, as represented by the MBS fixed rate component of the Lehman U.S. Aggregate Index, and outperformed equivalent duration Treasuries by 1.42%. As the year ended, the yield spreads between Treasuries, corporates and mortgages were tight, reflecting an improving economy and large market demand for yield. 6 Market Summary Russell Investment Funds Multi-Style Equity Fund Portfolio Management Discussion -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - -------------------------------------- Multi-Style Equity Fund - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ---------- 1 Year $10,981 9.81 % 5 Years $ 8,181 (3.93)%(S) Inception $15,858 5.93 %(S) - -------------------------------------- Russell 1000(R)Index - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ---------- 1 Year $11,140 11.41 % 5 Years $ 9,153 (1.76)%(S) Inception $18,675 8.12 %(S) Multi-Style Equity Fund 7 Russell Investment Funds Multi-Style Equity Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- What is the Fund's investment objective? The Fund seeks to provide long term capital growth. How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2004? For the fiscal year ended December 31, 2004, the Multi-Style Equity Fund gained 9.81%. This compared to the Russell 1000(R) Index, which gained 11.41% during the same period. The Fund's performance is net of operating expenses of 0.87%. Index returns do not reflect deduction for fees or expenses. Index returns do not include fair valuation adjustments which may be included in fund returns. How did the market conditions, as described starting on page 4 of this report, affect the Fund's performance? Market conditions were unfavorable to the Fund's positioning for most of the year. The market was led by defensive, lower risk stocks while Fund positioning reflected an optimistic view of the market and economy. The Fund was invested in companies with above-market forecasted growth rates while the market favored value-oriented companies. The market environment did not favor active core and value managers. What were the primary contributors and detractors to the Fund's performance during the last 12 months? The Fund's emphasis on companies with above-average growth and earnings cyclicality contributed to underperformance. Money managers were optimistic toward the economy and positioned their portfolios accordingly. Below-average performance from Brandywine Asset Management (due to aggressive positioning in a defensive market) and Montag & Caldwell (due to weakness in the health care and consumer staples sectors) also contributed negatively to Fund performance. Finally, stock selection was below expectations in the period due to factors such as underweighting Exxon Mobil and AT&T Wireless and overweighting Boston Scientific, Pfizer, Amgen, Cisco, and Paychex. Fund performance benefited from favorable sector positioning due to an underweight in the technology sector and an overweight in the materials and consumer discretionary sectors. An overweight to stocks with low price/book ratios also contributed positively to performance as depressed industrial cyclical stocks performed strongly in the period. An overweight to agriculture stocks (e.g. Archer Daniels Midland and Monsanto) and to Verisign, Ebay, Tyco, Qualcomm and Marriott helped performance. How did the investment strategies and techniques employed by the Fund and its money managers affect its performance? The largest factor contributing to relative underperformance was positioning for continued economic growth and rising stock prices. The Fund was situated contrary to market leadership. The market favored high yield and defensive stocks and penalized stocks with above-average growth prospects. Although sector allocations added value, stock selection detracted from performance due to the emphasis on undervalued growth stocks. Describe any changes to the Fund's structure or the money manager line-up. Barclays Global Investors, a structured value manager, was replaced with two more concentrated value managers, Institutional Capital Corporation and DePrince, Race & Zollo. This change is intended to increase stock-specific risk (i.e., concentration) in the Fund. Additionally, Turner's growth assignment was broadened to include medium capitalization stocks. Finally, Brandywine Asset Management was terminated. - -------------------------------------------------------------------------------- Money Managers as of December 31, 2004 Styles - -------------------------------------------------------------------------------- Alliance Capital Management L.P., which acts as money manager to the Fund through its Bernstein Investment Research and Management Unit Value Ark Asset Management Co., Inc. Growth DePrince, Race & Zollo, Inc. Value Institutional Capital Corporation Value Jacobs Levy Equity Management, Inc. Market-Oriented Montag & Caldwell, Inc. Growth Turner Investment Partners, Inc. Growth ---------- * The Fund commenced operations on January 2, 1997. Index comparison began January 1, 1997. ** Russell 1000(R) Index includes the 1,000 largest companies in the Russell 3000(R) Index. The Russell 1000(R) Index represents the universe of stocks from which most active money managers typically select. The Russell 1000(R) Index return reflects adjustments for income dividends and capital gains distributions reinvested as of the ex-dividend dates. (S) Annualized. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results. 8 Multi-Style Equity Fund Russell Investment Funds Multi-Style Equity Fund Shareholder Expense Example -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Fund Expenses The following disclosure provides important information regarding each Fund's Expense Example, which appears on each Fund's individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund. Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2004 to December 31, 2004. Actual Expenses The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Performance Actual (5% return Performance before expenses) ----------- ---------------- Beginning Account Value July 1, 2004 $1,000.00 $1,000.00 Ending Account Value December 31, 2004 $1,065.60 $1,020.63 Expenses Paid During Period* $ 4.52 $ 4.42 * Expenses are equal to the Fund's annualized expense ratio of 0.87%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed by the investment adviser. Without the waiver and/or reimbursement, expenses would have been higher. Multi-Style Equity Fund 9 Russell Investment Funds Multi-Style Equity Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount($) Value or Shares $ - -------------------------------------------------------------------------------- Common Stocks - 95.6% Auto and Transportation - 2.2% American Axle & Manufacturing Holdings, Inc. 5,300 163 BorgWarner, Inc. 2,600 141 Burlington Northern Santa Fe Corp. 3,300 156 CSX Corp. 14,850 595 Dana Corp. 5,000 87 Delphi Corp. 22,700 205 FedEx Corp. 1,200 118 Ford Motor Co. 24,400 357 General Motors Corp. (N) 10,600 425 Gentex Corp. 10,800 400 Magna International, Inc. Class A 1,200 99 Norfolk Southern Corp. 7,800 282 Oshkosh Truck Corp. 3,700 253 Overseas Shipholding Group 1,500 83 Skywest, Inc. 2,700 54 Southwest Airlines Co. 58,800 957 United Parcel Service, Inc. Class B 29,900 2,555 Westinghouse Air Brake Technologies Corp. 10,800 230 ------ 7,160 ------ Consumer Discretionary - 15.7% Advance Auto Parts (AE) 3,700 162 Bebe Stores, Inc. 1,950 53 Bed Bath & Beyond, Inc. (AE) 27,600 1,099 Best Buy Co., Inc. 7,800 463 Brink's Co. (The) 2,100 83 CDW Corp. 9,200 610 Cendant Corp. 122,300 2,859 Charming Shoppes (AE) 4,700 44 Chico's FAS, Inc. (AE) 13,300 606 Circuit City Stores, Inc. 24,500 383 Coach, Inc. (AE) 20,800 1,173 Convergys Corp. (AE) 3,000 45 Darden Restaurants, Inc. 8,000 222 Dollar General Corp. 12,100 251 DreamWorks Animation SKG, Inc. Class A (AE) 21,780 817 Eastman Kodak Co. 19,000 613 eBay, Inc. (AE) 18,910 2,199 Education Management Corp. (AE) 3,200 106 Electronic Arts, Inc. (AE) 7,000 432 Fisher Scientific International (AE) 10,720 669 Fossil, Inc. (AE) 1,800 46 Fox Entertainment Group, Inc. Class A (AE) 12,700 397 Gannett Co., Inc. 4,600 376 Gillette Co. (The) 44,800 2,006 Google, Inc. Class A (AE) 4,970 960 GTECH Holdings Corp. 7,600 197 Guitar Center, Inc. (AE) 600 32 Harrah's Entertainment, Inc. 1,800 120 Hilton Hotels Corp. 11,700 266 Home Depot, Inc. 59,300 2,534 International Game Technology 36,570 1,257 Interpublic Group of Cos., Inc. (AE) 7,000 94 JC Penney Co., Inc. Holding Co. 14,900 617 Jones Apparel Group, Inc. 5,950 218 Kimberly-Clark Corp. 27,900 1,836 Knight-Ridder, Inc. 10,200 683 Kohl's Corp. (AE) 28,700 1,411 Limited Brands, Inc. 12,000 276 Lowe's Cos., Inc. 27,400 1,578 Manpower, Inc. 3,600 174 Marriott International, Inc. Class A 29,710 1,871 Mattel, Inc. 26,700 520 May Department Stores Co. (The) 24,000 706 Maytag Corp. 2,000 42 McDonald's Corp. 55,100 1,767 Newell Rubbermaid, Inc. 43,200 1,045 News Corp. Class B 40,800 783 Nordstrom, Inc. 4,400 206 Office Depot, Inc. (AE) 13,000 226 OfficeMax, Inc. 6,050 190 Omnicom Group 12,100 1,020 Overstock.com, Inc. (AE) 800 55 Petco Animal Supplies, Inc. (AE) 2,200 87 Priceline.com, Inc. (AE)(N) 11,000 260 RadioShack Corp. 8,900 293 Reebok International, Ltd. 800 35 RR Donnelley & Sons Co. 45,650 1,611 Sears Roebuck and Co. 2,600 133 Service Corp. International (AE) 4,600 34 Sotheby's Holdings Class A (AE) 1,900 35 Sports Authority, Inc. (The) (AE) 8,700 224 Stanley Works (The) 1,000 49 Staples, Inc. 31,600 1,065 Starbucks Corp. (AE) 7,950 496 Starwood Hotels & Resorts Worldwide, Inc. (o) 20,700 1,209 Tech Data Corp. (AE) 3,000 136 Time Warner, Inc. (AE) 82,250 1,599 TJX Cos., Inc. 14,900 374 10 Multi-Style Equity Fund Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount($) Value or Shares $ - -------------------------------------------------------------------------------- VeriSign, Inc. (AE) 46,010 1,542 VF Corp. 3,400 188 Viacom, Inc. Class B 8,882 323 Viad Corp. 325 9 Wal-Mart Stores, Inc. 33,800 1,785 Walt Disney Co. 39,400 1,095 WESCO International, Inc. (AE) 900 27 Wynn Resorts, Ltd. (AE)(N) 6,000 402 XM Satellite Radio Holdings, Inc. Class A (AE)(N) 12,700 478 Yahoo!, Inc. (AE) 48,230 1,817 Yankee Candle Co., Inc. (AE) 2,000 66 Yum! Brands, Inc. 12,800 604 ------ 52,374 ------ Consumer Staples - 7.9% Albertson's, Inc. 2,500 60 Altria Group, Inc. 59,800 3,654 Anheuser-Busch Cos., Inc. 6,600 335 Campbell Soup Co. 27,800 831 Coca-Cola Co. (The) 17,000 708 Coca-Cola Enterprises, Inc. 6,900 144 Colgate-Palmolive Co. 53,300 2,727 ConAgra Foods, Inc. 23,500 692 CVS Corp. 5,100 230 Del Monte Foods Co. (AE) 18,500 204 General Mills, Inc. 17,600 875 HJ Heinz Co. 24,300 947 JM Smucker Co. (The) 9,300 438 Kraft Foods, Inc. Class A 22,200 790 Kroger Co. (The) (AE) 18,200 319 PepsiCo, Inc. 84,150 4,393 Procter & Gamble Co. 89,150 4,910 Reynolds American, Inc. 4,250 334 Safeway, Inc. (AE) 22,900 452 Sara Lee Corp. 37,500 905 Supervalu, Inc. 1,700 59 Sysco Corp. 8,820 337 Unilever NV 14,100 940 UST, Inc. 5,700 274 Whole Foods Market, Inc. 5,970 569 WM Wrigley Jr Co. 2,300 159 ------ 26,286 ------ Financial Services - 18.6% ACE, Ltd. 2,200 94 AG Edwards, Inc. 20,400 881 Alliance Data Systems Corp. (AE) 13,700 650 Allmerica Financial Corp. (AE) 1,700 56 Allstate Corp. (The) 9,200 476 American Express Co. 50,710 2,859 American Home Mortgage Investment Corp. (o) 700 24 American International Group, Inc. 72,389 4,754 AmeriCredit Corp. (AE) 11,600 284 Ameritrade Holding Corp. (AE) 20,000 284 Archstone-Smith Trust (o) 1,400 54 Astoria Financial Corp. 3,700 148 Automatic Data Processing, Inc. 11,400 506 Bank of America Corp. 121,558 5,712 Bank of New York Co., Inc. (The) 28,700 959 BB&T Corp. 1,000 42 Capital One Financial Corp. 17,700 1,490 Checkfree Corp. (AE) 23,200 883 Chubb Corp. 3,800 292 Cigna Corp. 10,000 816 Citigroup, Inc. 145,549 7,013 Comerica, Inc. 14,100 860 Commerce Bancshares, Inc. 11,495 577 Countrywide Financial Corp. 5,900 218 Deluxe Corp. 2,700 101 Dow Jones & Co., Inc. 17,600 758 East-West Bancorp, Inc. 1,800 76 eFunds Corp. (AE) 1,300 31 Equity Office Properties Trust (o) 11,200 326 Equity Residential (o) 6,800 246 Fannie Mae 6,200 441 Federated Investors, Inc. Class B 3,100 94 First American Corp. 3,200 112 First Bancorp 500 32 Freddie Mac 11,600 855 Genworth Financial, Inc. Class A 6,000 162 Goldman Sachs Group, Inc. 23,410 2,436 Hartford Financial Services Group, Inc. 6,700 464 Huntington Bancshares, Inc. 40,200 996 Jefferson-Pilot Corp. 12,600 655 JPMorgan Chase & Co. 105,052 4,098 Keycorp 23,100 783 La Quinta Corp. (AE)(o) 3,300 30 LandAmerica Financial Group, Inc. 1,000 54 Legg Mason, Inc. 4,500 330 Lehman Brothers Holdings, Inc. 7,400 647 Lincoln National Corp. 4,400 205 Manulife Financial Corp. 2,619 121 MBIA, Inc. 1,500 95 MBNA Corp. 26,100 736 Multi-Style Equity Fund 11 Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount($) Value or Shares $ - -------------------------------------------------------------------------------- Merrill Lynch & Co., Inc. 18,050 1,079 Metlife, Inc. 3,200 130 MGIC Investment Corp. 3,650 252 Morgan Stanley 18,700 1,038 National City Corp. 12,700 477 Nationwide Financial Services 17,200 658 Nationwide Health Properties, Inc. (o) 2,000 47 Northern Trust Corp. 15,700 763 PartnerRe, Ltd. 2,000 124 Paychex, Inc. 40,000 1,363 PNC Financial Services Group, Inc. 16,700 959 Prudential Financial, Inc. 9,700 533 RenaissanceRe Holdings, Ltd. 2,300 120 St. Paul Travelers Cos., Inc. (The) 75,799 2,810 SunTrust Banks, Inc. 17,100 1,263 T Rowe Price Group, Inc. 11,200 697 Torchmark Corp. 4,200 240 US Bancorp 11,196 351 Wachovia Corp. 13,100 689 Waddell & Reed Financial, Inc. Class A 18,700 447 Washington Mutual, Inc. 35,300 1,492 Wells Fargo & Co. 12,500 777 XL Capital, Ltd. Class A 1,600 124 Zions BanCorp. 11,600 789 ------ 62,038 ------ Health Care - 13.2% Abbott Laboratories 19,100 891 Abgenix, Inc. (AE) 3,400 35 Accredo Health, Inc. (AE) 3,800 105 Aetna, Inc. 9,430 1,176 Amgen, Inc. (AE) 50,790 3,258 Amylin Pharmaceuticals, Inc. (AE) 10,700 250 Applera Corp. - Celera Genomics Group (AE) 1,800 25 Biogen Idec, Inc. (AE) 13,050 869 Boston Scientific Corp. (AE) 40,400 1,436 Bristol-Myers Squibb Co. 19,900 510 Cardinal Health, Inc. 7,500 436 Caremark Rx, Inc. (AE) 59,960 2,364 Community Health Systems, Inc. (AE) 4,500 125 Cooper Cos., Inc. 5,910 417 CR Bard, Inc. 10,430 667 DaVita, Inc. (AE) 4,400 174 Eli Lilly & Co. 33,400 1,895 Endo Pharmaceuticals Holdings, Inc. (AE) 1,300 27 Eyetech Pharmaceuticals, Inc. (AE) 6,400 291 Genentech, Inc. (AE) 36,700 1,998 Gilead Sciences, Inc. (AE) 38,600 1,351 GlaxoSmithKline PLC - ADR 23,800 1,128 HCA Inc. 7,600 304 Humana, Inc. (AE) 7,000 208 ImClone Systems, Inc. (AE) 4,700 217 IVAX Corp. (AE) 11,250 178 Johnson & Johnson 107,940 6,846 Kinetic Concepts, Inc. (AE) 6,300 481 Kos Pharmaceuticals, Inc. (AE) 800 30 Magellan Health Services, Inc. (AE) 700 24 McKesson Corp. 4,100 129 Medco Health Solutions, Inc. (AE) 25,900 1,077 Medicines Co. (AE) 1,900 55 Medtronic, Inc. 25,900 1,286 Merck & Co., Inc. 9,100 293 MGI Pharma, Inc. (AE) 1,800 50 Millennium Pharmaceuticals, Inc. (AE) 7,000 85 Onyx Pharmaceuticals, Inc. (AE) 1,500 49 OSI Pharmaceuticals, Inc. (AE) 600 45 Pfizer, Inc. 158,110 4,252 Pharmion Corp. (AE) 900 38 Renal Care Group, Inc. (AE) 1,300 47 Sanofi-Aventis - ADR 31,688 1,269 Schering-Plough Corp. 40,700 850 Sepracor, Inc. (AE) 1,800 107 St. Jude Medical, Inc. (AE) 28,900 1,212 Stryker Corp. 9,100 439 Tenet Healthcare Corp. (AE) 6,402 70 United Therapeutics Corp. (AE) 1,000 45 UnitedHealth Group, Inc. 4,600 405 Valeant Pharmaceuticals International 10,500 277 Varian Medical Systems, Inc. (AE) 7,400 320 WellPoint, Inc. (AE) 11,110 1,278 Wyeth 25,100 1,069 Zimmer Holdings, Inc. (AE) 16,890 1,353 ------ 43,816 ------ Integrated Oils - 4.3% Amerada Hess Corp. 2,950 243 ChevronTexaco Corp. 25,822 1,356 ConocoPhillips 59,502 5,167 Exxon Mobil Corp. 66,700 3,419 Marathon Oil Corp. 65,502 2,464 Occidental Petroleum Corp. 27,200 1,587 Unocal Corp. 4,300 186 ------ 14,422 ------ 12 Multi-Style Equity Fund Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Materials and Processing - 5.2% Alcoa, Inc. 27,000 848 American Standard Cos., Inc. (AE) 10,000 413 Archer-Daniels-Midland Co. 99,486 2,220 Ashland, Inc. 2,600 152 Avery Dennison Corp. 12,300 738 Bemis Co. 29,100 847 Bowater, Inc. 17,200 756 Bunge, Ltd. 2,100 120 Cia Vale do Rio Doce Class A 14,400 409 Dow Chemical Co. (The) 21,700 1,074 Dycom Industries, Inc. (AE) 11,900 363 Eastman Chemical Co. 3,000 173 Ecolab, Inc. 10,100 355 EI Du Pont de Nemours & Co. 21,934 1,076 FMC Corp. (AE) 2,300 111 Freeport-McMoRan Copper & Gold, Inc. Class B 31,200 1,193 Georgia-Pacific Corp. 1,400 52 Hecla Mining Co. (AE) 6,200 36 Hercules, Inc. (AE) 3,600 53 Human Genome Sciences, Inc. (AE) 4,900 59 International Paper Co. 48,250 2,027 Lennar Corp. Class B 900 47 Louisiana-Pacific Corp. 7,300 195 Lubrizol Corp. 3,800 140 Lyondell Chemical Co. 16,160 467 Martin Marietta Materials, Inc. 2,000 107 Masco Corp. 19,800 723 Maverick Tube Corp. (AE) 2,600 79 Monsanto Co. 16,000 889 Neenah Paper, Inc. 203 7 Nektar Therapeutics (AE) 2,100 43 PPG Industries, Inc. 1,900 130 Rohm & Haas Co. 14,600 646 Sherwin-Williams Co. (The) 1,300 58 Smurfit-Stone Container Corp. (AE) 8,900 166 Sonoco Products Co. 4,700 139 Stillwater Mining Co. (AE) 2,400 27 Telik, Inc. (AE) 2,100 40 Temple-Inland, Inc. 1,100 75 United States Steel Corp. 4,800 246 URS Corp. (AE) 800 26 Vertex Pharmaceuticals, Inc. (AE) 2,200 23 Vulcan Materials Co. 1,300 71 ------ 17,419 ------ Miscellaneous - 4.3% 3M Co. 13,100 1,075 Eaton Corp. 4,350 315 Fortune Brands, Inc. 1,600 123 General Electric Co. 221,120 8,071 Hillenbrand Industries, Inc. 6,600 367 Honeywell International, Inc. 54,400 1,926 ITT Industries, Inc. 2,900 245 SPX Corp. 2,900 116 Teleflex, Inc. 5,700 296 Textron, Inc. 3,400 251 Trinity Industries, Inc. 1,200 41 Tyco International, Ltd. 43,920 1,570 ------ 14,396 ------ Other Energy - 1.5% Anadarko Petroleum Corp. 1,700 110 Apache Corp. 15,850 802 Arch Coal, Inc. 1,000 36 Burlington Resources, Inc. 12,600 548 Consol Energy, Inc. 2,800 115 El Paso Corp. 24,600 256 EOG Resources, Inc. 7,400 528 Global Industries, Ltd. (AE) 2,700 22 Houston Exploration Co. (AE) 1,800 101 Newfield Exploration Co. (AE) 3,800 224 Oil States International, Inc. (AE) 1,700 33 Peabody Energy Corp. 4,110 333 Rowan Cos., Inc. (AE) 400 10 Schlumberger, Ltd. 27,400 1,834 Universal Compression Holdings, Inc. (AE) 1,000 35 ------ 4,987 ------ Producer Durables - 4.0% Applied Materials, Inc. (AE) 42,530 727 Boeing Co. 13,000 673 Caterpillar, Inc. 28,230 2,753 Centex Corp. 4,200 250 Danaher Corp. 7,210 414 Deere & Co. 28,300 2,106 DR Horton, Inc. 8,100 326 Emerson Electric Co. 10,900 764 Goodrich Corp. 4,750 155 Hubbell, Inc. Class B 2,600 136 Illinois Tool Works, Inc. 9,700 899 KB Home 400 42 Multi-Style Equity Fund 13 Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Kla-Tencor Corp. (AE) 8,750 408 Koninklijke Philips Electronics NV 47,850 1,268 Lockheed Martin Corp. 1,900 106 Nortel Networks Corp. (AE) 15,500 54 Northrop Grumman Corp. 9,400 511 Parker Hannifin Corp. 700 53 Pitney Bowes, Inc. 2,400 111 Powerwave Technologies, Inc. (AE) 5,700 48 Pulte Homes, Inc. 5,600 357 United Defense Industries, Inc. (AE) 2,000 94 United Technologies Corp. 3,500 362 Waters Corp. (AE) 12,310 576 ------ 13,193 ------ Technology - 12.6% Adaptec, Inc. (AE) 4,400 33 ADC Telecommunications, Inc. (AE) 40,900 110 Advanced Micro Devices, Inc. (AE) 19,000 418 Agere Systems, Inc. Class A (AE) 65,000 89 Altera Corp. (AE) 23,900 495 Anteon International Corp. (AE) 1,400 59 Apple Computer, Inc. (AE) 13,010 838 Applied Micro Circuits Corp. (AE) 19,900 84 Ariba, Inc.(AE) 2,300 38 Arrow Electronics, Inc. (AE) 2,400 58 Avaya, Inc. (AE) 9,300 160 Avnet, Inc. (AE) 8,600 157 BMC Software, Inc. (AE) 3,800 71 Broadcom Corp. Class A (AE) 15,200 491 Celestica, Inc. (AE) 2,800 39 Cisco Systems, Inc. (AE) 174,280 3,364 Comverse Technology, Inc. (AE) 33,920 829 CSG Systems International (AE) 1,800 34 Dell, Inc. (AE) 79,610 3,355 DRS Technologies, Inc. (AE) 1,300 55 Electronic Data Systems Corp. 4,100 95 EMC Corp. (AE) 73,650 1,095 Flextronics International, Ltd. (AE) 6,800 94 Freescale Semiconductor, Inc. Class B (AE) 56,936 1,045 Gateway, Inc. (AE) 10,700 64 General Dynamics Corp. 600 63 Hewlett-Packard Co. 32,181 675 Ingram Micro, Inc. Class A (AE) 7,100 148 Integrated Device Technology, Inc. (AE) 4,200 49 International Business Machines Corp. 27,950 2,755 JDS Uniphase Corp. (AE) 72,200 229 Juniper Networks, Inc. (AE) 68,000 1,849 Lucent Technologies, Inc. (AE) 24,600 92 Macromedia, Inc. (AE) 13,700 426 Marvell Technology Group, Ltd. (AE) 17,950 637 Maxim Integrated Products, Inc. 24,100 1,022 McData Corp. Class A (AE) 5,000 30 MEMC Electronic Materials, Inc. (AE) 3,300 44 Micros Systems, Inc. (AE) 500 39 Microsoft Corp. 237,170 6,335 Motorola, Inc. 91,700 1,577 National Semiconductor Corp. 43,800 786 NAVTEQ Corp. (AE) 6,200 287 Nvidia Corp. (AE) 17,000 400 Oracle Corp. (AE) 134,500 1,845 PMC-Sierra, Inc. (AE) 32,800 369 Qualcomm, Inc. 52,100 2,209 Research In Motion, Ltd. (AE) 5,310 438 Rockwell Automation, Inc. 13,080 648 Sanmina-SCI Corp. (AE) 86,410 732 Seagate Technology 15,300 264 Seagate Technology, Inc. (AE) 2,300 -- Sigmatel, Inc. (AE) 3,200 114 Silicon Laboratories, Inc. (AE) 6,000 212 Skyworks Solutions, Inc. (AE) 22,100 208 Solectron Corp. (AE) 26,500 141 Sun Microsystems, Inc. (AE) 168,100 904 Tellabs, Inc. (AE) 4,000 34 Tessera Technologies, Inc. (AE) 3,000 112 Texas Instruments, Inc. 82,280 2,026 Western Digital Corp. (AE) 10,200 111 Xilinx, Inc. 22,790 676 Zebra Technologies Corp. Class A (AE) 2,200 124 ------ 41,780 ------ Utilities - 6.1% Alltel Corp. 14,500 852 American Electric Power Co., Inc. 8,100 278 AT&T Corp. 25,000 476 BellSouth Corp. 87,250 2,425 Citizens Communications Co. 34,300 473 CMS Energy Corp. (AE) 3,600 38 Comcast Corp. (AE) Class A (AE) 111,005 3,694 Special Class A (AE) 5,000 164 Consolidated Edison, Inc. 4,200 184 Dominion Resources, Inc. 35,350 2,395 DTE Energy Co. 2,200 95 Edison International 4,200 134 Entergy Corp. 22,650 1,531 14 Multi-Style Equity Fund Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Exelon Corp. 3,200 141 FirstEnergy Corp. 6,400 253 FPL Group, Inc. 800 60 Level 3 Communications, Inc. (AE) 8,600 29 MCI, Inc. 5,500 111 NiSource, Inc. 21,300 485 Northeast Utilities 7,200 136 Pepco Holdings, Inc. 6,900 147 PPL Corp. 14,900 794 Progress Energy, Inc. 3,800 113 Public Service Enterprise Group, Inc. 5,100 264 Puget Energy, Inc. 17,400 430 SBC Communications, Inc. 67,800 1,747 Sempra Energy 7,000 257 Sprint Corp. 7,100 176 TXU Corp. 2,600 168 Verizon Communications, Inc. 56,500 2,289 ------- 20,339 ------- Total Common Stocks (cost $274,333) 318,210 ------- Short-Term Investments - 4.3% Frank Russell Investment Company Money Market Fund 12,947,000 12,947 United States Treasury Bill (z)(S) 1.840% due 03/17/05 1,300 1,292 ------- Total Short-Term Investments (cost $14,241) 14,239 ------- Other Securities - 0.3% State Street Securities Lending Quality Trust (X) 889,250 889 ------- Total Other Securities (cost $889) 889 ------- Total Investments - 100.2% (identified cost $289,463) 333,338 Other Assets and Liabilities, Net - (0.2%) (579) ------- Net Assets - 100.0% 332,759 ======= See accompanying notes which are an integral part of the financial statements. Multi-Style Equity Fund 15 Russell Investment Funds Multi-Style Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Unrealized Notional Appreciation Futures Contracts Amount (Depreciation) (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Long Positions Russell 1000 Index expiration date 03/05 (7) 2,282 41 S&P 500 E-Mini Index expiration date 03/05 (34) 2,063 51 S&P 500 Index expiration date 03/05 (5) 1,517 11 S&P Midcap 400 Index expiration date 03/05 (25) 8,317 366 --- Total Unrealized Appreciation (Depreciation) on Open Futures Contracts 469 === % of Portfolio Summary Net (Unaudited) Assets - -------------------------------------------------------------------------------- Auto and Transportation 2.2 Consumer Discretionary 15.7 Consumer Staples 7.9 Financial Services 18.6 Health Care 13.2 Integrated Oils 4.3 Materials and Processing 5.2 Miscellaneous 4.3 Other Energy 1.5 Producer Durables 4.0 Technology 12.6 Utilities 6.1 Short-Term Investments 4.3 Other Securities 0.3 ----- Total Investments 100.2 Other Assets and Liabilities, Net (0.2) ----- Net Assets 100.0 ===== Futures Contracts 0.1 See accompanying notes which are an integral part of the financial statements. 16 Multi-Style Equity Fund Russell Investment Funds Aggressive Equity Fund Portfolio Management Discussion -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - ------------------------------------- Aggressive Equity Fund - ------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ------ 1 Year $11,473 14.73% 5 Years $13,114 5.57%(S) Inception $18,982 8.34%(S) - ------------------------------------- Russell 2500(TM) Index - ------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ------ 1 Year $11,829 18.29% 5 Years $14,934 8.35%(S) Inception $23,145 11.06%(S) Aggressive Equity Fund 17 Russell Investment Funds Aggressive Equity Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- What is the Fund's investment objective? The Fund seeks to provide long term capital growth. How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2004? For the fiscal year ended December 31, 2004, the Aggressive Equity Fund gained 14.73%. This compared to the Russell 2500(TM) Index, which gained 18.29% during the same period. The Fund's performance is net of operating expenses of 1.05%. Index returns do not reflect deduction for fees or expenses. Index returns do not include fair valuation adjustments which may be included in fund returns. How did the market conditions, as described starting on page 4 of this report, affect the Fund's performance? A difficult market environment for the Fund led to significant underperformance relative to the benchmark. In particular, the market's unfavorable treatment of stocks with higher levels of expected growth, positive earnings estimate revisions and/or lower yields and reward of higher dividend yielding stocks posed performance challenges for the Fund. The Fund's portfolio had valuation characteristics similar to those of the benchmark. However, the Fund's simultaneous emphasis of stocks with higher than benchmark expected growth and lower than benchmark dividend yields resulted in the Fund's significant relative underperformance. What were the primary contributors and detractors to the Fund's performance during the last 12 months? Security selection was the primary cause of the Fund's relative underperformance for the year. In particular, security selection in the technology, health care and consumer discretionary sectors was particularly poor and almost entirely responsible for the Fund's relative underperformance. How did the investment strategies and techniques employed by the Fund and its money managers affect its performance? While the Fund's relative underperformance is attributable mostly to security selection, this resulted not from the investment strategies employed by the money managers in stock picking, but rather from very defensive market conditions. These market conditions led to unprecedented returns for value stocks relative to growth stocks, contracting valuation multiples, extremely cheap pure growth stocks and extremely expensive higher yielding stocks. Of the Fund's eight money managers, only Geewax Terker and Goldman Sachs outperformed the benchmark for the year. Geewax outperformed primarily as a result of its emphasis on higher financial quality stocks and stocks with lower relative stock valuation. Goldman Sachs outperformed largely as a result of holding a handful of stocks that performed very well possibly due to the timing of cash flows allocated to this money manager. The Fund's other money managers underperformed the benchmark. CapitalWorks underperformed significantly as a result of its emphasis on higher expected growth stocks. David J. Greene only slightly underperformed because its emphasis on deep cyclical stocks caused its holdings to rally in the fourth quarter. TimesSquare underperformed largely due to its emphasis on higher expected growth stocks. Jacobs Levy underperformed as a consequence of its sector allocation decisions, in particular, an overweight to the technology sector and an underweight to the other energy sector. Suffolk Capital Management and Systematic Financial Management (money managers terminated in May 2004) significantly underperformed as a result of their emphasis on higher relative growth stocks and positive earnings fundamentals. Describe any changes to the Fund's structure or the money manager line-up. In May 2004, Nicholas Applegate Capital Management replaced Systematic Financial Management and Gould Investment Partners replaced Suffolk Capital. The Fund's investment strategies, risk parameters and portfolio characteristics such as valuation, sector exposure and growth relative to the benchmark did not materially change as a result of these changes. Like Suffolk, Gould pursues a relatively aggressive earnings momentum growth strategy. A key to Gould's success investing in higher valuation growth stocks is a very aggressive sell discipline. Consequently, Gould's portfolios tend to have very high turnover rates. Their portfolio tends to be concentrated among a few sectors in which companies with accelerating earnings are more prevalent such as technology, healthcare and producer durables. Nicholas-Applegate pursues a small capitalization value strategy incorporating a quantitative model with the fundamental insights of the portfolio manager. Consequently, the investment approach is a blend of quantitative and qualitative approaches to security selection. Nicholas-Applegate's portfolio capitalization, valuation, sector and growth traits closely resemble the Russell 2000(R) Value Index, with moderate deviations based on bottom-up stock preferences. In December 2004, approximately 4% of Fund assets were reallocated from value money managers to growth money managers as a result of Frank Russell Investment Management Company's belief that small capitalization growth stocks were attractively valued relative to small capitalization value stocks. The reallocation resulted in a very minor tilt toward growth stocks relative to benchmark and a small increase in forecasted tracking error. 18 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- - ----------------------------------------------------------- Money Managers as of December 31, 2004 Styles - ----------------------------------------------------------- CapitalWorks Investment Partners, LLC Growth David J. Greene and Company, LLC Value Geewax, Terker & Company Growth Goldman Sachs Asset Management, L.P. Market-Oriented Gould Investment Partners LLC Growth Jacobs Levy Equity Management, Inc. Value Nicholas-Applegate Capital Management LLC Value TimesSquare Capital Management, Inc. Growth ---------- * The Fund commenced operations on January 2, 1997. Index comparison began January 1, 1997. ** Russell 2500(TM) Index is composed of the bottom 500 stocks in the Russell 1000(R) Index and all the stocks in the Russell 2000(R) Index. The Russell 2500(TM) Index return reflects adjustments for income dividends and capital gains distributions reinvested as of the ex-dividend dates. (S) Annualized. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results. Aggressive Equity Fund 19 Russell Investment Funds Aggressive Equity Fund Shareholder Expense Example -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Fund Expenses The following disclosure provides important information regarding each Fund's Expense Example, which appears on each Fund's individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund. Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2004 to December 31, 2004. Actual Expenses The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Performance Actual (5% return Performance before expenses) ----------- ---------------- Beginning Account Value July 1, 2004 $1,000.00 $1,000.00 Ending Account Value December 31, 2004 $1,100.00 $1,019.72 Expenses Paid During Period* $ 5.54 $ 5.33 * Expenses are equal to the Fund's annualized expense ratio of 1.05%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed by the investment adviser. Without the waiver and/or reimbursement, expenses would have been higher. 20 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Common Stocks - 95.6% Auto and Transportation - 5.3% AAR Corp. (AE) 18,400 251 Alaska Air Group, Inc. (AE) 7,800 261 American Axle & Manufacturing Holdings, Inc. 8,000 245 Arctic Cat, Inc. 1,300 35 ArvinMeritor, Inc. 6,100 136 Autoliv, Inc. 23,000 1,111 Aviall, Inc. (AE) 2,700 62 BorgWarner, Inc. 2,000 108 CNF, Inc. 7,700 386 Cooper Tire & Rubber Co. 7,300 157 Dana Corp. 20,900 362 Dura Automotive Systems, Inc. Class A (AE) 2,300 25 EGL, Inc. (AE) 11,200 335 ExpressJet Holdings, Inc. (AE) 16,000 206 Frontier Airlines, Inc. (AE) 8,900 102 Genesee & Wyoming, Inc. Class A (AE) 16,250 457 Gentex Corp. 4,600 170 Greenbrier Cos., Inc. 3,000 102 Grupo TMM SA - ADR (AE)(N) 16,200 59 Heartland Express, Inc. 9,650 217 HUB Group, Inc. Class A (AE) 4,000 209 JB Hunt Transport Services, Inc. 14,600 655 Kansas City Southern (AE) 7,000 124 Kirby Corp. (AE) 1,900 84 Laidlaw International, Inc. (AE) 11,000 235 Navistar International Corp. (AE) 5,200 229 Offshore Logistics, Inc. (AE) 10,800 351 Old Dominion Freight Line (AE) 12,300 428 Oshkosh Truck Corp. 3,800 260 Overnite Corp. 6,100 227 Overseas Shipholding Group 6,000 331 Pacer International, Inc. (AE) 7,700 164 Polaris Industries, Inc. (N) 9,500 646 RailAmerica, Inc. (AE) 10,700 140 Sauer-Danfoss, Inc. 1,900 41 SCS Transportation, Inc. (AE) 1,500 35 Skywest, Inc. 10,500 211 Stoneridge, Inc. (AE) 1,200 18 TRW Automotive Holdings Corp. (AE) 5,000 104 US Xpress Enterprises, Inc. Class A (AE)(N) 1,500 44 UTI Worldwide, Inc. (N) 9,000 612 Visteon Corp. (N) 13,600 133 Werner Enterprises, Inc. 7,700 174 Westinghouse Air Brake Technologies Corp. 5,900 126 ------ 10,368 ------ Consumer Discretionary - 19.0% 51job, Inc. - ADR (AE)(N) 4,200 218 Aaron Rents, Inc. 4,500 112 Abercrombie & Fitch Co. Class A 11,200 526 ABM Industries, Inc. 3,900 77 AC Moore Arts & Crafts, Inc. (AE) 4,200 121 Activision, Inc. (AE) 9,300 188 Adesa, Inc. 6,100 129 Advance Auto Parts (AE) 8,100 354 Advo, Inc. 6,200 221 Aeropostale, Inc. (AE) 9,350 275 Alliance Gaming Corp. (AE)(N) 10,400 144 Ambassadors Group, Inc. 1,100 39 American Greetings Class A 7,500 190 American Woodmark Corp. 900 39 Ameristar Casinos, Inc. (N) 2,200 95 Applica, Inc. (AE) 5,800 35 Arbitron, Inc. (AE) 5,200 204 BearingPoint, Inc. (AE) 38,600 310 Big 5 Sporting Goods Corp. 2,100 61 Bon-Ton Stores, Inc. (The) (N) 4,200 66 Boyd Gaming Corp. 6,000 250 Bright Horizons Family Solutions, Inc. (AE) 900 58 Brink's Co. (The) 15,000 593 Brookstone, Inc. (AE) 11,250 220 Carmike Cinemas, Inc. 6,600 241 Cato Corp. (The) Class A 2,700 78 CEC Entertainment, Inc. (AE) 3,600 144 Central European Distribution Corp. (AE)(N) 16,750 495 Central Garden and Pet Co. (AE) 3,900 163 Charming Shoppes (AE) 44,900 421 Chemed Corp. 4,200 282 Choice Hotels International, Inc. 7,500 435 ChoicePoint, Inc. (AE) 8,133 374 Circuit City Stores, Inc. 37,900 593 Claire's Stores, Inc. 3,300 70 Coinstar, Inc. (AE)(N) 4,300 115 Coldwater Creek, Inc. (AE) 2,250 69 Concorde Career Colleges, Inc. (AE)(N) 6,083 123 Consolidated Graphics, Inc. (AE) 6,900 317 Convergys Corp. (AE) 24,600 369 Aggressive Equity Fund 21 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Corinthian Colleges, Inc. (AE) 11,000 207 Corporate Executive Board Co. 12,200 817 Corrections Corp. of America (AE) 5,800 235 CSK Auto Corp. (AE) 3,200 54 Ctrip.com International, Ltd. - ADR (AE)(N) 3,450 159 Darden Restaurants, Inc. 1,300 36 Dave & Buster's, Inc. (AE)(N) 7,400 149 Deckers Outdoor Corp. (AE)(N) 10,000 470 Dick's Sporting Goods, Inc. (AE)(N) 9,700 341 Dillard's, Inc. Class A 5,900 159 Dollar Thrifty Automotive Group (AE) 22,300 673 Dollar Tree Stores, Inc. (AE) 3,600 103 DreamWorks Animation SKG, Inc. Class A (AE) 3,500 131 Dress Barn, Inc. (AE)(N) 1,800 32 Earthlink, Inc. (AE) 12,700 146 Education Management Corp. (AE) 22,000 726 Electronics Boutique Holdings Corp. (AE) 3,400 146 Entercom Communications Corp. (AE) 7,000 251 Entravision Communications Corp. Class A (AE) 5,900 49 Ethan Allen Interiors, Inc. 3,200 128 Fastenal Co. 1,000 62 Finish Line Class A (N) 6,400 117 Fisher Scientific International (AE) 1,600 100 G&K Services, Inc. Class A 1,500 65 Gaylord Entertainment Co. (AE) 6,500 270 Geo Group, Inc. (The) (AE) 1,000 27 Getty Images, Inc. (AE) 9,300 640 Greenfield Online, Inc. (AE)(N) 3,200 70 GTECH Holdings Corp. 14,700 381 Guess ?, Inc. (AE) 6,600 83 Guitar Center, Inc. (AE)(N) 6,100 321 Handleman Co. (N) 14,000 301 Harte-Hanks, Inc. 5,100 132 Hartmarx Corp. (AE) 4,800 37 Hasbro, Inc. 15,000 291 Haverty Furniture Cos., Inc. 11,500 213 Hearst-Argyle Television, Inc. 22,500 594 Hewitt Associates, Inc. Class A (AE) 17,700 567 Hibbett Sporting Goods, Inc. (AE) 8,500 226 Hilton Hotels Corp. 12,600 287 Hollinger International, Inc. Class A (N) 3,800 60 IKON Office Solutions, Inc. (N) 20,300 235 Infospace, Inc. (AE)(N) 2,000 95 Insight Enterprises, Inc. (AE) 2,600 53 International Flavors & Fragrances, Inc. 2,000 86 International Speedway Corp. Class A 6,400 338 ITT Educational Services, Inc. (AE) 9,000 428 Jack in the Box, Inc. (AE) 10,600 391 Jarden Corp. (AE) 3,000 130 Jo-Ann Stores, Inc. (AE) 6,600 182 Journal Communications, Inc. Class A 3,300 60 Kellwood Co. 5,000 172 La-Z-Boy, Inc. Class C 5,900 91 Labor Ready, Inc. (AE) 30,250 512 Lamar Advertising Co. Class A (AE) 7,200 308 Landry's Restaurants, Inc. 3,600 105 Leapfrog Enterprises, Inc. (AE)(N) 8,600 117 Lee Enterprises, Inc. 4,900 226 Lithia Motors, Inc. Class A (N) 4,300 115 Lone Star Steakhouse & Saloon 9,300 260 Marcus Corp. 2,700 68 Marvel Enterprises, Inc. (AE) 9,450 194 Midway Games, Inc. (AE)(N) 3,500 37 Mohawk Industries, Inc. (AE) 4,400 401 Monro Muffler, Inc. (AE) 1,900 48 Monster Worldwide, Inc. (AE) 5,950 200 Movado Group, Inc. 4,200 78 MPS Group, Inc. (AE) 22,100 271 MSC Industrial Direct Co. Class A 2,000 72 Nautilus Group, Inc. (N) 12,100 292 Neiman-Marcus Group, Inc. Class A 2,700 193 Netratings, Inc. (AE) 6,813 131 O'Reilly Automotive, Inc. (AE)(N) 1,000 45 Overstock.com, Inc. (AE)(N) 5,200 359 Pantry, Inc. (The) (AE)(N) 6,500 196 Payless Shoesource, Inc. (AE) 3,400 42 PEP Boys-Manny Moe & Jack 4,700 80 Petco Animal Supplies, Inc. (AE) 20,500 809 Petsmart, Inc. 2,000 71 Pier 1 Imports, Inc. 5,600 110 Polo Ralph Lauren Corp. 23,300 993 Pre-Paid Legal Services, Inc. (N) 3,400 128 Primedia, Inc. (AE) 10,400 40 Radio One, Inc. Class D (AE) 26,300 424 RC2 Corp. (AE) 1,300 42 Red Robin Gourmet Burgers, Inc. (AE) 1,000 53 Regal Entertainment Group Class A 11,500 239 Regis Corp. 4,200 194 Rent-A-Center, Inc. (AE) 1,700 45 Resources Connection, Inc. (AE)(N) 10,300 559 RH Donnelley Corp. (AE) 1,100 65 RR Donnelley & Sons Co. 9,290 328 22 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Ruby Tuesday, Inc. 1,600 42 Rush Enterprises, Inc. Class B (AE) 700 12 Russ Berrie & Co., Inc. 1,300 30 Sabre Holdings Corp. Class A 9,500 211 Scholastic Corp. (AE) 3,300 122 Scientific Games Corp. Class A (AE) 4,700 112 SCP Pool Corp. 24,500 782 ShopKo Stores, Inc. (AE)(N) 13,300 248 Six Flags, Inc. (AE)(N) 21,300 114 Skechers U.S.A., Inc. Class A (AE) 3,300 43 Sonic Automotive, Inc. 1,700 42 Sourcecorp (AE) 10,900 208 Speedway Motorsports, Inc. 6,700 262 Sports Authority, Inc. (The) (AE)(N) 6,600 170 Stage Stores, Inc. (AE) 15,500 644 Stanley Works (The) 1,800 88 Steinway Musical Instruments (AE) 600 17 Stewart Enterprises, Inc. Class A (AE) 39,600 277 TBC Corp. (AE) 1,500 42 Tech Data Corp. (AE) 22,100 1,003 TeleTech Holdings, Inc. (AE)(N) 12,000 116 Tempur-Pedic International, Inc. (AE) 16,200 343 Thomas Nelson, Inc. 1,000 23 Tiffany & Co. 2,500 80 Too, Inc. (AE) 8,100 198 Toro Co. 5,300 431 Toys R US, Inc. (AE) 15,300 313 Trans World Entertainment (AE)(N) 17,300 216 Triarc Cos. Class B (N) 2,400 29 Unifirst Corp. (N) 600 17 USANA Health Sciences, Inc. (AE)(N) 4,600 157 Vail Resorts, Inc. (AE) 7,100 159 Valassis Communications, Inc. (AE) 3,000 105 Ventiv Health, Inc. (AE) 8,000 163 Volt Information Sciences, Inc. (AE) 1,000 29 Watson Wyatt & Co. Holdings 2,000 54 WESCO International, Inc. (AE) 17,500 519 West Corp. (AE) 10,800 358 Wet Seal, Inc. (The) Class A (AE)(N) 16,900 38 Wynn Resorts, Ltd. (AE)(N) 600 40 ------ 37,238 ------ Consumer Staples - 1.9% Adolph Coors Co. Class B 3,000 227 Church & Dwight Co., Inc. 3,050 103 Constellation Brands, Inc. Class A (AE) 12,900 600 Del Monte Foods Co. (AE) 3,400 37 DIMON, Inc. (N) 10,300 69 Lance, Inc. 2,500 48 Loews Corp. 4,400 127 Longs Drug Stores Corp. 1,900 52 M&F Worldwide Corp. (AE) 8,600 117 Nash Finch Co. (N) 16,300 616 Natures Sunshine Products, Inc. 3,900 79 NBTY, Inc. (AE) 6,500 156 Nutraceutical International Corp. (AE) 6,700 103 Pathmark Stores, Inc. (AE) 24,900 145 PepsiAmericas, Inc. 5,700 121 Pilgrim's Pride Corp. 14,600 448 Ralcorp Holdings, Inc. 5,300 222 Ruddick Corp. 4,000 87 Smart & Final, Inc. (AE)(N) 5,400 78 Tootsie Roll Industries, Inc. 1,700 59 Tyson Foods, Inc. Class A 3,600 66 Universal Corp. 3,200 153 ------ 3,713 ------ Financial Services - 19.4% 21st Century Insurance Group 100 1 ACE Cash Express, Inc. (AE) 2,000 59 Advent Software, Inc. (AE) 12,300 252 Alleghany Corp. (AE) 353 101 Alliance Data Systems Corp. (AE) 26,600 1,263 Allmerica Financial Corp. (AE) 10,400 341 AMB Property Corp. (o) 8,400 339 American Financial Group, Inc. 3,500 110 American Physicians Capital, Inc. (AE) 1,900 68 AmeriCredit Corp. (AE) 21,800 533 Anthracite Capital, Inc. (o) 739 9 Anworth Mortgage Asset Corp. (N) 14,100 151 Arden Realty, Inc. (o) 2,400 91 Ashford Hospitality Trust, Inc. (o) 18,000 196 Associated Banc-Corp 15,315 509 Assurant, Inc. 3,000 92 Assured Guaranty, Ltd. 10,500 207 Asta Funding, Inc. (N) 5,200 140 AvalonBay Communities, Inc. (o) 5,200 392 Bank Mutual Corp. 15,700 191 Bank of Hawaii Corp. 15,900 807 BankAtlantic Bancorp, Inc. Class A 300 6 Bankunited Financial Corp. Class A (AE) 3,000 96 BISYS Group, Inc. (The) (AE) 5,000 82 BOK Financial Corp. (AE) 1,030 50 Brookline Bancorp, Inc. (N) 12,800 209 Capital Automotive REIT (o) 8,500 302 Aggressive Equity Fund 23 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Capital Trust, Inc. Class A (o)(N) 2,900 89 CapitalSource, Inc. (AE) 25,400 652 Cash America International, Inc. 3,700 110 Cathay General Bancorp 2,100 79 CB Richard Ellis Group, Inc. Class A (AE) 15,700 527 CBL & Associates Properties, Inc. (o) 3,700 282 Certegy, Inc. 5,800 206 CharterMac 4,800 117 Checkfree Corp. (AE) 4,500 171 Chemical Financial Corp. 700 30 CIT Group, Inc. 4,000 183 City National Corp. 4,400 311 Colonial BancGroup, Inc. (The) 12,200 259 Colonial Properties Trust (o)(N) 3,800 149 Commerce Group, Inc. (N) 2,000 122 Commercial Federal Corp. 5,000 149 Commercial Net Lease Realty (o) 11,900 245 Community Bank System, Inc. 12,600 356 CompuCredit Corp. (AE) 20,300 555 Correctional Properties Trust (o) 1,000 29 Corus Bankshares, Inc. 2,900 139 Cousins Properties, Inc. (o) 11,800 357 CRT Properties, Inc. (o) 5,900 141 Developers Diversified Realty Corp. (o) 2,100 93 Diamondrock Hospitality Co. (AE) (p) 20,800 212 Direct General Corp. 7,300 234 Doral Financial Corp. 2,450 121 Downey Financial Corp. 3,700 211 East-West Bancorp, Inc. 1,700 71 Eastgroup Properties (o) 2,000 77 Eaton Vance Corp. 1,900 99 eFunds Corp. (AE) 8,000 192 Encore Capital Group, Inc. (AE) 6,600 157 Entertainment Properties Trust (o) 2,100 94 Equity Inns, Inc. (o) 3,800 45 Equity Lifestyle Properties, Inc. (o) 4,900 175 Equity One, Inc. (o) 12,700 301 Euronet Worldwide, Inc. (AE) 12,800 333 Factset Research Systems, Inc. 1,000 58 Fair Isaac Corp. 4,100 150 Fidelity Bankshares, Inc. 800 34 Fieldstone Investment Corp. (AE) (p) 13,100 226 First American Corp. 17,000 597 First Bancorp 1,600 102 First Financial Bancorp 5,400 94 First Marblehead Corp. (The) (AE)(N) 1,500 84 First Niagara Financial Group, Inc. 27,100 378 Flushing Financial Corp. 1,200 24 Friedman Billings Ramsey Group, Inc. Class A (o)(N) 2,300 45 Gabelli Asset Management, Inc. Class A (N) 2,500 121 GATX Corp. 4,600 136 Getty Realty Corp. (o) 1,900 55 Global Payments, Inc. 10,300 603 Gold Banc Corp., Inc. 10,600 155 Government Properties Trust, Inc. (o)(N) 3,200 32 Greater Bay Bancorp (N) 7,000 195 Hancock Holding Co. 1,400 47 Hanmi Financial Corp. 1,500 54 Health Care Property Investors, Inc. (o) 900 25 Health Care REIT, Inc. (o) 7,700 294 HealthExtras, Inc. (AE)(N) 26,900 438 Heritage Property Investment Trust (o)(N) 4,700 151 Hibernia Corp. Class A 1,400 41 HomeBanc Corp. (o)(N) 20,200 196 Hospitality Properties Trust (o) 1,500 69 Host Marriott Corp. (o) 5,700 99 HRPT Properties Trust (o) 45,100 579 Hudson United Bancorp 2,700 106 Independent Bank Corp. 990 30 Infinity Property & Casualty Corp. 9,400 331 Innkeepers USA Trust (o) 6,700 95 Investors Financial Services Corp. 15,000 750 iPayment, Inc. (AE) 8,389 415 iShares S&P MidCap 400/BARRA Growth Index Fund (N) 4,500 608 Jack Henry & Associates, Inc. 15,000 299 Jameson Inns, Inc. (AE) 92,200 182 Janus Capital Group, Inc. 27,600 464 Jefferies Group, Inc. 7,300 294 Jones Lang LaSalle, Inc. (AE) 10,800 404 KKR Financial Corp. (AE) 25,300 266 Knight Trading Group, Inc. Class A (AE) 20,200 221 Kronos, Inc. (AE) 3,900 199 La Quinta Corp. (AE) (o) 45,900 417 LandAmerica Financial Group, Inc. (N) 15,900 857 Legg Mason, Inc. 3,600 264 Macatawa Bank Corp. 5,200 168 MAF Bancorp, Inc. 4,100 184 Maguire Properties, Inc. (o) 6,600 181 Markel Corp. (AE) 1,600 582 Marlin Business Services, Inc. (AE)(N) 2,300 44 24 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Meadowbrook Insurance Group, Inc. (AE) 41,100 205 Meristar Hospitality Corp. (AE)(o) 16,600 139 Mid-America Apartment Communities, Inc. (o)(N) 1,400 58 National Health Investors, Inc. (o) 8,000 233 National Penn Bancshares, Inc. (N) 787 22 Nationwide Health Properties, Inc. (o) 9,000 214 Navigators Group, Inc. (AE) 5,100 154 NDCHealth Corp. 6,000 112 New Century Financial Corp. (o) 8,200 524 Nuveen Investments, Inc. Class A (N) 1,100 43 OceanFirst Financial Corp. 1,703 42 Ohio Casualty Corp. (AE) 6,800 158 Pacific Capital Bancorp 1,466 50 Parkvale Financial Corp. 3,757 108 Partners Trust Financial Group, Inc. 14,100 164 People's Bank 6,700 261 PFF Bancorp, Inc. 4,420 205 Philadelphia Consolidated Holding Co. (AE) 500 33 PMA Capital Corp. Class A (AE)(N) 5,200 54 Popular, Inc. 2,400 69 Portfolio Recovery Associates, Inc. (AE)(N) 9,800 404 Primus Guaranty, Ltd. (AE) 11,700 192 PrivateBancorp, Inc. (N) 2,400 77 Protective Life Corp. 7,300 312 Provident Bankshares Corp. 1,500 55 Provident Senior Living Trust (o) (p) 15,300 245 PS Business Parks, Inc. (o) 1,600 72 Quanta Capital Holdings, Ltd. (AE) 22,900 211 R&G Financial Corp. Class B 4,000 156 Radian Group, Inc. 4,500 240 Raymond James Financial, Inc. 9,600 297 Reckson Associates Realty Corp. (o) 3,800 125 Redwood Trust, Inc. (o) 2,600 161 Regency Centers Corp. (o) 900 50 Republic Bancorp, Inc. 4,069 62 Ryder System, Inc. 3,100 148 Safety Insurance Group, Inc. 800 25 Selective Insurance Group 6,900 305 Senior Housing Properties Trust (o) 23,100 437 Silicon Valley Bancshares (AE) 14,100 632 SL Green Realty Corp. (o) 8,400 509 Sovran Self Storage, Inc. (o) 1,100 46 State Auto Financial Corp. 1,200 31 Sterling Bancorp 532 15 Sterling Bancshares, Inc. 3,800 54 Stewart Information Services Corp. 15,700 654 Summit Properties, Inc. (o) 2,400 78 TCF Financial Corp. 9,700 312 Texas Regional Bancshares, Inc. Class A 4,500 147 Tower Group, Inc. 17,700 212 UCBH Holdings, Inc. 5,700 261 UICI 6,700 227 UMB Financial Corp. 500 28 United Bankshares, Inc. 2,000 76 United Community Banks, Inc. (N) 900 24 Universal Health Realty Income Trust (o) 900 29 Washington Real Estate Investment Trust (o) 5,500 186 Webster Financial Corp. 3,000 152 WeLLChoice, Inc. (AE) 7,100 379 WesBanco, Inc. 600 19 Whitney Holding Corp. 1,600 72 World Acceptance Corp. (AE) 3,700 102 WR Berkley Corp. 4,800 226 WSFS Financial Corp. 3,800 229 ------ 37,835 ------ Health Care - 10.7% Abaxis, Inc. (AE) 10,400 151 Abgenix, Inc. (AE)(N) 21,700 224 Able Laboratories, Inc. (AE) 11,400 259 Accelrys, Inc. (AE) 16,900 132 Accredo Health, Inc. (AE) 3,000 83 Advanced Medical Optics, Inc. (AE) 900 37 Alliance Imaging, Inc. (AE) 4,900 55 Alpharma, Inc. Class A 6,600 112 American Medical Systems Holdings, Inc. (AE) 4,870 204 Applera Corp. - Celera Genomics Group (AE) 81,900 1,126 Arthrocare Corp. (AE)(N) 4,800 154 Beckman Coulter, Inc. 1,400 94 Beverly Enterprises, Inc. (AE)(N) 7,200 66 Bio-Rad Laboratories, Inc. Class A (AE) 3,900 224 Candela Corp. (AE)(N) 19,400 220 Centene Corp. (AE) 2,000 57 Cephalon, Inc. (AE)(N) 11,500 585 Charles River Laboratories International, Inc. (AE) 10,200 469 Chattem, Inc. (AE) 1,200 40 Community Health Systems, Inc. (AE) 14,600 407 Aggressive Equity Fund 25 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Connetics Corp. (AE) 6,200 151 Covance, Inc. (AE) 800 31 CTI Molecular Imaging, Inc. (AE) 26,200 372 Cytyc Corp. (AE) 7,600 210 Dade Behring Holdings, Inc. (AE) 15,500 868 Datascope Corp. 1,000 40 DaVita, Inc. (AE) 34,250 1,354 Edwards Lifesciences Corp. (AE) 7,000 289 Endo Pharmaceuticals Holdings, Inc. (AE) 5,600 118 Enzon Pharmaceuticals, Inc. (AE)(N) 9,100 125 First Horizon Pharmaceutical Corp. (AE)(N) 5,100 117 Gen-Probe, Inc. (AE) 3,300 149 Genencor International, Inc. (AE) 7,200 118 Guilford Pharmaceuticals, Inc. (AE)(N) 5,100 25 Health Net, Inc. (AE) 11,500 332 Hologic, Inc. (AE) 7,800 214 Humana, Inc. (AE) 19,800 588 Immucor, Inc. (AE) 6,900 162 Inamed Corp. (AE) 3,500 221 Intralase Corp. (AE) 18,925 444 Intuitive Surgical, Inc. (AE) 1,600 64 Kindred Healthcare, Inc. (AE)(N) 9,100 273 Kos Pharmaceuticals, Inc. (AE) 8,049 303 Kosan Biosciences, Inc. (AE)(N) 16,600 115 LabOne, Inc. (AE) 1,200 38 Lexicon Genetics, Inc. (AE)(N) 5,900 46 LifePoint Hospitals, Inc. (AE) 5,400 188 Ligand Pharmaceuticals, Inc. Class B (AE) 14,300 166 Lincare Holdings, Inc. (AE) 9,500 405 Magellan Health Services, Inc. (AE) 9,900 338 Manor Care, Inc. 10,600 376 Martek Biosciences Corp. (AE) 2,700 138 Matria Healthcare, Inc. (AE)(N) 1,000 39 Maxygen, Inc. (AE) 1,500 19 Medarex, Inc. (AE)(N) 29,700 320 Medcath Corp. (AE)(N) 3,700 91 MGI Pharma, Inc. (AE) 4,500 126 Molecular Devices Corp. (AE) 12,499 251 Myriad Genetics, Inc. (AE)(N) 4,900 110 Nabi Biopharmaceuticals (AE) 15,644 229 NeighborCare, Inc. (AE) 200 6 OccuLogix, Inc. (AE)(N) 9,600 99 Ocular Sciences, Inc. (AE) 4,400 216 Option Care, Inc. (N) 2,300 40 Pacificare Health Systems (AE) 3,500 198 Parexel International Corp. (AE) 4,700 95 Pediatrix Medical Group, Inc. (AE) 10,300 660 Perrigo Co. 2,800 48 Pharmaceutical Product Development, Inc. (AE) 8,400 347 Pharmacopeia Drug Discovery, Inc. (AE) 9,350 56 Praecis Pharmaceuticals, Inc. (AE) 8,500 16 Protein Design Labs, Inc. (AE) 12,400 256 Renal Care Group, Inc. (AE) 1,000 36 Respironics, Inc. (AE) 9,500 516 Salix Pharmaceuticals, Ltd. (AE) 1,800 32 Serologicals Corp. (AE)(N) 18,100 400 SFBC International, Inc. (AE)(N) 3,400 134 Sierra Health Services (AE)(N) 8,800 485 Sonic Innovations, Inc. (AE)(N) 9,000 38 Stericycle, Inc. (AE) 8,500 391 Sybron Dental Specialties, Inc. (AE) 7,766 275 Thoratec Corp. (AE) 6,400 67 Triad Hospitals, Inc. (AE) 8,400 313 United Therapeutics Corp. (AE)(N) 1,500 68 Universal Health Services, Inc. Class B 5,600 249 VCA Antech, Inc. (AE) 15,800 310 Ventana Medical Systems (AE)(N) 11,600 742 Vicuron Pharmaceuticals, Inc. (AE) 8,200 143 West Pharmaceutical Services, Inc. 1,000 25 Wilson Greatbatch Technologies, Inc. (AE) 5,100 114 Zymogenetics, Inc. (AE)(N) 9,500 218 ------ 20,855 ------ Materials and Processing - 9.1% Airgas, Inc. 2,200 58 Albany International Corp. Class A 7,000 246 Arch Chemicals, Inc. 3,600 104 Armor Holdings, Inc. (AE) 9,600 451 Ashland, Inc. 6,800 397 Ball Corp. 9,600 422 Bemis Co. 10,800 314 Bluegreen Corp. (AE) 7,700 153 Brady Corp. Class A 3,200 200 Brookfield Homes Corp. 6,000 203 Brush Engineered Materials, Inc. (AE) 5,900 109 Building Material Holding Corp. (N) 2,400 92 Cabot Corp. 9,400 364 Calgon Carbon Corp. (N) 13,300 121 Carpenter Technology 11,000 643 Cell GeneSystem, Inc. (AE)(N) 16,200 131 Century Aluminum Co. (AE) 9,000 236 Comfort Systems USA, Inc. (AE) 14,500 111 26 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Constar International, Inc. (AE) 7,800 60 Corn Products International, Inc. 2,300 123 Crown Holdings, Inc. (AE) 15,700 216 Cytec Industries, Inc. 11,000 566 Drew Industries, Inc. (AE) 1,100 40 Dycom Industries, Inc. (AE) 8,900 272 Ennis, Inc. 1,700 33 Florida Rock Industries, Inc. 3,400 202 FMC Corp. (AE) 2,400 116 Georgia Gulf Corp. 9,400 468 Glatfelter 12,700 194 Gold Kist, Inc. (AE)(N) 15,500 211 Granite Construction, Inc. 7,100 189 Greif, Inc. Class A 100 6 Harsco Corp. 4,800 268 Hecla Mining Co. (AE) 7,500 44 Hercules, Inc. (AE) 16,600 246 Hughes Supply, Inc. 26,500 857 Human Genome Sciences, Inc. (AE) 4,300 52 ICOS Corp. (AE) 6,000 170 Incyte Corp. (AE) 4,600 46 Insituform Technologies, Inc. Class A (AE) 14,100 320 Jacuzzi Brands, Inc. (AE) 20,800 181 Jermyn Investments (AE) 19,400 293 Lafarge North America, Inc. 6,100 313 Louisiana-Pacific Corp. 4,600 123 Lyondell Chemical Co. 11,130 322 Martin Marietta Materials, Inc. 7,800 419 Metals USA, Inc. (AE)(N) 6,700 124 Mosaic Co. (The) (AE) 4,600 75 Myers Industries, Inc. 275 3 NCI Building Systems, Inc. (AE) 2,500 94 NewMarket Corp. (AE) 13,400 267 NS Group, Inc. (AE) 4,900 136 NuCo 2, Inc. (AE)(N) 2,500 55 Octel Corp. 3,500 73 Oregon Steel Mills, Inc. (AE) 6,200 126 Pactiv Corp. (AE) 13,100 331 PolyOne Corp. (AE) 10,400 94 Pope & Talbot, Inc. 3,600 62 Precision Castparts Corp. 2,500 164 Quanta Services, Inc. (AE)(N) 54,800 438 Ryerson Tull, Inc. (N) 32,300 509 Sealed Air Corp. (AE) 5,400 288 Seattle Genetics, Inc. (AE) 4,100 27 Silgan Holdings, Inc. 7,500 457 Sonoco Products Co. 10,700 317 Spartech Corp. 8,700 236 Steel Technologies, Inc. 2,400 66 Stillwater Mining Co. (AE) 15,100 170 Terra Industries, Inc. (AE)(N) 34,600 307 Texas Industries, Inc. 5,600 349 Trammell Crow Co. (AE) 2,000 36 Tredegar Corp. 9,500 192 UAP Holding Corp. (AE) 12,000 207 Unifi, Inc. (AE) 8,700 33 URS Corp. (AE) 3,100 99 USEC, Inc. 4,500 44 USG Corp. (AE)(N) 16,900 681 Valmont Industries, Inc. 1,100 28 Valspar Corp. 600 30 Washington Group International, Inc. (AE) 10,300 425 Watsco, Inc. 4,200 148 WCI Communities, Inc. (AE)(N) 4,600 135 Worthington Industries 10,100 198 York International Corp. 2,700 93 ------ 17,822 ------ Miscellaneous - 0.6% Brunswick Corp. 10,300 510 Carlisle Cos., Inc. 5,700 370 Trinity Industries, Inc. (N) 9,400 320 ------ 1,200 ------ Other Energy - 5.1% Berry Petroleum Co. Class A 9,400 448 Cal Dive International, Inc. (AE) 16,700 681 Callon Petroleum Co. (AE) 3,600 52 CARBO Ceramics, Inc. 800 55 Cimarex Energy Co. (AE) 1,200 45 Consol Energy, Inc. 1,400 57 Cooper Cameron Corp. (AE) 4,400 237 Denbury Resources, Inc. (AE) 12,500 343 Dril-Quip, Inc. (AE) 1,300 32 Edge Petroleum Corp. (AE)(N) 9,300 136 Encore Acquisition Co. (AE) 3,600 126 ENSCO International, Inc. 9,700 308 Frontier Oil Corp. 2,300 61 Global Industries, Ltd. (AE) 16,600 138 Houston Exploration Co. (AE) 15,900 895 Hydril (AE) 4,300 196 Input/Output, Inc. (AE)(N) 3,900 34 Magnum Hunter Resources, Inc. (AE) 6,700 86 Nabors Industries, Ltd. (AE) 5,200 267 National-Oilwell, Inc. Class C (AE)(N) 10,400 367 Aggressive Equity Fund 27 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Newfield Exploration Co. (AE) 3,500 207 NRG Energy, Inc. (AE) 12,100 436 Oil States International, Inc. (AE) 8,500 164 Parker Drilling Co. (AE) 5,800 23 Patina Oil & Gas Corp. 12,600 473 Patterson-UTI Energy, Inc. 24,200 471 Penn Virginia Corp. 3,700 150 Plains Exploration & Production Co. (AE) 6,682 174 Pogo Producing Co. 7,400 359 Premcor, Inc. 7,200 304 Quicksilver Resources, Inc. (AE) 3,000 110 Range Resources Corp. (N) 900 18 Remington Oil & Gas Corp. (AE)(N) 1,500 41 Smith International, Inc. (AE) 3,900 212 Stone Energy Corp. (AE) 10,400 469 Superior Energy Services (AE) 14,500 223 Swift Energy Co. (AE) 6,083 176 Todco Class A (AE) 9,300 171 Unit Corp. (AE) 1,500 57 Universal Compression Holdings, Inc. (AE) 11,600 405 Veritas DGC, Inc. (AE) 28,800 645 Whiting Petroleum Corp. (AE) 6,800 206 ------ 10,058 ------ Producer Durables - 6.4% Actuant Corp. Class A (AE) 4,200 219 American Tower Corp. Class A (AE) 13,500 248 AO Smith Corp. 6,300 189 ARGON ST, Inc. (AE) 2,300 82 Arris Group, Inc. (AE) 42,400 298 Artesyn Technologies, Inc. (AE) 17,700 200 ASV, Inc. (AE) 3,400 163 Belden CDT, Inc. 5,700 132 Blount International, Inc. (AE) 4,500 78 Briggs & Stratton Corp. 7,200 299 C&D Technologies, Inc. 2,900 49 C-COR, Inc. (AE) 10,200 95 Centex Corp. 400 24 CNH Global NV 8,540 165 Cognex Corp. 6,200 173 Cohu, Inc. 3,200 59 CTS Corp. (N) 3,400 45 Curtiss-Wright Corp. 1,000 57 Cymer, Inc. (AE) 8,500 251 Dionex Corp. (AE) 1,700 96 Dominion Homes, Inc. (AE) 700 18 Duratek, Inc. (AE) 8,373 209 ESCO Technologies, Inc. (AE) 3,200 245 Exide Technologies (AE) 8,000 110 Faro Technologies, Inc. (AE) 7,600 237 Flanders Corp. (AE) 4,500 43 Gardner Denver, Inc. (AE) 9,800 356 Genlyte Group, Inc. (AE) 1,400 120 Goodrich Corp. 13,700 447 Graco, Inc. 7,050 263 Hovnanian Enterprises, Inc. Class A (AE) 1,000 50 IDEX Corp. 8,400 340 Imagistics International, Inc. (AE) 6,200 209 Interface, Inc. Class A (AE) 3,200 32 Joy Global, Inc. 8,400 365 Lincoln Electric Holdings, Inc. 2,500 86 Manitowoc Co. 5,100 192 Mattson Technology, Inc. (AE) 13,000 146 MDC Holdings, Inc. 4,820 417 Measurement Specialties, Inc. (AE)(N) 7,584 193 Mettler Toledo International, Inc. (AE) 5,800 298 Middleby Corp. (N) 1,600 81 Milacron, Inc. (AE) 25,545 87 Mine Safety Appliances Co. 2,300 117 MTS Systems Corp. 10,600 358 NACCO Industries, Inc. Class A 2,900 306 Nanometrics, Inc. (AE)(N) 3,200 52 Nordson Corp. 3,700 148 Orbital Sciences Corp. (AE)(N) 7,500 89 Pall Corp. 9,400 272 Paxar Corp. (AE) 3,100 69 Pentair, Inc. 1,680 73 Photon Dynamics, Inc. (AE)(N) 9,600 233 Photronics, Inc. (AE) 7,200 119 Powerwave Technologies, Inc. (AE) 10,000 85 RAE Systems, Inc. (AE)(N) 30,900 226 Rayovac Corp. (AE) 900 28 Rofin-Sinar Technologies, Inc. (AE) 14,900 633 Roper Industries, Inc. 2,000 122 Spatialight, Inc. (AE)(N) 42,747 383 Standard-Pacific Corp. 6,300 404 Steelcase, Inc. Class A (N) 5,600 78 Symmetricom, Inc. (AE) 12,800 124 Technical Olympic USA, Inc. 2,600 66 Tecumseh Products Co. Class A 3,000 143 Teledyne Technologies, Inc. (AE) 4,600 135 Terex Corp. (AE) 4,700 224 Toll Brothers, Inc. (AE) 2,000 137 United Defense Industries, Inc. (AE) 4,000 189 28 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Woodward Governor Co. 800 57 Xyratex, Ltd. (AE) 16,100 265 ------ 12,601 ------ Technology - 14.9% Acxiom Corp. 14,300 376 ADC Telecommunications, Inc. (AE) 68,000 182 Aeroflex, Inc. (AE) 28,100 341 Agile Software Corp. (AE) 48,200 394 Aladdin Knowledge Systems (AE)(N) 4,300 106 Alliance Semiconductor Corp. (AE) 12,200 45 Alloy, Inc. (AE)(N) 4,300 35 Alvarion, Ltd. (AE) 3,300 44 Anixter International, Inc. 19,900 716 Anteon International Corp. (AE) 5,600 234 Applera Corp. - Applied Biosystems Group 7,100 148 Applied Micro Circuits Corp. (AE) 24,700 104 Ariba, Inc. (AE) 33,200 551 Ascential Software Corp. (AE) 20,400 333 AsiaInfo Holdings, Inc. (AE) 4,900 29 ATI Technologies, Inc. (AE) 35,200 683 Atmel Corp. (AE) 17,900 70 Audible, Inc. (AE)(N) 4,600 120 Avaya, Inc. (AE) 26,700 459 Avnet, Inc. (AE) 15,000 274 Avocent Corp. (AE) 5,100 207 AVX Corp. (N) 7,300 92 Business Objects SA - ADR (AE) 8,800 223 CACI International, Inc. Class A (AE) 1,400 95 Cadence Design Systems, Inc. (AE) 2,900 40 CallWave, Inc. (AE) 12,800 198 Ceridian Corp. (AE) 11,600 212 Cirrus Logic, Inc. (AE)(N) 5,800 32 Cognos, Inc. (AE) 10,200 449 CommScope, Inc. (AE) 12,700 240 Comtech Telecommunications Corp. (AE)(N) 8,300 312 Comverse Technology, Inc. (AE) 19,100 467 Concurrent Computer Corp. (AE) 8,200 23 Cree, Inc. (AE)(N) 27,600 1,106 Digi International, Inc. 2,600 45 Digital River, Inc. (AE)(N) 18,700 778 Diodes, Inc. (AE) 8,600 195 Ditech Communications Corp. (AE) 4,700 70 DRS Technologies, Inc. (AE)(N) 12,800 547 E.piphany, Inc. (AE) 22,500 109 EDO Corp. 8,300 264 Enterasys Networks, Inc. (AE) 23,900 43 Epicor Software Corp. (AE) 16,500 233 Equinix, Inc. (AE)(N) 15,400 658 Fairchild Semiconductor International, Inc. (AE) 15,200 247 Filenet Corp. (AE) 5,000 129 Formfactor, Inc. (AE) 7,600 206 Gateway, Inc. (AE) 36,900 222 ID Systems, Inc. (AE)(N) 13,900 259 II-VI, Inc. 9,200 391 Imergent, Inc. (AE) 9,700 147 Infocrossing, Inc. (AE)(N) 10,900 185 InFocus Corp. (AE) 19,300 177 Informatica Corp. (AE) 29,200 237 Ingram Micro, Inc. Class A (AE) 27,400 570 Innovative Solutions & Support, Inc. (AE)(N) 10,253 342 Integrated Device Technology, Inc. (AE) 41,700 482 Intergraph Corp. (AE) 12,900 347 International Rectifier Corp. (AE) 3,800 169 Internet Security Systems (AE) 19,300 449 Intersil Corp. Class A 14,400 241 Interwoven, Inc. (AE) 3,200 35 Jupitermedia Corp. (AE) 17,700 421 Keane, Inc. (AE) 11,500 169 Keynote Systems, Inc. (AE) 10,300 143 Kongzhong Corp. Class R (AE)(N) 16,300 157 LeCroy Corp. (AE) 1,000 23 Lions Gate Entertainment Corp. (AE)(N) 18,000 191 M-Systems Flash Disk Pioneers (AE)(N) 7,200 142 Macromedia, Inc. (AE) 13,000 405 Macrovision Corp. (AE) 4,000 103 Manhattan Associates, Inc. (AE) 4,600 110 Matrixone, Inc. (AE) 73,700 483 Maxtor Corp. (AE) 62,800 333 MEMC Electronic Materials, Inc. (AE) 12,600 167 Mercury Computer Systems, Inc. (AE) 12,900 383 Mercury Interactive Corp. (AE) 5,100 232 Methode Electronics, Inc. 17,100 220 Micros Systems, Inc. (AE) 4,900 383 Microsemi Corp. (AE) 10,900 189 Moldflow Corp. (AE) 2,200 35 MRV Communications, Inc. (AE)(N) 22,300 82 MSC.Software Corp. (AE)(N) 13,100 137 Multi-Fineline Electronix, Inc. (AE)(N) 9,600 175 National Instruments Corp. 2,750 75 Novatel Wireless, Inc. (AE)(N) 6,700 130 Nvidia Corp. (AE) 1,500 35 Open Solutions, Inc. (AE) 17,650 458 Aggressive Equity Fund 29 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Oplink Communications, Inc. (AE) 10,200 20 Parametric Technology Corp. (AE) 41,400 244 Pec Solutions, Inc. (AE)(N) 3,700 52 PerkinElmer, Inc. 15,700 353 Pinnacle Systems, Inc. (AE) 13,500 82 PMC - Sierra, Inc. (AE) 11,500 129 Quantum Corp. (AE)(N) 79,600 209 Quest Software, Inc. (AE) 14,700 235 Radisys Corp. (AE) 7,600 149 RADWARE, Ltd. (AE) 3,000 78 Redback Networks, Inc. (AE)(N) 9,800 53 Sandisk Corp. (AE) 2,900 72 Sapient Corp. (AE) 10,500 83 Scansource, Inc. (AE) 1,900 118 Seachange International, Inc. (AE)(N) 10,400 181 Semtech Corp. (AE) 14,500 317 Siebel Systems, Inc. (AE) 28,700 301 Sigmatel, Inc. (AE) 10,050 357 Silicon Image, Inc. (AE) 14,000 230 SimpleTech, Inc. (AE) 5,200 24 Skyworks Solutions, Inc. (AE) 15,000 141 Spectrasite, Inc. (AE) 7,700 446 SS&C Technologies, Inc. 13,700 283 Stratasys, Inc. (AE) 3,400 114 Sycamore Networks, Inc. (AE) 10,200 41 SYKES Enterprises, Inc. (AE) 2,200 15 Symbol Technologies, Inc. 17,100 296 Synaptics, Inc. (AE) 2,500 76 SYNNEX Corp. (AE) 1,600 39 Tekelec (AE) 7,000 143 Tellabs, Inc. (AE) 12,100 104 TIBCO Software, Inc. (AE) 12,800 171 Transaction Systems Architects, Inc. Class A (AE) 4,000 79 Unisys Corp. (AE) 17,400 177 Utstarcom, Inc. (AE)(N) 6,600 146 Verity, Inc. (AE) 6,300 83 WatchGuard Technologies (AE) 2,300 10 Wavecom SA - ADR (AE) 10,800 78 WebMethods, Inc. (AE) 3,000 22 Websense, Inc. (AE) 21,500 1,091 Western Digital Corp. (AE) 22,200 241 Zhone Technologies, Inc. (AE) 10,400 27 ------- 29,208 ------- Utilities - 3.2% AGL Resources, Inc. 8,200 273 Allete, Inc. 1,900 70 Aquila, Inc. (AE)(N) 64,600 238 Avista Corp. 2,000 35 Boston Communications Group (AE) 4,800 44 Centerpoint Energy, Inc. 9,800 111 CMS Energy Corp. (AE) 13,000 136 Commonwealth Telephone Enterprises, Inc. (AE) 3,300 164 Dobson Communications Corp. Class A (AE) 16,500 29 Energen Corp. 11,300 666 Laclede Group, Inc. (The) 1,000 31 MDU Resources Group, Inc. 8,200 219 NII Holdings, Inc. (AE)(N) 1,800 86 Northeast Utilities 40,300 760 Northwest Natural Gas Co. 1,700 57 NSTAR 4,700 255 OGE Energy Corp. 8,700 231 Pinnacle West Capital Corp. 2,800 124 PTEK Holdings, Inc. (AE) 18,300 196 Quantum Fuel Systems Technologies Worldwide, Inc. (AE)(N) 3,500 21 SEMCO Energy, Inc. 3,900 21 Sierra Pacific Resources (AE)(N) 44,400 466 South Jersey Industries, Inc. 800 42 Southwest Gas Corp. 2,100 53 Southwestern Energy Co. (AE) 3,300 167 Ubiquitel, Inc. (AE) 9,800 70 UGI Corp. 13,800 565 UnitedGlobalCom, Inc. Class A (AE)(N) 25,900 250 US Cellular Corp. (AE) 11,000 492 USA Mobility, Inc. (AE) 1,700 60 Western Gas Resources, Inc. 1,300 38 Western Wireless Corp. Class A (AE) 3,100 91 WGL Holdings, Inc. 2,800 86 WPS Resources Corp. 100 6 ------- 6,153 ------- Total Common Stocks (cost $153,430) 187,051 ------- 30 Aggressive Equity Fund Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Short-Term Investments - 4.5% Frank Russell Investment Company Money Market Fund 8,047,000 8,047 United States Treasury Bill (z)(S) 2.244% due 03/17/05 700 696 ------- Total Short-Term Investments (cost $8,744) 8,743 ------- Warrants & Rights - 0.0% Dime Bancorp. 2005 Warrants (AE) 35,400 6 ------- Total Warrants & Rights (cost $8) 6 ------- Other Securities - 11.3% State Street Securities Lending Quality Trust (X) 22,022,331 22,022 ------- Total Other Securities (cost $22,022) 22,022 ------- Total Investments - 111.4% (identified cost $184,204) 217,822 Other Assets and Liabilities, Net - (11.4%) (22,239) ------- Net Assets - 100.0% 195,583 ======= See accompanying notes which are an integral part of the financial statements. Aggressive Equity Fund 31 Russell Investment Funds Aggressive Equity Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Unrealized Notional Appreciation Futures Contracts Amount (Depreciation) (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Long Positions Russell 2000 E-Mini Index expiration date 03/05 (100) 6,540 261 Russell 2000 Index expiration date 03/05 (2) 654 14 S&P 500 E-Mini Index expiration date 03/05 (1) 61 1 S&P 500 Index expiration date 03/05 (4) 1,214 6 --- Total Unrealized Appreciation (Depreciation) on Open Futures Contracts 282 === % of Portfolio Summary Net (Unaudited) Assets - -------------------------------------------------------------------------------- Auto and Transportation 5.3 Consumer Discretionary 19.0 Consumer Staples 1.9 Financial Services 19.4 Health Care 10.7 Materials and Processing 9.1 Miscellaneous 0.6 Other Energy 5.1 Producer Durables 6.4 Technology 14.9 Utilities 3.2 Short-Term Investments 4.5 Warrants & Rights --* Other Securities 11.3 ----- Total Investments 111.4 Other Assets and Liabilities, Net (11.4) ----- Net Assets 100.0 ===== Futures Contracts 0.1 * Less than .05% See accompanying notes which are an integral part of the financial statements. 32 Aggressive Equity Fund Russell Investment Funds Non-U.S. Fund Portfolio Management Discussion -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - -------------------------------------- Non-U.S. Fund - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ---------- 1 Year $11,830 18.30% 5 Years $ 9,295 (1.45)%(S) Inception $14,043 4.34%(S) - -------------------------------------- MSCI EAFE Index - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ---------- 1 Year $12,070 20.70% 5 Years $ 9,605 (0.80)%(S) Inception $15,015 5.21%(S) Non-U.S. Fund 33 Russell Investment Funds Non-U.S. Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- What is the Fund's investment objective? The Fund seeks to provide long term capital growth. How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2004? For the fiscal year ended December 31, 2004, the Non-U.S. Fund gained 18.30%. This compared to its benchmark, the MSCI EAFE Index, which gained 20.70%. The Fund's performance is net of operating expenses of 1.15%. Index returns do not reflect deduction for fees or expenses. Index returns do not include fair valuation adjustments which may be included in fund returns. How did the market conditions, as described starting on page 4 of this report, affect the Fund's performance? The Fund's money managers maintained investment disciplines. The money managers' analysis of fundamentals frequently supported continued investment in companies they believed most likely to benefit from improving economic trends. Money managers often favored companies undergoing restructuring activity which they believed would lead to market recognition. Money managers increased exposure to Japan over the course of the year, moving from a modest underweight to a modest overweight. Investments in the markets of the Pacific region, particularly in Hong Kong-listed companies, were generally predicated on the expectation that recovering U.S. economic activity and strong growth in China would lead to earnings-driven gains in the Pacific region markets. The Fund's more momentum-driven money managers, whose strategies rely on positive (or negative) pricing trends as a signal of the market's increased (or decreased) interest in a stock, country or sector, rotated into several stocks and/or sectors experiencing positive pricing trends. However, frequent rotations in market leadership in response to new developments, including economic and political news, proved frustrating for momentum-driven decisions. This environment was not favorable for investment strategies relying on the persistence of price movements. This had a particularly negative affect on Oechsle's results during the year, but also negatively impacted the other money managers' results to a lesser degree. What were the primary contributors and detractors to the Fund's performance during the last 12 months? The Fund's emphasis on stocks with above-average forecasted long-term earnings growth and positive price momentum proved ineffective and detracted from Fund performance relative to benchmark. This was reflected in the Fund's limited effectiveness in stock selection, which accounted for most of the Fund's shortfall relative to the benchmark. However, sector and country allocations also contributed to the Fund's underperformance. From a sector perspective, an underweight to utilities and consumer staples stocks, and a modest overweight to the technology sector contributed to the underperformance relative to the benchmark. In addition, the Fund's overweight to more cyclical regions, Hong Kong and Japan in particular, and underweight to Australia and the United Kingdom were also detractors from performance. How did the investment strategies and techniques employed by the Fund and its money managers affect its performance? The Fund maintained a style-balanced profile over the period. This proved critical given the poor market climate for growth style investing. Growth stocks generally lagged value stocks during the year. The MSCI EAFE Value Index gained 24.88% in US dollars and the MSCI EAFE Growth Index gained 16.48% for the year ended December 31, 2004. Strategic constraints on the Fund's country and sector positioning limited the impact on Fund results. From a country perspective, underweight positions in Australia and Austria resulted in an opportunity cost given strong gains in these two markets. An overweight position in Germany also detracted from Fund performance given that market's weak performance. Overall sector positioning had a positive impact on performance. Describe any changes to the Fund's structure or the money manager line-up. The assignment for Oechsle International Advisors, LLC, one of the Fund's growth-oriented money managers, was changed in June from a moderate-risk investment strategy to a more concentrated, aggressive investment strategy. This change was made to attempt to capitalize on the strengths of Oechsle's research and to shift reliance for investment decision-making from a team of Oechsle's investment professionals to a single key individual. 34 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- - ---------------------------------------------------------- Money Managers as of December 31, 2004 Styles - ---------------------------------------------------------- AQR Capital Management, LLC Market-Oriented Fidelity Management & Research Company Market-Oriented Oechsle International Advisors, LLC Growth The Boston Company Asset Management, LLC Value ---------- * The Fund commenced operations on January 2, 1997. Index comparison began January 1, 1997. ** Morgan Stanley Capital International Europe, Australia, Far East (MSCI EAFE) Index is an index composed of an arithmetic, market value-weighted average of the performance of approximately 1,600 securities listed on the stock exchange of the countries of Europe, Australia, and the Far East. The index is calculated on a total-return basis, which includes reinvestment of gross dividends before deduction of withholding taxes. (S) Annualized. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results. Investments in securities of non-US issuers and foreign currencies involve investment risks different from those of US issuers. The Prospectus contains further information and details regarding these risks. Non-U.S. Fund 35 Russell Investment Funds Non-U.S. Fund Shareholder Expense Example -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Fund Expenses The following disclosure provides important information regarding each Fund's Expense Example, which appears on each Fund's individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund. Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2004 to December 31, 2004. Actual Expenses The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Performance Actual (5% return Performance before expenses) ----------- ---------------- Beginning Account Value July 1, 2004 $1,000.00 $1,000.00 Ending Account Value December 31, 2004 $1,133.40 $1,019.22 Expenses Paid During Period* $ 6.17 $ 5.84 * Expenses are equal to the Fund's annualized expense ratio of 1.15%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed by the investment adviser. Without the waiver and/or reimbursement, expenses would have been higher. 36 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Common Stocks - 92.7% Australia - 2.8% Amcor, Ltd. 96,322 555 AMP Ltd. 43,000 245 Ansell, Ltd. 100 1 Australia & New Zealand Banking Group, Ltd. 28,817 465 Australian Gas Light Co., Ltd. 1,800 19 AXA Asia Pacific Holdings, Ltd. 13,600 44 BHP Billiton, Ltd. 58,064 698 Billabong International, Ltd. (N) 10,100 91 BlueScope Steel, Ltd. 9,400 61 Boral, Ltd. 9,300 50 Brambles Industries, Ltd. 2,100 11 CFS Gandel Retail Trust 23,400 29 Coca-Cola Amatil, Ltd. 2,300 15 Coles Myer, Ltd. 6,800 53 Commonwealth Bank of Australia 8,400 211 Commonwealth Property Office Fund 18,200 18 ConnectEast Group (AE) 54,566 29 CSL, Ltd. 11,002 252 CSR, Ltd. 24,300 51 David Jones, Ltd. (N) 23,600 41 DB RREEF Trust 11,647 12 Foster's Group, Ltd. 76,743 348 Futuris Corp., Ltd. 6,700 11 General Property Trust 30,500 89 Iluka Resources, Ltd. 4,300 21 ING Industrial Fund 10,200 17 Insurance Australia Group, Ltd. 14,600 74 Lend Lease Corp., Ltd. 600 6 Lion Nathan, Ltd. 6,300 42 Macquarie Bank, Ltd. 6,400 233 Macquarie Goodman Industrial Trust 1,400 3 Macquarie Infrastructure Group 6,200 17 National Australia Bank, Ltd. 43,275 978 Newcrest Mining, Ltd. 100 1 OneSteel, Ltd. 20,900 42 Orica, Ltd. 3,600 57 Origin Energy, Ltd. 5,600 30 PaperlinX, Ltd. 26,500 98 Promina Group, Ltd. 68,188 289 Publishing & Broadcasting, Ltd. 6,720 92 QBE Insurance Group, Ltd. 27,835 335 Rinker Group, Ltd. 27,736 232 Rio Tinto, Ltd. 800 25 Santos, Ltd. 4,000 27 Sons of Gwalia, Ltd. (A) 8,400 -- Stockland 8,900 42 Suncorp-Metway, Ltd. 3,800 52 TABCORP Holdings, Ltd. 2,340 32 Telstra Corp., Ltd. 5,300 20 Wesfarmers, Ltd. 1,900 59 Westfield Group (AE)(N) 41,656 536 Westpac Banking Corp. 11,900 182 WMC Resources, Ltd. 29,100 165 Woodside Petroleum, Ltd. 2,100 33 Woolworths, Ltd. 3,300 39 ------ 7,178 ------ Belgium - 1.0% Belgacom SA (AE) 12,000 519 Colruyt SA 2,433 395 Compagnie Maritime Belge SA (N) 500 14 Delhaize Group 800 61 Dexia (N) 3,300 76 Electrabel (N) 107 48 Euronav NV (N) 600 16 Fortis 33,420 925 KBC Bancassurance Holding 1,000 77 Mobistar SA (AE) 3,800 356 Solvay SA Class A 500 55 Umicore 100 9 ------ 2,551 ------ Brazil - 0.3% Petroleo Brasileiro SA - ADR (N) 10,320 414 Telecomunicacoes Brasileiras SA - ADR (N) 12,400 399 ------ 813 ------ China - 0.5% China Petroleum & Chemical Corp. Class A 1,692,000 691 PetroChina Co., Ltd. 1,324,000 707 ZTE Corp. Class H 7,000 23 ------ 1,421 ------ Denmark - 0.6% AP Moller - Maersk A/S Class B 1 8 Danske Bank A/S 28,190 864 East Asiatic Co., Ltd. A/S 600 31 ISS A/S 2,900 162 Novo-Nordisk A/S Class B 8,484 464 Non-U.S. Fund 37 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- TDC A/S 1,500 64 William Demant Holding (AE) 400 19 ------ 1,612 ------ Finland - 1.1% Elisa Corp. Class S (AE) 600 10 Fortum OYJ 42,600 789 Kone OYJ Class B 200 16 M-real OYJ Class S 82,600 528 Nokia OYJ 26,700 422 Nokia OYJ - ADR (N) 20,408 322 Nokian Renkaat OYJ 200 30 Orion OYJ Class B 2,300 37 Sampo OYJ 4,800 66 Stora Enso OYJ Class R 300 5 UPM-Kymmene OYJ 26,369 586 ------ 2,811 ------ France - 9.5% Alcatel SA (AE) 100 2 AXA (N) 25,589 632 BNP Paribas (N) 30,084 2,180 Carrefour SA (N) 18,950 903 Christian Dior SA 3,300 224 Cie de Saint-Gobain (N) 4,700 283 CNP Assurances (N) 5,910 423 Credit Agricole SA 15,363 464 Eiffage 166 19 France Telecom SA 59,033 1,955 Groupe Danone 60 6 L'Oreal SA 13,677 1,038 Lafarge SA (N) 13,302 1,284 Lagardere S.C.A. (N) 12,557 906 Pernod-Ricard (N) 8,240 1,262 Peugeot SA (N) 5,700 362 Renault SA 800 67 Sanofi-Aventis 26,441 2,113 Schneider Electric SA (N) 10,290 716 Societe Assurances Generales de France 1,000 75 Societe BIC SA (N) 800 40 Societe Generale (N) 7,800 789 Suez SA (N) 9,800 261 Thomson (N) 22,471 594 Total SA (N) 16,121 3,521 Total SA - ADR 8,716 952 Valeo SA (N) 19,200 804 Vinci SA (N) 1,900 255 Vivendi Universal SA (AE) 73,565 2,349 Zodiac SA 1,200 56 ------ 24,535 ------ Germany - 5.2% Adidas-Salomon AG (N) 7,107 1,147 Allianz AG 8,300 1,101 AMB Generali Holding AG 300 24 BASF AG 2,600 187 Bayer AG 2,000 68 Bayerische Hypo-und Vereinsbank AG 2,400 54 Celesio AG 2,600 211 Commerzbank AG (AE) 3,300 68 Continental AG 9,900 629 DaimlerChrysler AG 2,600 125 Deutsche Bank AG 6,089 541 Deutsche Boerse AG 13,687 824 Deutsche Lufthansa AG 30,477 437 Deutsche Post AG 47,140 1,083 Deutsche Postbank AG 7,300 322 Deutsche Telekom AG (AE) 55,000 1,245 E.ON AG 17,693 1,613 Fresenius Medical Care AG 2,200 177 Hannover Rueckversicherung AG 2,500 98 Heidelberger Druckmaschinen (AE)(N) 10,000 340 Infineon Technologies AG (AE) 6,600 72 KarstadtQuelle AG (N) 31,888 329 MAN AG 7,700 297 Medion AG (N) 7,500 158 Merck KGaA 4,400 303 Metro AG (N) 1,700 93 MG Technologies AG (AE) 1,200 14 MLP AG (N) 600 12 Muenchener Rueckversicherungs AG 940 116 Puma AG Rudolf Dassler Sport 1,035 285 SAP AG 192 34 Schering AG 1,712 128 Siemens AG 4,100 348 ThyssenKrupp AG 3,000 66 TUI AG 8,800 208 Volkswagen AG (N) 17,300 784 ------ 13,541 ------ 38 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Greece - 0.4% Cosmote Mobile Telecommunications SA 17,100 342 EFG Eurobank Ergasias SA 11,700 402 OPAP SA 14,250 394 ------ 1,138 ------ Hong Kong - 1.2% Bank of East Asia, Ltd. 147,145 457 BOC Hong Kong Holdings, Ltd. (N) 22,000 42 Cathay Pacific Airways, Ltd. 12,000 23 Cheung Kong Holdings, Ltd. 29,000 290 China Mobile Hong Kong, Ltd. 141,000 478 Citic Pacific, Ltd. 39,500 112 CLP Holdings, Ltd. 35,500 204 Esprit Holdings, Ltd. 25,000 151 Giordano International, Ltd. 4,000 2 Hang Seng Bank, Ltd. 2,800 39 Henderson Land Development Co., Ltd. (N) 3,000 16 HongKong Electric Holdings 9,000 41 Hopewell Holdings 15,000 38 Hutchison Telecommunications International, Ltd. (AE) 20,000 18 Hutchison Whampoa, Ltd. 33,000 309 Kerry Properties, Ltd. 13,500 29 Li & Fung, Ltd. 42,000 71 MTR Corp. 18,500 30 New World Development, Ltd. 30,000 34 Orient Overseas International, Ltd. 8,000 30 PCCW, Ltd. 278,000 176 Shangri-La Asia, Ltd. (N) 14,000 21 Sino Land Co. 16,000 16 Sun Hung Kai Properties, Ltd. 5,000 50 Swire Pacific, Ltd. 26,000 217 Techtronic Industries Co. 43,000 94 Wharf Holdings, Ltd. 41,000 143 ------ 3,131 ------ Indonesia - 0.3% Telekomunikasi Indonesia Tbk PT - ADR 11,905 248 Telekomunikasi Indonesia Tbk PT 939,500 488 ------ 736 ------ Ireland - 0.7% Bank of Ireland 70,888 1,172 CRH PLC 23,200 621 ------ 1,793 ------ Italy - 5.0% Arnoldo Mondadori Editore SpA 6,200 72 Autostrade SpA 18,200 487 Banca Intesa SpA (N) 80,303 386 Banche Popolari Unite SCRL 18,583 378 Banco Popolare di Verona e Novara SCRL (AE) 29,370 597 Benetton Group SpA (N) 27,455 363 Enel SpA 110,317 1,084 ENI SpA (N) 169,427 4,242 Finmeccanica SpA 672,140 609 Fondiaria-Sai SpA (N) 7,600 205 Gruppo Editoriale L'Espresso SpA (N) 3,100 19 Hera SpA 18,300 53 Italcementi SpA (N) 9,300 150 Lottomatica SpA 1,800 66 Mediaset SpA 18,300 232 Milano Assicurazioni SpA 10,500 59 Parmalat Finanziaria SpA (AE) 12,500 2 Pirelli & C SpA 10,800 15 Riunione Adriatica di Sicurta SpA 15,562 352 Sanpaolo IMI SpA 11,905 171 Snam Rete Gas SpA 59,400 346 Telecom Italia Media SpA (AE)(N) 71,400 32 Telecom Italia SpA 501,245 1,864 UniCredito Italiano SpA 182,100 1,047 ------ 12,831 ------ Japan - 21.6% 77 Bank, Ltd. (The) 85,200 599 Acom Co., Ltd. 430 32 Aeon Co., Ltd. 13,100 219 Aiful Corp. 300 33 Aioi Insurance Co., Ltd. 15,000 69 Aisin Seiki Co., Ltd. 10,900 276 All Nippon Airways Co., Ltd. (N) 9,000 31 Alps Electric Co., Ltd. 26,900 401 Amano Corp. 2,000 20 Aoyama Trading Co., Ltd. 500 14 Arrk Corp. 2,700 111 Asahi Breweries, Ltd. (N) 4,500 56 Asahi Glass Co., Ltd. 37,000 408 Asahi Kasei Corp. 9,000 45 Non-U.S. Fund 39 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Autobacs Seven Co., Ltd. (N) 600 18 Bandai Visual Co., Ltd. 4 11 Bank of Fukuoka, Ltd. (The) 2,000 13 Bank of Yokohama, Ltd. (The) 11,000 69 Benesse Corp. 800 28 Bridgestone Corp. 14,000 279 Canon, Inc. 27,500 1,484 Central Glass Co., Ltd. 4,000 28 Chiba Bank, Ltd. (The) 11,000 74 Chubu Electric Power Co., Inc. 5,300 127 Citizen Watch Co., Ltd. 8,000 77 Cosmo Oil Co., Ltd. 15,000 44 Credit Saison Co., Ltd. 23,900 870 CSK Corp. 400 18 D&M Holdings, Inc. (AE) 20,000 49 Dai Nippon Printing Co., Ltd. 1,000 16 Daihatsu Motor Co., Ltd. 5,000 40 Daiichi Pharmaceutical Co., Ltd. 400 9 Daikin Industries, Ltd. 6,400 185 Daimaru, Inc. 6,000 49 Dainippon Ink and Chemicals, Inc. 2,000 5 Dainippon Pharmaceutical Co., Ltd. 1,000 10 Dainippon Screen Manufacturing Co., Ltd. 7,000 43 Daito Trust Construction Co., Ltd. 800 38 Daiwa House Industry Co., Ltd. 18,000 205 Daiwa Securities Group, Inc. 40,000 289 Dentsu, Inc. 163 439 Disco Corp. 100 5 Don Quijote Co., Ltd. (N) 2,400 122 eAccess, Ltd. (AE) 25 22 East Japan Railway Co. 72 401 Eisai Co., Ltd. 1,100 36 FamilyMart Co., Ltd. 1,000 29 Fast Retailing Co., Ltd. 3,100 236 Fuji Electric Holdings Co., Ltd. 4,000 11 Fuji Heavy Industries, Ltd. 80,400 392 Fuji Machine Manufacturing Co., Ltd. 4,800 47 Fuji Photo Film Co., Ltd. 19,100 697 Fujisawa Pharmaceutical Co., Ltd. 700 19 Fujitsu, Ltd. 48,000 312 Funai Electric Co., Ltd. 3,300 410 Global Media Online, Inc. 800 19 Hachijuni Bank, Ltd. (The) 2,000 14 Hankyu Department Stores 3,000 22 HIS Co., Ltd. 4,300 84 Hitachi Cable, Ltd. 16,000 75 Hitachi Chemical Co., Ltd. 2,900 52 Hitachi Kokusai Electric, Inc. 8,000 70 Hitachi Software Engineering Co., Ltd. 300 7 Hitachi Zosen Corp. (AE) 14,000 21 Hitachi, Ltd. 19,000 132 Hokkaido Electric Power Co., Inc. 1,300 26 Hokuhoku Financial Group, Inc. 38,000 104 Honda Motor Co., Ltd. 26,400 1,368 Hoya Corp. 2,100 237 Isuzu Motors, Ltd. (AE)(N) 19,000 56 Ito-Yokado Co., Ltd. 6,400 269 Itochu Corp. 16,000 74 Japan Radio Co., Ltd. (AE)(N) 12,000 46 Japan Tobacco, Inc. 18 206 JFE Holdings, Inc. 3,700 106 Joyo Bank, Ltd. (The) 8,000 39 Kadokawa Holdings, Inc. 4,800 199 Kamigumi Co., Ltd. (N) 14,000 112 Kaneka Corp. 13,000 147 Kansai Electric Power Co., Inc. (The) 9,300 189 Kao Corp. 24,000 614 Kawasaki Heavy Industries, Ltd. (N) 14,000 23 Kawasaki Kisen Kaisha, Ltd. 10,000 64 KDDI Corp. 172 927 Keihin Corp. 1,400 23 Keio Electric Railway Co., Ltd. 12,000 70 Keyence Corp. 600 134 Kobe Steel, Ltd. 5,000 8 Koei Co., Ltd. 3,400 85 Komatsu, Ltd. 3,000 21 Konica Minolta Holdings, Inc. 30,000 398 Kubota Corp. 14,000 69 Kuraray Co., Ltd. 44,700 401 Kyocera Corp. 1,600 123 Kyushu Electric Power Co., Inc. 4,000 81 Lawson, Inc. 12,600 465 Leopalace21 Corp. 500 9 Livedoor Co., Ltd. (AE) 1,243 5 Mabuchi Motor Co., Ltd. 8,300 599 Makita Corp. (N) 3,000 52 Mars Engineering Corp. 2,200 74 Marubeni Corp. 27,000 75 Matsumotokiyoshi Co., Ltd. 16,700 476 Matsushita Electric Industrial Co., Ltd. 35,000 555 MEDICEO Holdings Co., Ltd. (N) 500 6 Meiji Dairies Corp. 8,000 47 Meitec Corp. 2,500 93 Millea Holdings, Inc. 7 104 Minebea Co., Ltd. 119,000 519 Mitsubishi Chemical Corp. 21,000 64 Mitsubishi Corp. 4,700 61 40 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Mitsubishi Electric Corp. 14,000 69 Mitsubishi Estate Co., Ltd. 112,000 1,312 Mitsubishi Gas Chemical Co., Inc. 4,000 19 Mitsubishi Heavy Industries, Ltd. 22,000 62 Mitsubishi Materials Corp. 7,000 15 Mitsubishi Rayon Co., Ltd. 43,000 157 Mitsubishi Securities Co., Ltd. (N) 16,000 175 Mitsubishi Tokyo Financial Group, Inc. 160 1,624 Mitsui & Co., Ltd. 36,000 323 Mitsui Engineering & Shipbuilding Co., Ltd. 21,000 36 Mitsui Fudosan Co., Ltd. 25,000 304 Mitsui OSK Lines, Ltd. 16,000 96 Mitsui Sumitomo Insurance Co., Ltd. 8,000 69 Mitsui Trust Holdings, Inc. 12,000 120 Mizuho Financial Group, Inc. 149 750 Murata Manufacturing Co., Ltd. 8,400 470 Namco, Ltd. 2,000 26 NEC Corp. 33,000 205 NEC System Intergration & Construction, Ltd. 700 6 NET One Systems Co., Ltd. 43 179 Nichirei Corp. 1,000 4 Nidec Copal Corp. (N) 4,100 65 Nidec Corp. 1,200 146 Nikko Cordial Corp. 5,000 27 Nintendo Co., Ltd. 400 50 Nippon Electric Glass Co., Ltd. (N) 8,000 205 Nippon Express Co., Ltd. 184,600 910 Nippon Kayaku Co., Ltd. 1,000 6 Nippon Light Metal Co., Ltd. (N) 24,000 61 Nippon Mining Holdings, Inc. 3,000 14 Nippon Oil Corp. 32,000 205 Nippon Steel Corp. 109,000 267 Nippon Telegraph & Telephone Corp. 150 673 Nippon Yusen Kabushiki Kaisha 6,000 32 Nishi-Nippon City Bank, Ltd. (The) 39,000 150 Nissan Motor Co., Ltd. 13,300 145 Nissen Co., Ltd. 3,800 51 Nisshin Steel Co., Ltd. 26,000 60 Nisshinbo Industries, Inc. 2,000 15 Nitto Denko Corp. 7,200 395 NOK Corp. 6,900 216 Nomura Holdings, Inc. 11,000 160 NS Solutions Corp. 2,800 77 NSK, Ltd. 4,000 20 NTT DoCoMo, Inc. 46 85 Obayashi Corp. 3,000 19 OJI Paper Co., Ltd. 7,000 40 Olympus Corp. 20,900 446 Ono Pharmaceutical Co., Ltd. 400 22 ORIX Corp. 15,600 2,119 Parco Co., Ltd. 11,000 65 Promise Co., Ltd. 250 18 Rengo Co., Ltd. 2,000 9 Renown D'urban Holdings, Inc. (AE) 4,100 35 Resona Holdings, Inc. 14,000 28 Ricoh Co., Ltd. (N) 22,000 424 Rinnai Corp. 21,600 580 Rohm Co., Ltd. 6,900 714 Sanken Electric Co., Ltd. 10,000 131 Sankyo Co., Ltd. 7,400 220 Sanyo Electric Co., Ltd. 23,000 79 Sega Sammy Holdings, Inc. (AE) 784 43 Seino Transportation Co., Ltd. 5,000 47 Sekisui House, Ltd. 50,800 592 Senshukai Co., Ltd. 4,000 34 SFCG Co., Ltd. (N) 820 207 Shimachu Co., Ltd. 900 22 Shin-Etsu Chemical Co., Ltd. Class D 18,500 758 Shinko Electric Industries 2,900 89 Shiseido Co., Ltd. 24,900 361 Showa Shell Sekiyu KK 4,800 44 SKY Perfect Communications, Inc. 144 156 Skylark Co., Ltd. 31,700 545 SMC Corp. 1,300 149 Softbank Corp. 3,500 170 Sohgo Security Services Co., Ltd. 18,100 266 Sompo Japan Insurance, Inc. 9,000 92 Sony Corp. 4,300 166 Stanley Electric Co., Ltd. 10,600 182 STB Leasing Co., Ltd. 3,300 62 Sumisho Lease Co., Ltd. 5,500 224 Sumitomo Bakelite Co., Ltd. 68,900 435 Sumitomo Chemical Co., Ltd. 100,100 490 Sumitomo Corp. 21,000 181 Sumitomo Electric Industries, Ltd. 18,000 196 Sumitomo Forestry Co., Ltd. 16,000 161 Sumitomo Heavy Industries, Ltd. (AE) 24,000 89 Sumitomo Metal Industries, Ltd. 19,000 26 Sumitomo Mitsui Financial Group, Inc. (N) 217 1,578 Sumitomo Osaka Cement Co., Ltd. 50,000 122 Sumitomo Realty & Development Co., Ltd. 2,000 26 Sumitomo Rubber Industries, Inc. 11,000 103 Sumitomo Trust & Banking Co., Ltd. (The) 195,000 1,410 Non-U.S. Fund 41 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Suruga Bank, Ltd. 1,000 8 T&D Holdings, Inc. (AE) 8,050 385 Taiheiyo Cement Corp. 16,000 40 Takashimaya Co., Ltd. 1,000 10 Takeda Pharmaceutical Co., Ltd. 26,700 1,345 Takefuji Corp. 10,200 690 Tanabe Seiyaku Co., Ltd. 1,000 10 TDK Corp. 20,000 1,481 Telewave, Inc. 11 106 Terumo Corp. 900 24 Tobu Railway Co., Ltd. 5,000 19 Toda Corp. 4,000 20 Tohoku Electric Power Co., Inc. 2,400 43 Tokai Rika Co., Ltd. 3,000 52 Tokyo Electric Power Co., Inc. (The) 14,900 366 Tokyo Electron, Ltd. 12,600 776 Tokyo Gas Co., Ltd. 12,000 49 Toppan Printing Co., Ltd. 4,000 44 Toshiba Corp. 23,000 99 Tosoh Corp. 7,000 31 Toyo Seikan Kaisha, Ltd. 3,000 55 Toyoda Gosei Co., Ltd. 4,800 98 Toyota Motor Corp. 78,800 3,207 Toyota Tsusho Corp. 1,000 15 UFJ Holdings, Inc. 203 1,230 Uniden Corp. 7,000 138 UNY Co., Ltd. 1,000 11 USS Co., Ltd. 1,170 98 West Japan Railway Co. 16 65 World Co., Ltd. 600 21 Xebio Co., Ltd. 1,600 50 Yahoo! Japan Corp. (AE) 8 38 Yamaha Corp. 1,200 18 Yamaha Motor Co., Ltd. 47,400 711 Yamanouchi Pharmaceutical Co., Ltd. 3,800 148 Yamato Transport Co., Ltd. 41,000 608 Yokogawa Electric Corp. (N) 8,000 107 Yokohama Rubber Co., Ltd. (The) 1,000 4 York-Benimaru Co., Ltd. Class D 3,100 96 ------ 55,836 ------ Luxembourg - 0.0% Arcelor 400 9 Millicom International Cellular SA (AE) 4,700 105 ------ 114 ------ Mexico - 0.3% Coca-Cola Femsa SA de CV - ADR (N) 17,000 404 Telefonos de Mexico SA de CV - ADR (N) 10,550 405 ------ 809 ------ Morocco - 0.0% Maroc Telecom (AE) 3,371 39 ------ Netherlands - 3.7% ABN AMRO Holding NV 30,649 812 Aegon NV 51,184 698 Akzo Nobel NV 3,700 158 ASML Holding NV (AE) 57,332 920 Buhrmann NV 14,900 145 CSM Class A 900 28 DSM NV 5,100 330 European Aeronautic Defense and Space Co. 10,100 294 Heineken NV 21,668 722 ING Groep NV 44,120 1,335 Koninklijke Philips Electronics NV (N) 14,400 382 Koninklijke Philips Electronics NV 18,710 496 OCE NV 3,900 60 Rodamco Europe NV 3,100 246 Royal Dutch Petroleum Co. 20,100 1,157 Royal KPN NV 8,700 83 Royal Numico NV (AE) 31,500 1,136 TPG NV 200 5 Unilever NV 200 13 Wolters Kluwer NV 32,774 658 ------ 9,678 ------ New Zealand - 0.1% Carter Holt Harvey, Ltd. 140,900 211 Telecom Corp. of New Zealand, Ltd. 16,690 74 ------ 285 ------ Norway - 0.3% DNB NOR ASA 42,592 420 Norsk Hydro ASA 2,140 169 Yara International ASA (AE) 13,632 179 ------ 768 ------ Portugal - 0.1% Energias de Portugal SA 96,900 294 ------ 42 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Singapore - 1.0% CapitaLand, Ltd. (N) 25,000 33 City Developments, Ltd. 33,000 143 ComfortDelgro Corp., Ltd. 24,000 23 DBS Group Holdings, Ltd. 96,400 951 Fraser and Neave, Ltd. 5,000 50 Jardine Cycle & Carriage, Ltd. 6,000 39 Keppel Corp., Ltd. (N) 47,000 248 Keppel Land, Ltd. 7,000 10 NatSteel, Ltd. 10,000 13 Neptune Orient Lines, Ltd. 18,000 33 Oversea-Chinese Banking Corp. 2,000 16 Parkway Holdings, Ltd. 62,000 57 SembCorp Industries, Ltd. 23,000 23 Singapore Airlines, Ltd. 3,000 21 Singapore Press Holdings, Ltd. 19,000 53 Singapore Technologies Engineering, Ltd. 153,300 219 Singapore Telecommunications, Ltd. 24,790 36 SMRT Corp., Ltd. 3,000 2 Starhub, Ltd. (AE) 29,000 19 United Overseas Bank, Ltd. 57,200 484 United Overseas Land, Ltd. 2,000 2 ------ 2,475 ------ South Africa - 0.2% Nedcor, Ltd. 33,683 465 ------ South Korea - 0.7% Hyundai Motor Co. 14,560 781 Korea Electric Power Corp. - ADR (N) 31,800 412 KT Corp. - ADR (N) 20,200 440 POSCO - ADR (N) 2,450 111 ------ 1,744 ------ Spain - 4.2% ACS Actividades Cons y Serv 15,513 354 Altadis SA 35,000 1,603 Amadeus Global Travel Distribution SA Class A 22,300 230 Antena 3 de Television SA (AE) 300 22 Banco Sabadell SA 23,100 540 Banco Santander Central Hispano SA 41,600 516 Bankinter SA 2,100 112 Corp Mapfre SA 17,230 254 Endesa SA (N) 51,102 1,201 Fomento de Construcciones y Contratas SA 1,200 58 Gamesa Corp. Tecnologica SA 1,100 15 Iberia Lineas Aereas de Espana 44,700 155 Indra Sistemas SA 18,000 308 Repsol YPF SA 28,923 753 Repsol YPF SA - ADR (N) 28,739 748 Sociedad General de Aguas de Barcelona SA Class A 1,200 25 Sogecable SA (AE)(N) 9,400 417 Telefonica Moviles SA 300 4 Telefonica SA 189,886 3,577 Union Fenosa SA 4,400 116 ------ 11,008 ------ Sweden - 3.4% Atlas Copco AB Class A (N) 700 32 Axfood AB 700 24 Electrolux AB 30,860 706 Elekta AB Class B (AE) 1,600 46 Gambro AB Class A 3,000 43 Hennes & Mauritz AB Class B (N) 48,619 1,694 Lundin Petroleum AB (AE) 6,000 34 Nordea Bank AB (N) 18,500 186 OMX AB (AE)(N) 2,400 31 Sandvik AB 1,800 73 Skandia Forsakrings AB (N) 105,768 527 Skandinaviska Enskilda Banken AB Class A 5,800 112 Skanska AB Class B 5,100 61 Svenska Cellulosa AB Class B 1,300 55 Svenska Handelsbanken Class A (N) 68,735 1,789 Swedish Match AB 3,500 40 Tele2 AB Class B (N) 1,200 47 Telefonaktiebolaget LM Ericsson Class B (AE) 980,394 3,128 TeliaSonera AB 7,000 42 Volvo AB Class A 1,500 57 Class B 600 24 ------ 8,751 ------ Switzerland - 7.4% ABB, Ltd. (AE) 4,100 23 Clariant AG 27,205 439 Compagnie Financiere Richemont AG Class A 37,449 1,246 Credit Suisse Group 28,448 1,196 Georg Fischer AG (AE) 219 57 Non-U.S. Fund 43 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Givaudan 461 304 Julius Baer Holding AG Class B 1,520 457 Lonza Group AG 12,110 682 Micronas Semiconductor Hold (AE) 100 5 Nestle SA 6,791 1,777 Nobel Biocare Holding AG 300 54 Novartis AG Class G 61,317 3,090 PubliGroupe SA 77 24 Rieter Holding AG 111 32 Roche Holding AG 25,089 2,888 Straumann Holding AG 180 37 Sulzer AG 336 134 Swatch Group AG Class B 300 44 Swiss Reinsurance 10,960 782 Swisscom AG 460 181 Synthes, Inc. (AE) 4,116 461 UBS AG 54,733 4,590 Valora Holding AG 119 29 Xstrata PLC 8,600 154 Zurich Financial Services AG 2,762 460 ------ 19,146 ------ Taiwan - 0.7% First Financial Holding Co., Ltd. - GDR (AE)(p) 39,085 671 Taiwan Semiconductor Manufacturing Co., Ltd. - ADR 89,909 716 United Microelectronics Corp. - ADR (AE)(N) 137,144 444 ------ 1,831 ------ Thailand - 0.7% Bangkok Bank PCL (Alien Market) (AE) 296,200 869 Kasikornbank PCL (Alien Market) (AE) 586,300 845 ------ 1,714 ------ United Kingdom - 19.7% 3i Group PLC 73,580 941 Alliance & Leicester PLC 4,000 70 Alliance Unichem PLC 4,900 71 Anglo American PLC 36,283 858 Arriva PLC 7,000 73 Associated British Foods PLC 10,900 163 AstraZeneca PLC 12,260 445 Aviva PLC 46,400 559 AWG PLC 1,700 27 BAA PLC 62,300 699 BAE Systems PLC 193,977 858 Barclays PLC 133,235 1,499 Barratt Developments PLC 7,000 80 BG Group PLC 106,700 725 BHP Billiton PLC 26,300 308 BOC Group PLC 23,881 456 Boots Group PLC 54,025 680 BP PLC 403,554 3,936 Bradford & Bingley PLC 22,500 145 Brambles Industries PLC 32,100 160 British Airways PLC (AE) 23,900 108 British American Tobacco PLC 78,204 1,348 British Land Co. PLC 33,200 571 British Sky Broadcasting PLC 25,750 278 BT Group PLC 256,000 998 Bunzl PLC 73,371 612 Cairn Energy PLC (AE) 1,000 21 Carnival PLC 16,270 993 Centrica PLC 96,830 439 Colt Telecom Group PLC (AE) 2,600 2 Compass Group PLC 7,300 35 Corus Group PLC (AE) 112,308 109 Davis Service Group PLC 3,500 28 Diageo PLC 114,320 1,631 Dixons Group PLC 3,000 9 easyJet PLC (AE) 92,800 335 EMI Group PLC 26,700 136 Firstgroup PLC 500 3 FKI PLC 17,500 39 GKN PLC 185,950 844 GlaxoSmithKline PLC 117,235 2,750 HBOS PLC 74,399 1,211 HMV Group PLC 34,200 171 HSBC Holdings PLC 213,105 3,598 Imperial Chemical Industries PLC 35,200 163 Imperial Tobacco Group PLC 59,324 1,625 Inchcape PLC 5,100 191 ITV PLC 103,178 209 J Sainsbury PLC 101,277 526 Kelda Group PLC 6,900 84 Kesa Electricals PLC 51,304 278 Kingfisher PLC 42,444 252 Land Securities Group PLC 2,300 62 Legal & General Group PLC 7,500 16 Lloyds TSB Group PLC 112,030 1,017 Man Group PLC 17,160 485 Marks & Spencer Group PLC 70,900 467 MFI Furniture PLC 11,700 28 Mitchells & Butlers PLC 28,758 188 mmO2 PLC (AE) 24,300 57 44 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- MyTravel Group PLC (AE) 53,200 6 Northern Foods PLC 46,900 154 Old Mutual PLC 21,500 55 Pennon Group PLC 6,100 117 Persimmon PLC 4,500 60 Prudential PLC 40,366 351 Punch Taverns PLC 4,300 57 Reed Elsevier PLC 4,000 37 Reuters Group PLC 67,800 491 Rexam PLC 41,391 365 Rio Tinto PLC 31,724 934 Rolls-Royce Group PLC 1,146,589 168 Royal & Sun Alliance Insurance Group PLC 106,900 159 Royal Bank of Scotland Group PLC 52,045 1,751 SABMiller PLC 3,100 51 Scottish & Newcastle PLC 5,800 49 Scottish & Southern Energy PLC 32,100 538 Scottish Power PLC 18,400 142 Shell Transport & Trading Co. PLC 348,381 2,970 Shire Pharmaceuticals PLC 11,100 117 Stagecoach Group PLC 30,795 67 Standard Chartered PLC 18,500 344 Tate & Lyle PLC 20,300 184 Taylor Woodrow PLC 5,700 30 Tesco PLC 90,800 561 Trinity Mirror PLC 7,600 93 Unilever PLC 85,450 839 United Business Media PLC 11,961 110 United Utilities PLC 10,200 106 Vodafone Group PLC 1,910,631 5,181 Warner Chilcott PLC 1,600 26 Wimpey George PLC 15,900 122 ------- 50,905 ------- Total Common Stocks (cost $185,833) 239,953 ------- Preferred Stocks - 0.3% Germany - 0.3% Fresenius AG 4,900 459 Fresenius Medical Care AG 1,100 64 Porsche AG 2 1 ProSieben SAT.1 Media AG 8,623 158 ------- 682 ------- Italy - 0.0% Unipol SpA 12,600 44 ------- Total Preferred Stocks (cost $457) 726 ------- Notional Amount $ ---------- Options Purchased - 0.3% (Number of Contracts) Belgium - 0.2% Bel20 Index Futures Jan 2005 2,927.99 (EUR) Call (49) 3,900 675 ------- Switzerland - 0.1% Swiss Market Index Futures Mar 2005 5,622.30 (EUR) Put (52) 2,571 229 Mar 2005 5,658.00 (EUR) Put (4) 199 17 ------- 246 ------- Total Options Purchased (cost $890) 921 ------- Principal Amount ($) or Shares ---------- Short-Term Investments - 6.2% United States - 6.2% Frank Russell Investment Company Money Market Fund 13,352,000 13,352 United States Treasury Bill (z)(S) 1.770% due 01/20/05 (c) 1,500 1,498 1.840% due 03/17/05 1,200 1,193 ------- 16,043 ------- Total Short-Term Investments (cost $16,045) 16,043 ------- Non-U.S. Fund 45 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ ---------- -------- Warrants & Rights - 0.0% Germany - 0.0% KarstadtQuelle AG Rights (AE)(A) 25,000 -- ------- Hong Kong - 0.0% Kingboard Chemical Holdings, Ltd. 2006 Warrants (AE) 1,000 1 ------- Total Warrants & Rights (cost $103) 1 ------- Other Securities - 8.0% State Street Securities Lending Quality Trust (X) 20,647,080 20,647 ------- Total Other Securities (cost $20,647) 20,647 ------- Total Investments - 107.5% (identified cost $223,975) 278,291 Other Assets and Liabilities, Net - (7.5%) (19,525) ------- Net Assets - 100.0% 258,766 ======= Unrealized Notional Appreciation Futures Contracts Amount (Depreciation) (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Long Positions AEX Index (Netherlands) expiration date 01/05 (24) 2,272 11 CAC-40 Index (France) expiration date 03/05 (28) 1,457 (7) DAX Index (Germany) expiration date 03/05 (14) 2,032 10 EUR STOXX 50 Index (EMU) expiration date 03/05 (66) 2,645 8 FTSE-100 Index (UK) expiration date 03/05 (37) 3,408 39 Hang Seng Index (Hong Kong) expiration date 01/05 (31) 2,836 -- IBEX Plus Indes (Spain) expiration date 01/05 (4) 492 9 SPI 200 Index (Australia) expiration date 03/05 (13) 1,033 12 TOPIX Index (Japan) expiration date 03/05 (36) 4,031 184 Short Positions CAC-40 Index (France) expiration date 01/05 (17) 882 -- FTSE-100 Index (UK) expiration date 03/05 (20) 1,842 (27) MIB-30 (Italy) expiration date 03/05 (4) 839 (9) --- Total Unrealized Appreciation (Depreciation) on Open Futures Contracts 230 === See accompanying notes which are an integral part of the financial statements. 46 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Notional Market Options Written Amount Value (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Belgium Bel20 Index Futures Jan 2005 2,927.99 (EUR) Put (49) 3,900 (666) Switzerland Swiss Market Index Futures Mar 2005 5,658.00 (EUR) Call (4) 199 (18) Mar 2005 5,622.30 (EUR) Call (52) 2,571 (256) ---- Total Liability for Options Written (premiums received $888) (940) ==== See accompanying notes which are an integral part of the financial statements. Non-U.S. Fund 47 Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Foreign Currency Exchange Contracts - ----------------------------------------------------------- Unrealized Appreciation Amount Amount Settlement (Depreciation) Sold Bought Date $ - ------------- ------------- ---------- -------------- USD 2,030 AUD 2,719 03/16/05 90 USD 226 CHF 256 01/03/05 -- USD 966 CHF 1,116 03/16/05 20 USD 58 DKK 325 03/16/05 2 USD 265 EUR 200 03/16/05 7 USD 530 EUR 400 03/16/05 14 USD 1,160 EUR 874 03/16/05 29 USD 9,320 EUR 7,038 03/16/05 253 USD 1,609 GBP 837 03/16/05 (10) USD 1,842 GBP 958 03/16/05 (11) USD 3,618 GBP 1,900 03/16/05 12 USD 572 GBP 300 03/16/05 2 USD 6,430 GBP 3,377 03/16/05 22 USD 26 HKD 203 01/03/05 -- USD 27 HKD 210 01/04/05 -- USD 38 HKD 297 03/16/05 -- USD 26 HKD 202 03/16/05 -- USD 2 JPY 231 01/04/05 -- USD 2 JPY 244 01/04/05 -- USD 3 JPY 280 01/04/05 -- USD 3 JPY 283 01/04/05 -- USD 6 JPY 616 01/04/05 -- USD 9 JPY 892 01/04/05 -- USD 3 JPY 285 01/05/05 -- USD 2 JPY 232 01/05/05 -- USD 6 JPY 620 01/05/05 -- USD 9 JPY 887 01/05/05 -- USD 19 JPY 1,953 01/05/05 -- USD 6 JPY 627 01/06/05 -- USD 2 JPY 233 01/06/05 -- USD 29 JPY 2,978 01/06/05 -- USD 1 JPY 112 01/06/05 -- USD 3 JPY 287 01/06/05 -- USD 4,305 JPY 450,000 03/16/05 110 USD 481 JPY 50,000 03/16/05 10 USD 958 JPY 100,000 03/16/05 23 USD 71 NOK 433 01/04/05 -- USD 475 NZD 680 03/16/05 12 USD 705 NZD 1,001 03/16/05 12 USD 932 SEK 6,314 03/16/05 19 AUD 3,044 USD 2,291 03/16/05 (82) CHF 1,852 USD 1,606 03/16/05 (29) DKK 31 USD 6 01/05/05 -- DKK 33 USD 6 03/16/05 -- EUR 2,000 USD 2,649 03/16/05 (71) EUR 2,288 USD 3,029 03/16/05 (83) EUR 4,407 USD 5,836 03/16/05 (159) GBP 400 USD 762 03/16/05 (3) GBP 600 USD 1,151 03/16/05 5 JPY 183 USD 2 01/04/05 -- JPY 320 USD 3 01/04/05 -- JPY 783 USD 8 01/04/05 -- JPY 1,045 USD 10 01/04/05 -- JPY 1,386 USD 13 01/04/05 -- JPY 1,515 USD 15 01/04/05 -- JPY 93 USD 1 01/05/05 -- JPY 6,005 USD 58 01/05/05 (1) JPY 93 USD 1 01/06/05 -- JPY 2,251 USD 22 01/06/05 -- JPY 23,060 USD 221 03/16/05 (5) JPY 53,857 USD 515 03/16/05 (13) JPY 100,000 USD 957 03/16/05 (24) JPY 200,000 USD 1,919 03/16/05 (43) SEK 4,619 USD 682 03/16/05 (14) SEK 9,250 USD 1,365 03/16/05 (29) SGD 280 USD 170 03/16/05 (2) ---- 63 ==== See accompanying notes which are an integral part of the financial statements. 48 Non-U.S. Fund Russell Investment Funds Non-U.S. Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands % of Market Industry Diversification Net Value (Unaudited) Assets $ - -------------------------------------------------------------------------------- Auto and Transportation 6.6 17,454 Consumer Discretionary 10.5 27,043 Consumer Staples 6.8 17,595 Financial Services 24.9 64,298 Health Care 6.4 16,304 Integrated Oils 8.1 20,985 Materials and Processing 8.3 21,489 Miscellaneous 0.4 1,043 Options Purchased 0.3 921 Other Energy 0.2 453 Producer Durables 5.9 15,368 Technology 3.1 8,063 Utilities 11.8 30,584 Short-Term Investments 6.2 16,043 Warrants & Rights -- 1 Other Securities 8.0 20,647 ----- ------- Total Investments 107.5 278,291 Other Assets and Liabilities, Net (7.5) (19,525) ----- ------- Net Assets 100.0 258,766 ===== ======= % of Market Geographic Diversification Net Value (Unaudited) Assets $ - -------------------------------------------------------------------------------- Africa 0.2 465 Asia 7.9 20,515 Europe 43.0 111,297 Japan 21.6 55,836 Latin America 0.6 1,621 Middle East -- 39 Options Purchased 0.3 921 United Kingdom 19.7 50,906 Short-Term Investments 6.2 16,043 Warrants & Rights -- 1 Other Securities 8.0 20,647 ----- ------- Total Investments 107.5 278,291 Other Assets and Liabilities, Net (7.5) (19,525) ----- ------- Net Assets 100.0 258,766 ===== ======= % of Portfolio Summary Net (Unaudited) Assets - -------------------------------------------------------------------------------- Australia 2.8 Belgium 1.0 Brazil 0.3 China 0.5 Denmark 0.6 Finland 1.1 France 9.5 Germany 5.2 Greece 0.4 Hong Kong 1.2 Indonesia 0.3 Ireland 0.7 Italy 5.0 Japan 21.6 Luxembourg --* Mexico 0.3 Morocco --* Netherlands 3.7 New Zealand 0.1 Norway 0.3 Portugal 0.1 Singapore 1.0 South Africa 0.2 South Korea 0.7 Spain 4.2 Sweden 3.4 Switzerland 7.4 Taiwan 0.7 Thailand 0.7 United Kingdom 19.7 Preferred Stocks 0.3 Options Purchased 0.3 Short-Term Investments 6.2 Warrants & Rights --* Other Securities 8.0 ------ Total Investments 107.5 Other Assets and Liabilities, Net (7.5) ----- Net Assets 100.0 ===== Futures Contracts 0.1 Options Written 0.4 Foreign Currency Exchange Contracts --* * Less than .05% See accompanying notes which are an integral part of the financial statements. Non-U.S. Fund 49 Russell Investment Funds Real Estate Securities Fund Portfolio Management Discussion -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - -------------------------------------- Real Estate Securities Fund - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ------ 1 Year $13,487 34.88% 5 Years $26,358 21.36% Inception $24,444 17.02%(S) - -------------------------------------- NAREIT Equity REIT Index - -------------------------------------- Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- ------ 1 Year $13,157 31.57% 5 Years $26,967 21.95% Inception $24,682 17.29%(S) 50 Real Estate Securities Fund Russell Investment Funds Real Estate Securities Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- What is the Fund's investment objective? The Fund seeks to provide current income and long term capital growth. How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2004? For the fiscal year ended December 31, 2004, the Real Estate Securities Fund gained 34.88%. This compared to the NAREIT Equity REIT Index, which gained 31.57% during the same period. The Fund's performance is net of operating expenses of 0.92%. Index returns do not reflect deduction for fees or expenses. Index returns do not include fair valuation adjustments which may be included in fund returns. How did the market conditions, as described starting on page 4 of this report, affect the Fund's performance? The money managers positioned the Fund to benefit from perceived strengthening economic conditions and real estate market recoveries by maintaining the largest overweight positions in the regional malls, industrial and lodging sectors. The money managers maintained smaller overweight positions in the office and apartments sectors due to concerns about weaker fundamentals in these sectors. As more fully described below, sector positioning was a major contributor to the Fund's performance during the year. The Fund maintained a primary focus on larger capitalization and more liquid REITs during the year. As this segment of the market outperformed the broader REIT market, the Fund benefited from this trend. What were the primary contributors and detractors to the Fund's performance during the last 12 months? Both stock and property sector selection contributed positively to performance during the year relative to benchmark. The Fund maintained its largest overweight positions in the regional malls, industrial and lodging sectors, each of which outperformed the benchmark during the year. The Fund also benefited from a small overweight position in the apartments sector. Underweight positions in the manufactured homes, self storage, health care and specialty sectors contributed positively to performance relative to benchmark. The Fund's slight overweight position in the office sector and underweight positions in the shopping centers and diversified sectors detracted from performance. How did the investment strategies and techniques employed by the Fund and its money managers affect its performance? INVESCO maintains a broadly diversified portfolio with exposure to all major property sectors. Their investment style incorporates fundamental property market research and bottom-up quantitative securities analysis. Of the Fund's three managers, INVESCO contributed the strongest performance relative to benchmark. INVESCO's performance benefited from effective sector positioning and positive stock selection within sectors. INVESCO's largest overweight position was in the regional malls sector, which was the strongest performing property sector during the year. Their stock selection was particularly strong in the office sector. RREEF's style emphasizes a top-down approach to property sector weights, based on an assessment of property market fundamentals. RREEF outperformed the benchmark during the year due to positive stock and property sector selection. RREEF's analysis of property market conditions resulted in an overweight position in the outperforming regional malls sector and an underweight position in the underperforming office sector which contributed positively to Fund performance relative to benchmark. AEW's style is more value-oriented than either INVESCO or RREEF, with a primary focus on underlying real estate net asset value. AEW's property sector weightings tend to track relatively closely to the benchmark sector weights. AEW outperformed the benchmark during the year, primarily due to positive stock selection. Describe any changes to the Fund's structure or the money manager line-up. No changes to the Fund's structure or its money manager line-up were made during the year. Money Managers as of December 31, 2004 Styles - ---------------------------------------------------------------- AEW Management and Advisors, L.P. Value INVESCO Institutional (N.A.), Inc., which acts as a money manager to the Fund through its INVESCO Real Estate division Market-Oriented RREEF America L.L.C. Market-Oriented ---------- * Real Estate Securities Fund assumes initial investment on April 30, 1999, NAREIT Index comparison for the initial investment began May 1, 1999. ** National Association of Real Estate Investment Trusts (NAREIT) Equity REIT Index is an index composed of all the data based on the last closing price of the month for all tax-qualified REITs listed on the New York Stock Exchange, American Stock Exchange, and the NASDAQ National Market System. The data is market value-weighted. The total-return calculation is based upon whether it is 1-month, 3-months or 12-months. Only those REITs listed for the entire period are used in the total return calculation. (S) Annualized. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results. Real Estate Securities Fund 51 Russell Investment Funds Real Estate Securities Fund Shareholder Expense Example -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Fund Expenses The following disclosure provides important information regarding each Fund's Expense Example, which appears on each Fund's individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund. Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2004 to December 31, 2004. Actual Expenses The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Performance Actual (5% return Performance before expenses) ----------- ---------------- Beginning Account Value July 1, 2004 $1,000.00 $1,000.00 Ending Account Value December 31, 2004 $1,263.50 $1,020.37 Expenses Paid During Period* $ 5.23 $ 4.67 * Expenses are equal to the Fund's annualized expense ratio of 0.92%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed by the investment adviser. Without the waiver and/or reimbursement, expenses would have been higher. 52 Real Estate Securities Fund Russell Investment Funds Real Estate Securities Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Common Stocks - 96.8% Apartments - 16.7% Apartment Investment & Management Co. Class A 162,900 6,278 Archstone-Smith Trust (o) 270,017 10,342 AvalonBay Communities, Inc. (o) 191,400 14,412 BRE Properties Class A (o) 116,900 4,712 Camden Property Trust (o) 47,900 2,443 Equity Residential (o) 490,300 17,739 Essex Property Trust, Inc. (o) 40,700 3,411 Summit Properties, Inc. (o) 16,500 537 United Dominion Realty Trust, Inc. (o) 147,200 3,651 ------ 63,525 ------ Diversified - 2.9% Crescent Real Estate Equities Co. (o) 22,612 413 iStar Financial, Inc. (o) 30,500 1,381 Spirit Finance Corp. (AE)(o) 12,600 159 Vornado Realty Trust (o) 119,600 9,105 ------ 11,058 ------ Free Standing Retail - 0.2% Realty Income Corp. (o) 13,000 657 ------ Health Care - 3.0% Health Care REIT, Inc. (o) 4,300 164 Healthcare Realty Trust, Inc. (o) 47,500 1,933 National Health Investors, Inc. (o) 43,000 1,255 Omega Healthcare Investors, Inc. (o) 140,195 1,654 Senior Housing Properties Trust (o) 128,500 2,434 Ventas, Inc. (o) 138,900 3,807 ------ 11,247 ------ Industrial - 10.1% AMB Property Corp. (o) 68,700 2,775 Catellus Development Corp. (o) 347,266 10,626 Centerpoint Properties Trust (o) 81,900 3,922 First Potomac Realty Trust (o) 17,000 388 Prologis (o) 475,300 20,594 ------ 38,305 ------ Lodging/Resorts - 11.1% Fairmont Hotels & Resorts, Inc. 21,200 734 Great Wolf Resorts, Inc. (AE) 10,900 243 Hilton Hotels Corp. 560,400 12,743 Hospitality Properties Trust (o) 16,500 759 Host Marriott Corp. (o) 698,300 12,081 Innkeepers USA Trust (o) 38,000 540 La Quinta Corp. (AE)(o) 201,600 1,833 LaSalle Hotel Properties (o) 38,900 1,238 Starwood Hotels & Resorts Worldwide, Inc. (o) 198,332 11,583 Strategic Hotel Capital, Inc. (o) 28,900 477 ------ 42,231 ------ Manufactured Homes - 0.1% Sun Communities, Inc. (o) 10,500 423 ------ Mixed Industrial/Office - 3.2% Duke Realty Corp. (o) 87,200 2,977 Liberty Property Trust (o) 179,800 7,767 PS Business Parks, Inc. (o) 27,500 1,240 ------ 11,984 ------ Office - 19.0% Alexandria Real Estate Equities, Inc. (o) 26,000 1,935 American Financial Realty Trust (o) 352,800 5,708 Arden Realty, Inc. (o) 96,100 3,625 BioMed Realty Trust, Inc. (o) 82,300 1,828 Boston Properties, Inc. (o) 190,800 12,339 Brandywine Realty Trust (o) 34,900 1,026 Brookfield Properties Co. 177,400 6,635 CarrAmerica Realty Corp. (o) 47,200 1,558 Corporate Office Properties Trust (o)(N) 21,500 631 CRT Properties, Inc. (o) 52,900 1,262 Equity Office Properties Trust (o) 212,700 6,194 Glenborough Realty Trust, Inc. (o) 53,700 1,143 Highwoods Properties, Inc. (o) 163,700 4,534 Kilroy Realty Corp. (o) 81,700 3,493 Mack-Cali Realty Corp. (o) 193,821 8,921 Prentiss Properties Trust (o) 53,000 2,025 Reckson Associates Realty Corp. (o) 55,500 1,821 SL Green Realty Corp. (o) 78,800 4,771 Trizec Properties, Inc. (o) 142,000 2,687 ------ 72,136 ------ Regional Malls - 16.1% General Growth Properties Rights, 11/9 (AE) 22,080 10 General Growth Properties, Inc. (o) 337,600 12,208 Macerich Co. (The) (o) 122,000 7,661 Mills Corp. (The) (o) 107,400 6,848 Pennsylvania Real Estate Investment Trust (o) 76,347 3,268 Simon Property Group, Inc. (o) 444,400 28,739 Taubman Centers, Inc. (o) 78,000 2,336 ------ 61,070 ------ Real Estate Securities Fund 53 Russell Investment Funds Real Estate Securities Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Self Storage - 2.1% Extra Space Storage, Inc. (o) 25,300 337 Public Storage, Inc. (o) 99,075 5,524 Shurgard Storage Centers, Inc. Class A (o) 47,200 2,077 ------- 7,938 ------- Shopping Centers - 10.5% Developers Diversified Realty Corp. (o) 198,300 8,799 Federal Realty Investors Trust (o) 144,100 7,443 Inland Real Estate Corp. (o) 122,800 1,959 Kimco Realty Corp. (o) 38,500 2,233 Kite Realty Group Trust (o) 73,100 1,117 Pan Pacific Retail Properties, Inc. (o) 105,000 6,583 Regency Centers Corp. (o) 215,100 11,916 ------- 40,050 ------- Specialty - 1.8% Capital Automotive REIT (o) 46,200 1,641 GMH Communities Trust (o) 60,000 846 Plum Creek Timber Co., Inc. (REIT) (o) 113,500 4,363 ------- 6,850 ------- Total Common Stocks (cost $248,692) 367,474 ------- Short-Term Investments - 4.9% Frank Russell Investment Company Money Market Fund 18,622,000 18,622 ------- Total Short-Term Investments (cost $18,622) 18,622 ------- Other Securities - 0.0% State Street Securities Lending Quality Trust (X) 2,925 3 ------- Total Other Securities (cost $3) 3 ------- Total Investments - 101.7% (identified cost $267,317) 386,099 Other Assets and Liabilities, Net - (1.7%) (6,366) ------- Net Assets - 100.0% 379,733 ======= % of Portfolio Summary Net (Unaudited) Assets - -------------------------------------------------------------------------------- Apartment 16.7 Diversified 2.9 Freestanding Retail 0.2 Health Care 3.0 Industrial 10.1 Lodging/Resorts 11.1 Manufactured Homes 0.1 Mixed Industrial/Office 3.2 Office 19.0 Regional Malls 16.1 Self Storage 2.1 Shopping Centers 10.5 Specialty 1.8 Short-Term Investments 4.9 Other Securities --* ----- Total Investments 101.7 Other Assets and Liabilities, Net (1.7) ----- Net Assets 100.0 ===== * Less than .05% See accompanying notes which are an integral part of the financial statements. 54 Real Estate Securities Fund Russell Investment Funds Core Bond Fund Portfolio Management Discussion -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] - ------------------------------------ Core Bond Fund - ------------------------------------ Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- -------- 1 Year $10,466 4.66% 5 Years $14,286 7.39%(S) Inception $16,731 6.65%(S) - ------------------------------------ Lehman Brothers Aggregate Bond Index - ------------------------------------ Periods Ended Growth of Total 12/31/04 $10,000 Return - ------------- --------- -------- 1 Year $10,434 4.34% 5 Years $14,497 7.71%(S) Inception $17,136 6.96%(S) Core Bond Fund 55 Russell Investment Funds Core Bond Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- What is the Fund's investment objective? The Fund seeks to provide current income and the preservation of capital. How did the Fund perform relative to its benchmark for the fiscal year ended December 31, 2004? For the fiscal year ended December 31, 2004, the Core Bond Fund gained 4.66%. This compared to its benchmark, the Lehman Brothers Aggregate Bond Index, which gained 4.34%. The Fund's performance is net of operating expenses of 0.70%. Index returns do not reflect deduction for fees or expenses. Index returns do not include fair valuation adjustments which may be included in fund returns. How did the market conditions, as described starting on page 4 of this report, affect the Fund's performance? Over the course of the year, short-term interest rates increased due to tightening by the Federal Reserve and interest rates on bonds with maturities of 10 years or longer remained relatively unchanged. This resulted in nominal returns for the year being similar to yields. For the second year in a row, the best performing sector within the Lehman Brothers Aggregate Bond Index was the investment grade corporate sector. This sector benefited from better economic growth making it easier for corporate issuers to pay down debt. The Fund had a slight overweight to the investment grade corporate bond sector at the beginning of the year which contributed positively to performance. However, as prices of investment grade corporate bonds increased, money managers sold these bonds resulting in an underweight in this sector for most of 2004. The Fund was overweight to the high yield bond sector for much of the year. After posting a 29.0% return in 2003, the high yield bond market, as represented by the Lehman Brothers High Yield Index, rose 11.13% in 2004. The Fund started the year with a 6% allocation to high yield bonds. As prices of high yield bonds rose, money managers sold these bonds and took profits and the Fund ended the year with a 2.5% allocation to high yield bonds. The high yield bonds owned by the Fund were of higher average quality than the total high yield market, averaging BB. The emerging market debt sector had returns similar to that of the high yield bond sector. The Fund's exposure to the emerging markets debt sector declined from 1.7% to 1.3% over the year. What were the primary contributors and detractors to the Fund's performance during the last 12 months? Overweight positions in the high yield bond and emerging markets debt sector contributed positively to performance relative to the benchmark. Investment in short duration fixed income securities decreased the Fund's total return relative to benchmark. Certain of the Fund's money managers, expecting that interest rates would rise uniformly across maturities, held overweight positions in shorter maturity bonds which are less sensitive to a rise in interest rates. However, as the yield curve flattened as short term interest rates rose, bonds with longer maturities increased in price, while bonds with shorter maturities fell in price. A tactical allocation to Treasury Inflation Protected Securities (TIPS) contributed positively to performance relative to benchmark. Over the year, higher commodity prices led to expectations of higher inflation. TIPS provide higher yields in an inflationary environment. As a result, TIPS generally outperformed Treasury bonds during the year. The Fund held a 5% to 6% weighting to TIPS over the year. How did the investment strategies and techniques employed by the Fund and its money managers affect its performance? Generally, investors were rewarded for owning riskier bonds over the last 12 months. During the Fund's fiscal year ended December 31, 2004, investors' bid-up prices on high yield bonds, investment grade corporate bonds and emerging markets debt. As the prices of the Fund's holdings in high yield bonds, investment grade corporate bonds and emerging market debt increased, the Fund's money managers considered the possibility of a market sell-off in these fixed income sectors. As a result of very little yield compensation for holding bonds in these riskier sectors, the Fund's money managers reduced the Fund's portfolio weighting to these sectors by reducing the Fund's exposure to the high yield bond, investment grade corporate bond and emerging markets debt sectors and moved to higher quality fixed income instruments that they felt were less susceptible to a market sell-off. As expected, interest rates impacted the fixed income markets during 2004. The interest rate environment was quite volatile. Although the yield on the ten year U.S. Treasury Bond started and ended at close to the same level, 4.25% and 4.22%, respectively, ten year U.S. Treasury Bond yields ranged from 3.68% to 4.87%. As rates fell to new lows in March, the Fund's money managers moved to a more defensive position by selling bonds with longer maturities which are more sensitive to rising rates. This positioned the Fund's money managers to benefit from the rise in interest rates in April as measured by ten-year U.S. Treasury Bond yields moving up to over 4.87% in June. Despite opportunistic positioning of the Fund during volatile periods, the Fund's defensive position throughout much of the year detracted slightly from results. As the year ended, the Fund's money managers continued to hold defensive portfolios with respect to interest rates (i.e. shorter duration in the expectation of rising interest rates), with an average duration of 4.0 years, slightly below the 4.3 year average duration of the Lehman Brothers U.S. Aggregate Index. 56 Core Bond Fund Russell Investment Funds Core Bond Fund Portfolio Management Discussion, continued -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Describe any changes to the Fund's structure or the money manager line-up. No changes were made to the Fund's money manager lineup during the fiscal year ended December 31, 2004. However, one of the Fund's money managers, TimesSquare Capital Management, Inc. ("TimesSquare"), underwent an internal organizational change that resulted in its parent company exiting the institutional asset management business. TimesSquare's fixed income managers moved to Bear Stearns Asset Management Inc. ("Bear Stearns") as a result of its purchase of TimesSquare. There is no impact on the Fund, and the allocation to this manager remains the same. Money Managers as of December 31, 2004 Styles - ----------------------------------------------------------- Bear Stearns Asset Management Inc. Sector Rotation Pacific Investment Management Company LLC Sector Rotation ---------- * The Fund commenced operations on January 2, 1997. Index comparison began January 1, 1997. ** Lehman Brothers Aggregate Bond Index is composed of securities from Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization. (S) Annualized. Performance is historical and assumes reinvestment of all dividends and capital gains. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than when purchased. Past performance is not indicative of future results. Core Bond Fund 57 Russell Investment Funds Core Bond Fund Shareholder Expense Example -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Fund Expenses The following disclosure provides important information regarding each Fund's Expense Example, which appears on each Fund's individual page in this Annual Report. Please refer to this information when reviewing the Expense Example for a Fund. Example As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including management fees; and other Fund expenses. The Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period indicated, which for this Fund is from July 1, 2004 to December 31, 2004. Actual Expenses The information in the table under the heading "Actual Performance" provides information about actual account values and actual expenses. You may use the information in this column, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first column in the row entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information in the table under the heading "Hypothetical Performance (5% return before expenses)" provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the information under the heading "Hypothetical Performance (5% return before expenses)" is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Hypothetical Performance Actual (5% return Performance before expenses) ----------- ---------------- Beginning Account Value July 1, 2004 $1,000.00 $1,000.00 Ending Account Value December 31, 2004 $1,043.00 $1,021.48 Expenses Paid During Period* $ 3.59 $ 3.56 * Expenses are equal to the Fund's annualized expense ratio of 0.70%, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period). Reflects amounts waived and/or reimbursed by the investment adviser. Without the waiver and/or reimbursement, expenses would have been higher. 58 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Long-Term Investments - 74.4% Asset-Backed Securities - 6.4% American Airlines, Inc. 7.858% due 10/01/11 140 145 Argent Securities, Inc. (E) Series 2004-W11, Class A2 2.598% due 11/25/34 279 279 Centex Home Equity (E) Series 2004-B, Class AV2 2.518% due 03/25/34 208 208 Citifinancial Mortgage Securities, Inc. Series 2003-3, Class AF2 3.082% due 08/25/33 75 75 Series 2003-4, Class AF3 3.221% due 10/25/33 75 75 Countrywide Asset-Backed Certificates (E) Series 2004-10, Class AF2 3.323% due 05/25/22 190 188 Series 2004-13, Class AF2 3.683% due 08/25/24 140 139 Series 2004-6, Class 2A1 2.608% due 10/25/21 388 388 Series 2004-7, Class AF2 3.324% due 12/25/23 275 273 Series 2004-7, Class 2AV1 2.568% due 12/25/22 100 100 Credit-Based Asset Servicing and Securitization (E) Series 2004-CB5, Class AV1 2.548% due 09/25/21 448 448 Series 2004-CB3, Class AV2 2.528% due 03/25/34 116 116 Equity One ABS, Inc. (E) Series 2004-2, Class AF1 2.528% due 07/25/34 473 473 Fannie Mae Series 1992-10, Class ZD 8.000% due 11/25/21 722 753 GMAC Mortgage Corp. Loan Trust Series 2004-HE5, Class A3 3.970% due 09/25/34 320 315 GSAMP Trust (E) Series 2004-SEA, Class A2A 2.708% due 03/25/34 314 314 Home Equity Mortgage Trust (E) Series 2004-4, Class A2 2.568% due 12/25/34 377 377 Long Beach Mortgage Loan Trust (E) Series 2003-1, Class A2 2.818% due 03/25/33 146 147 Series 2004-A, Class A 2.568% due 02/25/24 263 263 Nelnet Student Loan Trust (E) Series 2004-4, Class A1 2.017% due 04/25/11 300 300 Park Place Securities, Inc. (E) Series 2004-WCW, Class A6 2.568% due 10/25/34 472 472 Parker Hannifin Employee Stock Ownership Trust (p) 6.340% due 07/15/08 217 227 Renaissance Home Equity Loan Trust (E) Series 2004-2, Class AF1 2.618% due 07/25/34 660 660 Residential Asset Mortgage Products, Inc. Series 2004-RS1, Class AI2 3.620% due 07/25/26 135 134 Series 2004-RS4, Class AI3 4.003% due 01/25/30 205 206 Series 2004-RS6, Class AI3 4.540% due 08/25/28 165 167 Series 2004-RS7, Class AI3 4.450% due 07/25/28 355 359 Series 2004-RS8, Class AI2 3.810% due 01/25/26 160 160 Series 2004-RS8, Class AI3 4.230% due 05/25/29 105 105 Series 2004-RS8, Class AII1 (E) 2.558% due 05/25/26 720 720 Residential Asset Securities Corp. Series 2004-KS8, Class AI2 3.340% due 10/25/24 395 392 Series 2003-KS1, Class AI3 3.320% due 02/25/29 160 159 Sears Credit Account Master Trust (E) Series 2002-4, Class A 2.533% due 08/18/09 800 801 Series 2002-5, Class A 2.783% due 11/17/09 800 800 Structured Asset Securities Corp. Series 2004-19X, Class A2 4.370% due 10/25/34 400 397 Tenaska Alabama II Partners, LP (p) 6.125% due 03/30/23 111 116 Core Bond Fund 59 Russell Investment Funds Core Bond Fund Schedule of Investments -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Wells Fargo Home Equity Trust (E) Series 2004-2, Class A31 2.578% due 06/25/19 89 89 ------ 11,340 ------ Corporate Bonds and Notes - 11.2% Amerada Hess Corp. 7.300% due 08/15/31 105 117 American Electric Power Co., Inc. Series C 5.375% due 03/15/10 35 37 American RE Corp. Series B 7.450% due 12/15/26 245 272 Ametek, Inc. 7.200% due 07/15/08 175 190 BAE Systems Holdings, Inc. (p) 6.400% due 12/15/11 350 392 Bank of America Corp. 7.800% due 02/15/10 30 35 BankBoston Corp. Series B 8.250% due 12/15/26 80 88 BellSouth Corp. 4.750%-5.200% due 11/15/12-12/15/16 125 126 Boeing Capital Corp. 6.100% due 03/01/11 65 71 Burlington Northern Santa Fe Corp. 6.750%-6.875% due 12/01/27-03/15/29 35 40 Campbell Soup Co. 5.875% due 10/01/08 70 75 CenterPoint Energy Houston Electric LLC Series J2 5.700% due 03/15/13 110 117 CenterPoint Energy Resources Corp. Series B 7.875% due 04/01/13 170 202 CIT Group, Inc. 5.750%-6.875% due 09/25/07-11/01/09 120 129 Citigroup, Inc. 3.500% due 02/01/08 560 557 5.000% due 09/15/14 (p) 230 231 Clorox Co. (p) 4.200%-5.000% due 01/15/10-01/15/15 170 172 Columbus Southern Power Co. Series C 5.500% due 03/01/13 55 57 Comcast Cable Communications 8.375% due 05/01/07 195 216 Comcast Corp. 5.850% due 01/15/10 130 139 Continental Airlines, Inc. Series 00-1 7.918% due 05/01/10 105 106 Countrywide Home Loans, Inc. Series MTNK 5.500% due 02/01/07 50 52 Credit Suisse First Boston USA, Inc. 4.625%-5.500% due 01/15/08-08/15/13 110 114 DaimlerChrysler NA Holding Corp. (E) Series MTND 2.640% due 11/17/06 600 600 Detroit Edison Co. 6.350% due 10/15/32 90 98 Devon Financing Corp. ULC 6.875% due 09/30/11 95 108 Dominion Resources, Inc. Series B 6.250% due 06/30/12 40 44 DPL, Inc. 8.250% due 03/01/07 160 173 Dresdner Funding Trust I (p) 8.151% due 06/30/31 185 229 Duke Capital LLC 4.302% due 05/18/06 70 71 Duke Energy Field Services LLC 5.750%-6.875% due 11/15/06-02/01/11 50 53 El Paso Corp. 8.050% due 10/15/30 400 387 Eli Lilly & Co. 6.770% due 01/01/36 245 291 FedEx Corp. 7.600% due 07/01/97 65 76 Fifth Third Bank 7.750% due 08/15/10 155 159 Financing Corp. Series 15P Principal Only Strip Zero Coupon due 03/07/19 70 34 60 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- FirstEnergy Corp. Series A 5.500% due 11/15/06 40 41 Series B 6.450% due 11/15/11 195 212 Series C 7.375% due 11/15/31 115 131 Ford Motor Co. 6.375% due 02/01/29 70 63 Ford Motor Credit Co. 7.375%-7.875% due 06/15/10-02/01/11 650 706 General Electric Capital Corp. Series MTNA 4.750%-6.000% due 06/15/12-09/15/14 115 117 General Electric Co. 5.000% due 02/01/13 305 313 General Motors Acceptance Corp. 6.875%-7.250% due 03/02/11-02/01/12 610 627 2.990% due 04/13/06 (E) 800 797 Glencore Funding LLC (p) 6.000% due 04/15/14 60 58 Golden West Financial Corp. 4.125% due 08/15/07 110 112 Goldman Sachs Group, Inc. 6.875% due 01/15/11 270 305 HCA, Inc. 5.250%-7.500% due 11/06/08-11/06/33 115 116 Historic TW, Inc. 8.050%-9.125% due 01/15/13-01/15/16 495 609 HJ Heinz Co. 6.375% due 07/15/28 20 22 HJ Heinz Finance Co. 6.750% due 03/15/32 55 64 Household Finance Corp. 4.750%-6.375% due 05/15/09-11/27/12 435 456 HVB Funding Trust I (p) 8.741% due 06/30/31 150 193 International Lease Finance Corp. 6.375% due 03/15/09 125 135 International Paper Co. 5.500% due 01/15/14 140 145 ITT Industries, Inc. 7.400% due 11/15/25 100 116 JP Morgan & Co., Inc. Series MTNA 6.000% due 01/15/09 120 128 Kellogg Co. Series B 6.600% due 04/01/11 395 442 KeySpan Corp. 7.625% due 11/15/10 150 176 Kraft Foods, Inc. 5.250%-5.625% due 06/01/07-11/01/11 515 544 Kroger Co. (The) 7.500%-8.000% due 09/15/29-04/01/31 30 37 Lehman Brothers Holdings, Inc. 6.625% due 01/18/12 155 173 Liberty Media Corp. 3.500% due 09/25/06 185 184 Manufacturers & Traders Trust Co. 8.000% due 10/01/10 75 89 May Department Stores Co. (The) 5.750% due 07/15/14 (p) 90 92 4.800%-5.750% due 07/15/09-07/15/14 50 51 Midland Funding II Series B 13.250% due 07/23/06 140 154 Miller Brewing Co. (p) 5.500% due 08/15/13 140 146 Mizuho Preferred Capital Co. LLC (p) 8.790% due 04/15/14 315 357 Monumental Global Funding II (p) 3.850% due 03/03/08 155 155 Morgan Stanley 6.750% due 04/15/11 205 230 Natexis Ambs Co. LLC (F) 8.440% due 12/29/49 120 135 National Rural Utilities Cooperative Finance Corp. 5.750% due 08/28/09 70 75 NB Capital Trust IV 8.250% due 04/15/27 90 100 News America Holdings 7.750%-9.250% due 02/01/13-10/17/96 240 294 News America, Inc. 6.750% due 01/09/38 20 22 Nisource Finance Corp. 7.875% due 11/15/10 155 182 Core Bond Fund 61 Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Norfolk Southern Corp. 7.050%-7.900% due 05/15/17-05/15/97 245 304 Occidental Petroleum Corp. 9.250% due 08/01/19 95 131 Ohio Power Co. Series F 5.500% due 02/15/13 20 21 Pacific Gas & Electric Co. 3.600%-6.050% due 03/01/09-03/01/34 175 176 Progress Energy, Inc. 7.000%-7.100% due 03/01/11-10/30/31 165 184 Qwest Capital Funding, Inc. 7.000% due 08/03/09 25 25 Qwest Services Corp. (p) 14.000% due 12/15/10 40 48 RBS Capital Trust I (F) 5.512% due 09/29/49 210 215 RC Trust 1 Equity Preferred 7.000% due 05/15/06 290 152 Safeway, Inc. 7.250% due 02/01/31 25 29 SBC Communications, Inc. 4.125%-5.100% due 09/15/09-09/15/14 155 156 Sprint Capital Corp. 6.125%-8.750% due 11/15/08-03/15/32 435 513 Tele-Communications-TCI Group 7.875%-9.800% due 02/01/12-08/01/13 425 522 Texas Genco LLC (p) 6.875% due 12/15/14 40 41 Time Warner, Inc. 6.750% due 04/15/11 175 197 Travelers Property Casualty Corp. 5.000% due 03/15/13 80 78 TXU Corp. (p) 4.800%-6.550% due 11/15/09-11/15/34 385 384 Tyson Foods, Inc. 8.250% due 10/01/11 60 71 Union Pacific Corp. 5.750%-6.125% due 10/15/07-01/15/12 175 190 Union Planters Corp. 7.750% due 03/01/11 50 59 Univision Communications, Inc. 7.850% due 07/15/11 90 106 Verizon Florida, Inc. Series F 6.125% due 01/15/13 85 90 Wells Fargo & Co. 4.950% due 10/16/13 65 66 Wells Fargo Bank NA 7.550% due 06/21/10 50 58 Weyerhaeuser Co. 6.750% due 03/15/12 55 62 Wisconsin Central Transport 6.625% due 04/15/08 325 351 Wyeth 5.500%-5.500% due 03/15/13-02/01/14 70 72 Yum! Brands, Inc. 8.875% due 04/15/11 120 148 Zurich Capital Trust I (p) 8.376% due 06/01/37 245 275 ------ 19,686 ------ International Debt - 5.9% Abbey National PLC (Step Up, 7.570%, 06/15/08) (F) 6.700% due 06/29/49 150 162 Argentina Government International Bond 11.375%-11.375% due 03/15/10-01/30/17 265 90 AXA 8.600% due 12/15/30 50 66 Brazilian Government International Bond 8.875%-11.000% due 10/22/10-04/15/24 980 1,142 3.063%-8.299% due 04/15/06-04/15/12 (E) 199 216 British Sky Broadcasting PLC 8.200% due 07/15/09 210 243 British Telecommunications PLC 8.375%-8.875% due 12/15/10-12/15/30 110 135 Conoco Funding Co. 6.350% due 10/15/11 405 452 62 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Deutsche Telekom International Finance BV 8.500%-8.750% due 06/15/10-06/15/30 365 457 EnCana Corp. 6.500% due 08/15/34 40 44 Export-Import Bank Of Korea (p) 4.125% due 02/10/09 120 120 France Telecom SA 7.950%-9.250% due 03/01/06-03/01/31 950 1,079 Intelsat, Ltd. 6.500% due 11/01/13 205 187 Ispat Inland ULC 9.750% due 04/01/14 154 190 Korea Development Bank 4.250% due 11/13/07 50 50 Korea Electric Power Corp. (p) 5.125% due 04/23/34 60 60 Mexico Government International Bond 6.375%-8.375% due 01/14/11-08/15/31 495 566 Mizuho Financial Group Cayman, Ltd. (p) 5.790% due 04/15/14 150 158 Morgan Stanley Bank AG for OAO Gazprom (p) 9.625% due 03/01/13 100 118 Panama Government International Bond 9.375% due 07/23/12 100 118 Peru Government International Bond 9.125%-9.875% due 02/21/12-02/06/15 400 478 Petroleos Mexicanos 9.500% due 09/15/27 35 44 Poland Government International Bond (Step Up, 5.000%, 11/01/14) 4.750% due 10/27/24 200 189 Province of Quebec 5.000%-7.500% due 07/17/09-07/15/23 220 276 Royal Bank of Scotland Group PLC (F) Series 1 9.118% due 03/31/49 550 670 Royal KPN NV 8.000% due 10/01/10 100 118 Russia Government International Bond (p) 5.000%-8.250% due 03/31/10-03/31/30 895 939 Santander Financial Issuances 6.375% due 02/15/11 110 121 Sanwa Finance Aruba AEC 8.350% due 07/15/09 135 157 Shaw Communications, Inc. 7.200%-8.250% due 04/11/10-12/15/11 165 186 Stora Enso OYJ 7.375% due 05/15/11 85 97 Systems 2001 AT LLC (p) 7.156% due 12/15/11 141 154 Telecom Italia Capital SA 4.000%-6.000% due 01/15/10-09/30/34 (p) 210 206 5.250%-6.375% due 11/15/13- 11/15/33 310 314 TELUS Corp. 7.500%-8.000% due 06/01/07-06/01/11 515 592 Tengizchevroil Finance Co. (p) 6.124% due 11/15/14 215 215 UFJ Finance Aruba AEC 6.750% due 07/15/13 35 39 ------ 10,448 ------ Mortgage-Backed Securities - 34.0% Banc of America Commercial Mortgage, Inc. Series 2004-4, Class A3 4.128% due 07/10/42 300 300 Series 2004-3, Class A3 4.875% due 06/10/39 445 458 Bank of America Mortgage Securities Series 2004-1, Class 5A1 6.500% due 09/25/33 41 42 Bear Stearns Adjustable Rate Mortgage Trust Series 2003-1, Class 6A1 5.112% due 04/25/33 144 144 Series 2003-8, Class 4A1 4.771% due 01/25/34 308 306 Core Bond Fund 63 Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Countrywide Alternative Loan Trust Series 2004-J7, Class 1A6 5.013% due 08/25/34 410 411 Series 2004-J7, Class 1A2 4.673% due 08/25/34 395 395 CS First Boston Mortgage Securities Corp. Series 2002-18, Class 1AIO Interest Only 7.500% due 06/25/32 400 -- Series 2001-AR2, Class 3A 6.156% due 12/25/31 69 70 Series 2002-22, Class 1AIO Interest Only 8.000% due 07/25/32 351 -- Fannie Mae 15 Year TBA (I) 5.000%-5.500% 5,580 5,694 30 Year TBA (I) 4.500%-6.500% 14,630 14,797 3.025%-3.974% due 2017-2036 (E) 920 931 4.500%-7.000% due 2016-2034 11,016 11,196 Series 2004-27, Class JC 5.000% due 05/25/34 363 358 Fannie Mae Whole Loan Series 2002-W6, Class 2AIO Interest Only 0.294% due 06/25/42 80 -- Series 2003-W1, Class 1A1 6.500% due 12/25/42 104 108 Federal Home Loan Mortgage Corp. Structured Pass Through Securities Series 2004-H01, Class A1 2.614% due 07/15/11 907 897 First Nationwide Trust (E) Series 2001-4, Class 3A5 3.018% due 09/25/31 7 7 Freddie Mac 15 Year TBA (I) 5.500% 555 573 30 Year TBA (I) 5.500%-6.000% 3,590 3,649 5.000%-6.000% due 2016-2034 2,937 3,017 7.829% due 2030 (E) 4 4 Series 2002-250, Class L 5.500% due 03/15/15 2 2 Series 2003-263, Class IO Interest Only 5.000% due 10/15/27 671 76 Series 2003-263, Class IA Interest Only 5.000% due 06/15/22 904 66 Series 2003-264, Class IC Interest Only 5.000% due 05/15/22 730 81 Series 2004-285, Class PI Interest Only 5.500% due 05/15/24 396 45 Series 2004-287, Class IA Interest Only 5.500% due 04/15/24 247 27 Series 2004-288, Class QI Interest Only 5.500% due 02/15/24 345 37 Series 2004-288, Class HC 5.500% due 07/15/28 385 399 Series 2004-290, Class PB 5.500% due 03/15/28 310 321 Series 2000-226, Class F 2.853% due 11/15/30 49 49 GE Capital Commercial Mortgage Corp. Series 2004-C2, Class A4 4.893% due 03/10/40 755 762 Ginnie Mae I 30 Year TBA (I) 5.000%-5.500% 7,610 7,688 6.000%-6.500% due 2029-2032 277 291 Ginnie Mae II 30 Year TBA (I) 5.500% 120 122 2.750%-3.750% due 2026-2032 869 878 Government National Mortgage Association (E) Series 2000-29, Class F 2.910% due 09/20/30 68 68 Series 2004-64, Class JH 5.500% due 07/20/30 240 249 Greenwich Capital Commercial Funding Corp. Series 2004-GG1, Class A7 5.317% due 06/10/36 285 296 GS Mortgage Securities Corp. II Series 2004-GG2, Class A6 5.396% due 08/10/38 285 297 64 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- JP Morgan Chase Commercial Mortgage Securities Corp. Series 2003-ML1, Class A2 4.767% due 03/12/39 370 373 Series 2004-LN2, Class A1 4.475% due 07/15/41 395 398 LB-UBS Commercial Mortgage Trust Series 2004-C4, Class A3 4.987% due 06/15/29 640 666 Mellon Residential Funding Corp. (E) Series 2000-TBC, Class A1 2.643% due 06/15/30 420 419 Merrill Lynch Mortgage Trust Series 2004-MKB, Class A2 4.353% due 02/12/42 380 384 Morgan Stanley Capital I Series 2004-HQ3, Class A2 4.050% due 01/13/41 400 397 Nomura Asset Acceptance Corp. Series 2004-AP3, Class A3 4.423% due 10/25/34 465 460 Prime Mortgage Trust (E) Series 2004-CL1, Class 1A2 2.818% due 02/25/34 104 104 SACO I, Inc. (E)(p) Series 2004-2, Class A2 2.608% due 07/25/19 450 450 Sequoia Mortgage Trust (E) Series 2001-5, Class A 2.760% due 10/19/26 306 306 Small Business Administration Series 2000-P10, Class 1 7.449% due 08/01/10 45 48 Structured Asset Securities Corp. Series 2004-21X, Class 1A3 4.440% due 12/25/34 650 654 ------- 59,770 ------- Municipal Bonds - 0.4% Golden State Tobacco Securitization Corp. Revenue Bonds, weekly demand 6.750% due 06/01/39 400 401 Tobacco Settlement Financing Corp. Revenue Bonds, weekly demand 6.250% due 06/01/43 200 188 Tobacco Settlement Financing Corp. Revenue Bonds, weekly demand 4.375% due 06/01/19 100 100 University of Texas Revenue Bonds, weekly demand 5.000% due 08/15/33 100 102 ------- 791 ------- Non-US Bonds - 0.5% United Kingdom Gilt 5.750% due 12/07/09 GBP 400 810 ------- United States Government Agencies - 1.5% Fannie Mae 4.375% due 03/15/13 345 344 Financing Corp. Principal Only Zero Coupon due 05/11/18-09/26/19 765 368 Freddie Mac 2.750%-4.000% due 03/15/08-12/15/09 1,640 1,641 Residual Funding Principal Only Zero Coupon due 10/15/20 600 267 ------- 2,620 ------- United States Government Treasuries - 14.5% United States Treasury Inflation Indexed Bonds 0.875%-4.250% due 01/15/07-07/15/14 9,387 10,082 United States Treasury Note 2.500%-8.875% due 05/15/06-02/15/26 14,530 15,351 ------- 25,433 ------- Total Long-Term Investments (cost $128,250) 130,898 ------- Core Bond Fund 65 Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands (except share amounts) Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Preferred Stocks - 0.4% Financial Services - 0.4% Centaur Funding Corp. (p) 165,000 217 DG Funding Trust (p) 49 525 ------ Total Preferred Stocks (cost $693) 742 ------ Notional Amount $ -------- Options Purchased - 0.0% (Number of Contracts) Eurodollar Futures Jun 2005 95.00 Put (50) 11,875 -- United States Treasury Bond Futures Feb 2005 115.00 Call (2) 230 1 Feb 2005 116.00 Call (1) 116 1 ------ Total Options Purchased (cost $3) 2 ------ Principal Amount ($) or Shares ---------- Short-Term Investments - 45.5% ANZ Delaware, Inc. (z) 2.375% due 02/22/05 (c) 1,000 997 2.420% due 03/16/05 1,600 1,590 ASIF II 1.200% due 01/26/05 JPY 120,000 1,172 Barclays US Funding, LLC (z) 1.985%-2.060% due 02/01/05-02/22/05 (c) 1,800 1,795 2.365% due 03/07/05 200 199 CBA Del Finance Discount Note (z) 2.380% due 03/07/05 1,200 1,193 Citibank New York Commercial Paper (c)(z) 2.030% due 01/24/05 900 900 Danske Corp. (c)(z) 1.790% due 02/14/05 1,200 1,197 Danske Corp. Discount Note (z) 2.370% due 03/14/05 1,400 1,391 Dexia Delaware (c)(z) 2.010%-2.040% due 01/21/05-01/25/05 2,400 2,397 Fannie Mae Discount Note (z) 1.968%-2.197% due 01/05/05-02/16/05 (c) 4,900 4,895 2.349%-2.390% due 03/16/05 700 696 Federal Home Loan Bank Discount Note (c)(z) 1.955%-2.028% due 01/14/05-01/28/05 3,800 3,795 Federal Home Loan Bank System 4.125% due 01/14/05 185 185 Federal Home Loan Discount Corp. (z) 2.308%-5.500% due 03/02/05-03/09/05 3,300 3,281 Federal National Mortgage Association Discount (z) 2.248%-2.430% due 03/02/05-03/23/05 3,000 2,982 Ford Motor Credit Co. 2.306%-7.600% due 03/15/05-08/01/05 900 913 Frank Russell Investment Company Money Market Fund 27,713,000 27,713 Freddie Mac Discount Note (z) 1.940%-1.950% due 01/04/05-01/18/05 1,700 1,699 2.183% due 03/08/05 1,000 994 General Electric Capital Corp. Discount Note (c)(z) 1.920%-2.355% due 01/03/05-03/01/05 2,600 2,594 HBOS Treasury Services, PLC (z) 2.070% due 02/22/05 (c) 1,500 1,496 2.370%-2.435% due 03/08/05-03/22/05 1,000 993 ING US Funding, LLC (z) 2.445% due 03/21/05 2,300 2,287 Lloyds Bank PLC (z) 2.250% due 01/14/05 1,400 1,399 Niagara Mohawk Power Corp. Series F 7.625% due 10/01/05 132 137 Rabobank USA Financial Corp. (c)(z) 2.170% due 01/03/05 2,300 2,300 66 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Principal Market Amount ($) Value or Shares $ - -------------------------------------------------------------------------------- Residential Asset Mortgage Products, Inc. Series 2002-RZ4, Class AIO Interest Only 5.750% due 04/25/05 367 4 Royal Bank of Scotland (c)(z) 2.025% due 01/21/05 900 899 Santander Financial Issuances 6.800% due 07/15/05 45 46 Shell Finance (z) 2.340% due 03/08/05 1,600 1,591 Spintab Swedish Mortgage (c)(z) 2.060% due 01/03/05 1,200 1,200 Swedbank Forenings (z) 2.370%-2.445% due 03/07/05-03/28/05 1,300 1,292 UBS Financial Del, LLC (z) 2.200% due 01/03/05 (c) 200 200 2.370%-2.390% due 03/10/05-03/14/05 2,400 2,386 Unicredit Delaware (c)(z) 1.985% due 01/31/05 400 399 United States Treasury Bills (z)(S) 1.940%-2.180% due 03/03/05-03/31/05 730 725 Wachovia Corp. 7.550% due 08/18/05 50 51 -------- Total Short-Term Investments (cost $79,793) 79,983 -------- Warrants & Rights - 0.1% Miscellaneous - 0.1% Mexico Government International Bond Value Recovery Rights (AE) Series B 2,500 34 Series D 2,496 49 Series E 1,900 23 -------- 106 Utilities - 0.0% GT Group Telecom, Inc. 2010 Warrants (AE)(p)(A) 175 -- -------- Total Warrants & Rights (cost $40) 106 -------- Total Investments - 120.4% (identified cost $208,779) 211,731 Other Assets and Liabilities, Net - (20.4%) (35,880) -------- Net Assets - 100.0% 175,851 ======== See accompanying notes which are an integral part of the financial statements. Core Bond Fund 67 Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Unrealized Notional Appreciation Futures Contracts Amount (Depreciation) (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Long Positions Eurodollar Futures expiration date 06/05 (1) 242 (1) expiration date 09/05 (85) 20,530 (108) expiration date 12/05 (58) 13,984 (20) Germany, Federal Republic 10 Year Bonds expiration date 03/05 (31) 4,997 (7) Japan Government 10 Year Bonds expiration date 03/05 (1) 1,350 1 United States Treasury Bonds expiration date 03/05 (65) 7,313 (63) United States Treasury 2 Year Notes expiration date 03/05 (48) 10,061 (5) United States Treasury 5 Year Notes expiration date 03/05 (18) 1,972 (3) United States Treasury 10 Year Notes expiration date 03/05 (112) 12,537 2 Short Positions United States Treasury 5 Year Notes expiration date 03/05 (57) 6,243 (30) United States Treasury 10 Year Notes expiration date 03/05 (17) 1,903 (14) ---- Total Unrealized Appreciation (Depreciation) on Open Futures Contracts (248) ==== Notional Market Options Written Amount Value (Number of Contracts) $ $ - -------------------------------------------------------------------------------- Euribor Futures Jun 2005 94.25 (GBP) Put (3) 679 -- Jun 2005 97.50 (EUR) Put (12) 3,986 (7) United States Treasury Notes 10 Year Futures Feb 2005 114.00 Call (63) 7,182 (14) Feb 2005 108.00 Put (44) 4,752 (5) ---- Total Liability for Options Written (premiums received $43) (26) ==== Foreign Currency Exchange Contracts Unrealized Appreciation Amount Amount Settlement (Depreciation) Sold Bought Date $ - ----------- ------------- ---------- -------------- USD 109 EUR 80 01/10/05 -- USD 369 EUR 275 01/10/05 (6) USD 318 JPY 32,579 01/06/05 -- USD 101 JPY 10,781 01/27/05 (4) EUR 167 USD 221 01/10/05 6 EUR 650 USD 866 03/18/05 19 JPY 6,000 USD 57 01/27/05 1 JPY 6,966 USD 67 01/27/05 1 --- 17 === See accompanying notes which are an integral part of the financial statements. 68 Core Bond Fund Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands Interest Rate Swaps
- ----------------------------------------------------------------------------------------- Notional Market Counter Amount Termination Value Party $ Fund Receives Fund Pays Date $ - ------------------ ------------- ----------------- --------- ----------- ------ Bank of America USD 5,500 Three Month LIBOR 4.000% 12/15/09 (54) Barclay's Bank PLC GBP 50 Six Month LIBOR 5.000% 06/16/11 1 Barclay's Bank PLC GBP 400 Six Month LIBOR 5.000% 06/18/34 (24) Goldman Sachs USD 600 Three Month LIBOR 5.000% 06/15/15 (10) Greenwick Capital Derivatives USD 1,000 Three Month LIBOR 4.000% 06/15/10 (10) J.P. Morgan EUR 600 Six Month LIBOR 6.000% 06/18/34 79 Lehman Brothers USD 1,000 Three Month LIBOR 5.000% 06/15/15 (16) Merrill Lynch EUR 900 Six Month LIBOR 4.000% 03/15/07 31 Morgan Stanley USD 4,500 Three Month LIBOR 5.000% 06/15/15 (73) Morgan Stanley USD 3,300 Three Month LIBOR 4.000% 06/15/07 18 UBS JPY 125,000 Six Month LIBOR 2.000% 06/15/12 (66) Total Market Value of Interest Rate Swaps ---- premiums paid (received) - ($182) (124) ====
See accompanying notes which are an integral part of the financial statements. Core Bond Fund 69 Russell Investment Funds Core Bond Fund Schedule of Investments, continued -- December 31, 2004 Amounts in thousands % of Portfolio Summary Net (Unaudited) Assets - ------------------------------------------------------------------------------- Asset-Backed Securities 6.4 Corporate Bonds and Notes 11.2 International Debt 5.9 Mortgage-Backed Securities 34.0 Municipal Bonds 0.4 Non-US Bonds 0.5 United States Government Agencies 1.5 United States Government Treasuries 14.5 Preferred Stocks 0.4 Options Purchased --* Short-Term Investments 45.5 Warrants & Rights 0.1 ----- Total Investments 120.4 Other Assets and Liabilities, Net (20.4) ----- Net Assets 100.0 ===== Futures Contracts 0.1 Options Written --* Foreign Currency Exchange Contract --* Interest Rate Swaps 0.1 * Less than .05% See accompanying notes which are an integral part of the financial statements. 70 Core Bond Fund Russell Investment Funds Notes to Schedules of Investments -- December 31, 2004 - -------------------------------------------------------------------------------- Footnotes: (AE) Nonincome-producing security. (o) Real Estate Investment Trust (REIT). (S) Held as collateral in connection with futures contracts purchased (sold), options written, or swaps entered into by the Fund. (z) Rate noted is yield-to-maturity from date of acquisition. (c) At amortized cost, which approximates market. (E) Adjustable or floating rate security. Rate shown reflects rate in effect at period end. (I) Forward commitment. (F) Perpetual floating rate security. Rate shown reflects rate in effect at period end. (U) Bond is insured by a guarantor. (A) This security has been valued by the Security Valuation Committee. It is possible that the estimated value may differ significantly from the amount that might ultimately be realized. (ae) Pre-refunded: These bonds are collateralized by US Treasury securities, which are held in escrow by a trustee and used to pay principal and interest in the tax-exempt issue and to retire the bonds in full at the earliest refunding date. The rate noted is for descriptive purposes; effective yield may vary. (O/) In default. (B) Illiquid security. (X) The security is purchased with the cash collateral from the securities loaned. (N) All or a portion of the shares of this security are on loan. (p) Restricted security. Security may have contractual restrictions on resale, may have been offered in a private placement transaction, and may not be registered under the Securities Act of 1933. Abbreviations: ADR - American Depositary Receipt GDR - Global Depositary Receipt ADS - American Depositary Share CMO - Collateralized Mortgage Obligation CVO - Contingent Value Obligation 144A - Represents private placement security for qualified buyers according to rule 144A of the Securities Act of 1933. GDS - Global Depositary Share LIBOR - London Interbank Offered Rate PIK - Payment in Kind FDIC - Federal Deposit Insurance Company REMIC - Real Estate Mortgage Investment Conduit STRIP - Separate Trading of Registered Interest and Principal of Securities TBA - To Be Announced Security Foreign Currency Abbreviations: ARS - Argentine peso GBP - British pound sterling PEN - Peruvian nouveau sol AUD - Australian dollar HKD - Hong Kong dollar PHP - Philippine peso BRL - Brazilian real HUF - Hungarian forint PLN - Polish zloty CAD - Canadian dollar IDR - Indonesian rupiah RUB - Russian ruble CHF - Swiss franc ILS - Israeli shekel SEK - Swedish krona CLP - Chilean peso INR - Indian rupee SGD - Singapore dollar CNY - Chinese renminbi yuan ITL - Italian lira SKK - Slovakian koruna COP - Colombian peso JPY - Japanese yen THB - Thai baht CRC - Costa Rica colon KES - Kenyan schilling TRL - Turkish lira CZK - Czech koruna KRW - South Korean won USD - United States dollar DKK - Danish krone MXN - Mexican peso VEB - Venezuelan bolivar EGP - Egyptian pound MYR - Malaysian ringgit VND - Vietnamese dong EUR - Euro NZD - New Zealand dollar ZAR - South African rand
Notes to Schedule of Investments 71 Russell Investment Funds Statement of Assets and Liabilities -- December 31, 2004 Multi-Style Equity Amounts in thousands Fund - -------------------------------------------------------------------------------- Assets Investments, at identified cost $289,463 - -------------------------------------------------------------------------------- Investments, at market*** 333,338 Foreign currency holdings* -- Unrealized appreciation on foreign currency exchange contracts -- Receivables: Dividends and interest 381 Dividends from affiliated money market funds 28 Investments sold 2,524 Fund shares sold 140 Foreign taxes recoverable -- Receivable from related fund -- From Advisor -- Daily variation margin on futures contracts 19 Interest rate swap contracts, at market value**** -- -------- Total assets 336,430 -------- Liabilities Payables: Due to Custodian -- Investments purchased 2,499 Fund shares redeemed 30 Accrued fees to affiliates 223 Other accrued expenses 30 Daily variation margin on futures contracts -- Unrealized depreciation on foreign currency exchange contracts -- Options written, at market value** -- Payable upon return of securities loaned 889 Interest rate swap contracts, at market value**** -- -------- Total liabilities 3,671 -------- Net Assets $332,759 ======== Net Assets Consist of: Undistributed (overdistributed) net investment income $ 1,321 Accumulated net realized gain (loss) (80,809) Unrealized appreciation (depreciation) on: Investments 43,875 Futures contracts 469 Options written -- Interest rate swap contracts -- Foreign currency-related transactions -- Shares of beneficial interest 264 Additional paid-in capital 367,639 -------- Net Assets $332,759 ======== See accompanying notes which are an integral part of the financial statements. 72 Statement of Assets and Liabilities Aggressive Equity Non-U.S. Real Estate Securities Core Bond Fund Fund Fund Fund - ----------------------------------------------------------------- $184,204 $223,975 $267,317 $208,779 - ----------------------------------------------------------------- 217,822 278,291 386,099 211,731 -- 2,481 -- 565 -- 642 -- 27 123 291 1,854 1,009 14 26 26 52 1,136 142 1,579 12,706 30 175 173 136 -- 23 -- -- -- -- 4,690 -- 26 39 -- 10 4 35 -- 97 -- -- -- 129 -------- -------- -------- -------- 219,155 282,145 394,421 226,462 -------- -------- -------- -------- -- 60 1,122 -- 1,329 852 1,260 50,194 22 15 12,002 14 155 206 276 89 44 65 25 21 -- 15 -- 4 -- 579 -- 10 -- 940 -- 26 22,022 20,647 3 -- -- -- -- 253 -------- -------- -------- -------- 23,572 23,379 14,688 50,611 -------- -------- -------- -------- $195,583 $258,766 $379,733 $175,851 ======== ======== ======== ======== $ -- $ (729) $ 223 $ 146 4,367 (45,379) 6,069 1,865 33,618 54,316 118,782 2,952 282 230 -- (248) -- (52) -- 17 -- -- -- 58 -- 124 -- 29 131 228 222 168 157,185 250,028 254,437 170,864 -------- -------- -------- -------- $195,583 $258,766 $379,733 $175,851 ======== ======== ======== ======== See accompanying notes which are an integral part of the financial statements. Statement of Assets and Liabilities 73 Russell Investment Funds Statement of Assets and Liabilities, continued -- December 31, 2004 Multi-Style Equity Fund - -------------------------------------------------------------------------------- Net Asset Value, offering and redemption price per share: Net asset value per share***** $ 12.60 Net assets $332,759,098 Shares outstanding ($.01 par value) 26,403,353 - -------------------------------------------------------------------------------- Amounts in thousands * Foreign currency holdings - cost $ -- ** Premiums received on options written $ -- *** Securities on loan included in investments $ 869 **** Interest rate swap contracts - premiums paid (received) $ -- ***** Net asset value per share equals net assets divided by shares of beneficial interest outstanding See accompanying notes which are an integral part of the financial statements. 74 Statement of Assets and Liabilities Aggressive Equity Non-U.S. Real Estate Securities Core Bond Fund Fund Fund Fund - ------------------------------------------------------------------------ $ 14.90 $ 11.33 $ 17.09 $ 10.50 $195,583,015 $258,765,629 $379,732,956 $175,850,594 13,125,244 22,829,056 22,215,412 16,750,929 - ------------------------------------------------------------------------ $ -- $ 2,429 $ -- $ 556 $ -- $ 888 $ -- $ 43 $ 21,387 $ 19,630 $ 3 $ -- $ -- $ -- $ -- $ (182) See accompanying notes which are an integral part of the financial statements. Statement of Assets and Liabilities 75 Russell Investment Funds Statement of Operations -- For the Fiscal Year Ended December 31, 2004 Multi-Style Equity Amounts in thousands Fund - -------------------------------------------------------------------------------- Investment Income Dividends $ 5,467 Dividends from affiliated money market funds 186 Interest 16 Securities lending income 12 Less foreign taxes withheld -- ------- Total investment income 5,681 ------- Expenses Management fees 2,419 Custodian fees 226 Transfer agent fees 1 Professional fees 55 Trustees' fees 8 Printing fees 10 Miscellaneous 22 ------- Expenses before reductions 2,741 Expense reductions (43) ------- Net expenses 2,698 ------- Net investment income (loss) 2,983 ------- Net Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 18,831 Futures contracts 2,557 Options written -- Index swap contracts -- Interest rate swap contracts -- Foreign currency-related transactions -- ------- Net realized gain (loss) 21,388 ------- Net change in unrealized appreciation (depreciation) on: Investments 6,162 Futures contracts (249) Options written -- Index swap contracts -- Interest rate swap contracts -- Foreign currency-related transactions -- ------- Net change in unrealized appreciation (depreciation) 5,913 ------- Net realized and unrealized gain (loss) 27,301 ------- Net Increase (Decrease) in Net Assets from Operations $30,284 ======= See accompanying notes which are an integral part of the financial statements. 76 Statement of Operations Aggressive Equity Non-U.S. Real Estate Securities Core Bond Fund Fund Fund Fund - ----------------------------------------------------------------- $ 1,946 $ 5,286 $ 9,992 $ 121 111 184 124 354 16 48 -- 4,358 72 152 17 -- -- (584) -- -- ------- ------- ------- ------ 2,145 5,086 10,133 4,833 ------- ------- ------- ------ 1,677 2,142 2,573 958 312 647 127 150 3 2 1 2 46 65 51 50 4 6 7 4 5 6 9 4 21 14 8 5 ------- ------- ------- ------ 2,068 2,882 2,776 1,173 (216) (288) (3) (55) ------- ------- ------- ------ 1,852 2,594 2,773 1,118 ------- ------- ------- ------ 293 2,492 7,360 3,715 ------- ------- ------- ------ 17,081 16,282 30,106 2,802 1,449 1,725 -- 1,816 -- (501) -- 261 -- -- -- 139 -- -- -- 36 -- 1,029 -- (444) ------- ------- ------- ------ 18,530 18,535 30,106 4,610 ------- ------- ------- ------ 6,173 19,541 58,342 (667) (51) (37) -- (464) -- (36) -- (51) -- -- -- (67) -- -- -- 17 -- (208) -- 240 ------- ------- ------- ------ 6,122 19,260 58,342 (992) ------- ------- ------- ------ 24,652 37,795 88,448 3,618 ------- ------- ------- ------ $24,945 $40,287 $95,808 $7,333 ======= ======= ======= ====== See accompanying notes which are an integral part of the financial statements. Statement of Operations 77 Russell Investment Funds Statement of Changes in Net Assets -- For the Fiscal Years Ended December 31,
Multi-Style Equity Fund ------------------- Amounts in thousands 2004 2003 - --------------------------------------------------------------------------------------- Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 2,983 $ 1,977 Net realized gain (loss) 21,388 13,702 Net change in unrealized appreciation (depreciation) 5,913 47,424 -------- -------- Net increase (decrease) in net assets from operations 30,284 63,103 -------- -------- Distributions From net investment income (2,311) (1,743) From net realized gain -- -- From tax return of capital -- -- -------- -------- Net decrease in net assets from distributions (2,311) (1,743) -------- -------- Share Transactions Net increase (decrease) in net assets from share transactions 8,019 28,613 -------- -------- Total Net Increase (Decrease) in Net Assets 35,992 89,973 Net Assets Beginning of period 296,767 206,794 -------- -------- End of Period $332,759 $296,767 ======== ======== Undistributed (overdistributed) net investment income included in net assets $ 1,321 $ 649
See accompanying notes which are an integral part of the financial statements. 78 Statement of Changes in Net Assets
Aggressive Equity Non-U.S. Real Estate Securities Core Bond Fund Fund Fund Fund - ------------------- ------------------- ---------------------- ------------------- 2004 2003 2004 2003 2004 2003 2004 2003 - -------- -------- -------- -------- -------- ----------- -------- -------- $ 293 $ 117 $ 2,492 $ 1,801 $ 7,360 $ 9,111 $ 3,715 $ 4,208 18,530 16,388 18,535 579 30,106 (511) 4,610 4,198 6,122 31,170 19,260 53,362 58,342 55,264 (992) 243 - -------- -------- -------- -------- -------- -------- -------- -------- 24,945 47,675 40,287 55,742 95,808 63,864 7,333 8,649 - -------- -------- -------- -------- -------- -------- -------- -------- (297) (138) (4,649) (4,573) (7,137) (10,273) (3,906) (5,257) (6,579) -- -- -- (20,710) -- (3,110) (2,755) -- -- -- -- -- (341) -- -- - -------- -------- -------- -------- -------- -------- -------- -------- (6,876) (138) (4,649) (4,573) (27,847) (10,614) (7,016) (8,012) - -------- -------- -------- -------- -------- -------- -------- -------- 11,129 21,054 16,509 17,610 57,081 41,265 28,332 6,285 - -------- -------- -------- -------- -------- -------- -------- -------- 29,198 68,591 52,147 68,779 125,042 94,515 28,649 6,922 166,385 97,794 206,619 137,840 254,691 160,176 147,202 140,280 - -------- -------- -------- -------- -------- -------- -------- -------- $195,583 $166,385 $258,766 $206,619 $379,733 $254,691 $175,851 $147,202 ======== ======== ======== ======== ======== ======== ======== ======== $ -- $ -- $ (729) $ (690) $ 223 $ (1,162) $ 146 $ 434
See accompanying notes which are an integral part of the financial statements. Statement of Changes in Net Assets 79 Russell Investment Funds Financial Highlights -- For the Fiscal Years Ended For a Share Outstanding Throughout Each Period.
$ $ $ $ Net Asset Net Net Realized Total $ $ Value, Investment and Income Distributions Distributions $ Beginning of Income Unrealized from from Net from Net Return of Period (Loss)(a) Gain (Loss) Operations Investment Income Realized Gain Capital - ----------------------------------------------------------------------------------------------------------------------------- Multi-Style Equity Fund December 31, 2004 11.56 .11 1.02 1.13 (.09) -- -- December 31, 2003 9.04 .08 2.51 2.59 (.07) -- -- December 31, 2002 11.84 .06 (2.80) (2.74) (.06) -- -- December 31, 2001 14.13 .07 (2.06) (1.99) (.06) (.24) -- December 31, 2000 16.79 .08 (2.10) (2.02) (.08) (.56) -- - ----------------------------------------------------------------------------------------------------------------------------- Aggressive Equity Fund December 31, 2004 13.47 .02 1.95 1.97 (.02) (.52) -- December 31, 2003 9.26 .01 4.21 4.22 (.01) -- -- December 31, 2002 11.44 (.02) (2.16) (2.18) -- -- -- December 31, 2001 11.73 --(b) (.28) (.28) --(b) -- (.01) December 31, 2000 13.36 .04 (.16) (.12) (.05) (1.46) -- - ----------------------------------------------------------------------------------------------------------------------------- Non-U.S. Fund December 31, 2004 9.76 .11 1.66 1.77 (.20) -- -- December 31, 2003 7.20 .09 2.69 2.78 (.22) -- -- December 31, 2002 8.64 .06 (1.37) (1.31) (.13) -- -- December 31, 2001 11.15 .06 (2.52) (2.46) (.04) -- (.01) December 31, 2000 14.19 .10 (2.11) (2.01) -- (1.00) (.03) - ----------------------------------------------------------------------------------------------------------------------------- Real Estate Securities Fund December 31, 2004 13.71 .36 4.33 4.69 (.36) (.95) -- December 31, 2003 10.51 .55 3.28 3.83 (.61) -- (.02) December 31, 2002 10.75 .54 (.13) .41 (.57) (.08) -- December 31, 2001 10.67 .57 .24 .81 (.55) (.18) -- December 31, 2000 8.81 .54 1.81 2.35 (.49) -- -- - ----------------------------------------------------------------------------------------------------------------------------- Core Bond Fund December 31, 2004 10.47 .24 .24 .48 (.26) (.19) -- December 31, 2003 10.43 .31 .31 .62 (.38) (.20) -- December 31, 2002 10.13 .36 .52 .88 (.30) (.28) -- December 31, 2001 10.07 .54 .18 .72 (.60) (.06) -- December 31, 2000 9.64 .61 .33 .94 (.51) -- -- - -----------------------------------------------------------------------------------------------------------------------------
(a) Average month-end shares outstanding were used for this calculation. (b) Less than $.01 per share. (c) May reflect amounts waived and/or reimbursed by the investment advisor and for certain funds, custody credit arrangements. The custody credit arrangements had an impact of less than .005%. See accompanying notes which are an integral part of the financial statements. 80 Financial Highlights
% % Ratio of Ratio of % $ Expenses Expenses Ratio of Net $ $ % Net Assets to Average to Average Investment Income % Total Net Asset Value, Total End of Period Net Assets Net Assets to Average Net Portfolio Distributions End of Period Return (000) Net(c) Gross Assets(c) Turnover Rate - ---------------------------------------------------------------------------------------------------------------- (.09) 12.60 9.81 332,759 .87 .88 .96 123.29 (.07) 11.56 28.86 296,767 .87 .95 .82 107.67 (.06) 9.04 (23.19) 206,794 .92 .99 .61 145.90 (.30) 11.84 (14.21) 251,730 .92 .99 .57 131.67 (.64) 14.13 (12.26) 262,664 .92 .93 .51 161.09 - ---------------------------------------------------------------------------------------------------------------- (.54) 14.90 14.73 195,583 1.05 1.17 .17 150.26 (.01) 13.47 45.60 166,385 1.06 1.26 .10 138.95 -- 9.26 (19.06) 97,794 1.25 1.36 (.17) 139.24 (.01) 11.44 (2.36) 111,693 1.25 1.38 .01 180.38 (1.51) 11.73 (.66) 106,665 1.25 1.28 .27 203.48 - ---------------------------------------------------------------------------------------------------------------- (.20) 11.33 18.30 258,766 1.15 1.28 1.11 73.45 (.22) 9.76 38.78 206,619 1.16 1.41 1.14 50.29 (.13) 7.20 (15.15) 137,840 1.30 1.48 .77 60.98 (.05) 8.64 (22.03) 154,494 1.30 1.43 .64 79.79 (1.03) 11.15 (14.43) 185,644 1.30 1.37 .78 86.06 - ---------------------------------------------------------------------------------------------------------------- (1.31) 17.09 34.88 379,733 .92 .92 2.43 47.21 (.63) 13.71 37.21 254,691 .95 .95 4.66 38.84 (.65) 10.51 3.80 160,176 .99 .99 5.01 55.43 (.73) 10.75 7.84 111,982 1.06 1.06 5.35 55.13 (.49) 10.67 27.24 88,713 1.08 1.08 5.58 45.79 - ---------------------------------------------------------------------------------------------------------------- (.45) 10.50 4.66 175,851 .70 .73 2.41 216.23 (.58) 10.47 6.15 147,202 .71 .78 2.86 232.64 (.58) 10.43 8.84 140,280 .80 .80 3.52 207.60 (.66) 10.13 7.41 109,971 .80 .88 5.25 205.62 (.51) 10.07 10.00 88,514 .80 .84 6.20 171.48 - ----------------------------------------------------------------------------------------------------------------
See accompanying notes which are an integral part of the financial statements. Financial Highlights 81 Russell Investment Funds Notes to Financial Statements -- December 31, 2004 - -------------------------------------------------------------------------------- 1. Organization Russell Investment Funds (the "Investment Company") is a series mutual fund with five investment portfolios, referred to as "Funds." These financial statements report on the Funds, each of which has distinct investment objectives and strategies. These Funds are offered at net asset value to qualified insurance company separate accounts offering variable insurance products. The Investment Company is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. It is organized and operates as a Massachusetts business trust under a master trust agreement dated July 11, 1996. The Investment Company's master trust agreement permits the Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest at a $.01 par value. 2. Significant Accounting Policies The following is a summary of the significant accounting policies consistently followed by the Fund in the preparation of these financial statements. These policies are in conformity with generally accepted accounting principles ("GAAP") for investment companies. The presentation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Security valuation United States equity securities listed and traded principally on any national securities exchange are valued on the basis of the last sale price or, if there were no sales on that day, at the last reported price, on the primary exchange on which the security is traded. Equity securities traded on Nasdaq or in a U.S. OTC market will be valued at the official closing price (NOCP) as of the close of the market's regular trading hours. Fixed-income securities listed and traded principally on any national securities exchange are valued at the evaluated bid price or, if there were no sales on that day, at the last reported bid price, on the primary exchange on which the security is traded. Over-the-counter fixed-income securities and options are valued on the basis of the last sale price. Many fixed-income securities do not trade each day, and thus last sale or bid prices are frequently not available. Accordingly, fixed-income securities may be valued using prices provided by a pricing service approved by the Board of Trustees when such prices are believed to reflect the market value of such securities. Futures contracts are valued on the basis of the last sales price. Exchange listed futures contracts are valued on a basis of the last quoted daily settlement prices established by the exchange on which they trade. If there were no sales, futures are valued at the last reported bid price. Investments in other mutual funds are valued at their net asset value per share, calculated at 4:00pm Eastern time or as of the close of the NYSE, whichever is earlier. The value of swap agreements are equal to the Funds' obligation (or rights) under swap contracts which will generally be equal to the net amounts to be paid or received under the contracts based upon the relative values of the positions held by each party to the contracts. International equity securities traded on a foreign national securities exchange or an over-the-counter market (foreign or domestic) are valued on the basis of the official closing price, or, lacking the official closing price, at the last sale price on the primary exchange on which the security is traded. Short-term investments purchased by the Funds and maturing within 60 days at the time of purchase are valued at "amortized cost" unless the Board of Trustees determines that amortized cost does not represent fair value. If market quotations are not readily available for a security or if subsequent events suggest that a market quotation is not reliable, the Funds will use the security's fair value, as determined in accordance with Fair Value Procedures. The effect of fair value pricing is that securities may not be priced on the basis of quotations from the primary market in which they are traded, but rather may be priced by another method that the Funds' Board of Trustees believes reflects fair value. This policy is intended to assure that the Funds' net asset value fairly reflects security values as of the time of pricing. Events or circumstances affecting the values of fund securities that occur between the closing of the principal markets on which they trade and the time the net asset value of fund shares is determined may be reflected in the calculation of net asset values for each applicable fund when a particular event or circumstance would materially affect such fund's net asset value. 82 Notes to Financial Statements Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- Because foreign securities can trade on non-business days, the net asset value of a fund's portfolio that includes foreign securities may change on days when shareholders will not be able to purchase or redeem fund shares. Investment transactions Securities transactions are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the basis of specific identified cost incurred by each money manager within a particular Fund. Investment income Dividend income is recorded net of applicable withholding taxes on the ex-dividend date, except that certain dividends from foreign securities are recorded as soon as the Funds are informed of the ex-dividend date. Interest income is recorded on the accrual basis. The Core Bond Fund classifies gains and losses realized on prepayments received on mortgage-backed securities as part of interest income. All premiums and discounts, including original issue discounts, are amortized/accreted using the interest method. Federal income taxes Since the Investment Company is a Massachusetts business trust, each Fund is a separate corporate taxpayer and determines its net investment income and capital gains (or losses) and the amounts to be distributed to each Fund's shareholders without regard to the income and capital gains (or losses) of the other Funds. It is each Fund's intention to qualify as a regulated investment company and distribute all of its taxable income and capital gains. Therefore, no federal income tax provision was required for the Funds. Dividends and distributions to shareholders For all Funds, income dividends and capital gain distributions, if any, are recorded on the ex-dividend date. Dividends are generally declared and paid quarterly, except for the Non-U.S. Fund, which generally declares and pays dividends annually. Capital gain distributions are generally declared and paid annually. An additional distribution may be paid by the Funds to avoid imposition of federal income and excise tax on any remaining undistributed capital gains and net investment income. The timing and characterization of certain income and capital gain distributions are determined in accordance with federal tax regulations which may differ from GAAP. As a result, net investment income and net realized gain (or loss) on investment and foreign currency-related transactions for a reporting period may differ significantly from distributions during such period. The differences between tax regulations and GAAP primarily relate to investments in options, futures, forward contracts, swap contracts, passive foreign investment companies, foreign-denominated investments, mortgage-backed securities, certain securities sold at a loss and capital loss carryforwards. Expenses The Funds will pay their own expenses other than those expressly assumed by Frank Russell Investment Management Company ("FRIMCo" or "Advisor"). Most expenses can be directly attributed to the individual Funds. Expenses which cannot be directly attributed to a specific Fund are allocated among all Funds principally based on their relative net assets. Foreign currency translations The books and records of the Funds are maintained in US dollars. Foreign currency amounts and transactions of the Funds are translated into US dollars on the following basis: (a) Market value of investment securities, other assets and liabilities at the closing rate of exchange on the valuation date. (b) Purchases and sales of investment securities and income at the closing rate of exchange prevailing on the respective trade dates of such transactions. Reported net realized gains or losses from foreign currency-related transactions arise from: sales and maturities of short-term securities; sales of foreign currencies; currency gains or losses realized between the trade and settlement dates on securities transactions; the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Non-U.S. Fund's books and the US dollar equivalent of the amounts actually received or paid. Net unrealized gains or losses from foreign Notes to Financial Statements 83 Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- currency-related transactions arise from changes in the value of assets and liabilities, other than investments in securities, at year end, as a result of changes in the exchange rates. The Funds do not isolate that portion of the results of operations of the Fund that arises as a result of changes in exchange rates from that portion that arises from changes in market prices of investments during the year. Such fluctuations are included with the net realized and unrealized gain or loss from investments. However, for federal income tax purposes the Funds do isolate the effects of changes in foreign exchange rates from the fluctuations arising from changes in market prices for realized gain (or loss) on debt obligations. Derivatives To the extent permitted by the investment objectives, restrictions and policies set forth in the Funds' Prospectus and Statement of Additional Information, the Funds may participate in various derivative-based transactions. Derivative securities are instruments or agreements whose value is derived from an underlying security or index. They include options, futures, swaps, forwards, structured notes and stripped securities. These instruments offer unique characteristics and risks that assist the Funds in meeting their investment strategies. The Funds typically use derivatives in three ways: cash equitization/monetization, hedging, and return enhancement. Cash equitization/monetization is a technique that may be used by certain Funds through the use of options and futures to earn "market-like" returns with their excess and liquidity reserve cash balances. Hedging is used by some Funds to limit or control risks, such as adverse movements in exchange rates and interest rates. Return enhancement can be accomplished through the use of derivatives in a Fund. By purchasing certain instruments, Funds may more effectively achieve the desired portfolio characteristics that assist them in meeting their investment objectives. Depending on how the derivatives are structured and utilized, the risks associated with them may vary widely. These risks are generally categorized as market risk, liquidity risk and counterparty or credit risk. Foreign currency exchange contracts In connection with portfolio purchases and sales of securities denominated in a foreign currency, the Non-U.S. and Core Bond Funds may enter into foreign currency exchange spot contracts and forward foreign currency exchange contracts ("contracts"). Contracts are recorded at market value. Certain risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and are generally limited to the amount of unrealized gain on the contracts, if any, that is recognized in the Statement of Assets and Liabilities. Realized gains or losses arising from such transactions are included in net realized gain (or loss) from foreign currency-related transactions. Open contracts at December 31, 2004 are presented on the Schedule of Investments for the Non-U.S. and Core Bond Funds. Forward commitments The Funds may contract to purchase securities for a fixed price at a future date beyond customary settlement time (not to exceed 120 days) consistent with a Fund's ability to manage its investment portfolio and meet redemption requests. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The Funds may dispose of a forward commitment transaction prior to settlement if it is appropriate to do so and realize short-term gains (or losses) upon such sale. When effecting such transactions, cash or liquid high-grade debt obligations of the Fund in a dollar amount sufficient to make payment for the portfolio securities to be purchased will be segregated on the Fund's records at the trade date and maintained until the transaction is settled. A forward commitment transaction involves a risk of loss if the value of the security to be purchased declines prior to the settlement date or the other party to the transaction fails to complete the transaction. Options The Funds may purchase and sell (write) call and put options on securities and securities indices, provided such options are traded on a national securities exchange or in an over-the-counter market. The Funds may also purchase and sell call and put options on foreign currencies. The domestic equity Funds may utilize options to equitize liquidity reserve balances. The Funds will not enter into any such transactions unless it owns (1) an offsetting ("covered") position in securities, currencies or other options, futures contracts or forward contracts or (2) cash or liquid assets with a value, marked to market daily, sufficient to cover their obligations to the extent not covered as provided in (1) above. The Funds will comply with SEC 84 Notes to Financial Statements Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- guidelines regarding cover for these instruments and will, if the guidelines so require, designate the prescribed amount of cash or liquid assets as segregated. When a Fund writes a covered call or a put option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as an asset and as an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. The Fund receives a premium on the sale of a call option but gives up the opportunity to profit from any increase in stock value above the exercise price of the option, and when the Fund writes a put option it is exposed to a decline in the price of the underlying security. Whether an option which the Fund has written either expires on its stipulated expiration date or the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss, if the cost of a closing purchase transaction exceeds the premium received when the option was sold) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. If a call option which the Fund has written is exercised, the Fund realizes a capital gain or loss from the sale of the underlying security, and the proceeds from such sale are increased by the premium originally received. When a put option which a Fund has written is exercised, the amount of the premium originally received will reduce the cost of the security which a Fund purchases upon exercise of the option. Realized gains (losses) on purchased options are included in net realized gain (loss) from investments. The Funds' use of written options involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The face or contract amounts of these instruments reflect the extent of the Funds' exposure to market risk. The risks may be caused by an imperfect correlation between movements in the price of the instrument and the price of the underlying securities and interest rates. Future contracts The Funds utilize futures contracts to equitize uninvested cash balances. The face or contract amounts of these instruments reflect the extent of the Funds' exposure to off balance sheet risk. The primary risks associated with the use of futures contracts are an imperfect correlation between the change in market value of the securities held by the Fund and the prices of futures contracts and the possibility of an illiquid market. Upon entering into a futures contract, the Funds are required to deposit with a broker an amount, termed the initial margin, which typically represents 5% of the purchase price indicated in the futures contract. Payments to and from the broker, known as variation margin, are required to be made on a daily basis as the price of the futures contract fluctuates. Changes in initial settlement value are accounted for as unrealized appreciation (depreciation) until the contracts are terminated, at which time realized gains and losses are recognized. Swap agreements The Funds may enter into swap agreements as an additional equitization vehicle for uninvested cash balances held by the Funds or to effect investment transactions consistent with the Funds' investment objectives and strategies. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, the two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular investments or instruments. The returns to be exchanged between the parties are calculated with respect to a "notional amount" (i.e. a specified dollar amount that is hypothetically invested in a "basket" of securities representing a particular index). Amounts paid to and received from the swap counterparties representing capital appreciation and depreciation on the underlying securities and accrued interest expense and interest income are recorded as net realized gain (loss). The Fund is exposed to credit risk in the event of non-performance by the swap counterparties; however, the Fund does not anticipate non-performance by the counterparties. Investment in international markets Investing in international markets may involve special risks and considerations not typically associated with investing in the United States markets. These risks include revaluation of currencies, high rates of inflation, repatriation, restrictions on income and capital, and future adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, delayed settlements, and their prices more volatile than those of comparable securities in the United States. Notes to Financial Statements 85 Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- Guarantees In the normal course of business the Funds enter into contracts that contain a variety of representations which provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds expect the risk of loss to be remote. 3. Investment Transactions Securities For the period ended December 31, 2004, purchases and sales of investment securities (excluding US Government and Agency obligations, short-term investments, options, futures and repurchase agreements) were as follows: Funds Purchases Sales ---------------------------------------------------- Multi-Style Equity $375,875,295 $357,961,743 Aggressive Equity 257,990,260 251,151,885 Non-U.S. 170,334,825 150,332,945 Real Estate Securities 174,949,773 139,062,847 Core Bond 103,607,858 85,976,250 Purchases and sales of US Government and Agency obligations (excluding short-term investments, options, futures and repurchase agreements) were as follows: Fund Purchases Sales ---------------------------------------------------- Core Bond $152,258,590 $142,653,504 Written Options Contracts Fund transactions in written options for the period ended December 31, 2004 were as follows:
Non-U.S. Core Bond ------------------------ --------------------- Number of Premiums Number of Premiums Contracts Received Contracts Received -------------------------------------------------------------------------------- Outstanding December 31, 2003 101 $ 846,267 47 $ 88,977 Opened 1,547 17,952,119 425 215,076 Closed (1,543) (17,910,215) (39) (31,348) Expired -- -- (311) (230,020) ------ ------------ ---- --------- Outstanding December 31, 2004 105 $ 888,171 122 $ 42,685 ====== ============ ==== =========
Securities Lending The Investment Company has a securities lending program whereby each Fund can loan securities with a value up to 33 1/3% of its total assets to certain brokers. The Fund receives cash (US currency), US Government or US Government agency obligations as collateral against the loaned securities. To the extent that a loan is collateralized by cash, such collateral shall be invested by the securities lending agent, State Street Bank and Trust Company ("State Street"), in money market mutual funds and such other short-term investments, provided the investments meet certain quality and diversification requirements. The collateral received is recorded on the Fund's statement of assets and liabilities along with the related obligation to return the collateral. Income generated from the investment of cash collateral, less negotiated rebate fees paid to participating brokers and transaction costs, is divided between the Fund and State Street and is recorded as income for the Fund. To the extent that a loan is secured by non-cash collateral, brokers pay the Fund negotiated lenders' fees, which are divided between the Fund and State Street and are recorded as securities lending income for the Fund. All collateral received will be in an amount at least equal to 102% (for loans of US securities) or 105% (for non-US securities) of the market value of the loaned securities at the inception of each loan. The market value of the loaned securities is determined at the close of business of the Funds and any additional required collateral is delivered to the Fund the next day. Should the borrower of the securities fail financially, there is a risk of delay in recovery of the securities or loss of rights in the collateral. Consequently, loans are made only to borrowers which are 86 Notes to Financial Statements Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- deemed to be of good financial standing. As of December 31, 2004, the value of outstanding securities on loan and the value of collateral amounted to as follows: Value of Value of Funds Securities on Loan Cash Collateral ------------------------------------------------------------- Multi-Style Equity $ 869,103 $ 889,250 Aggressive Equity 21,386,600 22,022,331 Non-U.S. 19,629,669 20,647,080 Real Estate Securities 2,935 2,925 As of December 31, 2004, there was no non-cash collateral received for the securities on loan. 4. Related Party Transactions, Fees and Expenses Manager FRIMCo advises and administers all of the Funds which comprise the Investment Company. FRIMCo is a wholly-owned subsidiary of Frank Russell Company, a wholly-owned subsidiary of The Northwestern Mutual Life Insurance Company. Frank Russell Company researches and recommends to FRIMCo, and to the Investment Company, one or more investment management organizations to manage the portfolio of each Fund. The Funds are permitted to invest their cash reserves (i.e., monies awaiting investment in portfolio securities suitable for the Funds' objectives), and a portion of the collateral received from the Investment Company's securities lending program in the Frank Russell Investment Company Money Market Fund. As of December 31, 2004, $80,681,000 of the Money Market Fund's net assets represents investments by the Funds. For the period ended December 31, 2004, the management fee paid to FRIMCo, for the Funds listed below, in accordance with the Investment Company's Management Agreement with that firm, amounted to $9,768,338 before waivers and/or reimbursements. Such fee is payable monthly and is equal to the annual rate, by Fund, shown in the following table, of the average daily net assets of the applicable Fund. Funds Annual Rate ------------------------------------ Multi-Style Equity 0.78% Aggressive Equity 0.95 Non-U.S. 0.95 Real Estate Securities 0.85 Core Bond 0.60 FRIMCo has contractually agreed to waive a portion of its management fee for each Fund, up to the full amount of its fee, to the extent the Fund's operating expenses exceed specified limits imposed by FRIMCo on an annual basis. Additionally, FRIMCo has contractually agreed to reimburse each Fund for all remaining expenses, after fee waivers, that still exceed their respective expense caps. There were no reimbursements for the period ended December 31, 2004. FRIMCo does not have the ability to recover amounts waived or reimbursed from previous periods. The expense caps and waivers were as follows: Manager Fees Funds Expense Cap Waived --------------------------------------------------- Multi-Style Equity 0.87% $ 42,289 Aggressive Equity 1.05 215,126 Non-U.S. 1.15 287,356 Real Estate Securities 1.10 -- Core Bond 0.70 52,142 Notes to Financial Statements 87 Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- Custodian The Funds have entered into arrangements with their Custodian whereby custody credits realized as a result of uninvested cash balances were used to reduce a portion of the Funds' expenses. For the period ended December 31, 2004, the Funds' custodian fees were reduced by the following amounts under these arrangements: Custody Credit Funds Amount --------------------------------------- Multi-Style Equity $ 400 Aggressive Equity 443 Non-U.S 513 Real Estate Securities 541 Core Bond 2,685 FRIMCo waived a portion of its advisory fee for the following Funds to provide the benefit of brokerage commission rebates from a non-affiliated broker to these Funds in the following amounts: Funds Amount Paid ------------------------------------ Multi-Style Equity $ 623 Aggressive Equity 859 Real Estate Securities 2,438 Analytic services Fees for analytic services provided to the Funds are paid or accrued to Russell/Mellon Analytical Services, an affiliate of FRIMCo. Russell/Mellon Analytical Services provided TruVP System to the Funds. The TruVP System provides investment analytics. Effective June 1, 2004, the Funds discontinued paying Russell/Mellon Analytical Services for use of the TruVP System and FRIMCo has agreed to pay these fees going forward. Total fees for the Funds reported herein for the period ended December 31, 2004 were $37,718. Distributor Russell Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary of FRIMCo, is the principal Distributor for Investment Company shares. The Distributor receives no compensation from the Investment Company for its services. Brokerage commissions The Funds may effect portfolio transactions through Frank Russell Securities, Inc., an affiliate of the Manager, when a money manager determines that the Fund will receive competitive execution, price and commissions. Amounts retained by Frank Russell Securities, Inc. for the period ended December 31, 2004 were as follows: Funds Amount -------------------------------- Multi-Style Equity $14,302 Aggressive Equity 6,927 Non-U.S 17,451 Real Estate Securities 3,595 Additionally, the Funds paid brokerage commissions to non-affiliated brokers who provided brokerage and research services to the Manager. Accrued fees payable to affiliates as of December 31, 2004 were as follows:
Real Estate Multi-Style Equity Aggressive Equity Non-U.S. Securities Core Bond ------------------------------------------------------------------------------------------------- Management fees $221,307 $154,695 $205,063 $274,348 $88,251 Transfer agent fees 1,612 583 1,084 1,963 678 -------- -------- -------- -------- ------- $222,919 $155,278 $206,147 $276,311 $88,929 ======== ======== ======== ======== =======
88 Notes to Financial Statements Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- Board of Trustees The Russell Fund Complex consists of Frank Russell Investment Company ("FRIC"), which has 34 funds, and Russell Investment Funds ("RIF"), which has five funds. Each of the trustees is a trustee of both FRIC and RIF. The Russell Fund Complex pays each of its Trustees not affiliated with FRIMCo a retainer of $52,000 per year, $5,000 for each regular quarterly meeting attended in person, $2,000 for each special meeting attended in person, and $2,000 for each Joint Audit Committee meeting or Nominating and Governance Committee or any other committee meeting established and approved by the Board that is attended in person. Each Trustee will receive a $500 fee for attending the meetings (quarterly, special, committee) by phone instead of receiving the full fee had the member attended in person. Out of pocket expenses are also paid by the Russell Fund Complex. The Lead Trustee is paid a fee of $10,000 per year. The Audit Committee chair is paid a fee of $12,000 per year and the Nominating and Governance Committee chair is paid a fee of $6,000 per year. 5. Federal Income Taxes At December 31, 2004, the following Funds had net tax basis capital loss carryforwards which may be applied against any net realized taxable gains in each succeeding year or until their respective expiration dates, whichever occurs first. Available capital loss carryforwards and expiration dates are as follows: Capital loss carryforward 12/31/09 12/31/10 12/31/11 Totals ------------------------------------------------------------------------- Multi-Style Equity $32,384,952 $42,288,325 $3,302,725 $77,976,002 Non-U.S. 12,093,749 25,579,757 5,528,524 43,202,030 At December 31, 2004, the cost of investments, net unrealized appreciation (depreciation), undistributed ordinary income and undistributed long-term capital gains for income tax purposes were as follows:
Real Estate Multi-Style Equity Aggressive Equity Non-U.S. Securities Core Bond ---------------------------------------------------------------------------------------------------------------------- Cost of Investments $291,827,512 $185,511,622 $229,052,059 $267,557,473 $208,857,846 ============ ============ ============ ============ ============ Unrealized Appreciation 44,516,644 34,009,828 51,114,258 118,624,275 3,550,284 Unrealized Depreciation (3,006,257) (1,699,635) (1,875,083) (82,391) (676,823) ------------ ------------ ------------ ------------ ------------ Net Unrealized Appreciation (Depreciation) $ 41,510,387 $ 32,310,193 $ 49,239,175 $118,541,884 $ 2,873,461 ============ ============ ============ ============ ============ Undistributed Ordinary Income $ 1,321,016 $ -- $ 2,235,713 $ 1,663,422 $ 1,358,318 Undistributed Long-Term Gains (Capital Loss Carryforward) (77,976,002) 5,956,305 (43,202,030) 4,869,229 667,820 Tax Composition of Distributions Ordinary Income $ 2,310,844 $ 292,847 $ 4,649,250 $ 8,052,521 $ 5,842,093 Long Term Capital Gains $ -- $ 6,583,523 $ -- $ 19,794,147 $ 1,174,404
As permitted by tax regulations, the Core Bond Fund intends to defer a net realized capital loss of $39,714 incurred from November 1, 2004 to December 31, 2004. Notes to Financial Statements 89 Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- 6. Fund Share Transactions (amounts in thousands) Share transactions for the period ended December 31, 2004 were as follows:
Shares Dollars --------------- ------------------- 2004 2003 2004 2003 ------ ------ -------- -------- Multi-Style Equity Proceeds from shares sold 4,020 3,987 $ 46,942 $ 40,534 Proceeds from reinvestment of distributions 196 181 2,311 1,744 Payments for shares redeemed (3,484) (1,381) (41,234) (13,665) ------ ------ -------- -------- Total net increase (decrease) 732 2,787 $ 8,019 $ 28,613 ====== ====== ======== ======== Aggressive Equity Proceeds from shares sold 2,208 3,825 $ 30,538 $ 43,296 Proceeds from reinvestment of distributions 474 11 6,876 138 Payments for shares redeemed (1,906) (2,043) (26,285) (22,380) ------ ------ -------- -------- Total net increase (decrease) 776 1,793 $ 11,129 $ 21,054 ====== ====== ======== ======== Non-U.S Proceeds from shares sold 3,827 2,604 $ 38,755 $ 21,233 Proceeds from reinvestment of distributions 432 489 4,649 4,572 Payments for shares redeemed (2,607) (1,048) (26,895) (8,195) ------ ------ -------- -------- Total net increase (decrease) 1,652 2,045 $ 16,509 $ 17,610 ====== ====== ======== ======== Real Estate Securities Proceeds from shares sold 4,847 3,284 $ 73,559 $ 39,761 Proceeds from reinvestment of distributions 1,702 856 27,847 10,614 Payments for shares redeemed (2,912) (806) (44,325) (9,110) ------ ------ -------- -------- Total net increase (decrease) 3,637 3,334 $ 57,081 $ 41,265 ====== ====== ======== ======== Core Bond Proceeds from shares sold 3,478 2,229 $ 36,630 $ 23,733 Proceeds from reinvestment of distributions 668 760 7,016 8,011 Payments for shares redeemed (1,455) (2,383) (15,314) (25,459) ------ ------ -------- -------- Total net increase (decrease) 2,691 606 $ 28,332 $ 6,285 ====== ====== ======== ========
7. Beneficial Interest As of December 31, 2004, the following table includes shareholders with shares of beneficial interest greater than 10% of the total outstanding shares of each respective Fund. Northwestern Mutual Life Insurance Company was the largest client in each Fund. Funds # of Shareholders % ------------------------------------------------- Multi-Style Equity 3 85.8 Aggressive Equity 3 84.0 Non-U.S. 3 87.8 Real Estate Securities 3 88.5 Core Bond 3 91.9 90 Notes to Financial Statements Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - -------------------------------------------------------------------------------- 8. Illiquid or Restricted Securities A Fund may invest a portion of its net assets not to exceed 15% in securities that are illiquid. Illiquid securities are securities that may not be readily marketable, and that cannot be sold within seven days in the ordinary course of business at the approximate amount at which the Fund has valued the securities. Illiquid and restricted securities may be priced by the Funds using fair value procedures approved by the Board of Trustees. Restricted securities are subject to contractual limitations on resale, are often issued in private placement transactions, and are not registered under the Securities Act of 1933 (the "Act"). The most common types of restricted securities are those sold under Rule 144A of the Act and commercial paper sold under Section 4(2) of the Act. Such restricted securities are not subject to the 15% limitation if the Adviser, under supervision of the Board of Trustees, determines that a liquid trading market exists. Information concerning illiquid and restricted securities held by the Funds is as follows: Pursuant to guidelines established by the Board of Trustees, the Adviser has determined that a liquid trading market exists for the following restricted securities held as of December 31, 2004: Restricted Securities (144A)
Principal Cost Cost Market Value Fund - % of Net Assets Acquisition Amount ($) per Unit (000) (000) Securities Date or Shares $ $ $ ------------------------------------------------------------------------------------------------------------ Aggressive Equity Fund - 0.3% Diamondrock Hospitality Co. 06/26/04 20,800 10.00 208 212 Fieldstone Investment Corp. 06/07/04 13,100 15.80 207 226 Provident Senior Living Trust 07/26/04 15,300 15.00 230 245 --- 683 === Non-U.S. Fund - 0.3% First Financial Holding Co., Ltd. 10/07/04 39,085 16.74 654 671 === Core Bond Fund - 3.6% BAE Systems Holdings, Inc. 11/28/04 350,000 100.09 350 392 Centaur Funding Corp. 03/07/02 165,000 1.07 177 217 Citigroup, Inc. 11/27/01 230,000 89.17 205 231 Clorox Co. 11/30/04 70,000 99.69 70 71 Clorox Co. 11/30/04 100,000 100.01 100 101 DG Funding Trust 11/03/04 49 10,537.12 516 525 Dresdner Funding Trust I 04/09/03 185,000 103.17 191 229 Export-Import Bank Of Korea 02/03/04 120,000 99.58 119 120 Glencore Funding LLC 05/12/04 60,000 91.33 55 58 GT Group Telecom, Inc. 01/27/00 175 48.28 8 -- HVB Funding Trust I 05/01/03 150,000 96.71 145 193 Korea Electric Power Corp. 04/20/04 60,000 98.45 59 60 May Department Stores Co. (The) 07/13/04 90,000 99.87 90 92 Miller Brewing Co. 08/06/03 140,000 99.97 140 146 Mizuho Financial Group Cayman, Ltd. 02/27/04 150,000 100.73 151 158 Mizuho Preferred Capital Co. LLC 08/20/99 315,000 90.81 286 357 Monumental Global Funding II 02/04/03 155,000 100.00 155 155 Morgan Stanley Bank AG for OAO Gazprom 02/21/03 100,000 109.99 110 118 Natexis Ambs Co. LLC 06/24/98 120,000 105.46 127 135 Parker Hannifin Employee Stock Ownership Trust 03/09/99 217,328 100.00 217 227 Qwest Services Corp. 03/25/04 40,000 115.58 46 48 Russia Government International Bond 12/03/01 495,000 90.72 449 510 Russia Government International Bond 10/27/04 200,000 110.89 222 222 Russia Government International Bond 12/09/04 200,000 102.37 205 207 SACO I, Inc. 11/28/07 450,407 100.00 450 450 Systems 2001 AT LLC 03/08/02 141,490 101.96 144 154
Notes to Financial Statements 91 Russell Investment Funds Notes to Financial Statements, continued -- December 31, 2004 - --------------------------------------------------------------------------------
Principal Cost Cost Market Value Fund - % of Net Assets Acquisition Amount ($) per Unit (000) (000) Securities Date or Shares $ $ $ ------------------------------------------------------------------------------------------------------------ Telecom Italia Capital SA 09/28/04 95,000 99.08 94 93 Telecom Italia Capital SA 12/20/04 115,000 98.13 113 113 Tenaska Alabama II Partners, LP 10/09/03 111,051 100.00 111 116 Tengizchevroil Finance Co. 11/23/04 215,000 100.65 216 215 Texas Geneco LLC 12/08/04 40,000 100.00 40 41 TXU Corp. 11/22/04 240,000 99.94 240 240 TXU Corp. 11/24/04 110,000 98.98 109 109 TXU Corp. 12/20/04 35,000 99.78 35 35 Zurich Capital Trust I 01/10/03 245,000 93.94 230 275 ----- 6,413 =====
92 Notes to Financial Statements Report of Independent Registered Public Accounting Firm To the Board of Trustees and Shareholders of Russell Investment Funds: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Multi-Style Equity Fund, Aggressive Equity Fund, Non-U.S. Fund, Core Bond Fund, and Real Estate Securities Fund (constituting the Russell Investment Funds, hereafter referred to as the "Funds") at December 31, 2004, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Funds' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2004 by correspondence with the custodian, brokers and transfer agent, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Seattle, Washington February 14, 2005 Report of Independent Auditors 93 Russell Investment Funds Tax Information -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- Pursuant to Section 852 of the Internal Revenue Code, the Funds designate the following amounts as long-term capital gain dividends for their taxable year ended December 31, 2004: Total 20% Total 15% Long-Term Long-Term Capital Gains Capital Gains ------------- ------------- Aggressive Equity $ -- $ 6,583,523 Real Estate Securities -- 19,794,147 Core Bond 456 1,173,948 The Non-U.S. Fund paid foreign taxes of $581,503 and recognized $4,917,836 of foreign source income during the taxable year ended December 31, 2004. Pursuant to Section 853 of the Internal Revenue Code, the Fund designates $0.0255 per share of foreign taxes paid and $0.2154 of gross income earned from foreign sources in the taxable year ended December 31, 2004. 94 Tax Information Russell Investment Funds Shareholder Requests for Other Information - -------------------------------------------------------------------------------- A description of the policies and procedures that the Fund has adopted to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling the Fund at (800) 787-7354 or (ii) on the Securities and Exchange Commission's website at www.sec.gov. Information on how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available at www.russell.com and on the SEC's website at www.sec.gov. The Funds will file their complete schedules of investments with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Funds' Form N-Q is available (i) without charge, upon request, by calling the Fund at (800) 787-7354, (ii) on the Fund's website at www.russell.com, (iii) on the Securities and Exchange Commission's website at www.sec.gov, and (iv) the Securities and Exchange commission's public reference room. Shareholder Requests for Other Information 95 Russell Investment Funds Disclosure of Information about Fund Directors -- December 31, 2004 (Unaudited) - -------------------------------------------------------------------------------- The following tables provide information for each officer and trustee of the Russell Fund Complex. The Russell Fund Complex consists of Frank Russell Investment Company ("FRIC"), which has 34 funds, and Russell Investment Funds ("RIF"), which has 5 funds. Each of the trustees is a trustee of both FRIC and RIF. The first table provides information for trustees who are interested trustees. The second table provides information for the independent trustees. The third table provides information for the officers.
- ------------------------------------------------------------------------------------------------------------------------------------ No. of Portfolios Position(s) Held in Russell Name, with Fund and Term Principal Occupation(s) Complex Other Age, Length of of During the Overseen Directorships Held Address Time Served Office Past 5 Years by Trustee by Trustee - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEES AND INTERESTED TRUSTEE EMERITUS - ------------------------------------------------------------------------------------------------------------------------------------ *George F. Russell, Jr., Trustee Emeritus Until resignation . Director Emeritus, FRC 39 None Born July 3, 1932 and Chairman or removal . Chairman Emeritus, FRIC and RIF Emeritus since . Chairman Emeritus, Frank Russell 1999 Securities, Inc. 909 A Street . Chairman Emeritus, Russell 20/20 Tacoma, Washington Association 98402-1616 . Chairman Emeritus, Frank Russell Trust Company . Director Emeritus FRIMCo . Chairman of Sunshine Management Services, LLC - ------------------------------------------------------------------------------------------------------------------------------------ *Lynn L. Anderson, Trustee since Appointed until . Vice Chairman, FRC 39 . Trustee, The Born April 22, 1939 1987 successor is duly . Chairman of the Board, Trustee, SsgA Funds elected and FRIC and RIF (investment 909 A Street qualified . CEO and Chairman of the Board, company) Tacoma, Washington Russell Fund Distributors, Inc. 98402-1616 Chairman of the Until successor and FRIMCo Board since 1999 is chosen and . Trustee, President and Chairman qualified by of the Board, SsgA Funds trustees (investment company) . Director, Chairman of the Board, Frank Russell Trust Company . Director, Frank Russell Investments (Ireland) Limited and Frank Russell Investments (Cayman) Ltd. . Until October, 2002, President and CEO, FRIC and RIF - ------------------------------------------------------------------------------------------------------------------------------------ *Michael J.A. Phillips, Trustee Since Appointed until . 1990-2003, President, FRC 39 None Born January 20, 1948 2002 successor is duly . 1993-2003, CEO, FRC elected and . Chairman of the Board and 909 A Street FRC qualified. Director, FRC Tacoma, Washington . Trustee, FRIC and RIF 98402-1616 . Director, FRTC and Frank Russell Capital Inc. . Director/Chairman, Frank Russell Investments (Delaware), Inc. . Director, Chairman of The Board and President, Russell 20/20 Association . Director, Frank Russell Company Pty. Limited, Frank Russell Japan Co., Ltd., Frank Russell Investments (Suisse), S.A., and Frank Russell Company Limited - ------------------------------------------------------------------------------------------------------------------------------------
* Each of Messrs. Russell, Anderson and Phillips is also an officer of an affiliate of FRIC and RIF and is therefore an interested trustee. 96 Disclosure of Information about Fund Directors Russell Investment Funds Disclosure of Information about Fund Directors, continued -- December 31, 2004 (Unaudited) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ No. of Portfolios Position(s) Held in Russell Name, with Fund and Term Principal Occupation(s) Complex Other Age, Length of of During the Overseen Directorships Held Address Time Served Office Past 5 Years by Trustee by Trustee - ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES AND INDEPENDENT TRUSTEE EMERITUS - ------------------------------------------------------------------------------------------------------------------------------------ Paul E. Anderson, Trustee since 1984 Appointed until . 1996 to present, President, 39 None Born October 15, 1931 successor is duly Anderson Management Group LLC elected and (private investments consulting) 909 A Street qualified Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------------------ Paul Anton, Ph.D., Trustee Emeritus Five year term . Retired since 1997 39 None Born December 1, 1919 since 2003 . Trustee of FRIC and RIF Until 2002 909 A Street Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------------------ William E. Baxter, Trustee Emeritus Five year term . Retired since 1986 39 None Born June 8, 1925 since 2004 . Trustee of FRIC and RIF Until 2004 909 A Street Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------------------ Kristianne Blake, Trustee since 2000 Appointed until . President, Kristianne Gates 39 . Trustee WM Born January 22, 1954 successor is duly Blake, P.S. (accounting Group of elected and services) Funds 909 A Street qualified (investment Tacoma, Washington company); 98402-1616 . Director, Avista Corp - ------------------------------------------------------------------------------------------------------------------------------------ Daniel P. Connealy Trustee since 2003 Appointed until . 2004, Senior Vice President and 39 . Director, Born June 6, 1946 successor is duly Chief Financial Officer, Waddell Gold Banc elected and & Reed Financial, Inc. Corporation, 909 A Street qualified . 2001-2003, Vice President and Inc. Tacoma, Washington Chief Financial Officer, Janus 98402-1616 Capital Group Inc. . 1979-2001, Audit and Accounting Partner, PricewaterhouseCoopers LLP - ------------------------------------------------------------------------------------------------------------------------------------ Jonathan Fine Trustee since 2004 Appointed until . President and Chief Executive 39 None Born July 8, 1954 successor is duly Officer, United Way of King elected and County, WA 909 A Street qualified . 1996-2000, Chief Executive Tacoma, Washington Officer, Seattle/King County 98402-1616 Chapter of the American Red Cross - ------------------------------------------------------------------------------------------------------------------------------------
Disclosure of Information about Fund Directors 97 Russell Investment Funds Disclosure of Information about Fund Directors, continued -- December 31, 2004 (Unaudited) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ No. of Portfolios Position(s) Held in Russell Name, with Fund and Term Principal Occupation(s) Complex Other Age, Length of of During the Overseen Directorships Held Address Time Served Office Past 5 Years by Trustee by Trustee - ------------------------------------------------------------------------------------------------------------------------------------ Lee C. Gingrich, Trustee since 1984 Appointed until . Retired since 1995 39 None Born October 6, 1930 successor is duly elected and 909 A Street qualified Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------------------ Eleanor W. Palmer, Trustee Emeritus Five year term . Retired since 1981 39 None Born May 5, 1926 since 2004 . Trustee of FRIC and RIF Until 2004 909 A Street Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------------------ Raymond P. Tennison, Trustee since 2000 Appointed until . Currently, President, Simpson 39 None Jr. Born December 21, successor is duly Investment Company and several 1955 elected and additional subsidiary companies, qualified including Simpson Timber 909 A Street Company, Simpson Paper Company Tacoma, Washington and Simpson Tacoma Kraft 98402-1616 Company - ------------------------------------------------------------------------------------------------------------------------------------ Julie W. Weston, Trustee since 2002 Appointed until . Retired since 2000 39 None Born October 2, 1943 successor is duly . 1987 to 2000, Arbitrator, The elected and American Arbitration Association qualified Commercial Panel . 1995 to 1999, Hearing Officer, University of Washington) . 1987 to 2002, Director, Smith Barney Fundamental Value Fund - ------------------------------------------------------------------------------------------------------------------------------------
98 Disclosure of Information about Fund Directors Russell Investment Funds Disclosure of Information about Fund Directors, continued -- December 31, 2004 (Unaudited) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------- Position(s) Held Name, with Fund and Principal Occupation(s) Age, Length of During the Address Time Served Term of Office Past 5 Years - ------------------------------------------------------------------------------------------------------------------------- OFFICERS - ------------------------------------------------------------------------------------------------------------------------- J. David Greenwald Chief Compliance Until successor is . Chief Compliance Officer, FRIC Born September 24, 1957 Officer since 2004 chosen and . Chief Compliance Officer, RIF qualified by . Chief Compliance Officer, FRIMCo Trustees . 2003-2004 Vice President and Head of Fund Compliance, ING Funds LLC 909 A Street . 1996-2003 Director of Mutual Fund Compliance Tacoma, Washington and Operations, American Skandia, Inc. 98402-1616 - ------------------------------------------------------------------------------------------------------------------------- Gregory J. Stark, President and Chief Until successor is . President and CEO, FRIC and RIF Born May 3, 1968 Executive Officer chosen and . Director, President and CEO, FRIMCo since 2004 qualified by . Director and President, Russell Fund 909 A Street Trustees Distributors, Inc. and Russell Insurance Tacoma, Washington Agency, Inc. 98402-1616 . 1995 to present, Managing Director of International Operations of FRC . Managing Director of Individual Investor Services, FRC . 2000 to 2004, Managing Director, Sales and Client Service, FRIMCo . 1998 to 2000, Representative Director, Frank Russell Investments (Japan), Ltd. - ------------------------------------------------------------------------------------------------------------------------- Mark E. Swanson, Treasurer and Chief Until successor is . Treasurer and Chief Accounting Officer, FRIC Born November 26, 1963 Accounting Officer chosen and and RIF 1998 to present since 1998 qualified by . Director, Funds Administration, FRIMCo and Trustees Frank Russell Trust Company 909 A Street . Treasurer, SsgA Funds (investment company) Tacoma, Washington . Manager, Funds Accounting and Taxes, Russell 98402-1616 Fund Distributors, Inc. . April 1996 to August 1998, Assistant Treasurer, FRIC and RIF; November 1995 to July 1998, Assistant Secretary, SsgA Funds; February 1997 to July 1998, Manager, Funds Accounting and Taxes, FRIMCo - ------------------------------------------------------------------------------------------------------------------------- Thomas F. Hanly Chief Investment Until removed by . Chief Investment Officer, FRC Born November 17, 1964 Officer since 2003 Trustees . 1999 to 2003, Chief Financial Officer 909 A Street Tacoma, Washington 98402-1616 - ------------------------------------------------------------------------------------------------------------------------- Randall P. Lert, Director of Until removed by . Director of Investments, FRIC and RIF Born October 3, 1953 Investments since Trustees . Chief Portfolio Strategist, FRIMCo 1991 . Chief Investment Officer, Frank Russell 909 A Street Trust Company Tacoma, Washington . Director, FRIMCo and Russell Fund 98402-1616 Distributors, Inc. - ------------------------------------------------------------------------------------------------------------------------- Karl J. Ege, Secretary and General Until removed by . Secretary and General Counsel, FRIC, RIF, Born October 8, 1941 Counsel since 1994 Trustees FRIMCo, Frank Russell Trust Company and Russell Fund Distributors, Inc. 909 A Street . Director, Secretary and General Counsel, Tacoma, Washington Frank Russell Capital Inc. 98402-1616 . Director and Secretary, Russell 20-20 Association - ------------------------------------------------------------------------------------------------------------------------- Mark D. Amberson, Director of Short-Term Until removed by . Director of Short-Term Investment Funds, Born July 20, 1960 Investment Funds Trustees FRIC, RIF, FRIMCo and Frank Russell Trust since 2001 Company 909 A Street . From 1991 to 2001, Portfolio Manager, FRIC, Tacoma, Washington RIF, FRIMCo and Frank Russell Trust Company 98402-1616 - -------------------------------------------------------------------------------------------------------------------------
Disclosure of Information about Fund Directors 99 Russell Investment Funds Frank Russell Investment Company 909 A Street, Tacoma, Washington 98402 (800) 832-6688 In Washington (253) 627-7001 - -------------------------------------------------------------------------------- Trustees Lynn L. Anderson, Chairman Paul E. Anderson Kristianne Blake Daniel P. Connealy Jonathan Fine Lee C. Gingrich Michael J.A. Phillips Raymond P. Tennison, Jr. Julie W. Weston Trustees Emeritus George F. Russell, Jr. Paul Anton, PhD William E. Baxter Eleanor W. Palmer Officers Lynn L. Anderson, Chairman of the Board Greg J. Stark, President and Chief Executive Officer J. David Greenwald, Chief Compliance Officer Karl J. Ege, Secretary Mark E. Swanson, Treasurer and Chief Accounting Officer Tom F. Hanly, Chief Investment Officer Randall P. Lert, Director of Investments Mark D. Amberson, Director of Short Term Investment Funds Manager, Transfer and Dividend Paying Agent Frank Russell Investment Management Company 909 A Street Tacoma, WA 98402 Consultant Frank Russell Company 909 A Street Tacoma, WA 98402 Custodian State Street Bank and Trust Company Allan Forbes Building 150 Newport Avenue AFB35 North Quincy, MA 02171 Office of Shareholder Inquiries 909 A Street Tacoma, WA 98402 (800)787-7354 Legal Counsel Stradley, Ronon, Stevens & Young, LLP 2600 One Commerce Square Philadelphia, PA 19103-7098 Distributor Russell Fund Distributors, Inc. 909 A Street Tacoma, WA 98402 Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP 1420 5th Avenue Suite 1900 Seattle, WA 98101 Money Managers Multi-Style Equity Fund Alliance Capital Management L.P., which acts as money manager to the Fund through its Bernstein Investment Research and Management Unit, New York, NY Ark Asset Management Co., Inc., New York, NY DePrince, Race & Zollo, Inc., Orlando, FL Institutional Capital Corporation, Chicago, IL Jacobs Levy Equity Management, Inc., Florham Park, NJ Montag & Caldwell, Inc., Atlanta, GA Turner Investment Partners, Inc., Berwyn, PA Aggressive Equity Fund CapitalWorks Investment Partners, LLC, San Diego, CA David J. Greene and Company, LLC, New York, NY Geewax, Terker & Company, Chadds Ford, PA Goldman Sachs Asset Management, L.P., New York, NY Gould Investment Partners LLC, Berwyn, PA Jacobs Levy Equity Management, Inc., Florham Park, NJ Nicholas-Applegate Capital Management LLC, San Diego, CA TimesSquare Capital Management, Inc., New York, NY Non-U.S. Fund AQR Capital Management, LLC, New York, NY Fidelity Management & Research Company, Boston, MA Oechsle International Advisors, LLC, Boston, MA The Boston Company Asset Management, LLC, Boston, MA 100 Manager, Money Managers and Service Providers Russell Investment Funds Frank Russell Investment Company 909 A Street, Tacoma, Washington 98402 (800) 832-6688 In Washington (253) 627-7001 - -------------------------------------------------------------------------------- Real Estate Securities Fund AEW Management and Advisors, L.P., Boston, MA INVESCO Institutional (N.A.), Inc., which acts as money manager to the Fund through its INVESCO Real Estate Division, Dallas, TX RREEF America L.L.C., Chicago, IL Core Bond Fund Bear Stearns Asset Management Inc.., New York, NY Pacific Investment Management Company LLC, Newport Beach, CA This report is prepared from the books and records of the Funds and is submitted for the general information of shareholders and is not authorized for distribution to prospective investors unless accompanied or preceded by an effective Prospectus. Nothing herein contained is to be considered an offer of sale or a solicitation of an offer to buy shares of Russell Investment Funds. Such offering is made only by Prospectus, which includes details as to offering price and other material information. Manager, Money Managers and Service Providers 101 (This page intentionally left blank) [LOGO] Russell Russell Investment Funds 909 A Street Tacoma, Washington 98402 253-627-7001 800-787-7354 Fax: 253-591-3495 www.russell.com 36-08-023 (12/04) [GRAPHIC] Annual Report December 31, 2004 Northwestern Mutual Variable Life Account Financial Statements Northwestern Mutual Variable Life Account Financial Statements Table of Contents Northwestern Mutual Variable Life Account Statement of Assets and Liabilities...................... 1 Statements of Operations................................. 4 Statements of Changes in Equity.......................... 6 Financial Highlights..................................... 8 Notes to Financial Statements............................ 10 Report of Independent Registered Public Accounting Firm.. 14
Financial Statements Northwestern Mutual Variable Life Account Statement of Assets and Liabilities December 31, 2004 (in thousands) Assets Investments at Market Value: Northwestern Mutual Series Fund, Inc. Small Cap Growth Stock 77,514 shares (cost $138,812)............ $178,281 T. Rowe Price Small Cap Value 51,707 shares (cost $59,602)............. 81,646 Aggressive Growth Stock 124,131 shares (cost $389,723)........... 385,922 International Growth 20,274 shares (cost $20,711)............. 26,741 Franklin Templeton International Equity 202,890 shares (cost $288,611)........... 335,784 AllianceBernstein Mid Cap Value 7,104 shares (cost $9,621)............... 10,336 Index 400 Stock 106,472 shares (cost $119,360)........... 155,768 Janus Capital Appreciation 5,077 shares (cost $6,261)............... 7,260 Growth Stock 138,803 shares (cost $276,392)........... 275,386 Large Cap Core Stock 150,779 shares (cost $188,531)........... 172,189 Capital Guardian Domestic Equity 57,479 shares (cost $52,864)............. 65,756 T. Rowe Price Equity Income 13,896 shares (cost $17,238)............. 18,760 Index 500 Stock 225,511 shares (cost $620,411)........... 663,680
Northwestern Mutual Series Fund, Inc. (continued) Asset Allocation 22,833 shares (cost $21,976)..................... $ 25,573 Balanced 155,354 shares (cost $272,855)................... 290,978 High Yield Bond 77,039 shares (cost $53,748)..................... 58,473 Select Bond 81,755 shares (cost $100,015).................... 100,396 Money Market 118,667 shares (cost $118,667)................... 118,667 Fidelity Variable Insurance Products Fund III VIP Mid Cap 786 shares (cost $19,724)....................... 23,473 Russell Investment Funds Multi-Style Equity 10,244 shares (cost $122,325).................... 129,079 Aggressive Equity 4,787 shares (cost $55,795)...................... 71,321 Non-U.S. 7,815 shares (cost $72,290)...................... 88,545 Core Bond 3,880 shares (cost $40,471)...................... 40,745 Real Estate Securities 5,064 shares (cost $63,491)...................... 86,537 --------
Total Investments at Market Value. $3,411,296
Due from Northwestern Mutual Life Insurance Company: Small Cap Growth Stock Division..................... $16 T. Rowe Price Small Cap Value Division.............. 11 Aggressive Growth Stock Division.................... 35 International Growth Division....................... -- Franklin Templeton International Equity Division.... 39 AllianceBernstein Mid Cap Value Division............ -- Index 400 Stock Division............................ 12 Janus Capital Appreciation Division................. 2 Growth Stock Division............................... 54 Large Cap Core Stock Division....................... 21 Capital Guardian Domestic Equity Division........... 20 T. Rowe Price Equity Income Division................ 1
Due from Northwestern Mutual Life Insurance Company (continued): Index 500 Stock Division............................ 130 Asset Allocation Division........................... 6 Balanced Division................................... 60 High Yield Bond Division............................ 10 Select Bond Division................................ 11 Money Market Division............................... 13 Fidelity VIP Mid Cap Division....................... -- Russell Multi-Style Equity Division................. 3 Russell Aggressive Equity Division.................. 3 Russell Non-U.S. Division........................... 3 Russell Core Bond Division.......................... 2 Russell Real Estate Securities Division............. -- ---
Total Due From Northwestern Mutual Life Insurance Company. 452 ---------- Total Assets................................................ $3,411,748 ==========
The Accompanying Notes are an Integral Part of the Financial Statements Northwestern Mutual Variable Life Account 1 Financial Statements Northwestern Mutual Variable Life Account Statement of Assets and Liabilities, continued December 31, 2004 (in thousands) Liabilities Due to Northwestern Division Mutual Life Insurance Company -------- ----------------------------- Small Cap Growth Stock................. $ 21 T. Rowe Price Small Cap Value.......... 4 Aggressive Growth Stock................ 43 International Growth................... 3 Franklin Templeton International Equity 35 AllianceBernstein Mid Cap Value........ 1 Index 400 Stock........................ -- Janus Capital Appreciation............. -- Growth Stock........................... 22 Large Cap Core Stock................... 18 Capital Guardian Domestic Equity....... 5 T. Rowe Price Equity Income............ -- Index 500 Stock........................ 50 Asset Allocation....................... -- Balanced............................... 11 High Yield Bond........................ -- Select Bond............................ 1 Money Market........................... -- Fidelity VIP Mid Cap................... 1 Russell Multi-Style Equity............. 12 Russell Aggressive Equity.............. 6 Russell Non-U.S........................ 4 Russell Core Bond...................... -- Russell Real Estate Securities......... 12 ---- $249 ---- Total Liabilities................................................ $249 ----
Equity Variable Life Policies Issued: Variable Complife Policies Issued: Division Before October 11, 1995 On or After October 11, 1995 - -------- ------------------------------ ---------------------------------- Small Cap Growth Stock................. $ 11,433 $ 155,838 T. Rowe Price Small Cap Value.......... 8,517 64,456 Aggressive Growth Stock................ 60,879 313,742 International Growth................... 1,847 21,288 Franklin Templeton International Equity 55,988 264,209 AllianceBernstein Mid Cap Value........ 1,124 8,164 Index 400 Stock........................ 10,160 132,356 Janus Capital Appreciation............. 687 5,921 Growth Stock........................... 28,329 230,929 Large Cap Core Stock................... 23,229 139,865 Capital Guardian Domestic Equity....... 6,555 51,510 T. Rowe Price Equity Income............ 3,241 14,386 Index 500 Stock........................ 114,037 507,528 Asset Allocation....................... 4,201 19,160 Balanced............................... 148,791 130,762 High Yield Bond........................ 6,313 47,996 Select Bond............................ 13,865 70,389 Money Market........................... 7,384 96,200 Fidelity VIP Mid Cap................... 3,027 18,455 Russell Multi-Style Equity............. 6,077 102,973 Russell Aggressive Equity.............. 4,855 57,728 Russell Non-U.S........................ 4,839 68,469 Russell Core Bond...................... 1,696 20,767 Russell Real Estate Securities......... 7,324 70,755 -------- ---------- $534,398 $2,613,846 3,148,244 -------- ----------
The Accompanying Notes are an Integral Part of the Financial Statements 2 Northwestern Mutual Variable Life Account Financial Statements Northwestern Mutual Variable Life Account Statement of Assets and Liabilities, continued December 31, 2004 (in thousands) Equity (continued) Variable Executive Life Policies Issued: Variable Joint Life Policies Issued: Division On or After March 2, 1998 On or After December 10, 1998 - -------- ---------------------------------------- ------------------------------------ Small Cap Growth Stock................. $ 3,857 $ 7,148 T. Rowe Price Small Cap Value.......... 3,493 5,188 Aggressive Growth Stock................ 5,002 6,291 International Growth................... 2,003 1,600 Franklin Templeton International Equity 6,049 9,542 AllianceBernstein Mid Cap Value........ 282 765 Index 400 Stock........................ 5,098 8,166 Janus Capital Appreciation............. 374 279 Growth Stock........................... 8,325 7,834 Large Cap Core Stock................... 4,340 4,758 Capital Guardian Domestic Equity....... 2,340 5,365 T. Rowe Price Equity Income............ 222 912 Index 500 Stock........................ 11,321 30,873 Asset Allocation....................... 798 1,419 Balanced............................... 3,740 7,734 High Yield Bond........................ 2,541 1,633 Select Bond............................ 10,496 5,657 Money Market........................... 9,263 5,833 Fidelity VIP Mid Cap................... 761 1,230 Russell Multi-Style Equity............. 12,768 7,252 Russell Aggressive Equity.............. 5,784 2,952 Russell Non-U.S........................ 10,402 4,835 Russell Core Bond...................... 17,165 1,119 Russell Real Estate Securities......... 3,711 4,735 -------- -------- $130,135 $133,120 263,255 -------- -------- ---------- Total Equity................................................................................................... 3,411,499 ---------- Total Liabilities and Equity................................................................................... $3,411,748 ==========
The Accompanying Notes are an Integral Part of the Financial Statements Northwestern Mutual Variable Life Account 3 Financial Statements Northwestern Mutual Variable Life Account Statements of Operations (in thousands)
Investment Income ------------------------------------------- Dividend Mortality and Net Investment Income Expense Risks Taxes Income (Loss) - --------------------------------------------------------------------------------------------- Year Ended December 31, 2004 Small Cap Growth Stock Division................. $ -- $ (844) $ (21) $ (865) T. Rowe Price Small Cap Value Division.......... 134 (327) (13) (206) Aggressive Growth Stock Division................ -- (1,956) (111) (2,067) International Growth Division................... 151 (95) (3) 53 Franklin Templeton International Equity Division 4,853 (1,579) (97) 3,177 AllianceBernstein Mid Cap Value Division........ 76 (32) (1) 43 Index 400 Stock Division........................ 887 (722) (19) 146 Janus Capital Appreciation Division............. 7 (22) (1) (16) Growth Stock Division........................... 1,743 (1,411) (54) 278 Large Cap Core Stock Division................... 1,461 (873) (43) 545 Capital Guardian Domestic Equity Division....... 824 (261) (11) 552 T. Rowe Price Equity Income Division............ 237 (62) (4) 171 Index 500 Stock Division........................ 7,915 (3,274) (216) 4,425 Asset Allocation Division....................... -- (109) (7) (116) Balanced Division............................... 6,806 (1,423) (287) 5,096 High Yield Bond Division........................ 3,762 (291) (12) 3,459 Select Bond Division............................ 3,996 (454) (26) 3,516 Money Market Division........................... 1,727 (633) (16) 1,078 Fidelity VIP Mid Cap Division................... -- (61) (3) (64) Russell Multi-Style Equity Division............. 817 (549) (11) 257 Russell Aggressive Equity Division.............. 105 (316) (8) (219) Russell Non-U.S. Division....................... 1,518 (347) (8) 1,163 Russell Core Bond Division...................... 906 (115) (3) 788 Russell Real Estate Securities Division......... 1,514 (338) (10) 1,166 Year Ended December 31, 2003 Small Cap Growth Stock Division................. $ -- $ (606) $ (17) $ (623) T. Rowe Price Small Cap Value Division.......... -- (180) (8) (188) Aggressive Growth Stock Division................ -- (1,584) (96) (1,680) International Growth Division................... 84 (39) (1) 44 Franklin Templeton International Equity Division 3,268 (1,096) (73) 2,099 AllianceBernstein Mid Cap Value Division #...... 11 (5) -- 6 Index 400 Stock Division........................ 658 (492) (14) 152 Janus Capital Appreciation Division #........... 1 (5) -- (4) Growth Stock Division........................... 1,701 (1,176) (50) 475 Large Cap Core Stock Division................... 1,205 (706) (37) 462 Capital Guardian Domestic Equity Division....... 545 (143) (9) 393 T. Rowe Price Equity Income Division #.......... 44 (8) -- 36 Index 500 Stock Division........................ 6,704 (2,525) (182) 3,997 Asset Allocation Division....................... 282 (65) (5) 212 Balanced Division............................... 7,375 (1,208) (260) 5,907 High Yield Bond Division........................ 91 (230) (11) (150) Select Bond Division............................ 3,350 (414) (29) 2,907 Money Market Division........................... 1,516 (644) (17) 855 Fidelity VIP Mid Cap Division #................. -- (7) (1) (8) Russell Multi-Style Equity Division............. 554 (373) (7) 174 Russell Aggressive Equity Division.............. 46 (202) (5) (161) Russell Non-U.S. Division....................... 1,335 (207) (5) 1,123 Russell Core Bond Division...................... 1,291 (87) (4) 1,200 Russell Real Estate Securities Division......... 2,110 (201) (6) 1,903
# Division commenced operations on May 1, 2003 The Accompanying Notes are an Integral Part of the Financial Statements 4 Northwestern Mutual Variable Life Account
Realized and Unrealized Gain (Loss) on Investments ------------------------------------------------------- Realized Gain Unrealized Appreciation Net Gain Increase (Decrease) (Loss) on (Depreciation) of Investments (Loss) on in Equity Derived from Investments During the Period Investments Investment Activity ------------------------------------------------------------------------------ $ 536 $ 27,184 $ 27,720 $ 26,855 1,598 12,855 14,453 14,247 (3,751) 51,722 47,971 45,904 644 3,352 3,996 4,049 (567) 49,310 48,743 51,920 819 396 1,215 1,258 1,598 18,751 20,349 20,495 108 793 901 885 (2,194) 17,740 15,546 15,824 (2,159) 13,652 11,493 12,038 1,201 6,686 7,887 8,439 602 1,130 1,732 1,903 4,625 50,959 55,584 60,009 209 1,968 2,177 2,061 9,994 4,340 14,334 19,430 (1,021) 3,786 2,765 6,224 3,163 (2,884) 279 3,795 -- -- -- 1,078 227 3,202 3,429 3,365 (1,052) 11,556 10,504 10,761 3,269 5,619 8,888 8,669 (358) 11,965 11,607 12,770 852 (41) 811 1,599 5,780 13,291 19,071 20,237 $ (891) $ 33,526 $ 32,635 $ 32,012 201 10,725 10,926 10,738 (5,832) 69,733 63,901 62,221 (22) 2,841 2,819 2,863 (1,700) 70,906 69,206 71,305 43 319 362 368 (235) 28,826 28,591 28,743 32 207 239 235 (4,730) 41,613 36,883 37,358 (2,807) 30,073 27,266 27,728 (111) 8,718 8,607 9,000 39 393 432 468 61 114,875 114,936 118,933 (25) 2,223 2,198 2,410 (501) 32,210 31,709 37,616 (1,078) 11,836 10,758 10,608 2,745 (1,552) 1,193 4,100 -- -- -- 855 41 548 589 581 (1,818) 21,714 19,896 20,070 (1,673) 17,264 15,591 15,430 (1,188) 15,804 14,616 15,739 1,353 (425) 928 2,128 267 10,286 10,553 12,456
Northwestern Mutual Variable Life Account 5 Financial Statements Northwestern Mutual Variable Life Account Statements of Changes in Equity (in thousands)
Operations -------------------------------------------------------- Net Increase Change in (Decrease) in Net Net Unrealized Equity Derived Investment Realized Appreciation from Investment Income (Loss) Gain (Loss) (Depreciation) Activity - --------------------------------------------------------------------------------------------------------- Year Ended December 31, 2004 Small Cap Growth Stock Division................. $ (865) $ 536 $ 27,184 $ 26,855 T. Rowe Price Small Cap Value Division.......... (206) 1,598 12,855 14,247 Aggressive Growth Stock Division................ (2,067) (3,751) 51,722 45,904 International Growth Division................... 53 644 3,352 4,049 Franklin Templeton International Equity Division 3,177 (567) 49,310 51,920 AllianceBernstein Mid Cap Value Division........ 43 819 396 1,258 Index 400 Stock Division........................ 146 1,598 18,751 20,495 Janus Capital Appreciation Division............. (16) 108 793 885 Growth Stock Division........................... 278 (2,194) 17,740 15,824 Large Cap Core Stock Division................... 545 (2,159) 13,652 12,038 Capital Guardian Domestic Equity Division....... 552 1,201 6,686 8,439 T. Rowe Price Equity Income Division............ 171 602 1,130 1,903 Index 500 Stock Division........................ 4,425 4,625 50,959 60,009 Asset Allocation Division....................... (116) 209 1,968 2,061 Balanced Division............................... 5,096 9,994 4,340 19,430 High Yield Bond Division........................ 3,459 (1,021) 3,786 6,224 Select Bond Division............................ 3,516 3,163 (2,884) 3,795 Money Market Division........................... 1,078 -- -- 1,078 Fidelity VIP Mid Cap Division................... (64) 227 3,202 3,365 Russell Multi-Style Equity Division............. 257 (1,052) 11,556 10,761 Russell Aggressive Equity Division.............. (219) 3,269 5,619 8,669 Russell Non-U.S. Division....................... 1,163 (358) 11,965 12,770 Russell Core Bond Division...................... 788 852 (41) 1,599 Russell Real Estate Securities Division......... 1,166 5,780 13,291 20,237 Year Ended December 31, 2003 Small Cap Growth Stock Division................. $ (623) $ (891) $ 33,526 $ 32,012 T. Rowe Price Small Cap Value Division.......... (188) 201 10,725 10,738 Aggressive Growth Stock Division................ (1,680) (5,832) 69,733 62,221 International Growth Division................... 44 (22) 2,841 2,863 Franklin Templeton International Equity Division 2,099 (1,700) 70,906 71,305 AllianceBernstein Mid Cap Value Division #...... 6 43 319 368 Index 400 Stock Division........................ 152 (235) 28,826 28,743 Janus Capital Appreciation Division #........... (4) 32 207 235 Growth Stock Division........................... 475 (4,730) 41,613 37,358 Large Cap Core Stock Division................... 462 (2,807) 30,073 27,728 Capital Guardian Domestic Equity Division....... 393 (111) 8,718 9,000 T. Rowe Price Equity Income Division #.......... 36 39 393 468 Index 500 Stock Division........................ 3,997 61 114,875 118,933 Asset Allocation Division....................... 212 (25) 2,223 2,410 Balanced Division............................... 5,907 (501) 32,210 37,616 High Yield Bond Division........................ (150) (1,078) 11,836 10,608 Select Bond Division............................ 2,907 2,745 (1,552) 4,100 Money Market Division........................... 855 -- -- 855 Fidelity VIP Mid Cap Division #................. (8) 41 548 581 Russell Multi-Style Equity Division............. 174 (1,818) 21,714 20,070 Russell Aggressive Equity Division.............. (161) (1,673) 17,264 15,430 Russell Non-U.S. Division....................... 1,123 (1,188) 15,804 15,739 Russell Core Bond Division...................... 1,200 1,353 (425) 2,128 Russell Real Estate Securities Division......... 1,903 267 10,286 12,456
# Division commenced operations on May 1, 2003. The Accompanying Notes are an Integral Part of the Financial Statements 6 Northwestern Mutual Variable Life Account
Equity Transactions Equity - ---------------------------------------------------------------------------- ------------------ Increase Policy Loans, Transfers Transfers (Decrease) in Net Surrenders, Mortality from Other to Other Equity Derived Increase Beginning End Policyowners' and Death and Divisions Divisions from Equity (Decrease) of of Net Payments Benefits Other (net) or Sponsor or Sponsor Transactions in Equity Period Period - ---------------------------------------------------------------------------------------------------------- $ 26,759 $(11,703) $ (6,198) $21,671 $ (18,284) $12,245 $ 39,100 $139,176 $178,276 10,189 (3,492) (2,362) 23,572 (9,593) 18,314 32,561 49,093 81,654 55,267 (25,925) (12,675) 20,373 (26,901) 10,139 56,043 329,871 385,914 3,252 (1,144) (821) 12,255 (4,183) 9,359 13,408 13,330 26,738 39,898 (19,103) (10,864) 30,170 (15,731) 24,370 76,290 259,498 335,788 1,075 (343) (218) 7,754 (2,325) 5,943 7,201 3,134 10,335 21,327 (7,997) (4,990) 20,935 (14,494) 14,781 35,276 120,504 155,780 299 (98) (130) 5,286 (1,386) 3,971 4,856 2,405 7,261 45,476 (19,916) (9,785) 16,812 (23,240) 9,347 25,171 250,246 275,417 26,742 (11,382) (5,680) 12,499 (12,884) 9,295 21,333 150,859 172,192 8,225 (2,570) (1,940) 18,054 (5,764) 16,005 24,444 41,326 65,770 1,468 (439) (379) 13,051 (1,873) 11,828 13,731 5,030 18,761 92,591 (45,350) (22,429) 44,579 (37,870) 31,521 91,530 572,229 663,759 2,724 (1,180) (792) 7,373 (2,124) 6,001 8,062 17,516 25,578 31,258 (17,272) (8,935) 18,137 (13,505) 9,683 29,113 261,914 291,027 7,965 (4,128) (2,074) 9,372 (10,845) 290 6,514 51,969 58,483 15,191 (8,999) (3,600) 20,909 (19,656) 3,845 7,640 92,767 100,407 163,891 (17,870) (12,248) 43,324 (183,139) (6,042) (4,964) 123,644 118,680 1,826 (468) (410) 18,090 (3,314) 15,724 19,089 4,384 23,473 19,802 (8,514) (4,366) 17,916 (6,356) 18,482 29,243 99,827 129,070 9,925 (4,560) (2,332) 14,858 (10,750) 7,141 15,810 55,509 71,319 10,941 (4,757) (2,662) 15,782 (4,368) 14,936 27,706 60,839 88,545 4,318 (1,871) (1,331) 8,212 (3,905) 5,423 7,022 33,725 40,747 9,558 (3,907) (2,471) 23,749 (12,243) 14,686 34,923 51,602 86,525 $ 27,434 $ (9,924) $ (5,738) $19,899 $ (13,246) $18,425 $ 50,437 $ 88,739 $139,176 7,786 (1,952) (1,727) 16,289 (5,684) 14,712 25,450 23,643 49,093 60,234 (23,756) (13,144) 24,161 (25,415) 22,080 84,301 245,570 329,871 1,787 (409) (395) 7,087 (2,032) 6,038 8,901 4,429 13,330 39,949 (15,249) (9,144) 21,577 (12,400) 24,733 96,038 163,460 259,498 157 (17) (39) 2,883 (218) 2,766 3,134 -- 3,134 20,801 (7,075) (4,639) 19,312 (8,557) 19,842 48,585 71,919 120,504 57 (11) (29) 2,616 (463) 2,170 2,405 -- 2,405 50,569 (17,909) (10,550) 22,213 (18,323) 26,000 63,358 186,888 250,246 29,172 (10,449) (5,860) 11,799 (11,558) 13,104 40,832 110,027 150,859 6,504 (1,333) (1,360) 14,259 (4,575) 13,495 22,495 18,831 41,326 103 (21) (56) 4,815 (279) 4,562 5,030 -- 5,030 100,972 (34,018) (21,978) 44,892 (28,934) 60,934 179,867 392,362 572,229 3,039 (804) (603) 7,018 (1,444) 7,206 9,616 7,900 17,516 33,357 (14,745) (8,943) 18,756 (13,440) 14,985 52,601 209,313 261,914 7,849 (2,601) (2,190) 12,672 (7,086) 8,644 19,252 32,717 51,969 16,297 (5,347) (4,256) 31,858 (25,381) 13,171 17,271 75,496 92,767 163,443 (17,489) (12,821) 56,729 (186,977) 2,885 3,740 119,904 123,644 203 (27) (52) 4,423 (744) 3,803 4,384 -- 4,384 19,042 (6,524) (4,144) 15,128 (5,824) 17,678 37,748 62,079 99,827 8,625 (3,111) (1,995) 25,231 (18,789) 9,961 25,391 30,118 55,509 10,589 (3,623) (2,181) 8,442 (3,681) 9,546 25,285 35,554 60,839 4,050 (1,346) (2,035) 8,251 (12,046) (3,126) (998) 34,723 33,725 8,375 (2,861) (2,047) 13,386 (6,600) 10,253 22,709 28,893 51,602
Northwestern Mutual Variable Life Account 7 Financial Highlights Northwestern Mutual Variable Life Account (For a unit outstanding during the period)
Dividend Unit Value, Income as a % Expense Ratio, as of Period End(3) of Average Lowest to Total Return(5), Division Lowest to Highest Net Assets(4) Highest Lowest to Highest - ------------------------------------------------------------------------------------------------------------------ Small Cap Growth Stock Year Ended 12/31/04.................. $1.961525 to $ 24.646196 0.00% .20% to .75% 17.97% to 18.80% Year Ended 12/31/03.................. $1.662679 to $ 20.745671 0.00% .20% to .75% 32.13% to 33.06% Year Ended 12/31/02.................. $1.258323 to $ 15.591407 0.15% .20% to .75% (18.99%) to (18.42%) Year Ended 12/31/01.................. $1.553320 to $ 19.112629 0.01% .20% to .75% (4.44%) to (3.76%) T. Rowe Price Small Cap Value (1) Year Ended 12/31/04.................. $1.579431 to $ 16.175980 0.21% .20% to .75% 23.70% to 24.57% Year Ended 12/31/03.................. $1.276782 to $ 12.985287 0.00% .20% to .75% 34.21% to 35.15% Year Ended 12/31/02.................. $0.951303 to $ 9.607906 0.72% .20% to .75% (6.24%) to (5.58%) Period Ended 12/31/01................ $1.014592 to $ 10.175772 0.42% .20% to .75% 1.46% to 1.76% Aggressive Growth Stock Year Ended 12/31/04.................. $2.060530 to $ 54.747494 0.00% .20% to .75% 13.42% to 14.22% Year Ended 12/31/03.................. $1.814891 to $ 47.932675 0.00% .20% to .75% 23.83% to 24.69% Year Ended 12/31/02.................. $1.464237 to $ 38.441232 0.09% .20% to .75% (21.70%) to (21.15%) Year Ended 12/31/01.................. $1.868189 to $ 48.753408 0.10% .20% to .75% (20.44%) to (19.87%) International Growth Stock (1) Year Ended 12/31/04.................. $1.310570 to $ 13.422496 0.77% .20% to .75% 20.74% to 21.59% Year Ended 12/31/03.................. $1.085420 to $ 11.039080 1.06% .20% to .75% 38.02% to 38.99% Year Ended 12/31/02.................. $0.786402 to $ 7.942434 0.78% .20% to .75% (12.95%) to (12.34%) Period Ended 12/31/01................ $0.903343 to $ 9.060000 0.00% .20% to .75% (9.67%) to (9.40%) Franklin Templeton International Equity Year Ended 12/31/04.................. $2.014473 to $ 2.949634 1.69% .20% to .75% 18.50% to 19.33% Year Ended 12/31/03.................. $1.698301 to $ 2.471833 1.64% .20% to .75% 39.49% to 40.46% Year Ended 12/31/02.................. $1.216308 to $ 1.759773 1.99% .20% to .75% (17.98%) to (17.40%) Year Ended 12/31/01.................. $1.481423 to $ 2.130553 1.68% .20% to .75% (14.60%) to (14.00%) AllianceBernstein Mid Cap Value (2) Year Ended 12/31/04.................. $1.561859 to $ 15.801473 1.20% .20% to .75% 17.84% to 18.67% Period Ended 12/31/03................ $1.325376 to $ 13.315544 1.14% .20% to .75% 32.54% to 33.16% Index 400 Stock Year Ended 12/31/04.................. $1.607481 to $ 17.624859 0.66% .20% to .75% 15.45% to 16.26% Year Ended 12/31/03.................. $1.392302 to $ 15.159273 0.70% .20% to .75% 34.08% to 35.01% Year Ended 12/31/02.................. $1.038438 to $ 11.227976 0.75% .20% to .75% (15.14%) to (14.54%) Year Ended 12/31/01.................. $1.223656 to $ 13.138452 0.01% .20% to .75% (1.35%) to (0.65%) Janus Capital Appreciation (2) Year Ended 12/31/04.................. $1.418302 to $ 14.349081 0.15% .20% to .75% 18.84% to 19.67% Period Ended 12/31/03................ $1.193442 to $ 11.990097 0.09% .20% to .75% 19.34% to 19.90% Growth Stock Year Ended 12/31/04.................. $2.062785 to $ 27.170823 0.68% .20% to .75% 5.93% to 6.67% Year Ended 12/31/03.................. $1.945424 to $ 25.471804 0.79% .20% to .75% 18.12% to 18.94% Year Ended 12/31/02.................. $1.645371 to $ 21.414901 1.10% .20% to .75% (21.38%) to (20.83%) Year Ended 12/31/01.................. $2.090785 to $ 27.049526 0.74% .20% to .75% (14.82%) to (14.22%) Large Cap Core Stock Year Ended 12/31/04.................. $1.718946 to $ 22.430441 0.93% .20% to .75% 7.41% to 8.16% Year Ended 12/31/03.................. $1.598784 to $ 20.737771 0.94% .20% to .75% 23.19% to 24.05% Year Ended 12/31/02.................. $1.296529 to $ 16.717038 0.90% .20% to .75% (28.70%) to (28.20%) Year Ended 12/31/01.................. $1.816535 to $ 23.281928 0.75% .20% to .75% (8.42%) to (7.77%) Capital Guardian Domestic Equity (1) Year Ended 12/31/04.................. $1.181356 to $ 12.099054 1.59% .20% to .75% 16.04% to 16.85% Year Ended 12/31/03.................. $1.018090 to $ 10.354264 1.88% .20% to .75% 33.48% to 34.41% Year Ended 12/31/02.................. $0.762737 to $ 7.703469 1.77% .20% to .75% (21.79%) to (21.24%) Period Ended 12/31/01................ $0.975250 to $ 9.781208 0.73% .20% to .75% (2.48%) to (2.19%) T. Rowe Price Equity Income (2) Year Ended 12/31/04.................. $1.407305 to $ 14.237970 1.99% .20% to .75% 14.36% to 15.16% Period Ended 12/31/03................ $1.230617 to $ 12.363579 2.79% .20% to .75% 23.06% to 23.64%
(1)Division commenced operations on July 31, 2001. (2)Division commenced operations on May 1, 2003. (3)Year ended 12/31/03 unit value ranges revised from previous annual report. (4)Year ended 12/31/01 revised from previous reports. (5)Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year. The Accompanying Notes are an Integral Part of the Financial Statements 8 Northwestern Mutual Variable Life Account Financial Highlights Northwestern Mutual Variable Life Account (For a unit outstanding during the period)
Dividend Unit Value, Income as a % Expense Ratio, as of Period End(3) of Average Lowest to Total Return(5), Division Lowest to Highest Net Assets(4) Highest Lowest to Highest - --------------------------------------------------------------------------------------------------------- Index 500 Stock Year Ended 12/31/04......... $2.290186 to $ 50.112283 1.31% .20% to .75% 9.93% to 10.70% Year Ended 12/31/03......... $2.081264 to $ 45.268617 1.43% .20% to .75% 27.54% to 28.43% Year Ended 12/31/02......... $1.630187 to $ 35.246385 1.30% .20% to .75% (22.61%) to (22.07%) Year Ended 12/31/01......... $2.104460 to $ 45.228886 1.23% .20% to .75% (12.50%) to (11.88%) Asset Allocation (1) Year Ended 12/31/04......... $1.138467 to $ 11.659896 0.00% .20% to .75% 9.25% to 10.02% Year Ended 12/31/03......... $1.042045 to $ 10.598020 2.23% .20% to .75% 19.79% to 20.63% Year Ended 12/31/02......... $0.869901 to $ 8.785751 2.35% .20% to .75% (10.88%) to (10.26%) Period Ended 12/31/01....... $0.976111 to $ 9.789803 1.19% .20% to .75% (2.39%) to (2.10%) Balanced Year Ended 12/31/04......... $2.063062 to $107.555819 2.50% .20% to .75% 7.14% to 7.89% Year Ended 12/31/03......... $1.923623 to $ 99.686821 3.15% .20% to .75% 17.17% to 17.99% Year Ended 12/31/02......... $1.640075 to $ 84.486469 3.70% .20% to .75% (8.18%) to (7.54%) Year Ended 12/31/01......... $1.784400 to $ 91.372736 4.04% .20% to .75% (3.83%) to (3.15%) High Yield Bond Year Ended 12/31/04......... $1.835249 to $ 23.096633 6.94% .20% to .75% 11.98% to 12.76% Year Ended 12/31/03......... $1.637330 to $ 20.482734 0.21% .20% to .75% 28.16% to 29.06% Year Ended 12/31/02......... $1.276280 to $ 15.870922 11.64% .20% to .75% (3.57%) to (2.89%) Year Ended 12/31/01......... $1.322201 to $ 16.343831 11.57% .20% to .75% 4.29% to 5.03% Select Bond Year Ended 12/31/04......... $1.773542 to $134.012483 4.16% .20% to .75% 4.02% to 4.75% Year Ended 12/31/03......... $1.703354 to $127.939501 3.78% .20% to .75% 4.76% to 5.49% Year Ended 12/31/02......... $1.624374 to $121.279756 4.23% .20% to .75% 11.31% to 12.09% Year Ended 12/31/01......... $1.457873 to $108.200259 5.07% .20% to .75% 9.59% to 10.37% Money Market Year Ended 12/31/04......... $1.359011 to $ 35.049174 1.43% .20% to .75% 0.73% to 1.43% Year Ended 12/31/03......... $1.347874 to $ 34.553668 1.22% .20% to .75% 0.53% to 1.23% Year Ended 12/31/02......... $1.339422 to $ 34.132616 1.63% .20% to .75% 0.95% to 1.65% Year Ended 12/31/01......... $1.325528 to $ 33.577318 1.10% .20% to .75% 3.19% to 3.92% Fidelity VIP Mid Cap (2) Year Ended 12/31/04......... $1.733216 to $ 17.535222 0.00% .20% to .75% 23.79% to 24.66% Period Ended 12/31/03....... $1.400160 to $ 14.066904 0.00% .20% to .75% 40.02% to 40.67% Russell Multi-Style Equity Year Ended 12/31/04......... $0.822570 to $ 8.802993 0.73% .20% to .75% 9.04% to 9.81% Year Ended 12/31/03......... $0.754341 to $ 8.016570 0.70% .20% to .75% 27.96% to 28.86% Year Ended 12/31/02......... $0.589495 to $ 6.221208 0.58% .20% to .75% (23.72%) to (23.19%) Year Ended 12/31/01......... $0.772852 to $ 8.099453 0.45% .20% to .75% (14.81%) to (14.21%) Russell Aggressive Equity Year Ended 12/31/04......... $1.325166 to $ 14.545498 0.17% .20% to .75% 13.93% to 14.73% Year Ended 12/31/03......... $1.163121 to $ 12.677885 0.11% .20% to .75% 44.59% to 45.60% Year Ended 12/31/02......... $0.804447 to $ 8.707578 0.00% .20% to .75% (19.62%) to (19.06%) Year Ended 12/31/01......... $1.000805 to $ 10.757522 0.11% .20% to .75% (3.05%) to (2.36%) Russell Non-U.S. Year Ended 12/31/04......... $1.114327 to $ 11.650240 2.08% .20% to .75% 17.48% to 18.30% Year Ended 12/31/03......... $0.948548 to $ 9.848016 2.98% .20% to .75% 37.82% to 38.79% Year Ended 12/31/02......... $0.688244 to $ 7.095865 1.79% .20% to .75% (15.74%) to (15.15%) Year Ended 12/31/01......... $0.816787 to $ 8.362558 0.67% .20% to .75% (22.58%) to (22.03%) Russell Core Bond Year Ended 12/31/04......... $1.381724 to $ 14.163304 2.43% .20% to .75% 3.94% to 4.66% Year Ended 12/31/03......... $1.329405 to $ 13.532112 3.47% .20% to .75% 5.41% to 6.15% Year Ended 12/31/02......... $1.261197 to $ 12.748590 2.67% .20% to .75% 3.08% to 3.80% Year Ended 12/31/01......... $1.166871 to $ 11.713217 5.52% .20% to .75% 7.08% to 7.84% Russell Real Estate Securities Year Ended 12/31/04......... $2.387952 to $ 24.444468 2.31% .20% to .75% 33.94% to 34.87% Year Ended 12/31/03......... $1.782914 to $ 18.123797 5.39% .20% to .75% 36.26% to 37.21% Year Ended 12/31/02......... $1.308500 to $ 13.208871 5.44% .20% to .75% 8.08% to 8.84% Year Ended 12/31/01......... $1.269394 to $ 12.725061 5.23% .20% to .75% 6.65% to 7.41%
(1)Division commenced operations on July 31, 2001. (2)Division commenced operations on May 1, 2003. (3)Year ended 12/31/03 unit value ranges revised from previous annual report. (4)Year ended 12/31/01 revised from previous reports. (5)Total Return includes deductions for management and other expenses; excludes deductions for sales loads and other charges. Returns are not annualized for periods less than one year. The Accompanying Notes are an Integral Part of the Financial Statements Northwestern Mutual Variable Life Account 9 Notes to Financial Statements Northwestern Mutual Variable Life Account December 31, 2004 Note 1 -- Northwestern Mutual Variable Life Account ("the Account") is registered as a unit investment trust under the Investment Company Act of 1940 and is a segregated asset account of The Northwestern Mutual Life Insurance Company ("Northwestern Mutual" or "NM") used to fund variable life insurance policies. Note 2 -- The preparation of the 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principal accounting policies are summarized below. Note 3 -- All assets of each Division of the Account are invested in shares of the corresponding Portfolio of Northwestern Mutual Series Fund, Inc., Fidelity Variable Insurance Products Fund III and the Russell Investment Funds (collectively known as "the Funds"). The shares are valued at the Funds' offering and redemption prices per share. The Funds are open-end investment companies registered under the Investment Company Act of 1940. Note 4 -- Dividend income and distributions of net realized gains from the Funds are recorded on the ex-date of the dividends. Transactions in the Funds' shares are accounted for on the trade date. The basis for determining cost on sale of Funds' shares is identified cost. Purchase and sales of the Funds' shares for the year ended December 31, 2004 by each Division are shown as follows: (in thousands)
Division Purchases Sales -------- --------- ------- Small Cap Growth Stock................. $26,195 $14,782 T. Rowe Price Small Cap Value.......... 23,577 4,692 Aggressive Growth Stock................ 39,486 31,279 International Growth................... 11,046 1,631 Franklin Templeton International Equity 51,023 23,600 AllianceBernstein Mid Cap Value........ 7,052 477 Index 400 Stock........................ 26,102 10,387 Janus Capital Appreciation............. 4,108 154 Growth Stock........................... 33,408 23,731 Large Cap Core Stock................... 23,842 13,937 Capital Guardian Domestic Equity....... 20,943 3,532 T. Rowe Price Equity Income............ 13,070 627 Index 500 Stock........................ 96,245 53,846 Asset Allocation....................... 7,656 1,767 Balanced............................... 45,322 20,929 High Yield Bond........................ 8,783 5,054 Select Bond............................ 21,110 10,968 Money Market........................... 47,390 52,345 Fidelity VIP Mid Cap................... 16,339 681 Russell Multi-Style Equity............. 29,352 10,599 Russell Aggressive Equity.............. 14,963 5,666 Russell Non-U.S........................ 22,216 6,130 Russell Core Bond...................... 9,737 2,783 Russell Real Estate Securities......... 25,687 5,284
Note 5 -- A deduction for mortality and expense risks is determined daily and paid to Northwestern Mutual. Generally, for Variable Life policies issued before October 11, 1995, and Variable CompLife policies issued on or after October 11, 1995 the deduction is at an annual rate of .50% and .60%, respectively, of the net assets of the Account. A deduction for the mortality and expense risks for Variable Executive Life policies issued on or after March 2, 1998 is determined monthly at an annual rate of .75% of the amount invested in the Account for the Policy for the first ten Policy years, and .32% thereafter for policies with the Cash Value Amendment, or .30% thereafter for policies without the Cash Value Amendment. A deduction for the mortality and expense risks for Variable Joint Life policies issued on or after December 10, 1998 is determined monthly at an annual rate of .20% of the amounts invested in the Account for the Policy. The mortality risk is that insureds may not live as long as estimated. The expense risk is that expenses of issuing and administering the policies may exceed the estimated costs. Certain deductions are also made from the annual, single or other premiums before amounts are allocated to the Account. These deductions are for (1) sales load, (2) administrative expenses, (3) taxes and (4) a risk charge for the guaranteed minimum death benefit. Additional mortality costs are deducted from the policy annually for Variable Life and Variable CompLife policies, and monthly for Variable Executive Life and Variable Joint Life policies, and are paid to Northwestern Mutual to cover the cost of providing insurance protection. For Variable Life and Variable CompLife policies this cost is actuarially calculated based upon the insured's age, the 1980 Commissioners Standard Ordinary Mortality Table and the amount of insurance provided under the policy. For Variable Executive Life and Variable Joint Life policies the cost reflects expected mortality costs based upon actual experience. Note 6 -- Northwestern Mutual is taxed as a "life insurance company" under the Internal Revenue Code. The variable life insurance policies, which are funded in the Account, are taxed as part of the operations of Northwestern Mutual. Policies provide that a charge for taxes may be made against the assets of the Account. Generally, for Variable Life policies issued before October 11, 1995, Northwestern Mutual charges the Account at an annual rate of .20% of the Account's net assets and reserves the right to increase, decrease or eliminate the charge for taxes in the future. Generally, for Variable CompLife policies issued on or after October 11, 1995, and for Variable Executive Life policies issued on or after March 2, 1998, and Variable Joint Life 10 Northwestern Mutual Variable Life Account Notes to Financial Statements policies issued on or after December 10, 1998, there is no charge being made against the assets of the Account for federal income taxes, but Northwestern Mutual reserves the right to charge for taxes in the future. Note 7 -- The Account is credited for the policyowners' net annual premiums at the respective policy anniversary dates regardless of when policyowners actually pay their premiums. Northwestern Mutual's equity represents any unpaid portion of net annual premiums. This applies to Variable Life and Variable CompLife policies only. Note 8 -- The changes in units outstanding for the years ended December 31, 2004 and December 31, 2003 by each Division are shown as follows: (in thousands)
Units Units Net Increase Year Ended December 31, 2004 Issued Redeemed (Decrease) ----------------------------------------------------------------------------- Small Cap Growth Stock Division................. 14,913 7,652 7,261 T. Rowe Price Small Cap Value Division.......... 13,476 2,828 10,648 Aggressive Growth Stock Division................ 20,476 14,100 6,376 International Growth Division................... 8,078 1,040 7,038 Franklin Templeton International Equity Division 24,276 11,518 12,758 AllianceBernstein Mid Cap Value Division........ 3,710 257 3,453 Index 400 Stock Division........................ 16,105 6,417 9,688 Janus Capital Appreciation Division............. 2,602 107 2,495 Growth Stock Division........................... 16,130 10,405 5,725 Large Cap Core Stock Division................... 12,147 7,405 4,742 Capital Guardian Domestic Equity Division....... 16,364 2,707 13,657 T. Rowe Price Equity Income Division............ 7,456 309 7,147 Index 500 Stock Division........................ 34,971 18,637 16,334 Asset Allocation Division....................... 5,775 1,332 4,443 Balanced Division............................... 11,839 5,198 6,641 High Yield Bond Division........................ 3,260 2,201 1,059 Select Bond Division............................ 8,147 4,055 4,092 Money Market Division........................... 25,307 28,394 (3,087) Fidelity VIP Mid Cap Division................... 8,728 374 8,354 Russell Multi-Style Equity Division............. 33,326 11,280 22,046 Russell Aggressive Equity Division.............. 9,324 4,060 5,264 Russell Non-U.S. Division....................... 18,533 5,238 13,295 Russell Core Bond Division...................... 5,107 1,314 3,793 Russell Real Estate Securities Division......... 8,388 2,352 6,036
Units Units Net Increase Year Ended December 31, 2003 Issued Redeemed (Decrease) ----------------------------------------------------------------------------- Small Cap Growth Stock Division................. 19,518 7,767 11,751 T. Rowe Price Small Cap Value Division.......... 13,219 2,089 11,130 Aggressive Growth Stock Division................ 28,858 15,092 13,766 International Growth Division................... 5,512 545 4,967 Franklin Templeton International Equity Division 28,643 11,477 17,166 AllianceBernstein Mid Cap Value Division........ 1,859 28 1,831 Index 400 Stock Division........................ 21,656 6,417 15,239 Janus Capital Appreciation Division............. 1,756 38 1,718 Growth Stock Division........................... 24,361 10,438 13,923 Large Cap Core Stock Division................... 16,288 7,413 8,875 Capital Guardian Domestic Equity Division....... 14,784 1,962 12,822 T. Rowe Price Equity Income Division............ 3,184 45 3,139 Index 500 Stock Division........................ 48,109 18,742 29,367 Asset Allocation Division....................... 7,099 881 6,218 Balanced Division............................... 13,284 5,007 8,277 High Yield Bond Division........................ 6,953 2,035 4,918 Select Bond Division............................ 9,860 3,417 6,443 Money Market Division........................... 24,722 24,254 468 Fidelity VIP Mid Cap Division................... 2,438 48 2,390 Russell Multi-Style Equity Division............. 34,575 10,681 23,894 Russell Aggressive Equity Division.............. 12,760 3,541 9,219 Russell Non-U.S. Division....................... 16,087 4,949 11,138 Russell Core Bond Division...................... 4,233 1,627 2,606 Russell Real Estate Securities Division......... 8,150 2,163 5,987
#The initial investment in this Division was made on May 1, 2003. The changes in units outstanding do not include Variable Life policies issued before October 11, 1995. Northwestern Mutual Variable Life Account 11 Notes to Financial Statements Note 9 -- Equity Values by Division are shown as follows: (in thousands)
Variable Life Policies Issued Before October 11, 1995 Equity of: Total ----------------------- Equity Division Policyowners NM -------- ---------------------------------------------------------------- Small Cap Growth Stock................. $ 11,082 $ 351 $ 11,433 T. Rowe Price Small Cap Value.......... 8,304 213 8,517 Aggressive Growth Stock................ 58,611 2,268 60,879 International Growth................... 1,798 49 1,847 Franklin Templeton International Equity 54,120 1,868 55,988 AllianceBernstein Mid Cap Value........ 1,088 36 1,124 Index 400 Stock........................ 9,874 286 10,160 Janus Capital Appreciation............. 673 14 687 Growth Stock........................... 27,247 1,082 28,329 Large Cap Core Stock................... 22,280 949 23,229 Capital Guardian Domestic Equity....... 6,339 216 6,555 T. Rowe Price Equity Income............ 3,140 101 3,241 Index 500 Stock........................ 110,555 3,482 114,037 Asset Allocation....................... 4,082 119 4,201 Balanced............................... 145,668 3,123 148,791 High Yield Bond........................ 6,087 226 6,313 Select Bond............................ 13,476 389 13,865 Money Market........................... 7,187 197 7,384 Fidelity VIP Mid Cap................... 2,950 77 3,027 Russell Multi-Style Equity............. 5,902 175 6,077 Russell Aggressive Equity.............. 4,729 126 4,855 Russell Non-U.S........................ 4,713 126 4,839 Russell Core Bond...................... 1,623 73 1,696 Russell Real Estate Securities......... 7,172 152 7,324 -------- ------- -------- $518,700 $15,698 $534,398 ======== ======= ========
Variable Complife Policies Issued On or After October 11, 1995 Equity of: Total --------------------- Equity Division Policyowners NM ---------- -------------------------------------------------------------- Small Cap Growth Stock................. $ 138,867 $ 16,971 $ 155,838 T. Rowe Price Small Cap Value.......... 57,476 6,980 64,456 Aggressive Growth Stock................ 284,636 29,106 313,742 International Growth................... 18,700 2,588 21,288 Franklin Templeton International Equity 239,566 24,643 264,209 AllianceBernstein Mid Cap Value........ 7,290 874 8,164 Index 400 Stock........................ 118,260 14,096 132,356 Janus Capital Appreciation............. 5,296 625 5,921 Growth Stock........................... 207,829 23,100 230,929 Large Cap Core Stock................... 126,469 13,396 139,865 Capital Guardian Domestic Equity....... 45,812 5,698 51,510 T. Rowe Price Equity Income............ 13,074 1,312 14,386 Index 500 Stock........................ 458,177 49,351 507,528 Asset Allocation....................... 17,086 2,074 19,160 Balanced............................... 117,745 13,017 130,762 High Yield Bond........................ 43,514 4,482 47,996 Select Bond............................ 63,162 7,227 70,389 Money Market........................... 79,121 17,079 96,200 Fidelity VIP Mid Cap................... 16,338 2,117 18,455 Russell Multi-Style Equity............. 91,204 11,769 102,973 Russell Aggressive Equity.............. 51,392 6,336 57,728 Russell Non-U.S........................ 61,110 7,359 68,469 Russell Core Bond...................... 18,344 2,423 20,767 Russell Real Estate Securities......... 63,082 7,673 70,755 ---------- -------- ---------- $2,343,550 $270,296 $2,613,846 ========== ======== ==========
12 Northwestern Mutual Variable Life Account Notes to Financial Statements
Variable Executive Life Variable Joint Life Policies Issued Policies Issued On or After March 2, 1998 On or After December 10, 1998 ------------------------- ----------------------------- Division Total Equity Total Equity - ----------------------------------------------------------------------------------------------- Small Cap Growth Stock................. $ 3,857 $ 7,148 T. Rowe Price Small Cap Value.......... 3,493 5,188 Aggressive Growth Stock................ 5,002 6,291 International Growth................... 2,003 1,600 Franklin Templeton International Equity 6,049 9,542 AllianceBernstein Mid Cap Value........ 282 765 Index 400 Stock........................ 5,098 8,166 Janus Capital Appreciation............. 374 279 Growth Stock........................... 8,325 7,834 Large Cap Core Stock................... 4,340 4,758 Capital Guardian Domestic Equity....... 2,340 5,365 T. Rowe Price Equity Income............ 222 912 Index 500 Stock........................ 11,321 30,873 Asset Allocation....................... 798 1,419 Balanced............................... 3,740 7,734 High Yield Bond........................ 2,541 1,633 Select Bond............................ 10,496 5,657 Money Market........................... 9,263 5,833 Fidelity VIP Mid Cap................... 761 1,230 Russell Multi-Style Equity............. 12,768 7,252 Russell Aggressive Equity.............. 5,784 2,952 Russell Non-U.S........................ 10,402 4,835 Russell Core Bond...................... 17,165 1,119 Russell Real Estate Securities......... 3,711 4,735 -------- -------- $130,135 $133,120 ======== ========
Northwestern Mutual Variable Life Account 13 Report of Independent Registered Public Accounting Firm [LOGO] PRICEWATERHOUSECOOPERS To The Northwestern Mutual Life Insurance Company and Contract Owners of Northwestern Mutual Variable Life Account In our opinion, the accompanying statement of assets and liabilities, the related statements of operations, and of changes in equity and the financial highlights present fairly, in all material respects, the financial position of the Northwestern Mutual Variable Life Account and its Small Cap Growth Stock Division, T. Rowe Price Small Cap Value Division, Aggressive Growth Stock Division, International Growth Division, Franklin Templeton International Equity Division, AllianceBernstein Mid Cap Value Division, Index 400 Stock Division, Janus Capital Appreciation Division, Growth Stock Division, Large Cap Core Stock Division, Capital Guardian Domestic Equity Division, T. Rowe Price Equity Income Division, Index 500 Stock Division, Asset Allocation Division, Balanced Division, High Yield Bond Division, Select Bond Division, Money Market Division, Fidelity VIP Mid Cap Division, Russell Multi-Style Equity Division, Russell Aggressive Equity Division, Russell Non-U.S. Division, Russell Core Bond Division, and Russell Real Estate Securities Division at December 31, 2004, and the results of each of their operations, the changes in each of their equity and their financial highlights for the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of The Northwestern Mutual Life Insurance Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included direct confirmation of securities owned at December 31, 2004 with Northwestern Mutual Series Fund, Inc., Fidelity VIP Mid Cap Portfolio and the Russell Investment Funds, provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Milwaukee, Wisconsin February 3, 2005 14 Report of Independent Registered Public Accounting Firm The Northwestern Mutual Life Insurance Company . Milwaukee, WI www.northwesternmutual.com 90-1899 (0786) (REV 0105) This report is submitted for the general information of owners of Northwestern Mutual variable life insurance policies. This report is not authorized for distribution to prospective purchasers of variable life insurance policies unless it is accompanied by an effective prospectus. Northwestern Mutual variable life insurance policies are sold through individuals who, in addition to being licensed life insurance agents of Northwestern Mutual Life, are registered representatives of Northwestern Mutual Investment Services, LLC, a wholly-owned company of Northwestern Mutual Life and a registered broker-dealer under the Securities Exchange Act of 1934. Member NASD and SIPC. Issuer: The Northwestern Mutual Life Insurance Company (Northwestern Mutual), 720 E. Wisconsin Avenue, Milwaukee, WI 53202-4797 Principal Underwriter: Northwestern Mutual Investment Services, LLC (NMIS), Suite 300, 611 E. Wisconsin Avenue, Milwaukee, WI 53202, 1-866-664-7737, member NASD and SIPC. [LOGO] Northwestern Mutual(R) PO Box 3095 Milwaukee, WI 53201-3095 -----END PRIVACY-ENHANCED MESSAGE-----