-----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, IeQkRXHxGAdotYfLy6O2J+01AwuFBuGWYXIg64OZJ2IM71DagrZdVFzWA9jhbuKE HTpKbnrf5IDvPz6FBRWcUw== 0000950123-11-001397.txt : 20110107 0000950123-11-001397.hdr.sgml : 20110107 20110107142726 ACCESSION NUMBER: 0000950123-11-001397 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20101031 FILED AS OF DATE: 20110107 DATE AS OF CHANGE: 20110107 EFFECTIVENESS DATE: 20110107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAINSTAY FUNDS CENTRAL INDEX KEY: 0000787441 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04550 FILM NUMBER: 11517004 BUSINESS ADDRESS: STREET 1: 51 MADISON AVE CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2125767000 MAIL ADDRESS: STREET 1: 51 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: MACKAY SHIELDS MAINSTAY SERIES FUND /NY/ DATE OF NAME CHANGE: 19911126 FORMER COMPANY: FORMER CONFORMED NAME: MACKAY SHIELDS SERIES FUND DATE OF NAME CHANGE: 19860506 0000787441 S000006894 MainStay Diversified Income Fund C000018685 Class A MASAX C000018686 Class B MASBX C000018687 Class C MSICX C000018688 Class I MSDIX C000060790 INVESTOR CLASS MSYDX 0000787441 S000006895 MainStay Government Fund C000018689 Class A MGVAX C000018690 Class B MCSGX C000018691 Class C MGVCX C000018692 Class I MGOIX C000060791 INVESTOR CLASS MGVNX 0000787441 S000006896 MainStay High Yield Corporate Bond Fund C000018693 Class A MHCAX C000018694 Class B MKHCX C000018695 Class C MYHCX C000018696 Class I MHYIX C000057099 Class R2 MHYRX C000060792 INVESTOR CLASS MHHIX 0000787441 S000006897 MainStay Money Market Fund C000018697 Class A MMAXX C000018698 Class B MKMXX C000018699 Class C MSCXX C000060793 INVESTOR CLASS MKTXX 0000787441 S000006898 MainStay Tax Free Bond Fund C000018700 Class A MTBAX C000018701 Class B MKTBX C000018702 Class C MTFCX C000060794 INVESTOR CLASS MKINX C000082082 Class I 0000787441 S000006899 MainStay Convertible Fund C000018703 Class A MCOAX C000018704 Class B MCSVX C000018705 Class C MCCVX C000060795 INVESTOR CLASS MCINX C000087595 Class I MCNVX 0000787441 S000006900 MainStay Income Builder Fund C000018706 Class A MTRAX C000018707 Class B MKTRX C000018708 Class C MCTRX C000018709 Class I MTOIX C000060796 INVESTOR CLASS MTINX 0000787441 S000006901 MainStay Global High Income Fund C000018710 Class A MGHAX C000018711 Class B MGHBX C000018712 Class C MHYCX C000052120 Class I MGHIX C000060797 INVESTOR CLASS MGHHX 0000787441 S000006902 MainStay International Equity Fund C000018713 Class A MSEAX C000018714 Class B MINEX C000018715 Class C MIECX C000018716 Class I MSIIX C000018717 Class R1 MIERX C000018718 Class R2 MIRRX C000030957 Class R3 MIFRX C000060798 INVESTOR CLASS MINNX 0000787441 S000006903 MainStay Common Stock Fund C000018719 Class A MSOAX C000018720 Class B MOPBX C000018721 Class C MGOCX C000018722 Class I MSOIX C000057100 Class R2 MSORX C000060799 INVESTOR CLASS MCSSX 0000787441 S000006904 MainStay Equity Index Fund C000018723 Class A MCSEX 0000787441 S000006905 MainStay Large Cap Growth Fund C000018724 Class A MLAAX C000018725 Class B MLABX C000018726 Class C MLACX C000018727 Class I MLAIX C000018728 Class R1 MLRRX C000018729 Class R2 MLRTX C000030958 Class R3 MLGRX C000060800 INVESTOR CLASS MLINX 0000787441 S000006906 MainStay MAP Fund C000018730 Class A MAPAX C000018731 Class B MAPBX C000018732 Class C MMPCX C000018733 Class I MUBFX C000018734 Class R1 MAPRX C000018735 Class R2 MPRRX C000030959 Class R3 MMAPX C000060801 INVESTOR CLASS MSMIX 0000787441 S000018791 MainStay Principal Preservation Fund C000051987 Class I MSPPX N-CSR 1 y88798nvcsr.txt FORM N-CSR ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES INVESTMENT COMPANY ACT FILE NUMBER 811-04550 THE MAINSTAY FUNDS (Exact name of Registrant as specified in charter) 51 Madison Avenue, New York, NY 10010 (Address of principal executive offices) (Zip code) J. Kevin Gao, Esq. 169 Lackawanna Avenue Parsippany, New Jersey 07054 (Name and address of agent for service) Registrant's telephone number, including area code: (973) 394-4437 Date of fiscal year end: October 31 Date of reporting period: October 31, 2010 ================================================================================ FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. (MAINSTAY INVESTMENTS LOGO) MAINSTAY COMMON STOCK FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 16 - --------------------------------------------- Notes to Financial Statements 23 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 29 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 30 - --------------------------------------------- Federal Income Tax Information 33 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 33 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 33 - --------------------------------------------- Board Members and Officers 34 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY COMMON STOCK FUND CLASS B S&P 500(R) RUSSELL 1000(R) SHARES INDEX INDEX --------------- ---------- --------------- 10/31/00 10000 10000 10000 10/31/01 7286 7510 7396 10/31/02 6013 6375 6316 10/31/03 6877 7701 7726 10/31/04 7286 8427 8447 10/31/05 8003 9162 9331 10/31/06 9250 10659 10826 10/31/07 10304 12211 12454 10/31/08 6412 7803 7871 10/31/09 6688 8568 8752 10/31/10 7434 9983 10298
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 5.83% -1.83% Excluding sales charges 11.99 -0.71 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 5.5% Initial Sales Charge With sales charges 6.45 -1.57 Excluding sales charges 12.64 -0.45 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 6.14 -1.82 if Redeemed Within the First Six Years of Purchase Excluding sales charges 11.14 -1.47 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 10.12 -1.47 if Redeemed Within One Year of Purchase Excluding sales charges 11.12 -1.47 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 13.00 0.02 - ----------------------------------------------------------------------------------------------------------------------------------- Class R2 Shares(5) No Sales Charge 12.53 -0.55 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) -2.75% 1.75% -2.19 1.75 - ------------------------------------------------- Class A Shares -2.62 1.00 -2.06 1.00 - ------------------------------------------------- Class B Shares -2.92 2.51 -2.92 2.51 - ------------------------------------------------- Class C Shares -2.92 2.51 -2.92 2.51 - ------------------------------------------------- Class I Shares(4) -1.68 0.75 - ------------------------------------------------- Class R2 Shares(5) -2.16 1.10 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Investor Class shares were first offered on February 28, 2008. Performance figures for Investor Class shares includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for the Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on December 28, 2004, includes historical performance of Class A shares through December 27, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class I shares might have been lower. 5. Performance figures for Class R2 shares, first offered on December 14, 2007, includes the historical performance of Class A shares through October 31, 2010, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Class R2 shares might have been lower. As of October 31, 2010, Class R2 shares had yet to commence investment operations. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS S&P 500(R) Index(6) 16.52% 1.73% -0.02% - ------------------------------------------------------------------ Russell 1000(R) Index(7) 17.67 1.99 0.29 - ------------------------------------------------------------------ Average Lipper Large-Cap Core Fund(8) 14.47 1.48 0.26 - ------------------------------------------------------------------
6. "S&P 500(R)" is a trademark of the McGraw-Hill Companies, Inc. The S&P 500(R) Index is widely regarded as the standard index for measuring large- cap U.S. stock market performance. Results assume reinvestment of all dividends and capital gains. The S&P 500(R) Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 7. The Russell 1000(R) Index measures the performance of the 1,000 largest companies in the Russell 3000(R) Index, which represents approximately 92% of the total market capitalization of the Russell 3000(R) Index. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Total returns assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. 8. The average Lipper large-cap core fund is representative of funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalization (on a three-year weighted basis) above Lipper's U.S. Diversified Equity large-cap floor. Large-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earning ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500(R) Index. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Common Stock Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY COMMON STOCK FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $982.70 $ 8.00 $1,017.10 $ 8.13 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $985.40 $ 4.85 $1,020.30 $ 4.94 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $978.40 $11.72 $1,013.40 $11.93 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $978.40 $11.72 $1,013.40 $11.93 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $986.30 $ 3.55 $1,021.60 $ 3.62 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.60% for Investor Class, 0.97% for Class A, 2.35% for Class B and Class C and 0.71% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. See page 5 for more information on Class R2 shares. mainstayinvestments.com 7 INDUSTRY COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
Oil, Gas & Consumable Fuels 11.5% Computers & Peripherals 6.4 Insurance 4.7 Pharmaceuticals 4.4 Software 4.2 Diversified Financial Services 3.9 Diversified Telecommunication Services 3.8 Health Care Providers & Services 3.7 Media 3.5 Capital Markets 2.8 Communications Equipment 2.8 Beverages 2.6 IT Services 2.6 Machinery 2.5 Multiline Retail 2.4 Commercial Banks 2.1 Tobacco 2.1 Industrial Conglomerates 2.0 Semiconductors & Semiconductor Equipment 1.9 Specialty Retail 1.9 Food Products 1.8 Hotels, Restaurants & Leisure 1.8 Chemicals 1.7 Food & Staples Retailing 1.7 Metals & Mining 1.7 Multi-Utilities 1.6 Biotechnology 1.4 Exchange Traded Funds 1.4 Electrical Equipment 1.2 Real Estate Investment Trusts 1.2 Textiles, Apparel & Luxury Goods 1.2 Household Products 1.0 Airlines 0.8 Electric Utilities 0.8 Aerospace & Defense 0.7 Automobiles 0.7 Household Durables 0.7 Internet Software & Services 0.7 Trading Companies & Distributors 0.7 Air Freight & Logistics 0.6 Wireless Telecommunication Services 0.6 Paper & Forest Products 0.5 Auto Components 0.4 Gas Utilities 0.4 Construction & Engineering 0.3 Health Care Equipment & Supplies 0.3 Internet & Catalog Retail 0.3 Road & Rail 0.3 Commercial Services & Supplies 0.2 Energy Equipment & Services 0.2 Independent Power Producers & Energy Traders 0.2 Life Sciences Tools & Services 0.2 Office Electronics 0.2 Personal Products 0.2 Consumer Finance 0.1 Diversified Consumer Services 0.1 Real Estate Management & Development 0.1 Containers & Packaging 0.0++ Electronic Equipment & Instruments 0.0++ Short-Term Investment 0.2 Other Assets, Less Liabilities 0.0 ----- 100.0% =====
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. ExxonMobil Corp. 2. Apple, Inc. 3. International Business Machines Corp. 4. Microsoft Corp. 5. Chevron Corp. 6. JPMorgan Chase & Co. 7. AT&T, Inc. 8. Wells Fargo & Co. 9. Intel Corp. 10. Johnson & Johnson
8 MainStay Common Stock Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by Harvey Fram, CFA, and Migene Kim, CFA, of Madison Square Investors LLC, the Fund's Subadvisor. HOW DID MAINSTAY COMMON STOCK FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Common Stock Fund returned 11.99% for Investor Class shares, 12.64% for Class A shares, 11.14% for Class B shares and 11.12% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 13.00% and Class R2 shares returned 12.53%.(1) All share classes underperformed the 14.47% return of the average Lipper(2) large-cap core fund for the same period. All share classes also underperformed the 16.52% return of the S&P 500(R) Index(3) for the 12 months ended October 31, 2010. The S&P 500(R) Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The reporting period reflected two dominant investment themes. The first theme, which extended through March 2010, was a low-quality rally in which stocks--particularly financials--with low or negative earnings outperformed their benchmarks. The second theme, which ran from April through September 2010, reflected investors' concerns about the Greek debt crisis and the possibility of it leading to a double-dip recession. In light of these two themes, our most important investment factor--namely, earnings-based valuation--performed poorly during the reporting period. The drivers of performance were different for the two investment themes. In the first theme, low-quality stocks outperformed and almost all valuation factors performed poorly. In the second theme, stocks with high dividend yields performed well as interest rates fell. Many of these stocks were issued by highly leveraged companies and rose in that environment. We have made a point with our value factors to equalize the playing field between companies that use leverage and those that do not because we believe this to be the best long-term approach. Unfortunately, this approach hurt performance from April through September. Fortunately, in October signs in the marketplace led us to believe that this effect may be beginning to reverse. DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS WERE PARTICULARLY WEAK? Taking weightings and total returns into account, the sectors that made the strongest positive contributions to the Fund's performance relative to the S&P 500(R) Index were materials, energy and health care. Within materials and energy, stocks linked to global economic growth, such as copper-mining company Freeport-McMoRan Copper & Gold, did extremely well. During the reporting period, the weakest contributors to the Fund's relative performance were information technology, financials and consumer staples. Within information technology, stocks such as software company Microsoft and computer & peripherals companies Hewlett Packard and Western Digital, which appeared to be extremely undervalued, became even cheaper as the fear of a double-dip recession in the third quarter led investors to revise growth prospects for those companies downward. In financials, many so-called low-quality stocks (stocks of companies with negative earnings), such as mortgage insurer MBIA and commercial bank Zions Bancorp, performed strongly as the market continued to purchase riskier assets through the first quarter of 2010. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST POSITIVE CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCK DETRACTED THE MOST? Taking weightings and total returns into account, the stocks that made the strongest positive contributions to the Fund's absolute performance were computer & peripherals company Apple, IT services company IBM and media company DirecTV. Major detractors from the Fund's absolute performance included Bank of America, Hewlett-Packard and diversified financial services company JPMorganChase. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? During the reporting period, we purchased shares of copper-mining company Freeport-McMoRan Copper & Gold, gold-mining company Newmont Mining and sports clothing manufacturer Nike. In all three cases, the stocks had valuations that in our view were reasonable to good, coupled with momentum that indicated a catalyst for continued price appreciation. During the reporting period, the Fund sold shares of entertainment company Time Warner and air freight company United Parcel Service, both of which had become expensive relative to their peers. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? The Fund saw its largest sector weighting increases in the consumer staples and industrials sectors. In both cases, the Fund moved from a substantially underweight to a less-underweight position. The Fund's largest sector weighting decreases were in the information technology and consumer discretionary sectors. In 1. See footnote on page 5 for more information on Class R2 shares. 2. See footnote on page 6 for more information on Lipper Inc. 3. See footnote on page 6 for more information on the S&P 500(R) Index. mainstayinvestments.com 9 both cases, the Fund moved from a substantially overweight position to a moderately overweight position. HOW WAS THE FUND POSITIONED AT THE END OF OCTOBER 2010? As of October 31, 2010, the Fund's most substantially overweight positions were in the consumer discretionary and telecommunication services sectors. The Fund's most substantially underweight positions were in utilities and health care. In all cases, the deviations from the S&P 500(R) Index were moderate. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Common Stock Fund PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
SHARES VALUE COMMON STOCKS 98.4%+ - --------------------------------------------------------------------------- AEROSPACE & DEFENSE 0.7% Boeing Co. (The) 1,301 $ 91,902 Honeywell International, Inc. 34,979 1,647,861 Raytheon Co. 3,912 180,265 ------------ 1,920,028 ------------ AIR FREIGHT & LOGISTICS 0.6% FedEx Corp. 16,849 1,477,994 ------------ AIRLINES 0.8% Southwest Airlines Co. 145,613 2,003,635 ------------ AUTO COMPONENTS 0.4% Johnson Controls, Inc. 31,263 1,097,957 ------------ AUTOMOBILES 0.7% Ford Motor Co. (a) 114,203 1,613,688 Harley-Davidson, Inc. 9,344 286,674 ------------ 1,900,362 ------------ BEVERAGES 2.6% Coca-Cola Co. (The) 24,522 1,503,689 Dr. Pepper Snapple Group, Inc. 58,436 2,135,836 PepsiCo., Inc. 51,601 3,369,545 ------------ 7,009,070 ------------ BIOTECHNOLOGY 1.4% Amgen, Inc. (a) 42,811 2,448,361 Cephalon, Inc. (a) 17,214 1,143,698 ------------ 3,592,059 ------------ CAPITAL MARKETS 2.8% Bank of New York Mellon Corp. (The) 102,539 2,569,627 Charles Schwab Corp. (The) 4,918 75,737 Goldman Sachs Group, Inc. (The) 9,837 1,583,265 Morgan Stanley 5,111 127,111 Northern Trust Corp. 39,657 1,968,177 State Street Corp. 24,564 1,025,793 ------------ 7,349,710 ------------ CHEMICALS 1.7% Airgas, Inc. 661 46,885 Ashland, Inc. 14,112 728,602 Cytec Industries, Inc. 6,953 344,312 E.I. du Pont de Nemours & Co. 2,911 137,632 Lubrizol Corp. (The) 12,467 1,277,743 PPG Industries, Inc. 16,634 1,275,828 Sherwin-Williams Co. (The) 8,141 594,049 ------------ 4,405,051 ------------ COMMERCIAL BANKS 2.1% PNC Financial Services Group, Inc. 7,929 427,373 X Wells Fargo & Co. 202,156 5,272,229 ------------ 5,699,602 ------------ COMMERCIAL SERVICES & SUPPLIES 0.2% Avery Dennison Corp. 9,964 362,191 Waste Management, Inc. 7,758 277,116 ------------ 639,307 ------------ COMMUNICATIONS EQUIPMENT 2.8% Cisco Systems, Inc. (a) 175,051 3,996,414 Harris Corp. 30,013 1,356,287 Motorola, Inc. (a) 208,070 1,695,771 QUALCOMM, Inc. 3,138 141,618 Tellabs, Inc. 47,147 321,543 ------------ 7,511,633 ------------ COMPUTERS & PERIPHERALS 6.4% X Apple, Inc. (a) 22,297 6,708,499 Dell, Inc. (a) 160,722 2,311,182 EMC Corp. (a) 122,097 2,565,258 Hewlett-Packard Co. 96,187 4,045,625 Lexmark International, Inc. Class A (a) 23,566 896,215 SanDisk Corp. (a) 8,681 326,232 Western Digital Corp. (a) 2,006 64,232 ------------ 16,917,243 ------------ CONSTRUCTION & ENGINEERING 0.3% KBR, Inc. 16,662 423,215 Shaw Group, Inc. (The) (a) 12,469 381,053 ------------ 804,268 ------------ CONSUMER FINANCE 0.1% Discover Financial Services 19,488 343,963 ------------ CONTAINERS & PACKAGING 0.0%++ Pactiv Corp. (a) 2,191 72,697 ------------ DIVERSIFIED CONSUMER SERVICES 0.1% Sotheby's 2,997 131,389 ------------ DIVERSIFIED FINANCIAL SERVICES 3.9% Bank of America Corp. 391,276 4,476,197 Citigroup, Inc. (a) 104,274 434,823 X JPMorgan Chase & Co. 145,572 5,477,874 ------------ 10,388,894 ------------ DIVERSIFIED TELECOMMUNICATION SERVICES 3.8% X AT&T, Inc. 191,487 5,457,380 Frontier Communications Corp. 2,549 22,380
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) DIVERSIFIED TELECOMMUNICATION SERVICES (CONTINUED) Qwest Communications International, Inc. 180,205 $ 1,189,353 Verizon Communications, Inc. 108,102 3,510,072 ------------ 10,179,185 ------------ ELECTRIC UTILITIES 0.8% Duke Energy Corp. 60,528 1,102,215 Edison International 15,726 580,289 Entergy Corp. 5,963 444,422 NextEra Energy, Inc. 2,017 111,016 ------------ 2,237,942 ------------ ELECTRICAL EQUIPMENT 1.2% Emerson Electric Co. 44,092 2,420,651 Hubbel, Inc. Class B 7,206 389,268 Regal-Beloit Corp. 6,614 381,694 Thomas & Betts Corp. (a) 237 10,321 ------------ 3,201,934 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS 0.0%++ Corning, Inc. 1,574 28,773 ------------ ENERGY EQUIPMENT & SERVICES 0.2% Halliburton Co. 4,640 147,830 Nabors Industries, Ltd. (a) 694 14,505 Oceaneering International, Inc. (a) 1,480 91,567 Rowan Cos., Inc. (a) 5,741 188,879 Schlumberger, Ltd. 2,319 162,075 ------------ 604,856 ------------ FOOD & STAPLES RETAILING 1.7% Costco Wholesale Corp. 16,701 1,048,322 Kroger Co. (The) 35,280 776,160 Safeway, Inc. 29,418 673,672 Wal-Mart Stores, Inc. 38,771 2,100,225 ------------ 4,598,379 ------------ FOOD PRODUCTS 1.8% Archer-Daniels-Midland Co. 2,397 79,868 ConAgra Foods, Inc. 51,244 1,152,477 Corn Products International, Inc. 22,403 953,248 Sara Lee Corp. 78,570 1,125,908 Tyson Foods, Inc. Class A 100,372 1,560,785 ------------ 4,872,286 ------------ GAS UTILITIES 0.4% Atmos Energy Corp. 1,081 31,835 Energen Corp. 3,230 144,187 Nicor, Inc. 9,718 462,868 ONEOK, Inc. 2,435 121,312 Questar Corp. 11,945 202,707 ------------ 962,909 ------------ HEALTH CARE EQUIPMENT & SUPPLIES 0.3% CareFusion Corp. (a) 33,673 812,866 Stryker Corp. 1,007 49,837 ------------ 862,703 ------------ HEALTH CARE PROVIDERS & SERVICES 3.7% Aetna, Inc. 5,170 154,376 AmerisourceBergen Corp. 9,734 319,470 Cardinal Health, Inc. 67,415 2,338,626 Express Scripts, Inc. (a) 5,512 267,442 Health Net, Inc. (a) 25,124 675,584 Humana, Inc. (a) 40,064 2,335,331 McKesson Corp. 19,745 1,302,775 UnitedHealth Group, Inc. 65,553 2,363,186 ------------ 9,756,790 ------------ HOTELS, RESTAURANTS & LEISURE 1.8% Darden Restaurants, Inc. 34,426 1,573,612 Marriott International, Inc. Class A 11,605 429,965 McDonald's Corp. 1,702 132,365 Panera Bread Co. Class A (a) 8,597 769,517 Starbucks Corp. 59,595 1,697,266 Wynn Resorts, Ltd. 750 80,378 ------------ 4,683,103 ------------ HOUSEHOLD DURABLES 0.7% Whirlpool Corp. 22,984 1,742,877 ------------ HOUSEHOLD PRODUCTS 1.0% Procter & Gamble Co. (The) 39,847 2,533,074 ------------ INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2% Constellation Energy Group, Inc. 730 22,075 NRG Energy, Inc. (a) 18,794 374,189 ------------ 396,264 ------------ INDUSTRIAL CONGLOMERATES 2.0% 3M Co. 859 72,345 General Electric Co. 146,328 2,344,175 Textron, Inc. 33,343 694,201 Tyco International, Ltd. 60,474 2,314,945 ------------ 5,425,666 ------------ INSURANCE 4.7% ACE, Ltd. 38,548 2,290,522 American Financial Group, Inc. 8,993 275,006 Berkshire Hathaway, Inc. Class B (a) 18,365 1,461,119 Chubb Corp. (The) 25,068 1,454,445 Hartford Financial Services Group, Inc. (The) 37,538 900,161 Principal Financial Group, Inc. 42,561 1,142,337 Prudential Financial, Inc. 46,272 2,432,982
12 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) INSURANCE (CONTINUED) Travelers Cos., Inc. (The) 47,499 $ 2,621,945 Unum Group 2,006 44,975 ------------ 12,623,492 ------------ INTERNET & CATALOG RETAIL 0.3% Amazon.com, Inc. (a) 3,851 635,954 Expedia, Inc. 4,646 134,502 ------------ 770,456 ------------ INTERNET SOFTWARE & SERVICES 0.7% AOL, Inc. (a) 8,901 237,479 Google, Inc. Class A (a) 2,674 1,639,135 ------------ 1,876,614 ------------ IT SERVICES 2.6% Broadridge Financial Solutions, Inc. 7,718 169,796 X International Business Machines Corp. 45,436 6,524,610 Total System Services, Inc. 8,763 136,790 ------------ 6,831,196 ------------ LIFE SCIENCES TOOLS & SERVICES 0.2% Pharmaceutical Product Development, Inc. 12,272 316,740 Thermo Fisher Scientific, Inc. (a) 3,957 203,469 ------------ 520,209 ------------ MACHINERY 2.5% AGCO Corp. (a) 29,485 1,252,228 Caterpillar, Inc. 22,899 1,799,861 Oshkosh Corp. (a) 10,878 321,010 PACCAR, Inc. 38,179 1,957,055 Parker Hannifin Corp. 1,472 112,682 SPX Corp. 8,380 561,963 Timken Co. (The) 16,731 692,998 ------------ 6,697,797 ------------ MEDIA 3.5% CBS Corp. Class B 1,475 24,972 Comcast Corp. Class A 134,606 2,770,191 DIRECTV Class A (a) 65,358 2,840,459 Interpublic Group of Cos., Inc. (The) (a) 94,726 980,414 Omnicom Group, Inc. 11,960 525,761 Time Warner Cable, Inc. 35,794 2,071,399 Washington Post Co. Class B 73 29,357 ------------ 9,242,553 ------------ METALS & MINING 1.7% Freeport-McMoRan Copper & Gold, Inc. 31,826 3,013,286 Newmont Mining Corp. 26,381 1,605,811 ------------ 4,619,097 ------------ MULTI-UTILITIES 1.6% CenterPoint Energy, Inc. 59,755 989,543 CMS Energy Corp. 1,917 35,234 Dominion Resources, Inc. 4,476 194,527 DTE Energy Co. 22,463 1,050,370 Integrys Energy Group, Inc. 28,295 1,505,011 MDU Resources Group, Inc. 260 5,182 OGE Energy Corp. 8,046 355,311 ------------ 4,135,178 ------------ MULTILINE RETAIL 2.4% Big Lots, Inc. (a) 28,923 907,314 Dollar Tree, Inc. (a) 11,274 578,469 Family Dollar Stores, Inc. 41,386 1,910,792 Macy's, Inc. 2,456 58,060 Sears Holdings Corp. (a) 1,278 91,990 Target Corp. 52,834 2,744,198 ------------ 6,290,823 ------------ OFFICE ELECTRONICS 0.2% Xerox Corp. 49,076 574,189 ------------ OIL, GAS & CONSUMABLE FUELS 11.5% American Oil & Gas, Inc. (a) 18,482 159,684 Anadarko Petroleum Corp. 3,356 206,629 Chesapeake Energy Corp. 11,821 256,516 X Chevron Corp. 72,654 6,001,947 Cimarex Energy Co. 317 24,330 ConocoPhillips 69,430 4,124,142 X ExxonMobil Corp. 138,204 9,186,420 Hess Corp. 12,992 818,886 Marathon Oil Corp. 74,281 2,642,175 Murphy Oil Corp. 36,101 2,352,341 Newfield Exploration Co. (a) 1,944 115,901 Occidental Petroleum Corp. 14,785 1,162,545 QEP Resources, Inc. 16,054 530,264 Sunoco, Inc. 39,916 1,495,652 Valero Energy Corp. 82,040 1,472,618 ------------ 30,550,050 ------------ PAPER & FOREST PRODUCTS 0.5% International Paper Co. 55,982 1,415,225 ------------ PERSONAL PRODUCTS 0.2% Estee Lauder Cos., Inc. (The) Class A 8,545 608,148 ------------ PHARMACEUTICALS 4.4% Abbott Laboratories 4,106 210,720 Bristol-Myers Squibb Co. 35,551 956,322 Eli Lilly & Co. 76,756 2,701,811 Endo Pharmaceuticals Holdings, Inc. (a) 2,325 85,420 Forest Laboratories, Inc. (a) 21,110 697,685 X Johnson & Johnson 71,707 4,565,585
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) PHARMACEUTICALS (CONTINUED) Merck & Co., Inc. 24,542 $ 890,384 Pfizer, Inc. 87,119 1,515,871 ------------ 11,623,798 ------------ REAL ESTATE INVESTMENT TRUSTS 1.2% Camden Property Trust 716 35,506 Duke Realty Corp. 36,201 451,427 Hospitality Properties Trust 6,633 151,299 Public Storage 20,596 2,043,535 Rayonier, Inc. 12,007 626,765 ------------ 3,308,532 ------------ REAL ESTATE MANAGEMENT & DEVELOPMENT 0.1% Jones Lang LaSalle, Inc. 4,231 330,272 ------------ ROAD & RAIL 0.3% Ryder System, Inc. 19,369 847,394 ------------ SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.9% X Intel Corp. 234,910 4,714,644 Micron Technology, Inc. (a) 26,494 219,105 Teradyne, Inc. (a) 1,175 13,207 ------------ 4,946,956 ------------ SOFTWARE 4.2% Autodesk, Inc. (a) 6,273 226,957 BMC Software, Inc. (a) 1,105 50,233 CA, Inc. 23,248 539,586 Compuware Corp. (a) 3,098 31,011 Intuit, Inc. (a) 13,015 624,720 McAfee, Inc. (a) 3,770 178,321 X Microsoft Corp. 239,074 6,368,931 Oracle Corp. 73,559 2,162,635 Symantec Corp. (a) 27,964 452,458 Synopsys, Inc. (a) 17,625 450,848 ------------ 11,085,700 ------------ SPECIALTY RETAIL 1.9% Advance Auto Parts, Inc. 23,498 1,526,900 Best Buy Co., Inc. 16,245 698,210 GameStop Corp. Class A (a) 33,099 650,727 Gap, Inc. (The) 13,959 265,361 Limited Brands, Inc. 18,898 555,412 Ross Stores, Inc. 7,772 458,470 TJX Cos., Inc. 20,017 918,580 ------------ 5,073,660 ------------ TEXTILES, APPAREL & LUXURY GOODS 1.2% NIKE, Inc. Class B 28,364 2,309,964 VF Corp. 8,624 717,862 Warnaco Group, Inc. (The) (a) 3,866 205,323 ------------ 3,233,149 ------------ TOBACCO 2.1% Altria Group, Inc. 40,758 1,036,068 Philip Morris International, Inc. 77,474 4,532,229 ------------ 5,568,297 ------------ TRADING COMPANIES & DISTRIBUTORS 0.7% W.W. Grainger, Inc. 16,045 1,990,061 ------------ WIRELESS TELECOMMUNICATION SERVICES 0.6% MetroPCS Communications, Inc. (a) 458 4,768 Sprint Nextel Corp. (a) 264,904 1,091,405 Telephone and Data Systems, Inc. 13,751 478,947 ------------ 1,575,120 ------------ Total Common Stocks (Cost $241,785,828) 261,689,569 ------------ EXCHANGE TRADED FUND 1.4% (B) - --------------------------------------------------------------------------- S&P 500 Index-SPDR Trust Series 1 31,383 3,719,827 ------------ Total Exchange Traded Fund (Cost $3,711,384) 3,719,827 ------------ PRINCIPAL AMOUNT SHORT-TERM INVESTMENT 0.2% - --------------------------------------------------------------------------- REPURCHASE AGREEMENT 0.2% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $385,777 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $360,000 and a Market Value of $394,704) $385,777 385,777 ------------ Total Short-Term Investment (Cost $385,777) 385,777 ------------ Total Investments (Cost $245,882,989) (c) 100.0% 265,795,173 Other Assets, Less Liabilities 0.0++ 69,982 -------- ------------ Net Assets 100.0% $265,865,155 ======== ============
14 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. ++ Less than one-tenth of a percent. (a) Non-income producing security. (b) Exchange Traded Fund--An investment vehicle that represents a basket of securities that is traded on an exchange. (c) At October 31, 2010, cost is $254,250,676 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $ 24,025,930 Gross unrealized depreciation (12,481,433) ------------ Net unrealized appreciation $ 11,544,497 ============
The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Common Stocks $261,689,569 $ -- $ -- $261,689,569 Exchange Traded Fund 3,719,827 -- -- 3,719,827 Short-Term Investment Repurchase Agreement -- 385,777 -- 385,777 ------------ -------- -------- ------------ Total Investments in Securities $265,409,396 $385,777 $-- $265,795,173 ============ ======== ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - --------------------------------------------------- Investment in securities, at value (identified cost $245,882,989) $ 265,795,173 Receivables: Dividends and interest 320,763 Investment securities sold 119,211 Fund shares sold 11,215 Other assets 46,110 ------------- Total assets 266,292,472 ------------- LIABILITIES - --------------------------------------------------- Payables: Fund shares redeemed 182,784 Manager (See Note 3) 130,446 Transfer agent (See Note 3) 48,317 Shareholder communication 31,247 NYLIFE Distributors (See Note 3) 13,804 Professional fees 12,236 Custodian 5,496 Trustees 480 Accrued expenses 2,507 ------------- Total liabilities 427,317 ------------- Net assets $ 265,865,155 ============= COMPOSITION OF NET ASSETS - --------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 246,496 Additional paid-in capital 373,689,503 ------------- 373,935,999 Undistributed net investment income 2,472,620 Accumulated net realized loss on investments (130,455,648) Net unrealized appreciation on investments 19,912,184 ------------- Net assets $ 265,865,155 ============= INVESTOR CLASS Net assets applicable to outstanding shares $ 13,661,038 ============= Shares of beneficial interest outstanding 1,268,274 ============= Net asset value per share outstanding $ 10.77 Maximum sales charge (5.50% of offering price) 0.63 ------------- Maximum offering price per share outstanding $ 11.40 ============= CLASS A Net assets applicable to outstanding shares $ 12,139,975 ============= Shares of beneficial interest outstanding 1,124,905 ============= Net asset value per share outstanding $ 10.79 Maximum sales charge (5.50% of offering price) 0.63 ------------- Maximum offering price per share outstanding $ 11.42 ============= CLASS B Net assets applicable to outstanding shares $ 8,465,677 ============= Shares of beneficial interest outstanding 849,758 ============= Net asset value and offering price per share outstanding $ 9.96 ============= CLASS C Net assets applicable to outstanding shares $ 1,352,233 ============= Shares of beneficial interest outstanding 135,738 ============= Net asset value and offering price per share outstanding $ 9.96 ============= CLASS I Net assets applicable to outstanding shares $ 230,246,232 ============= Shares of beneficial interest outstanding 21,270,935 ============= Net asset value and offering price per share outstanding $ 10.82 =============
16 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Dividends (a) $ 5,324,988 Interest 155 ----------- Total income 5,325,143 ----------- EXPENSES Manager (See Note 3) 1,620,792 Transfer agent (See Note 3) 276,201 Distribution/Service--Investor Class (See Note 3) 33,430 Distribution/Service--Class A (See Note 3) 30,549 Distribution/Service--Class B (See Note 3) 95,699 Distribution/Service--Class C (See Note 3) 13,892 Registration 82,408 Professional fees 75,534 Shareholder communication 69,806 Custodian 40,483 Trustees 9,282 Miscellaneous 17,027 ----------- Total expenses 2,365,103 ----------- Net investment income 2,960,040 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS - ------------------------------------------------- Net realized gain on investments (b) 24,660,077 Net change in unrealized appreciation (depreciation) on investments 10,187,172 ----------- Net realized and unrealized gain on investments 34,847,249 ----------- Net increase in net assets resulting from operations $37,807,289 ===========
(a) Dividends recorded net of foreign withholding taxes in the amount of $1,905. (b) Includes realized gain of $1,594,834 due to in-kind redemption (See Note 9). The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 DECREASE IN NET ASSETS - ---------------------------------------------------------- Operations: Net investment income $ 2,960,040 $ 5,164,158 Net realized gain (loss) on investments (a) 24,660,077 (107,755,855) Net change in unrealized appreciation (depreciation) on investments 10,187,172 118,957,834 ---------------------------- Net increase in net assets resulting from operations 37,807,289 16,366,137 ---------------------------- Dividends to shareholders: From net investment income: Investor Class (104,752) (61,370) Class A (154,695) (137,541) Class B (10,051) -- Class C (1,080) -- Class I (4,263,402) (4,956,637) ---------------------------- Total dividends to shareholders (4,533,980) (5,155,548) ---------------------------- Capital share transactions: Net proceeds from sale of shares 71,173,115 44,912,902 Net asset value of shares issued to shareholders in reinvestment of dividends 4,258,039 4,901,112 Cost of shares redeemed (b) (138,978,262) (140,577,108) ---------------------------- Decrease in net assets derived from capital share transactions (63,547,108) (90,763,094) ---------------------------- Net decrease in net assets (30,273,799) (79,552,505) NET ASSETS - ---------------------------------------------------------- Beginning of year 296,138,954 375,691,459 ---------------------------- End of year $ 265,865,155 $ 296,138,954 ============================ Undistributed net investment income at end of year $ 2,472,620 $ 4,057,054 ============================
(a) Includes realized gain of $1,594,834 due to in-kind redemption. (See Note 9) (b) Includes in-kind redemption in the amount of $25,592,241. (See Note 9) 18 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 9.69 $ 9.27 $ 13.17 ------- ------- ------- Net investment income (a) 0.03 0.07 0.03 Net realized and unrealized gain (loss) on investments 1.13 0.40 (3.93) ------- ------- ------- Total from investment operations 1.16 0.47 (3.90) ------- ------- ------- Less dividends and distributions: From net investment income (0.08) (0.05) -- From net realized gain on investments -- -- -- ------- ------- ------- Total dividends and distributions (0.08) (0.05) -- ------- ------- ------- Net asset value at end of period $ 10.77 $ 9.69 $ 9.27 ======= ======= ======= Total investment return (b) 11.99% 5.12% (29.61%)(c) Ratios (to average net assets)/Supplemental Data: Net investment income (loss) 0.25% 0.81% 0.41% ++ Net expenses 1.61% 1.46% 1.40% ++ Expenses (before waiver/reimbursement) 1.61% 1.73% 1.58% ++ Portfolio turnover rate 152% 138% 158% Net assets at end of period (in 000's) $13,661 $12,752 $11,811
CLASS B ------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of year $ 8.97 $ 8.60 $ 15.07 $ 13.80 $ 11.94 ------ ------- ------- ------- ------- Net investment income (loss) (a) (0.05) 0.01 (0.04) (0.04) (0.01) Net realized and unrealized gain (loss) on investments 1.05 0.36 (5.29) 1.59 1.87 ------ ------- ------- ------- ------- Total from investment operations 1.00 0.37 (5.33) 1.55 1.86 ------ ------- ------- ------- ------- Less dividends and distributions: From net investment income (0.01) -- -- -- -- From net realized gain on investments -- -- (1.14) (0.28) -- ------ ------- ------- ------- ------- Total dividends and distributions (0.01) -- (1.14) (0.28) -- ------ ------- ------- ------- ------- Net asset value at end of period $ 9.96 $ 8.97 $ 8.60 $ 15.07 $ 13.80 ====== ======= ======= ======= ======= Total investment return (b) 11.14% 4.30% (37.77%) 11.39% 15.58% Ratios (to average net assets)/Supplemental Data: Net investment income (loss) (0.49%) 0.14% (0.30%) (0.31%) (0.05%) Net expenses 2.36% 2.20% 2.10% 2.04% 2.05% Expenses (before waiver/reimbursement) 2.36% 2.49% 2.27% 2.23% 2.35% Portfolio turnover rate 152% 138% 158% 122% 144% Net assets at end of year (in 000's) $8,466 $10,371 $13,212 $33,203 $39,024
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Total investment return is not annualized.
20 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A --------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 9.70 $ 9.28 $ 16.10 $ 14.66 $ 12.62 ------- ------- ------- ------- ------- 0.09 0.12 0.08 0.06 0.09 1.13 0.40 (5.70) 1.72 1.97 ------- ------- ------- ------- ------- 1.22 0.52 (5.62) 1.78 2.06 ------- ------- ------- ------- ------- (0.13) (0.10) (0.06) (0.06) (0.02) -- -- (1.14) (0.28) -- ------- ------- ------- ------- ------- (0.13) (0.10) (1.20) (0.34) (0.02) ------- ------- ------- ------- ------- $ 10.79 $ 9.70 $ 9.28 $ 16.10 $ 14.66 ======= ======= ======= ======= ======= 12.64% 5.80% (37.22%) 12.24% 16.43% 0.90% 1.38% 0.65% 0.42% 0.63% 0.96% 0.94% 1.15% 1.29% 1.30% 0.96% 0.98% 1.30% 1.48% 1.60% 152% 138% 158% 122% 144% $12,140 $11,579 $12,530 $44,874 $38,940
CLASS C ----------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 8.97 $ 8.59 $ 15.07 $13.79 $11.94 ------ ------ ------- ------ ------ (0.05) 0.01 (0.04) (0.05) (0.01) 1.05 0.37 (5.30) 1.61 1.86 ------ ------ ------- ------ ------ 1.00 0.38 (5.34) 1.56 1.85 ------ ------ ------- ------ ------ (0.01) -- -- -- -- -- -- (1.14) (0.28) -- ------ ------ ------- ------ ------ (0.01) -- (1.14) (0.28) -- ------ ------ ------- ------ ------ $ 9.96 $ 8.97 $ 8.59 $15.07 $13.79 ====== ====== ======= ====== ====== 11.12% 4.42% (37.84%) 11.47% 15.49% (0.49%) 0.12% (0.30%) (0.32%) (0.09%) 2.36% 2.21% 2.10% 2.04% 2.05% 2.36% 2.49% 2.27% 2.23% 2.35% 152% 138% 158% 122% 144% $1,352 $1,357 $ 1,611 $3,334 $3,254
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of year $ 9.72 $ 9.32 $ 16.19 $ 14.73 $ 12.68 -------- -------- -------- -------- -------- Net investment income (a) 0.12 0.15 0.15 0.16 0.17 Net realized and unrealized gain (loss) on investments 1.14 0.39 (5.73) 1.73 1.99 -------- -------- -------- -------- -------- Total from investment operations 1.26 0.54 (5.58) 1.89 2.16 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.16) (0.14) (0.15) (0.15) (0.11) From net realized gain on investments -- -- (1.14) (0.28) -- -------- -------- -------- -------- -------- Total dividends and distributions (0.16) (0.14) (1.29) (0.43) (0.11) -------- -------- -------- -------- -------- Net asset value at end of period $ 10.82 $ 9.72 $ 9.32 $ 16.19 $ 14.73 ======== ======== ======== ======== ======== Total investment return (b) 13.00% 5.99% (36.92%) 13.03% 17.19% Ratios (to average net assets)/Supplemental Data: Net investment income 1.16% 1.69% 1.16% 1.06% 1.24% Net expenses 0.71% 0.65% 0.62% 0.62% 0.66% Expenses (before waiver/reimbursement) 0.71% 0.73% 0.80% 0.87% 0.96% Portfolio turnover rate 152% 138% 158% 122% 144% Net assets at end of year (in 000's) $230,246 $260,081 $336,529 $219,460 $133,818
(a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges.
22 MainStay Common Stock Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Common Stock Fund (the "Fund"), a diversified fund. The Fund currently offers six classes of shares. Class A shares and Class B shares commenced operations on June 1, 1998. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on December 28, 2004. Class R2 shares were first offered on December 14, 2007. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I and Class R2 shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The six classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class, Class A and Class R2 shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. Class R2 shares are authorized to pay a shareholder service fee to the Manager, as defined in Note 3(A), its affiliates, or third-party service providers, as compensation for services rendered to shareholders of Class R2 shares. This is in addition to any fees paid under a distribution plan, where applicable. There were no investment operations for Class R2 during the year ended October 31, 2010. The Fund's investment objective is to seek long-term growth of capital, with income as a secondary consideration. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below: - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the 24 MainStay Common Stock Fund obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. Madison Square Investors LLC ("Madison Square Investors" or "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of a Subadvisory Agreement, as amended ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.55% up to $500 million, 0.525% from $500 million to $1 billion and 0.50% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate was 0.57% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments agreed to voluntarily waive or reimburse the expenses of the appropriate class of the Fund so that the total ordinary operating expenses of a class do not exceed the following percentages of average daily net assets: Investor Class, 1.85%; Class B, 2.60%; and Class C, 2.60%. These voluntary waivers or reimbursements may be discontinued at any time. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $1,620,792. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act. mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor receives a monthly distribution fee from the Investor Class, Class A and Class R2 shares at an annual rate of 0.25% of the average daily net assets of the Investor Class, Class A and Class R2 shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. In accordance with the Shareholder Services Plan for the Class R2 shares, the Manager has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R2 shares. For its services, the Manager is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R2 shares. This is in addition to any fees paid under a distribution plan, where applicable. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $3,379 and $1,451, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Class A, Class B and Class C shares of $62, $13,819 and $29, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $ 91,939 - ----------------------------------------------- Class A 5,123 - ----------------------------------------------- Class B 66,008 - ----------------------------------------------- Class C 9,556 - ----------------------------------------------- Class I 103,575 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 240 0.00%++ - ------------------------------------------------- Class C 117 0.00++ - ------------------------------------------------- Class I 2,072 0.00++ - -------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $10,142. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $2,472,620 $(122,087,961) $-- $11,544,497 $(108,070,844) - -----------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized depreciation is primarily due to wash sale deferrals, real estate investment trusts ("REITs") basis adjustments and class action payments basis adjustments. The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized loss on investments arising from permanent differences; net assets at October 31, 2010 are not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) ON PAID-IN INCOME (LOSS) INVESTMENTS CAPITAL $(10,494) $(1,584,340) $1,594,834 - ----------------------------------------------
The reclassifications for the Fund are primarily due to capital gain distributions from REITs, return of capital distributions from REITs and redemptions in-kind. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $122,087,961 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired. 26 MainStay Common Stock Fund
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2016 $19,054 2017 103,034 - ---------------------------------- ----- Total $122,088 - ---------------------------------- -----
The Fund utilized $18,668,217 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $4,533,980 $5,155,548 - -----------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $424,598 and $463,568, respectively. NOTE 8-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 69,122 $ 718,903 Shares issued to shareholders in reinvestment of dividends 10,049 104,003 Shares redeemed (231,603) (2,407,029) -------------------------- Net increase (decrease) in shares outstanding before conversion (152,432) (1,584,123) Shares converted into Investor Class (See Note 1) 144,572 1,493,092 Shares converted from Investor Class (See Note 1) (39,650) (417,349) -------------------------- Net increase (decrease) (47,510) $ (508,380) ========================== Year ended October 31, 2009: Shares sold 93,575 $ 805,501 Shares issued to shareholders in reinvestment of dividends 7,249 60,971 Shares redeemed (242,848) (2,070,771) -------------------------- Net increase (decrease) in shares outstanding before conversion (142,024) (1,204,299) Shares converted into Investor Class (See Note 1) 246,001 1,996,705 Shares converted from Investor Class (See Note 1) (62,571) (608,108) -------------------------- Net increase (decrease) 41,406 $ 184,298 ========================== CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 103,502 $ 1,083,518 Shares issued to shareholders in reinvestment of dividends 13,866 142,959 Shares redeemed (263,594) (2,739,698) -------------------------- Net increase (decrease) in shares outstanding before conversion (146,226) (1,513,221) Shares converted into Class A (See Note 1) 85,585 896,175 Shares converted from Class A (See Note 1) (8,651) (90,708) -------------------------- Net increase (decrease) (69,292) $ (707,754) ========================== Year ended October 31, 2009: Shares sold 152,731 $ 1,289,321 Shares issued to shareholders in reinvestment of dividends 15,031 125,963 Shares redeemed (363,744) (3,078,312) -------------------------- Net increase (decrease) in shares outstanding before conversion (195,982) (1,663,028) Shares converted into Class A (See Note 1) 138,763 1,250,027 Shares converted from Class A (See Note 1) (98,151) (775,732) -------------------------- Net increase (decrease) (155,370) $ (1,188,733) ==========================
mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 79,011 $ 760,251 Shares issued to shareholders in reinvestment of dividends 1,012 9,746 Shares redeemed (190,139) (1,821,160) -------------------------- Net increase (decrease) in shares outstanding before conversion (110,116) (1,051,163) Shares converted from Class B (See Note 1) (196,019) (1,881,210) -------------------------- Net increase (decrease) (306,135) $ (2,932,373) ========================== Year ended October 31, 2009: Shares sold 144,659 $ 1,152,489 Shares redeemed (284,200) (2,238,643) -------------------------- Net increase (decrease) in shares outstanding before conversion (139,541) (1,086,154) Shares converted from Class B (See Note 1) (241,611) (1,862,892) -------------------------- Net increase (decrease) (381,152) $ (2,949,046) ========================== CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 18,405 $ 180,846 Shares issued to shareholders in reinvestment of dividends 90 866 Shares redeemed (34,082) (330,222) -------------------------- Net increase (decrease) (15,587) $ (148,510) ========================== Year ended October 31, 2009: Shares sold 29,401 $ 239,798 Shares redeemed (65,475) (515,915) -------------------------- Net increase (decrease) (36,074) $ (276,117) ========================== CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 6,684,422 $ 68,429,597 Shares issued to shareholders in reinvestment of dividends 387,642 4,000,465 Shares redeemed (a) (12,545,659) (131,680,153) -------------------------- Net increase (decrease) (5,473,595) $ (59,250,091) ========================== Year ended October 31, 2009: Shares sold 5,079,800 $ 41,425,793 Shares issued to shareholders in reinvestment of dividends 562,551 4,714,178 Shares redeemed (14,988,512) (132,673,467) -------------------------- Net increase (decrease) (9,346,161) $ (86,533,496) ==========================
(a) Includes the redemption of 2,491,893 shares through an in-kind transfer of securities in the amount of $25,592,241, (See Note 9) NOTE 9-IN-KIND TRANSFER OF SECURITIES During the year ended October 31, 2010, the Fund redeemed shares of beneficial interest in exchange for securities. The securities were transferred at their current value on the date of transaction.
TRANSACTION DATE SHARES REDEEMED VALUE GAIN (LOSS) 2/26/2010 2,491,893 $25,592,241 $1,594,834 - ---------------------------------------------------------------
NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified. 28 MainStay Common Stock Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Common Stock Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Common Stock Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 29 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Common Stock Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and Madison Square Investors LLC ("MSI") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MSI on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MSI as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MSI; (ii) the investment performance of the Fund, New York Life Investments and MSI; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MSI as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MSI In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MSI's compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MSI provides to the Fund. The Board evaluated MSI's experience in serving as subadviser to the Fund and managing other portfolios. It examined MSI's track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MSI, and MSI's overall legal and compliance environment. The Board also reviewed MSI's willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio 30 MainStay Common Stock Fund managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MSI's experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MSI to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MSI The Board considered the costs of the services provided by New York Life Investments and MSI under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MSI is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MSI in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MSI, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MSI must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to MSI from legally permitted "soft- dollar" arrangements by which brokers provide research and other services to MSI in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MSI) due to their relationships with the Fund supported the Board's determination to approve the Agreements. mainstayinvestments.com 31 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MSI are paid by New York Life Investments, not the Fund. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MSI on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MSI about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. 32 MainStay Common Stock Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $5,167,135 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 100.0% to arrive at the amount eligible for the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). mainstayinvestments.com 33 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 34 MainStay Common Stock Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 35
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
36 MainStay Common Stock Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 37 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 38 MainStay Common Stock Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. (C) 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-A021096 MS333-10 MSCS11-12/10 21 (MAINSTAY INVESTMENTS LOGO) MAINSTAY CONVERTIBLE FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 16 - --------------------------------------------- Notes to Financial Statements 23 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 30 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 31 - --------------------------------------------- Federal Income Tax Information 34 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 34 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 34 - --------------------------------------------- Board Members and Officers 35 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
BANK OF AMERICA MERRILL MAINSTAY CONVERTIBLE LYNCH ALL FUND CLASS U.S. CONVERTIBLE B SHARES INDEX -------------------- ---------------- 10/31/00 10000 10000 8784 8333 8242 7505 9688 9696 10010 10484 11046 10954 12129 12393 14465 13968 9322 8591 12196 11792 10/31/10 14382 14242
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 12.25% 4.99% Excluding sales charges 18.78 6.18 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 5.5% Initial Sales Charge With sales charges 12.51 5.11 Excluding sales charges 19.05 6.31 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 12.93 5.09 if Redeemed Within the First Six Years of Purchase Excluding sales charges 17.93 5.42 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 16.94 5.41 if Redeemed Within One Year of Purchase Excluding sales charges 17.94 5.41 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 19.41 6.57 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 3.88% 1.43% 4.47 1.43 - ------------------------------------------------- Class A Shares 3.94 1.15 4.53 1.15 - ------------------------------------------------- Class B Shares 3.70 2.19 3.70 2.19 - ------------------------------------------------- Class C Shares 3.69 2.18 3.69 2.18 - ------------------------------------------------- Class I Shares(4) 4.79 0.89 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on November 28, 2008, includes the historical performance of Class A shares through November 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Bank of America Merrill Lynch All U.S. Convertible Index(5) 20.78% 5.39% 3.60% - --------------------------------------------------------------------------------------- Average Lipper Convertible Securities Fund(6) 18.62 4.70 3.77 - ---------------------------------------------------------------------------------------
5. The Bank of America Merrill Lynch All U.S. Convertible Index is a market- capitalization weighted index of domestic corporate convertible securities. In order to be included in this index, bonds and preferred stocks must be convertible only to common stock and have a market value or original par value of at least $50 million. Total returns assume reinvestment of all income, dividends and capital gains. The Bank of America Merrill Lynch All U.S. Convertible Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 6. The average Lipper convertible securities fund is representative of funds that invest primarily in convertible bonds and/or convertible preferred stock. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Convertible Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY CONVERTIBLE FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,027.70 $ 6.49 $1,018.80 $ 6.46 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,028.90 $ 5.37 $1,019.90 $ 5.35 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,023.70 $10.30 $1,015.00 $10.26 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,023.70 $10.30 $1,015.00 $10.26 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,030.20 $ 4.09 $1,021.20 $ 4.08 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.27% for Investor Class, 1.05% for Class A, 2.02% for Class B and Class C and 0.80% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Convertible Bonds 78.5 Convertible Preferred Stocks 9.1 Common Stocks 8.5 Short-Term Investment 4.4 Other Assets, Less Liabilities (0.5)
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. JPMorgan Chase & Co., 1.50%, due 6/25/15 2. Teva Pharmaceutical Finance Co. B.V., 1.75%, due 2/1/26 3. Core Laboratories, L.P., 0.25%, due 10/31/11 4. Cameron International Corp., 2.50%, due 6/15/26 5. Incyte Corp., Ltd., 4.75%, due 10/1/15 6. Fisher Scientific International, Inc., 3.25%, due 3/1/24 7. Citigroup, Inc., 7.50% 8. BioMarin Pharmaceutical, Inc., 1.875%, due 4/23/17 9. Peabody Energy Corp., 4.75%, due 12/15/66 10. Allegheny Technologies, Inc., 4.25%, due 6/1/14
8 MainStay Convertible Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio manager Edward Silverstein, CFA, of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY CONVERTIBLE FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Convertible Fund returned 18.78% for Investor Class shares, 19.05% for Class A shares, 17.93% for Class B shares and 17.94% for Class C shares for the 12 months ended October 31, 2010. Over the same period, Class I shares returned 19.41%. Investor Class, Class A and Class I shares outperformed--and Class B and Class C shares underperformed--the 18.62% return of the average Lipper(1) convertible securities fund. All share classes underperformed the 20.78% return of the Bank of America Merrill Lynch All U.S. Convertible Index(2) for the 12 months ended October 31, 2010. The Bank of America Merrill Lynch All U.S. Convertible Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund underperformed the Bank of America Merrill Lynch All U.S. Convertible Index primarily because of sector allocation and credit quality. The Fund's overweight position in the health care sector hurt performance, as several of the Fund's larger health care holdings performed poorly during the reporting period. The health care sector underperformed the overall convertible bond market, as investors expressed a preference for economically sensitive sectors such as materials and consumer durables during the reporting period. The Fund did, however, benefit from its overweight allocations to energy and materials, which performed well during the reporting period. The Fund's quality bias and overweight position in investment-grade convertible bonds also hampered relative performance. During the reporting period, investment-grade convertible bonds significantly underperformed speculative- grade convertible bonds. DURING THE REPORTING PERIOD, WHICH SEGMENTS OF THE FUND WERE STRONG PERFORMERS AND WHICH SEGMENTS WERE WEAK? During the reporting period, the segments that provided the best absolute performance for the Fund were the biotechnology industry, the oil services & equipment industry and the materials sector. In biotechnology, the convertible bonds of Incyte Corp. and BioMarin Pharmaceutical enjoyed sizable gains. As investors became more open to risk, they bid up the price of both companies' common stocks with the expectation that each would successfully bring new drugs to market. The Fund's best-performing security in terms of dollars gained was a convertible bond position in Core Laboratories in the oil services & equipment industry. Core Laboratories' stock and convertible bonds performed well after the company exceeded earnings estimates and raised future earnings guidance in consecutive quarters. The convertible bonds of several of the Fund's materials holdings, such as Allegheny Technologies and U.S. Steel, also performed well during the reporting period. Investors favored the convertible bonds of economically sensitive companies likely to prosper if the nascent economic recovery strengthens. The segments that were weak on an absolute basis included the food retailing industry, the medical devices industry and financials sector. The Fund's worst- performing security was a convertible bond position in the Great Atlantic & Pacific Tea Company (A&P), a food retailer. The bonds declined sharply after the company reported several quarters of poor operating performance and the market began to speculate about A&P seeking bankruptcy protection. Several of the Fund's medical device holdings, such as the convertible bonds of Nuvasive and the common stock of Boston Scientific, were also poor performers during the reporting period. Both companies reported disappointing results, as cost pressures and the poor economy continued to weigh on sales of medical devices, particularly those used for elective surgeries. In financials, the common stock of Morgan Stanley and the convertible bonds of Janus Capital were poor performers during the reporting period. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL FUND HOLDINGS WERE THE STRONGEST ABSOLUTE PERFORMERS AND WHICH FUND HOLDINGS WERE PARTICULARLY WEAK? The convertible bonds of Core Laboratories and Incyte Corp. (discussed above), were among the Fund's best performers. The convertible bonds of Canadian pharmaceutical company Biovail were also strong following the announcement during the reporting period of the company's merger with Valeant Pharmaceuticals. By reducing overlapping costs, the merged company hoped to increase profitability. In addition to the convertible bonds of food retailer A&P (discussed above), the common stock of personal computer giant Hewlett-Packard was a poor performer during the reporting period, largely because of the unexpected firing of the company's chief executive officer, who was found to have submitted inaccurate expense reports. The convertible bonds of ISIS Pharmaceuticals were also weak performers during the reporting period. Investors became concerned that the company's leading drug candidate for the treatment of extremely high cholesterol might not receive approval from the U.S. Food and Drug Administration because some test patients experienced elevated liver enzymes. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? We added to the Fund's position in the convertible bonds of airline company AMR during the reporting period. In our view, the bonds offered the potential to participate in the upside of AMR's common stock, which we expected to do well in light of 1. See footnote on page 6 for more information about Lipper Inc. 2. See footnote on page 6 for more information on the Bank of America Merrill Lynch All U.S. Convertible Index. mainstayinvestments.com 9 increased levels of business and leisure travel. The bonds also offered some downside protection and a high yield relative to the company's common shares, should our investment thesis prove to be premature or incorrect. We initiated a position in the convertible preferred shares of oil & gas products company Apache during the reporting period. Apache issued the shares, in part, to fund the purchase of several properties from BP. We believe that the properties were purchased at an attractive price and should offer meaningful upside to Apache's oil production and reserves. We increased the Fund's position in Ford Motor Company's convertible bonds, as we expected the company to materially benefit from the stabilizing economy in the United States and increased auto sales in developing regions of the world. We sold the Fund's position in integrated oil company Whiting Petroleum after it converted its convertible preferred shares into common stock. We sold a portion of the Fund's convertible-bond position in consumer products manufacturer Newell Rubbermaid following a significant rise in the price of the company's common stock. The share-price gain eliminated much of the downside protection inherent in the company's convertible bonds. We trimmed the Fund's position in the convertible bonds of offshore driller Transocean after a significant decline in the company's common stock rendered its convertible bonds relatively unattractive and unlikely to participate in much of the potential upside of the company's common stock. WERE THERE ANY CHANGES IN THE FUND'S SECTOR WEIGHTINGS DURING THE REPORTING PERIOD? There were no significant changes in the Fund's sector weightings relative to the Bank of America Merrill Lynch All U.S. Convertible Index during the reporting period. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund was overweight relative to the Bank of America Merrill Lynch All U.S. Convertible Index in the health care, energy and materials sectors. On the same date, the Fund was underweight relative to its benchmark in financials and information technology. The Fund held neutral-to- market positions in other sectors. The opinions expressed are those of the portfolio manager as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Convertible Fund PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE CONVERTIBLE SECURITIES 87.6%+ CONVERTIBLE BONDS 78.5% - ------------------------------------------------------------ AEROSPACE & DEFENSE 3.1% GenCorp, Inc. 4.063%, due 12/31/39 (a) $11,735,000 $ 10,708,187 L-3 Communications Corp. 3.00%, due 8/1/35 (a) 6,455,000 6,519,550 3.00%, due 8/1/35 516,000 521,160 Triumph Group, Inc. 2.625%, due 10/1/26 4,654,000 7,295,145 ------------ 25,044,042 ------------ AIRLINES 1.6% AMR Corp. 6.25%, due 10/15/14 11,649,000 13,323,544 ------------ AUTO MANUFACTURERS 1.4% Ford Motor Co. 4.25%, due 11/15/16 6,366,000 11,092,755 ------------ AUTO PARTS & EQUIPMENT 1.7% ArvinMeritor, Inc. 4.00%, due 2/15/27 6,564,000 6,416,310 BorgWarner, Inc. 3.50%, due 4/15/12 4,222,000 7,494,050 ------------ 13,910,360 ------------ BANKS 3.5% X JPMorgan Chase & Co. 1.50%, due 6/25/15 (a) 20,170,427 28,351,552 ------------ BIOTECHNOLOGY 5.4% American Oriental Bioengineering, Inc. 5.00%, due 7/15/15 (a) 3,076,000 2,495,405 Amgen, Inc. 0.375%, due 2/1/13 13,459,000 13,559,942 Gilead Sciences, Inc. 1.00%, due 5/1/14 (a) 7,606,000 8,252,510 X Incyte Corp., Ltd. 4.75%, due 10/1/15 8,975,000 18,903,594 ------------ 43,211,451 ------------ COAL 2.9% Alpha Natural Resources, Inc. 2.375%, due 4/15/15 5,552,000 6,530,540 X Peabody Energy Corp. 4.75%, due 12/15/66 13,794,000 16,466,588 ------------ 22,997,128 ------------ COMMERCIAL SERVICES 0.7% United Rentals, Inc. 4.00%, due 11/15/15 2,897,000 5,399,284 ------------ COMPUTERS 4.5% Cadence Design Systems, Inc. 2.625%, due 6/1/15 (a) 8,060,000 10,397,400 EMC Corp. 1.75%, due 12/1/13 10,384,000 14,862,100 SanDisk Corp. 1.00%, due 5/15/13 5,300,000 5,001,875 1.50%, due 8/15/17 6,321,000 6,178,777 ------------ 36,440,152 ------------ DISTRIBUTION & WHOLESALE 0.7% WESCO International, Inc. 6.00%, due 9/15/29 3,093,000 5,370,221 ------------ ELECTRONICS 1.0% TTM Technologies, Inc. 3.25%, due 5/15/15 7,990,000 8,029,950 ------------ ENERGY--ALTERNATE SOURCES 1.3% Covanta Holding Corp. 1.00%, due 2/1/27 11,153,000 10,902,058 ------------ ENGINEERING & CONSTRUCTION 0.4% MasTec, Inc. 4.00%, due 6/15/14 2,910,000 3,241,013 ------------ ENTERTAINMENT 0.8% Lions Gate Entertainment Corp. 3.625%, due 3/15/25 2,538,000 2,480,895 Lions Gate Entertainment, Inc. 3.625%, due 3/15/25 3,697,000 3,835,638 ------------ 6,316,533 ------------ FOOD 1.3% Great Atlantic & Pacific Tea Co. 6.75%, due 12/15/12 8,304,000 4,525,680 Spartan Stores, Inc. 3.375%, due 5/15/27 (a) 5,749,000 5,382,501 3.375%, due 5/15/27 462,000 432,548 ------------ 10,340,729 ------------ HEALTH CARE--PRODUCTS 3.9% China Medical Technologies, Inc. 4.00%, due 8/15/13 16,220,000 13,097,650 NuVasive, Inc. 2.25%, due 3/15/13 6,541,000 6,426,532
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings or issuers held, as of October 31, 2010, excluding short-term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) HEALTH CARE--PRODUCTS (CONTINUED) Teleflex, Inc. 3.875%, due 8/1/17 $10,556,000 $ 11,624,795 ------------ 31,148,977 ------------ HEALTH CARE--SERVICES 2.3% X Fisher Scientific International, Inc. 3.25%, due 3/1/24 13,775,000 18,320,750 ------------ INSURANCE 0.7% American Equity Investment Life Holding Co. 3.50%, due 9/15/15 (a) 4,195,000 4,541,088 MGIC Investment Corp. 5.00%, due 5/1/17 1,353,000 1,510,286 ------------ 6,051,374 ------------ INTERNET 3.4% At Home Corp. 4.75%, due 12/31/49 (b)(c)(d)(e) 9,147,056 915 Digital River, Inc. 2.00%, due 11/1/30 (a) 885,000 894,956 Equinix, Inc. 4.75%, due 6/15/16 2,300,000 2,912,375 GSI Commerce, Inc. 2.50%, due 6/1/27 928,000 1,018,480 Symantec Corp. 1.00%, due 6/15/13 5,500,000 6,194,375 TeleCommunication Systems, Inc. 4.50%, due 11/1/14 (a) 6,378,000 6,122,880 VeriSign, Inc. 3.25%, due 8/15/37 9,139,000 10,578,392 ------------ 27,722,373 ------------ IRON & STEEL 4.4% X Allegheny Technologies, Inc. 4.25%, due 6/1/14 11,021,000 16,269,751 ArcelorMittal 5.00%, due 5/15/14 4,668,000 6,144,255 Steel Dynamics, Inc. 5.125%, due 6/15/14 5,597,000 6,471,531 United States Steel Corp. 4.00%, due 5/15/14 4,363,000 6,659,029 ------------ 35,544,566 ------------ MEDIA 0.9% Central European Media Enterprises, Ltd. 3.50%, due 3/15/13 (a) 8,245,000 7,410,194 ------------ MINING 0.4% Alcoa, Inc. 5.25%, due 3/15/14 1,417,000 3,069,576 ------------ MISCELLANEOUS--MANUFACTURING 0.8% Ingersoll-Rand Co. 4.50%, due 4/15/12 2,903,000 6,491,834 ------------ OIL & GAS 2.6% BPZ Resources, Inc. 6.50%, due 3/1/15 3,020,000 2,740,650 Chesapeake Energy Corp. 2.50%, due 5/15/37 5,722,000 4,956,683 St. Mary Land & Exploration Co. 3.50%, due 4/1/27 5,229,000 5,601,566 Transocean, Inc. Series C 1.50%, due 12/15/37 7,726,000 7,503,877 ------------ 20,802,776 ------------ OIL & GAS SERVICES 5.3% X Cameron International Corp. 2.50%, due 6/15/26 16,537,000 21,436,086 X Core Laboratories, L.P. 0.25%, due 10/31/11 12,610,000 21,484,288 ------------ 42,920,374 ------------ PHARMACEUTICALS 11.1% X BioMarin Pharmaceutical, Inc. 1.875%, due 4/23/17 12,639,000 17,663,003 Biovail Corp. 5.375%, due 8/1/14 (a) 5,913,000 11,626,436 Cephalon, Inc. 2.00%, due 6/1/15 3,536,000 5,339,360 2.50%, due 5/1/14 6,573,000 7,764,356 Isis Pharmaceuticals, Inc. 2.625%, due 2/15/27 7,829,000 7,662,634 Salix Pharmaceuticals, Ltd. 2.75%, due 5/15/15 6,149,000 6,894,566 X Teva Pharmaceutical Finance Co. B.V. Series D 1.75%, due 2/1/26 20,589,000 23,188,361 Viropharma, Inc. 2.00%, due 3/15/17 8,333,000 9,291,295 ------------ 89,430,011 ------------ REAL ESTATE INVESTMENT TRUSTS 1.8% Host Hotels & Resorts, L.P. 2.50%, due 10/15/29 (a) 6,278,000 8,279,112 SL Green Operating Partnership, L.P. 3.00%, due 10/15/17 (a) 6,019,000 6,086,714 ------------ 14,365,826 ------------ SEMICONDUCTORS 3.1% Intel Corp. 3.25%, due 8/1/39 (a) 2,579,000 3,072,234
12 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) SEMICONDUCTORS (CONTINUED) Microchip Technology, Inc. 2.125%, due 12/15/37 $ 8,145,000 $ 9,387,112 Micron Technology, Inc. 4.25%, due 10/15/13 2,460,000 4,440,300 ON Semiconductor Corp. 2.625%, due 12/15/26 7,450,000 7,822,500 ------------ 24,722,146 ------------ SOFTWARE 2.5% Microsoft Corp. (zero coupon), due 6/15/13 (a) 8,865,000 9,330,413 Nuance Communications, Inc. 2.75%, due 8/15/27 6,696,000 7,348,860 SYNNEX Corp. 4.00%, due 5/15/18 (a) 3,004,000 3,597,290 ------------ 20,276,563 ------------ TELECOMMUNICATIONS 5.0% Anixter International, Inc. 1.00%, due 2/15/13 6,220,000 6,702,050 Ciena Corp. 0.875%, due 6/15/17 1,503,000 1,087,796 4.00%, due 3/15/15 (a) 6,774,000 6,934,883 Leap Wireless International, Inc. 4.50%, due 7/15/14 2,701,000 2,447,781 SBA Communications Corp. 1.875%, due 5/1/13 8,226,000 9,141,142 Virgin Media, Inc. 6.50%, due 11/15/16 8,791,000 14,065,600 ------------ 40,379,252 ------------ Total Convertible Bonds (Cost $557,042,008) 632,627,364 ------------ SHARES CONVERTIBLE PREFERRED STOCKS 9.1% - ------------------------------------------------------------ AUTO MANUFACTURERS 0.6% General Motors Corp. 6.25% 259,700 2,220,175 Motors Liquidation Co. 5.25% 309,500 2,676,866 ------------ 4,897,041 ------------ BANKS 2.2% X Citigroup, Inc. 7.50% 145,700 17,999,778 ------------ ELECTRIC 0.7% PPL Corp. 9.50% 92,100 5,197,203 ------------ INSURANCE 1.4% Hartford Financial Services Group, Inc. 7.25% 459,600 11,283,180 ------------ OIL & GAS 2.4% Apache Corp. 6.00% 251,400 14,631,480 Energy XXI Bermuda Ltd. 5.63% 18,700 5,002,456 ------------ 19,633,936 ------------ PHARMACEUTICALS 0.7% Omnicare Capital Trust II 4.00% 152,100 5,718,960 ------------ TELECOMMUNICATIONS 1.1% Crown Castle International Corp. 6.25% 150,000 9,019,500 ------------ Total Convertible Preferred Stocks (Cost $70,743,419) 73,749,598 ------------ Total Convertible Securities (Cost $627,785,427) 706,376,962 ------------ COMMON STOCKS 8.5% - ------------------------------------------------------------ AEROSPACE & DEFENSE 0.0%++ Triumph Group, Inc. 3,811 318,562 ------------ APPAREL 0.6% Iconix Brand Group, Inc. (f) 294,200 5,148,500 ------------ AUTO PARTS & EQUIPMENT 0.2% ArvinMeritor, Inc. (f) 88,138 1,461,328 ------------ BANKS 0.4% Bank of America Corp. 189,500 2,167,880 Morgan Stanley 34,800 865,476 ------------ 3,033,356 ------------ COMPUTERS 0.7% Hewlett-Packard Co. 135,800 5,711,748 ------------ ELECTRONICS 0.1% TTM Technologies, Inc. (f) 30,900 323,832 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) HEALTH CARE--PRODUCTS 0.2% Boston Scientific Corp. (f) 284,600 $ 1,815,748 ------------ OIL & GAS 0.9% Forest Oil Corp. (f) 83,100 2,553,663 Frontier Oil Corp. 187,700 2,487,025 Transocean, Ltd. (f) 35,100 2,223,936 ------------ 7,264,624 ------------ OIL & GAS SERVICES 2.1% Baker Hughes, Inc. 160,600 7,440,598 Gulf Island Fabrication, Inc. 16,900 385,996 Halliburton Co. 195,626 6,232,644 ION Geophysical Corp. (f) 530,100 2,592,189 ------------ 16,651,427 ------------ PHARMACEUTICALS 1.7% Merck & Co., Inc. 191,917 6,962,749 Omnicare, Inc. 61,800 1,490,616 ViroPharma, Inc. (f) 322,100 5,269,556 ------------ 13,722,921 ------------ RETAIL 0.6% Costco Wholesale Corp. 77,203 4,846,032 ------------ SOFTWARE 0.6% Microsoft Corp. 191,600 5,104,224 ------------ TRANSPORTATION 0.4% Tidewater, Inc. 65,800 3,035,354 ------------ Total Common Stocks (Cost $77,887,822) 68,437,656 ------------ PRINCIPAL AMOUNT VALUE SHORT-TERM INVESTMENT 4.4% - ------------------------------------------------------------ REPURCHASE AGREEMENT 4.4% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $35,212,066 (Collateralized by a United States Treasury Note with a rate 3.125% and a maturity date of 4/30/17, with a Principal Amount of $32,760,000 and a Market Value of $35,918,064) $35,212,036 $ 35,212,036 ------------ Total Short-Term Investment (Cost $35,212,036) 35,212,036 ------------ Total Investments (Cost $740,885,285) (g) 100.5% 810,026,654 Other Assets, Less Liabilities (0.5) (4,070,705) ----------- ------------ Net Assets 100.0% $805,955,949 =========== ============
++ Less than one-tenth of a percent. (a) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (b) Illiquid security--The total market value of this security at October 31, 2010 is $915, which represents less than one- tenth of a percent of the Fund's net assets. (c) Restricted security. (d) Issue in default. (e) Fair valued security--The total market value of this security at October 31, 2010 is $915, which represents less than one-tenth of a percent of the Fund's net assets. (f) Non-income producing security. (g) At October 31, 2010, cost is $740,883,401 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $ 94,760,190 Gross unrealized depreciation (25,616,937) ------------ Net unrealized appreciation $ 69,143,253 ============
14 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Convertible Securities Convertible Bonds (b) $ -- $632,626,449 $915 $632,627,364 Convertible Preferred Stocks 73,749,598 -- -- 73,749,598 ------------ ------------ ---- ------------ Total Convertible Securities 73,749,598 632,626,449 915 706,376,962 ------------ ------------ ---- ------------ Common Stocks 68,437,656 -- -- 68,437,656 ------------ ------------ ---- ------------ Short-Term Investment Repurchase Agreement -- 35,212,036 -- 35,212,036 ------------ ------------ ---- ------------ Total Investments in Securities $142,187,254 $667,838,485 $915 $810,026,654 ============ ============ ==== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The level 3 security valued at $915 is held in Internet within the Convertible Bonds section of the Portfolio of Investments. The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE CHANGE IN BALANCE AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS AS OF INVESTMENTS IN OCTOBER 31, DISCOUNTS GAIN APPRECIATION IN TO OUT OF OCTOBER 31, SECURITIES 2009 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2010 Convertible Bonds Internet $915 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $915 ---- -------- -------- -------- -------- -------- -------- -------- ---- Total $915 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $915 ==== ======== ======== ======== ======== ======== ======== ======== ==== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM INVESTMENTS STILL HELD AT INVESTMENTS IN OCTOBER 31, SECURITIES 2010 (A) Convertible Bonds Internet $ -- -------- Total $ -- ========
(a) Included in "Net change in unrealized appreciation (depreciation) on investments" in the Statement of Operations. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $740,885,285) $810,026,654 Receivables: Investment securities sold 9,296,227 Dividends and interest 4,706,340 Fund shares sold 1,196,694 Other assets 49,733 ------------ Total assets 825,275,648 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 17,253,117 Fund shares redeemed 1,123,662 Manager (See Note 3) 388,085 Transfer agent (See Note 3) 247,032 NYLIFE Distributors (See Note 3) 216,949 Shareholder communication 55,382 Professional fees 28,270 Custodian 2,196 Trustees 1,821 Accrued expenses 3,185 ------------ Total liabilities 19,319,699 ------------ Net assets $805,955,949 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 532,456 Additional paid-in capital 735,371,526 ------------ 735,903,982 Undistributed net investment income 1,150,397 Accumulated net realized loss on investments (239,799) Net unrealized appreciation on investments 69,141,369 ------------ Net assets $805,955,949 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 86,300,977 ============ Shares of beneficial interest outstanding 5,707,209 ============ Net asset value per share outstanding $ 15.12 Maximum sales charge (5.50% of offering price) 0.88 ------------ Maximum offering price per share outstanding $ 16.00 ============ CLASS A Net assets applicable to outstanding shares $367,972,419 ============ Shares of beneficial interest outstanding 24,324,676 ============ Net asset value per share outstanding $ 15.13 Maximum sales charge (5.50% of offering price) 0.88 ------------ Maximum offering price per share outstanding $ 16.01 ============ CLASS B Net assets applicable to outstanding shares $ 54,646,487 ============ Shares of beneficial interest outstanding 3,604,326 ============ Net asset value and offering price per share outstanding $ 15.16 ============ CLASS C Net assets applicable to outstanding shares $ 90,473,542 ============ Shares of beneficial interest outstanding 5,971,529 ============ Net asset value and offering price per share outstanding $ 15.15 ============ CLASS I Net assets applicable to outstanding shares $206,562,524 ============ Shares of beneficial interest outstanding 13,637,876 ============ Net asset value and offering price per share outstanding $ 15.15 ============
16 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Interest (a) $ 21,226,662 Dividends 4,435,108 ------------ Total income 25,661,770 ------------ EXPENSES Manager (See Note 3) 4,368,785 Distribution/Service--Investor Class (See Note 3) 205,105 Distribution/Service--Class A (See Note 3) 917,306 Distribution/Service--Class B (See Note 3) 573,179 Distribution/Service--Class C (See Note 3) 839,899 Transfer agent (See Note 3) 1,454,914 Shareholder communication 162,108 Professional fees 147,473 Registration 105,682 Custodian 29,251 Trustees 25,193 Miscellaneous 29,116 ------------ Total expenses 8,858,011 ------------ Net investment income 16,803,759 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS - -------------------------------------------------- Net realized gain on investments 37,675,296 Net change in unrealized appreciation (depreciation) on investments 65,881,876 ------------ Net realized and unrealized gain on investments 103,557,172 ------------ Net increase in net assets resulting from operations $120,360,931 ============
(a) Interest recorded net of foreign withholding taxes in the amount of $24,481. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - ---------------------------------------------------------- Operations: Net investment income $ 16,803,759 $ 14,341,377 Net realized gain (loss) on investments 37,675,296 (30,902,005) Net change in unrealized appreciation (depreciation) on investments 65,881,876 147,377,618 ---------------------------- Net increase in net assets resulting from operations 120,360,931 130,816,990 ---------------------------- Dividends to shareholders: From net investment income: Investor Class (1,855,020) (1,912,086) Class A (9,144,224) (7,910,870) Class B (846,508) (1,113,905) Class C (1,262,714) (1,088,046) Class I (3,930,555) (773,228) ---------------------------- Total dividends to shareholders (17,039,021) (12,798,135) ---------------------------- Capital share transactions: Net proceeds from sale of shares 300,967,545 232,485,675 Net asset value of shares issued to shareholders in reinvestment of dividends 12,293,067 10,407,877 Cost of shares redeemed (241,206,770) (108,368,572) ---------------------------- Increase in net assets derived from capital share transactions 72,053,842 134,524,980 ---------------------------- Net increase in net assets 175,375,752 252,543,835 NET ASSETS - ---------------------------------------------------------- Beginning of year 630,580,197 378,036,362 ---------------------------- End of year $ 805,955,949 $ 630,580,197 ============================ Undistributed net investment income at end of year $ 1,150,397 $ 1,385,659 ============================
18 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 13.02 $ 10.16 $ 15.00 ------- ------- ------- Net investment income (a) 0.32 0.35 0.16 Net realized and unrealized gain (loss) on investments 2.10 2.82 (4.85) ------- ------- ------- Total from investment operations 2.42 3.17 (4.69) ------- ------- ------- Less dividends and distributions: From net investment income (0.32) (0.31) (0.15) From net realized gain on investments -- -- -- ------- ------- ------- Total dividends and distributions (0.32) (0.31) (0.15) ------- ------- ------- Net asset value at end of period $ 15.12 $ 13.02 $ 10.16 ======= ======= ======= Total investment return (c) 18.78% 31.77% (31.51%)(b) Ratios (to average net assets)/Supplemental Data: Net investment income 2.25% 3.16% 1.69% ++ Net expenses 1.28% 1.30% 1.28% ++ Expenses (before waiver/reimbursement) 1.28% 1.43% 1.34% ++ Portfolio turnover rate 80% 68% 103% Net assets at end of period (in 000's) $86,301 $78,734 $61,439
CLASS B --------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 13.05 $ 10.18 $ 17.21 $ 14.54 $ 13.29 ------- ------- ------- -------- -------- Net investment income (a) 0.21 0.27 0.11 0.05 0.09 Net realized and unrealized gain (loss) on investments 2.11 2.83 (5.75) 2.73 1.21 ------- ------- ------- -------- -------- Total from investment operations 2.32 3.10 (5.64) 2.78 1.30 ------- ------- ------- -------- -------- Less dividends and distributions: From net investment income (0.21) (0.23) (0.11) (0.11) (0.05) From net realized gain on investments -- -- (1.28) -- -- ------- ------- ------- -------- -------- Total dividends and distributions (0.21) (0.23) (1.39) (0.11) (0.05) ------- ------- ------- -------- -------- Net asset value at end of period $ 15.16 $ 13.05 $ 10.18 $ 17.21 $ 14.54 ======= ======= ======= ======== ======== Total investment return (c) 17.93% 30.83% (35.55%) 19.25% 9.81% Ratios (to average net assets)/Supplemental Data: Net investment income 1.51% 2.42% 0.72% 0.31% 0.68% Net expenses 2.03% 2.05% 1.98% 1.94% 1.95% Expenses (before waiver/reimbursement) 2.03% 2.19% 2.01% 2.04% 2.14% Portfolio turnover rate 80% 68% 103% 113% 72% Net assets at end of period (in 000's) $54,646 $59,041 $59,071 $116,937 $121,274
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is not annualized. (c) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges.
20 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 13.03 $ 10.16 $ 17.18 $ 14.51 $ 13.28 -------- -------- -------- -------- -------- 0.35 0.38 0.23 0.16 0.16 2.10 2.82 (5.74) 2.74 1.23 -------- -------- -------- -------- -------- 2.45 3.20 (5.51) 2.90 1.39 -------- -------- -------- -------- -------- (0.35) (0.33) (0.23) (0.23) (0.16) -- -- (1.28) -- -- -------- -------- -------- -------- -------- (0.35) (0.33) (1.51) (0.23) (0.16) -------- -------- -------- -------- -------- $ 15.13 $ 13.03 $ 10.16 $ 17.18 $ 14.51 ======== ======== ======== ======== ======== 19.05% 32.11% (35.00%) 20.10% 10.57% 2.48% 3.34% 1.57% 1.05% 1.14% 1.05% 1.10% 1.13% 1.19% 1.20% 1.05% 1.15% 1.13% 1.29% 1.39% 80% 68% 103% 113% 72% $367,972 $355,311 $217,028 $379,148 $340,331
CLASS C --------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 13.04 $ 10.18 $ 17.20 $ 14.53 $ 13.29 ------- ------- ------- ------- ------- 0.21 0.27 0.11 0.05 0.07 2.11 2.82 (5.74) 2.73 1.22 ------- ------- ------- ------- ------- 2.32 3.09 (5.63) 2.78 1.29 ------- ------- ------- ------- ------- (0.21) (0.23) (0.11) (0.11) (0.05) -- -- (1.28) -- -- ------- ------- ------- ------- ------- (0.21) (0.23) (1.39) (0.11) (0.05) ------- ------- ------- ------- ------- $ 15.15 $ 13.04 $ 10.18 $ 17.20 $ 14.53 ======= ======= ======= ======= ======= 17.94% 30.73% (35.51%) 19.27% 9.73% 1.49% 2.39% 0.75% 0.30% 0.49% 2.03% 2.05% 2.00% 1.94% 1.95% 2.03% 2.18% 2.04% 2.04% 2.14% 80% 68% 103% 113% 72% $90,474 $72,563 $40,498 $31,158 $24,640
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I -------------------------------------- NOVEMBER 28, 2008** YEAR ENDED THROUGH OCTOBER 31, OCTOBER 31, 2010 2009 Net asset value at beginning of period $ 13.04 $ 9.55 -------- ------- Net investment income (a) 0.38 0.38 Net realized and unrealized gain on investments 2.12 3.44 -------- ------- Total from investment operations 2.50 3.82 -------- ------- Less dividends and distributions: From net investment income (0.39) (0.33) From net realized gain on investments -- -- -------- ------- Total dividends and distributions (0.39) (0.33) -------- ------- Net asset value at end of period $ 15.15 $ 13.04 ======== ======= Total investment return (c) 19.41% 40.46%(b)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 2.66% 3.33%++ Net expenses 0.80% 0.86%++ Expenses (before waiver/reimbursement) 0.80% 0.89%++ Portfolio turnover rate 80% 68% Net assets at end of period (in 000's) $206,563 $64,931
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is not annualized. (c) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (d) Total investment returns may reflect adjustments to conform to generally accepted accounting principles.
22 MainStay Convertible Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Convertible Fund (the "Fund"), a diversified fund. The Fund currently offers five classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on May 1, 1986. Class C shares commenced operations on September 1, 1998. Investor Class shares commenced operations on February 28, 2008. Class I shares commenced operations on November 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to seek capital appreciation together with current income. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below: - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund held securities with a value of $915 that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgements that maybe somewhat subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. 24 MainStay Convertible Fund (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income, if any, quarterly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (I) RESTRICTED SECURITIES. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. The Fund may not have the right to demand that such securities be registered. Disposal of these securities may involve time-consuming negotiations and expenses and it may be difficult to obtain a prompt sale at an acceptable price. (See Note 5.) (J) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes called "junk bonds"), which are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a premium--a high interest rate or yield--because of the increased risk of loss. These securities can also be subject to greater price volatility. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) economic or political developments in a specific country, industry or region. (K) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of Fund's average daily net assets as follows: 0.60% up to $500 million; 0.55% from $500 million to $1 billion; and 0.50% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.59% for the year ended October 31, 2010, inclusive of the effective fund accounting services fee rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares did not exceed 1.18% of its average daily net assets. New York Life Investments applied an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This agreement expired on July 31, 2010. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $4,368,785. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Investor Class and Class A shares at an annual rate of 0.25% of the average daily net assets of the Investor Class and Class A shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $22,691 and $104,388 respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $3, $15,767, $66,680 and $19,983, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent 26 MainStay Convertible Fund expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $295,405 - ----------------------------------------------- Class A 470,413 - ----------------------------------------------- Class B 206,592 - ----------------------------------------------- Class C 302,312 - ----------------------------------------------- Class I 180,192 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 257 0.0%++ - ------------------------------------------------ Class C 149 0.0++ - ------------------------------------------------ Class I 41,932 0.0++ - ------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $25,654. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $1,308,656 $(241,683) $(158,259) $69,143,253 $70,051,967 - -------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized appreciation (depreciation) is primarily due to wash sales deferrals and Lehman Brothers adjustments. At October 31, 2010, for federal income tax purposes capital loss carryforwards of $241,683 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2017 $242 - ---------------------------------- ------
The Fund utilized $36,248,382 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $17,039,021 $12,798,135 - ------------------------------------------------------
NOTE 5-RESTRICTED SECURITY As of October 31, 2010, the Fund held the following restricted security:
DATE OF PRINCIPAL 10/31/10 PERCENTAGE OF SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS At Home Corp. Convertible Bond 4.75%, due 12/31/49 7/25/01 $9,147,056 $674,023 $915 0.0%++ - ----------------------------------------------------------------------------------------------------------
++ Less than one-tenth of a percent. NOTE 6-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $619,663 and $555,943, respectively. NOTE 9-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 417,765 $ 5,911,854 Shares issued to shareholders in reinvestment of dividends 130,423 1,834,207 Shares redeemed (792,321) (11,171,986) ------------------------- Net increase (decrease) in shares outstanding before conversion (244,133) (3,425,925) Shares converted into Investor Class (See Note 1) 426,571 6,033,494 Shares converted from Investor Class (See Note 1) (522,362) (7,460,031) ------------------------- Net increase (decrease) (339,924) $ (4,852,462) ========================= Year ended October 31, 2009: Shares sold 486,648 $ 5,523,780 Shares issued to shareholders in reinvestment of dividends 168,292 1,887,980 Shares redeemed (870,647) (9,452,523) ------------------------- Net increase (decrease) in shares outstanding before conversion (215,707) (2,040,763) Shares converted into Investor Class (See Note 1) 657,340 7,071,266 Shares converted from Investor Class (See Note 1) (443,007) (5,490,758) ------------------------- Net increase (decrease) (1,374) $ (460,255) ========================= CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 6,759,032 $ 95,814,997 Shares issued to shareholders in reinvestment of dividends 551,531 7,757,414 Shares redeemed (9,769,724) (137,788,175) ------------------------- Net increase (decrease) in shares outstanding before conversion (2,459,161) (34,215,764) Shares converted into Class A (See Note 1) 941,155 13,401,042 Shares converted from Class A (See Note 1) (91,343) (1,337,331) Shares converted from Class A (b) (1,343,100) (18,709,381) ------------------------- Net increase (decrease) (2,952,449) $ (40,861,434) ========================= Year ended October 31, 2009: Shares sold 11,227,318 $ 128,952,895 Shares issued to shareholders in reinvestment of dividends 594,747 6,744,912 Shares redeemed (6,520,158) (71,863,020) ------------------------- Net increase (decrease) in shares outstanding before conversion 5,301,907 63,834,787 Shares converted into Class A (See Note 1) 876,044 10,313,860 Shares converted from Class A (See Note 1) (260,625) (2,823,866) ------------------------- Net increase (decrease) 5,917,326 $ 71,324,781 ========================= CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 495,225 $ 7,022,583 Shares issued to shareholders in reinvestment of dividends 52,723 743,905 Shares redeemed (713,434) (10,080,766) ------------------------- Net increase (decrease) in shares outstanding before conversion (165,486) (2,314,278) Shares converted from Class B (See Note 1) (753,246) (10,637,174) ------------------------- Net increase (decrease) (918,732) $ (12,951,452) ========================= Year ended October 31, 2009: Shares sold 662,215 $ 7,464,429 Shares issued to shareholders in reinvestment of dividends 88,806 1,001,533 Shares redeemed (1,200,221) (13,043,546) ------------------------- Net increase (decrease) in shares outstanding before conversion (449,200) (4,577,584) Shares converted from Class B (See Note 1) (828,204) (9,070,502) ------------------------- Net increase (decrease) (1,277,404) $ (13,648,086) ========================= CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,605,272 $ 22,743,678 Shares issued to shareholders in reinvestment of dividends 59,035 833,214 Shares redeemed (1,255,621) (17,676,182) ------------------------- Net increase (decrease) 408,686 $ 5,900,710 ========================= Year ended October 31, 2009: Shares sold 2,620,107 $ 29,894,911 Shares issued to shareholders in reinvestment of dividends 65,257 745,091 Shares redeemed (1,102,186) (11,999,790) ------------------------- Net increase (decrease) 1,583,178 $ 18,640,212 =========================
28 MainStay Convertible Fund
CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 11,801,058 $ 169,474,433 Shares issued to shareholders in reinvestment of dividends 79,699 1,124,327 Shares redeemed (4,562,713) (64,489,661) ------------------------- Net increase (decrease) in shares outstanding before conversion 7,318,044 106,109,099 Shares converted into Class I (b) 1,341,173 18,709,381 ------------------------- Net increase (decrease) 8,659,217 $ 124,818,480 ========================= Period ended October 31, 2009 (a): Shares sold 5,137,499 $ 60,649,660 Shares issued to shareholders in reinvestment of dividends 2,235 28,361 Shares redeemed (161,075) (2,009,693) ------------------------- Net increase (decrease) 4,978,659 $ 58,668,328 =========================
(a) Class I shares commenced investment operation on November 28, 2008. (b) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified. mainstayinvestments.com 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Convertible Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Convertible Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 30 MainStay Convertible Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Convertible Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' mainstayinvestments.com 31 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to MacKay Shields from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to MacKay Shields in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships 32 MainStay Convertible Fund with the Fund supported the Board's determination to approve the Agreements. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board also noted that New York Life Investments had not proposed to renew the Fund's expense limitation agreement. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 33 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $3,999,919 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 24.6% to arrive at the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 34 MainStay Convertible Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 35
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
36 MainStay Convertible Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 37
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
38 MainStay Convertible Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 39 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21141 MS333-10 MSC11-12/10 05 (MAINSTAY INVESTMENTS LOGO) MAINSTAY DIVERSIFIED INCOME FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 25 - --------------------------------------------- Notes to Financial Statements 31 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 42 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 43 - --------------------------------------------- Federal Income Tax Information 46 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 46 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 46 - --------------------------------------------- Board Members and Officers 47 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY DIVERSIFIED INCOME FUND BARCLAYS CAPITAL CLASS B U.S. AGGREGATE SHARES BOND INDEX -------------------- ---------------- 10/31/00 10000 10000 10/31/01 10457 11456 10/31/02 10306 12130 10/31/03 12649 12725 10/31/04 13620 13429 10/31/05 13787 13581 10/31/06 14616 14286 10/31/07 15527 15055 10/31/08 12905 15101 10/31/09 16435 17183 10/31/10 18593 18560
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 4.5% Initial Sales Charge With sales charges 8.84% 5.98% Excluding sales charges 13.97 6.96 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 4.5% Initial Sales Charge With sales charges 9.05 6.05 Excluding sales charges 14.19 7.03 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 8.13 5.85 if Redeemed Within the First Six Years of Purchase Excluding sales charges 13.13 6.16 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 12.14 6.17 if Redeemed Within One Year of Purchase Excluding sales charges 13.14 6.17 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 14.59 7.41 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 6.70% 1.70% 7.20 1.70 - ------------------------------------------------- Class A Shares 6.74 1.37 7.23 1.37 - ------------------------------------------------- Class B Shares 6.40 2.46 6.40 2.46 - ------------------------------------------------- Class C Shares 6.40 2.45 6.40 2.45 - ------------------------------------------------- Class I Shares(4) 7.56 1.12 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, include the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on January 2, 2004, include the historical performance of Class A shares through January 1, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Barclays Capital U.S. Aggregate Bond Index(5) 8.01% 6.45% 6.38% - ------------------------------------------------------------------------- Average Lipper Multi-Sector Income Fund(6) 13.43 6.63 7.11 - -------------------------------------------------------------------------
5. The Barclays Capital U.S. Aggregate Bond Index consists of the following other unmanaged Barclays Capital indices: the Government Bond Index, Corporate Bond Index, MBS Index, and ABS Index. To qualify for inclusion in the Barclays Capital U.S. Aggregate Bond Index, securities must be U.S. dollar denominated and investment grade and have a fixed rate coupon, a remaining maturity of at least one year, and a par amount outstanding of at least $250 million. Results assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. The Barclays Capital U.S. Aggregate Bond Index is the Fund's broad-based securities market index for comparison purposes. 6. The average Lipper multi-sector income fund is representative of funds that seek current income by allocating assets among several different fixed income securities sectors (with no more than 65% in any one sector except for defensive purposes), including U.S. government and foreign governments, with a significant portion of assets in securities rated below investment-grade. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Diversified Income Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY DIVERSIFIED INCOME FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,043.30 $ 7.11 $1,018.20 $ 7.02 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,044.70 $ 6.03 $1,019.30 $ 5.95 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,039.80 $10.95 $1,014.50 $10.82 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,039.90 $10.95 $1,014.50 $10.82 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,046.00 $ 4.69 $1,020.60 $ 4.63 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.38% for Investor Class, 1.17% for Class A, 2.13% for Class B and Class C and 0.91% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Corporate Bonds 50.10 Yankee Bonds 11.60 U.S. Government & Federal Agencies 7.90 Loan Assignments & Participations 7.20 Asset-Backed Securities 6.50 Foreign Bonds 5.50 Short-Term Investment 3.60 Convertible Bonds 2.30 Convertible Preferred Stocks 1.70 Other Assets, Less Liabilities 1.40 Mortgage-Backed Securities 1.30 Common Stocks 1.00 Municipal Bonds 0.10 Preferred Stock 0.00 Warrants 0.00 Futures Contracts Short (0.20)
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. United States Treasury Bonds, 3.50%-3.875%, due 2/15/39-8/15/40 2. United States Treasury Notes, 2.375%-4.875%, due 10/31/14-2/15/20 3. EGG Banking PLC, 6.875%-7.50%, due 12/29/21-5/29/49 4. Harrah's Operating Co., Inc., 3.288%, due 1/28/15 5. AgriBank FCB, 9.125%, due 7/15/19 6. CIT Group, Inc. 7. SLM Corp., 4.75%-8.00%, due 3/17/14-3/25/20 8. Dow Chemical Co. (The), 8.55%, due 5/15/19 9. Pacific Life Insurance Co., 7.90%-9.25%, due 12/30/23-6/15/39 10. Ford Motor Co. Capital Trust II, 6.50%
8 MainStay Diversified Income Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers Dan Roberts, Michael Kimble, Louis N. Cohen and Taylor Wagenseil of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY DIVERSIFIED INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Diversified Income Fund returned 13.97% for Investor Class shares, 14.19% for Class A shares, 13.13% for Class B shares and 13.14% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 14.59%. Investor Class, Class A and Class I shares outperformed--and Class B and Class C shares underperformed--the 13.43% return of the average Lipper(1) multi-sector income fund for the 12 months ended October 31, 2010. Over the same period, all share classes outperformed the 8.01% return of the Barclays Capital U.S. Aggregate Bond Index.(2) The Barclays Capital U.S. Aggregate Bond Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? We believe that the Fund's performance relative to its peers and benchmark was a function of our efforts to increase the Fund's beta(3) at the beginning of the bond rally that began in earnest in 2009. We pursued this strategy by increasing the Fund's exposure to lower-quality securities, by holding bonds that we considered to be less defensive and by increasing the Fund's exposure to cyclical securities and to the financials sector, specifically banking. DURING THE REPORTING PERIOD, HOW WAS THE FUND'S PERFORMANCE MATERIALLY AFFECTED BY INVESTMENTS IN DERIVATIVES? We typically use derivatives to hedge certain portions of the Fund. The currency forwards held during the reporting period added to performance. Given their intended use as a hedging vehicle, however, the overall impact was minimal. The Fund also held futures contracts which, by themselves, detracted from performance. With their intended use as a hedging vehicle, however, the overall impact was minimal. WHAT WAS THE FUND'S DURATION(4) STRATEGY DURING THE REPORTING PERIOD? The Fund's duration was shorter than that of the Barclays Capital U.S. Aggregate Bond Index, in large part because of the Fund's overweight position in high- yield corporate bonds, which tend to have shorter durations. These bonds also tend to have a low correlation to Treasurys, so they have a lower sensitivity to interest rates. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? We did not make many material changes to the Fund's positioning during the reporting period. Prior to the reporting period, we had judged the Federal Reserve's accommodative monetary policy and an increase in market liquidity as positive signs of a rally in the corporate bond markets, especially the high- yield corporate bond market. We had positioned the Fund for such an event by increasing the Fund's beta. Though we stopped increasing beta during the reporting period, we continued to believe that Federal Reserve policy favored a rally in high-yield corporate bonds. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH MARKET SEGMENTS WERE PARTICULARLY WEAK? During the reporting period, the Fund's high-yield corporate bonds made the biggest contribution to performance. Within the high-yield corporate bond market and the investment-grade corporate bond market, the financials sector was a leading performer. Our overweight position relative to the Barclays Capital U.S. Aggregate Bond Index in financials was a substantial positive contributor to the Fund's performance. With banks around the world continuing to report good results (albeit with slower growth rates and some concerns about new capital requirements under the Basel III accords),(5) we continued to see value in the sector and remained overweight relative to the Index in financials at the end of the reporting period. The Fund's positions in the auto industry have also been strong performers for the Fund. Automakers have seen a recovery in their market. General Motors has reorganized through bankruptcy, and Ford Motor has experienced a significant operational rebound. At the end of 2009, Ford Motor reported its first annual profit in four years. In addition, the company's bonds were recently upgraded. Although all of the sectors in the Barclays Capital U.S. Aggregate Bond Index performed well for the Fund on an absolute basis, the Fund's positions in investment-grade securities underperformed their non-investment-grade counterparts. Within the high-yield corporate bond market, sectors that were more defensive (such as energy) lagged during the reporting period. 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the Barclays Capital U.S. Aggregate Bond Index. 3. Beta is a measure of volatility in relation to the market as a whole. A beta higher than 1 indicates that a security or portfolio will tend to exhibit higher volatility than the market. A beta lower than 1 indicates that a security or portfolio will tend to exhibit lower volatility than the market. 4. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 5. The Basel III accords seek to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. mainstayinvestments.com 9 On an individual security basis, U.S. Concrete and Mohegan Tribal Gaming were poor performers during the reporting period. U.S. Concrete went through a restructuring, and the Fund received restricted stock in the new company. Unfortunately, the stock has underperformed the market since it was issued. Mohegan Tribal Gaming, which was sold during the reporting period, underperformed on concerns about the company's level of debt. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? The largest purchases for the Fund included Ford Motor, semiconductor manufacturer Freescale Semiconductor and insurance company American International Group (AIG). We swapped the Fund's fixed-income holdings in Ford Motor for a convertible bond that we felt represented a better risk-reward opportunity. We purchased AIG as part of our effort to increase the Fund's exposure to the financials sector. Freescale Semiconductor is benefiting from the cyclical recovery. The largest sales for the Fund included mining company Teck Resources, Ford Motor and lodging company Harrah's. We sold Teck Resources bonds when they were upgraded to investment-grade status and began trading at very tight spreads.(6) We sold part of the Fund's position in Ford Motor to swap into other bonds within the company that we felt offered a better risk-reward opportunity. The Harrah's sale was due to relative value concerns. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we reduced the Fund's holdings in investment-grade corporate bonds and increased its weighting in floating-rate notes. The Fund's largest sector continued to be high-yield corporate bonds. Within the high-yield sector, we increased the Fund's holdings in the auto, banking and life insurance industries. With positive expectations for the economy and for improving fundamentals, we increased the Fund's exposure to cyclicals. Auto-related companies received a substantial lift from the economy's revival and financials realized gains from the steep yield curve and an improving economy. During the reporting period, we reduced the Fund's exposure to defensive sectors such as health services in an effort to increase the Fund's beta. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund's most substantially overweight positions relative to the Barclays Capital U.S. Aggregate Bond Index were in high-yield corporate bonds, floating-rate notes and convertibles. We favored cyclical sectors because of our positive expectations for the economy and the high-yield corporate bond market. We also favored financials--specifically banks--in light of the governmental support that they have received. We also felt that the steepness of the yield curve would be conducive to earnings for financial companies. As of October 31, 2010, the Fund's most substantially underweight positions relative to the Barclays Capital U.S. Aggregate Bond Index were in Treasurys and agency securities. 6. The terms "spread" and "yield spread" may refer to the difference in yield between a security or type of security and comparable U.S. Treasury issues. The terms may also refer to the difference in yield between two specific securities or types of securities at a given time. At a meeting of the Board of Trustees ("Board") of the Fund on December 15, 2010, the Board approved a change to the name of the Fund, and modifications to its investment objective and principal investment strategies. Accordingly, effective February 28, 2011, the Fund's name will be changed to MainStay Flexible Bond Opportunities Fund and the Fund's investment objective and principal investment strategies will be modified. For more information regarding the proposed name change and modifications to the Fund's investment objective and principal investment strategies, please refer to the Prospectus supplement dated December 17, 2010. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Diversified Income Fund PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS 92.5%+ ASSET-BACKED SECURITIES 6.5% - ------------------------------------------------------------- AIRLINES 1.1% American Airlines Pass-Through Trust Series 2001-1, Class A1 6.977%, due 5/23/21 $ 1,033,258 $ 898,934 United Air Lines, Inc. Series 2009-2, Class A 9.75%, due 1/15/17 951,726 1,118,277 ------------ 2,017,211 ------------ DIVERSIFIED FINANCIAL SERVICES 0.1% Dunkin Securitization Series 2006-1, Class A2 5.779%, due 6/20/31 (a) 110,000 111,550 ------------ HOME EQUITY 4.6% Citicorp Residential Mortgage Securities, Inc. Series 2006-3, Class A3 5.61%, due 11/25/36 (b) 41,264 41,614 Series 2006-1, Class A3 5.706%, due 7/25/36 (b) 70,623 71,441 Citigroup Mortgage Loan Trust, Inc. Series 2007-AHL2, Class A3A 0.326%, due 5/25/37 (c) 870,973 700,793 Equifirst Loan Securitization Trust Series 2007-1, Class A2A 0.316%, due 4/25/37 (c) 393,706 367,381 First NLC Trust Series 2007-1, Class A1 0.326%, due 8/25/37 (a)(c) 813,806 577,418 GSAA Home Equity Trust Series 2006-14, Class A1 0.306%, due 9/25/36 (c) 1,511,385 699,572 Home Equity Loan Trust Series 2007-FRE1, Class 2AV1 0.386%, due 4/25/37 (c) 559,598 462,935 JP Morgan Mortgage Acquisition Corp. Series 2007-HE1, Class AF1 0.356%, due 3/25/47 (c) 653,877 473,234 Master Asset Backed Securities Trust Series 2006-HE4, Class A1 0.306%, due 11/25/36 (c) 193,661 131,721 Merrill Lynch Mortgage Investors Trust Series 2007-MLN1, Class A2A 0.366%, due 3/25/37 (c) 1,467,514 1,014,951 Morgan Stanley ABS Capital I, Inc. Series 2006-HE8, Class A2B 0.356%, due 10/25/36 (c) 525,981 409,280 Series 2007-HE4, Class A2A 0.366%, due 2/25/37 (c) 475,561 440,006 Series 2007-NC2, Class A2FP 0.406%, due 2/25/37 (c) 853,074 615,612 Renaissance Home Equity Loan Trust Series 2007-2, Class AF1 5.893%, due 6/25/37 (c) 1,158,519 903,905 Soundview Home Equity Loan Trust Series 2007-OPT1, Class 2A1 0.336%, due 6/25/37 (c) 572,240 517,193 Series 2006-EQ2, Class A2 0.366%, due 1/25/37 (c) 834,394 744,604 ------------ 8,171,660 ------------ STUDENT LOANS 0.7% Keycorp Student Loan Trust Series 2000-A, Class A2 0.638%, due 5/25/29 (c) 794,757 689,153 Securitized Asset Backed Receivables LLC Trust Series 2007-BR4, Class A2A 0.346%, due 5/25/37 (c) 862,617 646,284 ------------ 1,335,437 ------------ Total Asset-Backed Securities (Cost $11,244,453) 11,635,858 ------------ CONVERTIBLE BONDS 2.3% - ------------------------------------------------------------- AEROSPACE & DEFENSE 0.0%++ Triumph Group, Inc. 2.625%, due 10/1/26 38,000 59,565 ------------ AUTO MANUFACTURERS 0.0%++ Ford Motor Co. 4.25%, due 11/15/16 24,000 41,820 ------------ AUTO PARTS & EQUIPMENT 0.1% ArvinMeritor, Inc. 4.00%, due 2/15/27 72,000 70,380 BorgWarner, Inc. 3.50%, due 4/15/12 60,000 106,500 ------------ 176,880 ------------ BANKS 0.1% JPMorgan Chase & Co. 1.50%, due 6/25/15 (a) 129,375 181,849 ------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings or issuers held, as of October 31, 2010, excluding short-term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) BIOTECHNOLOGY 0.2% Amgen, Inc. 0.375%, due 2/1/13 $ 196,000 $ 197,470 Gilead Sciences, Inc. 1.00%, due 5/1/14 (a) 48,000 52,080 Life Technologies Corp. 1.50%, due 2/15/24 12,000 14,025 3.25%, due 6/15/25 88,000 101,640 ------------ 365,215 ------------ COAL 0.1% Alpha Natural Resources, Inc. 2.375%, due 4/15/15 48,000 56,460 Peabody Energy Corp. 4.75%, due 12/15/66 51,000 60,881 ------------ 117,341 ------------ COMPUTERS 0.1% EMC Corp. 1.75%, due 12/1/13 126,000 180,337 SanDisk Corp. 1.00%, due 5/15/13 8,000 7,550 1.50%, due 8/15/17 43,000 42,033 ------------ 229,920 ------------ DISTRIBUTION & WHOLESALE 0.0%++ WESCO International, Inc. 6.00%, due 9/15/29 34,000 59,033 ------------ ELECTRONICS 0.0%++ TTM Technologies, Inc. 3.25%, due 5/15/15 49,000 49,245 ------------ ENERGY--ALTERNATE SOURCES 0.1% Covanta Holding Corp. 1.00%, due 2/1/27 167,000 163,243 ------------ ENTERTAINMENT 0.0%++ Lions Gate Entertainment Corp. 3.625%, due 3/15/25 15,000 14,663 Lions Gate Entertainment, Inc. 3.625%, due 3/15/25 24,000 24,900 ------------ 39,563 ------------ FOOD 0.1% Great Atlantic & Pacific Tea Co. 6.75%, due 12/15/12 53,000 28,885 Spartan Stores, Inc. 3.375%, due 5/15/27 (a) 118,000 110,477 3.375%, due 5/15/27 40,000 37,450 ------------ 176,812 ------------ HAND & MACHINE TOOLS 0.1% Stanley Black & Decker, Inc. (zero coupon), due 5/17/12 89,000 102,546 ------------ HEALTH CARE--PRODUCTS 0.3% Beckman Coulter, Inc. 2.50%, due 12/15/36 93,000 98,347 Medtronic, Inc. 1.625%, due 4/15/13 331,000 334,724 Teleflex, Inc. 3.875%, due 8/1/17 71,000 78,189 ------------ 511,260 ------------ HEALTH CARE--SERVICES 0.1% Fisher Scientific International, Inc. 3.25%, due 3/1/24 82,000 109,060 ------------ INSURANCE 0.0%++ MGIC Investment Corp. 5.00%, due 5/1/17 9,000 10,046 ------------ INTERNET 0.0%++ At Home Corp. 4.75%, due 12/31/49 (d)(e)(f)(g) 504,238 50 Digital River, Inc. 2.00%, due 11/1/30 (a) 6,000 6,068 Equinix, Inc. 4.75%, due 6/15/16 16,000 20,260 ------------ 26,378 ------------ IRON & STEEL 0.2% Allegheny Technologies, Inc. 4.25%, due 6/1/14 149,000 219,961 ArcelorMittal 5.00%, due 5/15/14 36,000 47,385 Steel Dynamics, Inc. 5.125%, due 6/15/14 37,000 42,781 United States Steel Corp. 4.00%, due 5/15/14 27,000 41,209 ------------ 351,336 ------------ MEDIA 0.0%++ Central European Media Enterprises, Ltd. 3.50%, due 3/15/13 (a) 35,000 31,456 ------------ MINING 0.0%++ Alcoa, Inc. 5.25%, due 3/15/14 10,000 21,663 ------------ MISCELLANEOUS--MANUFACTURING 0.1% Ingersoll-Rand Co. 4.50%, due 4/15/12 10,000 22,363
12 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) MISCELLANEOUS--MANUFACTURING (CONTINUED) Textron, Inc. 4.50%, due 5/1/13 $ 42,000 $ 72,817 ------------ 95,180 ------------ OIL & GAS 0.2% Chesapeake Energy Corp. 2.50%, due 5/15/37 165,000 142,931 St. Mary Land & Exploration Co. 3.50%, due 4/1/27 53,000 56,776 Transocean, Inc. Series C 1.50%, due 12/15/37 154,000 149,573 Series A 1.625%, due 12/15/37 44,000 44,055 ------------ 393,335 ------------ OIL & GAS SERVICES 0.2% Cameron International Corp. 2.50%, due 6/15/26 72,000 93,330 Core Laboratories, L.P. 0.25%, due 10/31/11 100,000 170,375 ------------ 263,705 ------------ PHARMACEUTICALS 0.1% Teva Pharmaceutical Finance Co. B.V. Series D 1.75%, due 2/1/26 149,000 167,811 ------------ REAL ESTATE INVESTMENT TRUSTS 0.0%++ SL Green Operating Partnership, L.P. 3.00%, due 10/15/17 (a) 41,000 41,461 ------------ SEMICONDUCTORS 0.0%++ Microchip Technology, Inc. 2.125%, due 12/15/37 25,000 28,813 ON Semiconductor Corp. 2.625%, due 12/15/26 49,000 51,450 ------------ 80,263 ------------ SOFTWARE 0.1% Microsoft Corp. (zero coupon), due 6/15/13 (a) 57,000 59,992 SYNNEX Corp. 4.00%, due 5/15/18 (a) 25,000 29,938 ------------ 89,930 ------------ TELECOMMUNICATIONS 0.1% Anixter International, Inc. 1.00%, due 2/15/13 46,000 49,565 Leap Wireless International, Inc. 4.50%, due 7/15/14 6,000 5,438 SBA Communications Corp. 1.875%, due 5/1/13 78,000 86,677 ------------ 141,680 ------------ Total Convertible Bonds (Cost $3,919,507) 4,097,596 ------------ CORPORATE BONDS 50.1% - ------------------------------------------------------------- ADVERTISING 0.5% Lamar Media Corp. 6.625%, due 8/15/15 920,000 944,150 ------------ AEROSPACE & DEFENSE 0.0%++ BE Aerospace, Inc. 8.50%, due 7/1/18 60,000 67,200 ------------ AGRICULTURE 0.2% Altria Group, Inc. 9.70%, due 11/10/18 295,000 406,933 ------------ AIRLINES 1.7% Continental Airlines, Inc. 7.875%, due 1/2/20 627,132 622,428 9.798%, due 4/1/21 560,961 560,961 Delta Air Lines, Inc. 6.20%, due 7/2/18 550,000 588,500 12.25%, due 3/15/15 (a) 600,000 683,250 Northwest Airlines, Inc. Series 2007-1, Class A 7.027%, due 11/1/19 476,922 501,960 ------------ 2,957,099 ------------ AUTO MANUFACTURERS 1.0% Ford Motor Co. 6.625%, due 10/1/28 280,000 291,200 General Motors Corp. 8.375%, due 7/15/33 (d) 2,665,000 959,400 Navistar International Corp. 8.25%, due 11/1/21 450,000 493,312 ------------ 1,743,912 ------------ AUTO PARTS & EQUIPMENT 0.1% Goodyear Tire & Rubber Co. (The) 10.50%, due 5/15/16 230,000 263,350 ------------ BANKS 5.2% X AgriBank FCB 9.125%, due 7/15/19 1,600,000 1,988,517 BAC Capital Trust XIV 5.63%, due 9/29/49 (c) 800,000 566,000
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) BANKS (CONTINUED) Bank of America Corp. 5.625%, due 7/1/20 $ 1,400,000 $ 1,451,715 X CIT Group, Inc. 7.00%, due 5/1/14 124,200 124,821 7.00%, due 5/1/15 157,705 157,508 7.00%, due 5/1/16 409,843 408,306 7.00%, due 5/1/17 367,980 366,140 Citigroup, Inc. 8.50%, due 5/22/19 45,000 56,505 GMAC, Inc. 8.00%, due 11/1/31 507,000 553,897 8.30%, due 2/12/15 (a) 700,000 763,000 JPMorgan Chase & Co. 7.90%, due 4/29/49 (c) 1,000,000 1,066,010 Morgan Stanley 5.625%, due 9/23/19 100,000 105,006 PNC Funding Corp. 5.625%, due 2/1/17 675,000 739,795 Regions Financial Corp. 7.00%, due 3/1/11 110,000 111,462 Whitney National Bank 5.875%, due 4/1/17 1,000,000 922,985 ------------ 9,381,667 ------------ BEVERAGES 0.2% Coca-Cola Enterprises, Inc. 8.00%, due 9/15/22 95,000 131,054 Constellation Brands, Inc. 7.25%, due 9/1/16 155,000 170,500 ------------ 301,554 ------------ BUILDING MATERIALS 2.0% Associated Materials LLC/Associated Materials Financing, Inc. 9.875%, due 11/15/16 575,000 690,000 Boise Cascade LLC 7.125%, due 10/15/14 1,100,000 1,061,500 Nortek, Inc. 11.00%, due 12/1/13 276,222 294,176 Texas Industries, Inc. 9.25%, due 8/15/20 (a) 1,030,000 1,084,075 USG Corp. 9.50%, due 1/15/18 445,000 438,325 ------------ 3,568,076 ------------ CHEMICALS 2.7% Chevron Phillips Chemical Co. LLC 7.00%, due 6/15/14 (a) 595,000 690,707 X Dow Chemical Co. (The) 8.55%, due 5/15/19 1,330,000 1,708,168 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC 9.75%, due 11/15/14 450,000 473,625 Huntsman International LLC 5.50%, due 6/30/16 875,000 869,531 Rohm & Haas Co. 7.85%, due 7/15/29 933,000 1,048,445 ------------ 4,790,476 ------------ COAL 0.5% Cloud Peak Energy Resources LLC/Cloud Peak Energy Finance Corp. 8.25%, due 12/15/17 750,000 815,625 ------------ COMMERCIAL SERVICES 2.3% ARAMARK Corp. 8.50%, due 2/1/15 900,000 945,000 Avis Budget Car Rental LLC 7.625%, due 5/15/14 450,000 462,375 Ford Holdings LLC 9.30%, due 3/1/30 155,000 193,750 Hertz Corp. (The) 8.875%, due 1/1/14 1,250,000 1,284,375 Quebecor World, Inc. (Litigation Recovery Trust--Escrow Shares) 6.50%, due 8/1/49 (f)(g)(h) 5,000 260 9.75%, due 1/15/49 (f)(g)(h) 160,000 8,320 Service Corp. International 8.00%, due 11/15/21 450,000 490,500 United Rentals North America, Inc. 9.25%, due 12/15/19 600,000 666,000 ------------ 4,050,580 ------------ COMPUTERS 0.4% SunGard Data Systems, Inc. 10.25%, due 8/15/15 700,000 737,625 ------------ DIVERSIFIED FINANCIAL SERVICES 0.8% General Electric Capital Corp. 6.50%, due 9/15/67 (c) E 1,000,000 1,490,186 ------------ ELECTRIC 1.0% Edison Mission Energy 7.50%, due 6/15/13 $ 700,000 682,500 Energy Future Intermediate Holding Co. LLC/EFIH Finance, Inc. 10.00%, due 12/1/20 274,000 286,988
14 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) ELECTRIC (CONTINUED) NRG Energy, Inc. 7.25%, due 2/1/14 $ 345,000 $ 353,194 8.50%, due 6/15/19 450,000 481,500 ------------ 1,804,182 ------------ ENERGY--ALTERNATE SOURCES 0.0%++ Paiton Energy Funding B.V. 9.34%, due 2/15/14 82,105 86,416 ------------ ENTERTAINMENT 1.1% Isle of Capri Casinos, Inc. 7.00%, due 3/1/14 82,000 77,695 Mohegan Tribal Gaming Authority 6.125%, due 2/15/13 1,000,000 877,500 Pinnacle Entertainment, Inc. 7.50%, due 6/15/15 825,000 820,875 River Rock Entertainment Authority (The) 9.75%, due 11/1/11 119,000 102,935 United Artists Theatre Circuit, Inc. Series BA7 9.30%, due 7/1/15 (f)(g) 57,417 40,192 ------------ 1,919,197 ------------ ENVIRONMENTAL CONTROLS 0.4% EnergySolutions, Inc./EnergySolutions LLC 10.75%, due 8/15/18 (a) 675,000 737,438 ------------ FINANCE--CONSUMER LOANS 2.4% American General Finance Corp. 3.25%, due 1/16/13 750,000 897,585 6.90%, due 12/15/17 585,000 487,013 HSBC Finance Capital Trust IX 5.911%, due 11/30/35 (c) 1,175,000 1,122,125 X SLM Corp. 4.75%, due 3/17/14 E 1,000,000 1,290,254 8.00%, due 3/25/20 $ 500,000 505,384 ------------ 4,302,361 ------------ FINANCE--CREDIT CARD 1.2% American Express Co. 6.80%, due 9/1/66 (c) 1,050,000 1,053,937 Capital One Capital III 7.686%, due 8/15/36 1,150,000 1,167,250 ------------ 2,221,187 ------------ FINANCE--OTHER SERVICES 0.6% Icahn Enterprises, L.P./Icahn Enterprises Finance Corp. 7.75%, due 1/15/16 1,000,000 1,027,500 ------------ FOREST PRODUCTS & PAPER 1.5% Boise Paper Holdings LLC/Boise Finance Co. 9.00%, due 11/1/17 500,000 545,000 Domtar Corp. 10.75%, due 6/1/17 900,000 1,128,375 International Paper Co. 7.30%, due 11/15/39 850,000 968,852 ------------ 2,642,227 ------------ HEALTH CARE--PRODUCTS 1.2% Alere, Inc. 8.625%, due 10/1/18 (a) 750,000 804,375 9.00%, due 5/15/16 600,000 640,500 Bausch & Lomb, Inc. 9.875%, due 11/1/15 700,000 761,250 ------------ 2,206,125 ------------ HOME BUILDERS 2.0% Beazer Homes USA, Inc. 8.125%, due 6/15/16 1,005,000 973,594 K Hovnanian Enterprises, Inc. 10.625%, due 10/15/16 650,000 661,375 MDC Holdings, Inc. 5.625%, due 2/1/20 850,000 856,926 Standard Pacific Corp. 8.375%, due 5/15/18 1,000,000 1,036,250 ------------ 3,528,145 ------------ HOUSEHOLD PRODUCTS & WARES 0.3% ACCO Brands Corp. 10.625%, due 3/15/15 400,000 451,500 ------------ INSURANCE 3.7% Allstate Corp. (The) 6.50%, due 5/15/67 (c) 875,000 868,438 Farmers Exchange Capital 7.20%, due 7/15/48 (a) 740,000 699,290 Hartford Financial Services Group, Inc. (The) 6.10%, due 10/1/41 775,000 697,936 Liberty Mutual Group, Inc. 7.80%, due 3/7/87 (a) 555,000 555,000 10.75%, due 6/15/88 (a)(c) 400,000 496,000 Lincoln National Corp. 7.00%, due 5/17/66 (c) 850,000 828,750 X Pacific Life Insurance Co. 7.90%, due 12/30/23 (a) 1,150,000 1,393,345 9.25%, due 6/15/39 (a) 250,000 304,779 Progressive Corp. (The) 6.70%, due 6/15/67 (c) 750,000 766,875 ------------ 6,610,413 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) IRON & STEEL 0.9% Allegheny Ludlum Corp. 6.95%, due 12/15/25 $ 850,000 $ 874,299 California Steel Industries, Inc. 6.125%, due 3/15/14 750,000 744,375 ------------ 1,618,674 ------------ LEISURE TIME 0.3% Harley-Davidson Funding Corp. 6.80%, due 6/15/18 (a) 500,000 543,723 ------------ LODGING 0.4% MGM Mirage, Inc. 7.50%, due 6/1/16 235,000 209,150 MGM Resorts International 11.125%, due 11/15/17 400,000 460,000 ------------ 669,150 ------------ MACHINERY--CONSTRUCTION & MINING 0.7% Caterpillar, Inc. 6.05%, due 8/15/36 70,000 81,935 Terex Corp. 7.375%, due 1/15/14 825,000 839,437 8.00%, due 11/15/17 250,000 249,375 ------------ 1,170,747 ------------ MACHINERY--DIVERSIFIED 0.5% CNH America LLC 7.25%, due 1/15/16 800,000 872,000 ------------ MEDIA 0.6% Cequel Communications Holdings/LLC and Cequel Capital Corp. 8.625%, due 11/15/17 (a) 650,000 695,500 Charter Communications Operating LLC 8.00%, due 4/30/12 (a) 185,000 196,794 Morris Publishing Group LLC 10.00%, due 9/1/14 (f) 70,855 69,172 Time Warner Cable, Inc. 8.25%, due 2/14/14 140,000 167,140 Ziff Davis Media, Inc. (Escrow Shares) 8.788%, due 7/15/11 (f)(g)(h) 32,078 837 ------------ 1,129,443 ------------ METAL FABRICATE & HARDWARE 0.8% Mueller Water Products, Inc. 7.375%, due 6/1/17 630,000 570,150 8.75%, due 9/1/20 (a) 855,000 926,606 ------------ 1,496,756 ------------ MINING 0.6% Freeport-McMoRan Copper & Gold, Inc. 8.375%, due 4/1/17 970,000 1,097,313 ------------ MISCELLANEOUS--MANUFACTURING 2.1% American Railcar Industries, Inc. 7.50%, due 3/1/14 1,405,000 1,422,562 Cargill, Inc. 4.375%, due 6/1/13 (a) 85,000 91,205 Colt Defense LLC/Colt Finance Corp. 8.75%, due 11/15/17 (a) 574,000 431,218 Hexcel Corp. 6.75%, due 2/1/15 1,000,000 1,017,500 Koppers, Inc. 7.875%, due 12/1/19 500,000 541,250 SPX Corp. 7.625%, due 12/15/14 295,000 327,450 ------------ 3,831,185 ------------ OIL & GAS 3.2% Delta Petroleum Corp. 7.00%, due 4/1/15 600,000 420,000 Denbury Resources, Inc. 7.50%, due 12/15/15 445,000 461,687 9.75%, due 3/1/16 145,000 164,213 Frontier Oil Corp. 8.50%, due 9/15/16 100,000 105,250 Hilcorp Energy I, L.P./Hilcorp Finance Co. 9.00%, due 6/1/16 (a) 200,000 211,000 Linn Energy LLC 9.875%, due 7/1/18 500,000 555,000 Linn Energy LLC/Linn Energy Finance Corp. 7.75%, due 2/1/21 (a) 1,000,000 1,032,500 Nabors Industries, Inc. 5.00%, due 9/15/20 (a) 1,200,000 1,224,290 Range Resources Corp. 8.00%, due 5/15/19 70,000 77,525 Swift Energy Co. 8.875%, due 1/15/20 500,000 540,000 Tesoro Corp. 6.50%, due 6/1/17 950,000 945,250 ------------ 5,736,715 ------------ OIL & GAS SERVICES 1.3% Basic Energy Services, Inc. 7.125%, due 4/15/16 550,000 522,500 Helix Energy Solutions Group, Inc. 9.50%, due 1/15/16 (a) 650,000 672,750
16 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) OIL & GAS SERVICES (CONTINUED) Hornbeck Offshore Services, Inc. Class B 6.125%, due 12/1/14 $ 700,000 $ 700,000 8.00%, due 9/1/17 500,000 506,875 ------------ 2,402,125 ------------ PHARMACEUTICALS 0.2% Medco Health Solutions, Inc. 7.25%, due 8/15/13 240,000 277,338 ------------ PIPELINES 0.6% MarkWest Energy Partners, L.P./MarkWest Energy Finance Corp. 6.875%, due 11/1/14 145,000 148,625 8.50%, due 7/15/16 40,000 42,500 8.75%, due 4/15/18 70,000 76,825 Targa Resources Partners, L.P./Targa Resources Partners Finance Corp. 8.25%, due 7/1/16 130,000 137,800 11.25%, due 7/15/17 525,000 609,000 ------------ 1,014,750 ------------ RETAIL 1.5% CVS Caremark Corp. 5.789%, due 1/10/26 (a)(g) 88,967 93,180 Ferrellgas L.P./Ferrellgas Finance Corp. 9.125%, due 10/1/17 725,000 801,125 Home Depot, Inc. 5.40%, due 3/1/16 60,000 68,824 Inergy L.P./Inergy Finance Corp. 6.875%, due 12/15/14 900,000 920,250 Neiman Marcus Group, Inc. (The) 9.00%, due 10/15/15 (i) 758,028 792,139 TJX Cos., Inc. 6.95%, due 4/15/19 40,000 50,655 ------------ 2,726,173 ------------ TELECOMMUNICATIONS 2.6% Alcatel-Lucent USA, Inc. 6.45%, due 3/15/29 285,000 237,975 AT&T, Inc. 5.35%, due 9/1/40 (a) 184,000 180,570 Cellco Partnership/Verizon Wireless Capital LLC 7.375%, due 11/15/13 100,000 118,330 Frontier Communications Corp. 8.50%, due 4/15/20 1,275,000 1,472,625 MetroPCS Wireless, Inc. 7.875%, due 9/1/18 450,000 482,625 9.25%, due 11/1/14 450,000 471,375 Sprint Capital Corp. 6.90%, due 5/1/19 750,000 766,875 Sprint Nextel Corp. 8.375%, due 8/15/17 205,000 226,012 Viasat, Inc. 8.875%, due 9/15/16 650,000 706,875 ------------ 4,663,262 ------------ TEXTILES 0.1% INVISTA 9.25%, due 5/1/12 (a) 171,000 173,779 ------------ TRANSPORTATION 0.7% KAR Holdings, Inc. 10.00%, due 5/1/15 5,000 5,287 PHI, Inc. 8.625%, due 10/15/18 (a) 820,000 826,150 RailAmerica, Inc. 9.25%, due 7/1/17 438,000 485,085 ------------ 1,316,522 ------------ Total Corporate Bonds (Cost $82,584,261) 89,794,779 ------------ FOREIGN BONDS 5.5% - ------------------------------------------------------------- COLOMBIA 0.1% Republic of Colombia 7.375%, due 3/18/19 200,000 255,500 ------------ EL SALVADOR 0.3% Republic of El Salvador 7.65%, due 6/15/35 200,000 227,250 8.25%, due 4/10/32 (a) 200,000 237,250 ------------ 464,500 ------------ GERMANY 0.8% IKB Deutsche Industriebank A.G. 4.50%, due 7/9/13 E 1,100,000 1,358,745 ------------ INDONESIA 0.2% Republic of Indonesia 5.875%, due 3/13/20 (a) $ 300,000 348,000 ------------ LIBERIA 0.4% Royal Caribbean Cruises, Ltd. Series Reg S 5.625%, due 1/27/14 E 525,000 730,695 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE FOREIGN BONDS (CONTINUED) NETHERLANDS 0.3% EN Germany Holdings B.V. 10.75%, due 11/15/15 E 390,000 $ 527,875 ------------ PHILIPPINES 0.2% Republic of Philippines 6.50%, due 1/20/20 300,000 360,360 ------------ SOUTH AFRICA 0.2% Republic of South Africa 5.50%, due 3/9/20 $ 300,000 339,750 ------------ UKRAINE 0.3% Ukraine Government 6.875%, due 3/4/11 (a) 175,000 175,787 7.65%, due 6/11/13 (a) 400,000 413,500 ------------ 589,287 ------------ UNITED KINGDOM 2.7% X EGG Banking PLC 6.875%, due 12/29/21 (c) L 650,000 1,001,604 7.50%, due 5/29/49 (c) 1,050,000 1,611,679 HSH Nordbank A.G. 4.375%, due 2/14/17 (c) E 750,000 794,807 Northern Rock Asset Management PLC 9.375%, due 10/17/21 L 1,000,000 1,442,116 ------------ 4,850,206 ------------ Total Foreign Bonds (Cost $8,627,303) 9,824,918 ------------ LOAN ASSIGNMENTS & PARTICIPATIONS 7.2% (J) - ------------------------------------------------------------- AEROSPACE & DEFENSE 0.6% Hawker Beechcraft Acquisition Co. LLC Term Loan 2.264%, due 3/26/14 $ 1,170,898 $ 977,334 LC Facility Deposits 2.289%, due 3/26/14 70,002 58,430 ------------ 1,035,764 ------------ AUTO MANUFACTURERS 0.9% Federal-Mogul Corp. Term Loan B 2.198%, due 12/29/14 1,054,040 934,473 Term Loan C 2.198%, due 12/28/15 537,776 476,772 Ford Motor Co. Term Loan B1 3.038%, due 12/16/13 155,454 153,834 ------------ 1,565,079 ------------ CHEMICALS 1.5% CF Industries, Inc. Term Loan B1 4.50%, due 4/6/15 910,029 916,217 Lyondell Chemical Co. Exit Term Loan 5.50%, due 4/8/16 897,750 904,848 PQ Corp. Term Loan B 3.529%, due 7/30/14 994,911 949,891 ------------ 2,770,956 ------------ COMMERCIAL SERVICES 0.6% Quad/Graphics, Inc. Term Loan B 5.50%, due 4/14/16 1,147,125 1,140,414 ------------ DIVERSIFIED/CONGLOMERATE MANUFACTURING 0.2% JohnsonDiversey, Inc. Term Loan B 5.50%, due 11/24/15 281,980 284,095 ------------ ELECTRIC 0.2% Calpine Corp. 1st Priority Term Loan 3.165%, due 3/29/14 399,351 396,804 ------------ ENTERTAINMENT 1.2% X Harrah's Operating Co., Inc. Term Loan B1 3.288%, due 1/28/15 2,500,000 2,202,500 ------------ HEALTH CARE--SERVICES 0.1% Community Health Systems, Inc. Term Loan 2.549%, due 7/25/14 179,104 175,497 ------------ MACHINERY 0.0%++ BHM Technologies LLC Exit Term Loan B 8.50%, due 9/30/13 (d)(f)(g) 77,725 210 ------------ MEDIA 0.5% Charter Communications Operating LLC Extended Term Loan 3.54%, due 9/6/16 87,471 85,769 Clear Channel Communication Term Loan B 3.905%, due 1/28/16 1,016,289 805,409 ------------ 891,178 ------------
18 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED) PACKAGING & CONTAINERS 0.3% Reynolds Group Holdings, Inc. Incremental Term Loan 6.25%, due 5/5/16 $ 596,250 $ 598,980 ------------ REAL ESTATE 0.5% Realogy Corp. Letter of Credit 0.106%, due 10/10/13 106,843 96,616 Term Loan 3.257%, due 10/10/13 783,828 708,805 ------------ 805,421 ------------ TEXTILES, APPAREL & LUXURY GOODS 0.5% Phillips-Van Heusen Corp. Tranche B 4.75%, due 5/6/16 851,678 858,326 ------------ UTILITIES 0.1% Texas Competitive Electric Holdings Co. LLC Term Loan B3 3.756%, due 10/10/14 97,000 76,057 Term Loan B2 3.923%, due 10/10/14 223,100 174,827 ------------ 250,884 ------------ Total Loan Assignments & Participations (Cost $12,927,699) 12,976,108 ------------ MORTGAGE-BACKED SECURITIES 1.3% - ------------------------------------------------------------- COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE OBLIGATIONS) 1.3% Banc of America Commercial Mortgage, Inc. Series 2005-J, Class 1A1 3.256%, due 11/25/35 (k) 753,523 581,548 Series 2005-5, Class A2 5.001%, due 10/10/45 33,247 33,339 Bayview Commercial Asset Trust Series 2006-4A, Class A1 0.486%, due 12/25/36 (a)(f) 72,241 54,955 Deutsche ALT-A Securities, Inc. Alternate Loan Trust Series 2005-5, Class 1A3 5.50%, due 11/25/35 (c) 692,545 682,039 LB-UBS Commercial Mortgage Trust Series 2004-C2, Class A2 3.246%, due 3/15/29 41,935 42,012 WaMu Mortgage Pass Through Certificates Series 2006-AR14, Class 1A1 5.501%, due 11/25/36 (k) 593,794 546,576 Wells Fargo Mortgage Backed Securities Trust Series 2006-AR10, Class 5A2 5.428%, due 7/25/36 (k) 457,937 388,381 ------------ Total Mortgage-Backed Securities (Cost $2,334,755) 2,328,850 ------------ MUNICIPAL BONDS 0.1% - ------------------------------------------------------------- OHIO 0.1% Buckeye, Ohio, Tobacco Settlement Financing Authority Series A-2 5.75%, due 6/1/34 250,000 199,370 ------------ WEST VIRGINIA 0.0%++ Tobacco Settlement Finance Authority of West Virginia 7.467%, due 6/1/47 100,000 78,407 ------------ Total Municipal Bonds (Cost $342,765) 277,777 ------------ U.S. GOVERNMENT & FEDERAL AGENCIES 7.9% - ------------------------------------------------------------- FEDERAL NATIONAL MORTGAGE ASSOCIATION 0.7% 4.625%, due 5/1/13 1,135,000 1,230,635 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) 0.0%++ 6.00%, due 8/15/32 2 2 ------------ OVERSEAS PRIVATE INVESTMENT CORPORATION 0.7% 5.142%, due 12/15/23 1,044,433 1,192,210 ------------ X UNITED STATES TREASURY BONDS 4.3% 3.50%, due 2/15/39 570,000 521,906 3.875%, due 8/15/40 7,300,000 7,144,875 ------------ 7,666,781 ------------ X UNITED STATES TREASURY NOTES 2.2% 2.375%, due 10/31/14 150,000 159,012 3.625%, due 2/15/20 3,165,000 3,455,538 4.75%, due 8/15/17 80,000 94,881 4.875%, due 8/15/16 270,000 321,279 ------------ 4,030,710 ------------ Total U.S. Government & Federal Agencies (Cost $13,833,114) 14,120,338 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE YANKEE BONDS 11.6% (L) - ------------------------------------------------------------- BANKS 2.0% Bangkok Bank PCL 4.80%, due 10/18/20 (a) $ 250,000 $ 247,190 Barclays Bank PLC 8.55%, due 9/29/49 (a)(c) 1,250,000 1,270,312 Lloyds TSB Bank PLC 4.375%, due 1/12/15 (a) 120,000 125,812 Mizuho Capital Investment, Ltd. 14.95%, due 12/31/49 (a)(c) 540,000 693,036 Royal Bank of Scotland Group PLC 6.40%, due 10/21/19 1,050,000 1,145,335 Royal Bank of Scotland PLC (The) 4.875%, due 8/25/14 (a) 125,000 133,786 ------------ 3,615,471 ------------ BEVERAGES 0.0%++ Coca-Cola HBC Finance B.V. 5.125%, due 9/17/13 50,000 54,622 ------------ BUILDING MATERIALS 0.0%++ Asia Aluminum Holdings, Ltd. 8.00%, due 12/23/11 (a)(d)(f) 500,000 50 ------------ COMMERCIAL SERVICES 0.3% Ashtead Holdings PLC 8.625%, due 8/1/15 (a) 550,000 576,125 ------------ DIVERSIFIED FINANCIAL SERVICES 0.3% TNK-BP Finance S.A. 7.875%, due 3/13/18 (a) 400,000 451,600 ------------ ELECTRIC 0.9% Centrais Eletricas Brasileiras S.A. 6.875%, due 7/30/19 (a) 400,000 476,000 Intergen N.V. 9.00%, due 6/30/17 (a) 840,000 907,200 Majapahit Holding B.V. 8.00%, due 8/7/19 (a) 200,000 248,250 ------------ 1,631,450 ------------ FOOD 0.0%++ Independencia International, Ltd. Series Reg S 12.00%, due 12/30/16 56,027 1,681 ------------ FOREST PRODUCTS & PAPER 0.4% Norske Skogindustrier A.S.A. 7.125%, due 10/15/33 (a) 1,000,000 655,000 ------------ GAS 0.2% Grupo Petrotemex S.A. de C.V. 9.50%, due 8/19/14 (a) 400,000 443,500 ------------ HOME BUILDERS 0.3% Corporacion GEO SAB de C.V. 8.875%, due 9/25/14 (a) 500,000 564,375 ------------ HOUSEHOLD PRODUCTS & WARES 0.4% Reynolds Group Issuer, Inc./Reynolds Group Issuer LLC/Reynolds Group Issuer 7.75%, due 10/15/16 (a) 750,000 795,000 ------------ INSURANCE 0.9% ING Groep N.V. 5.775%, due 12/29/49 (c) 1,000,000 922,500 Oil Insurance, Ltd. 7.558%, due 12/29/49 (a)(c) 800,000 718,680 ------------ 1,641,180 ------------ LEISURE TIME 0.1% Willis Group Holdings, Ltd. (Trinity Acquisition, Ltd.) 12.875%, due 12/31/16 (a)(f)(g) 85,000 119,945 ------------ MEDIA 0.1% British Sky Broadcasting Group PLC 9.50%, due 11/15/18 (a) 135,000 184,866 ------------ MINING 1.4% FMG Finance Property, Ltd. 10.00%, due 9/1/13 (a) 825,000 1,032,282 Novelis, Inc. 7.25%, due 2/15/15 625,000 644,531 Rio Tinto Finance USA, Ltd. 9.00%, due 5/1/19 610,000 858,870 ------------ 2,535,683 ------------ MISCELLANEOUS--MANUFACTURING 0.5% Bombardier, Inc. 7.50%, due 3/15/18 (a) 260,000 284,050 7.75%, due 3/15/20 (a) 520,000 577,200 Tyco Electronics Group S.A. 6.00%, due 10/1/12 75,000 81,218 ------------ 942,468 ------------ OIL & GAS 0.7% CITIC Resources Finance, Ltd. 6.75%, due 5/15/14 (a) 200,000 210,750 Compton Petroleum Finance Corp. 10.00%, due 9/15/17 517,000 442,035
20 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE YANKEE BONDS (CONTINUED) OIL & GAS (CONTINUED) Petroleum Co. of Trinidad & Tobago, Ltd. 9.75%, due 8/14/19 (a) $ 425,000 $ 529,762 ------------ 1,182,547 ------------ OIL & GAS SERVICES 0.5% Compagnie Generale de Geophysique 7.50%, due 5/15/15 800,000 826,000 ------------ PACKAGING & CONTAINERS 0.6% Ardagh Packaging Finance PLC 9.125%, due 10/15/20 (a) 1,000,000 1,060,000 ------------ TELECOMMUNICATIONS 0.9% Intelsat Luxembourg S.A. 11.25%, due 2/4/17 1,000,000 1,071,250 Nordic Telephone Co. 8.875%, due 5/1/16 (a) 400,000 424,000 Telecom Italia Capital S.A. 6.20%, due 7/18/11 140,000 144,983 ------------ 1,640,233 ------------ TRANSPORTATION 1.1% CHC Helicopter S.A. 9.25%, due 10/15/20 (a) 1,350,000 1,410,750 Hapag-Lloyd A.G. 9.75%, due 10/15/17 (a) 500,000 524,375 ------------ 1,935,125 ------------ Total Yankee Bonds (Cost $19,944,748) 20,856,921 ------------ Total Long-Term Bonds (Cost $155,758,605) 165,913,145 ------------ SHARES COMMON STOCKS 1.0% - ------------------------------------------------------------- BANKS 0.9% X CIT Group, Inc. (h) 19,549 847,058 Citigroup, Inc. (h) 170,000 708,900 ------------ 1,555,958 ------------ BUILDING MATERIALS 0.1% Nortek, Inc. (h) 275 11,462 U.S. Concrete, Inc. (f)(h) 24,068 200,487 ------------ 211,949 ------------ COMMERCIAL SERVICES 0.0%++ Quad/Graphics, Inc. (h) 20 894 ------------ MACHINERY 0.0%++ BHM Technologies Holdings, Inc. (f)(g)(h) 7,233 $ 72 ------------ MEDIA 0.0%++ Adelphia Contingent Value Vehicle (f)(g)(h) 100,330 1,003 ------------ Total Common Stocks (Cost $1,374,797) 1,769,876 ------------ CONVERTIBLE PREFERRED STOCKS 1.7% - ------------------------------------------------------------- AUTO MANUFACTURERS 0.9% X Ford Motor Co. Capital Trust II 6.50% 33,800 1,679,860 ------------ BANKS 0.2% Bank of America Corp. 7.25% Series L 81 76,707 Citigroup, Inc. 7.50% 800 98,832 Wells Fargo & Co. 7.50% Series L 100 100,000 ------------ 275,539 ------------ DIVERSIFIED FINANCIAL SERVICES 0.5% SG Preferred Capital II LLC (a)(c) 6.30% 1,000 968,750 ------------ INSURANCE 0.0%++ Hartford Financial Services Group, Inc. 7.25% 2,400 58,920 ------------ LEISURE TIME 0.0%++ Callaway Golf Co. 7.50% 200 23,398 ------------ TELECOMMUNICATIONS 0.1% Crown Castle International Corp. 6.25% 1,300 78,169 ------------ Total Convertible Preferred Stocks (Cost $2,836,614) 3,084,636 ------------ PREFERRED STOCK 0.0%++ - ------------------------------------------------------------- MACHINERY 0.0%++ BHM Technologies Holdings, Inc. 10.00% (d)(f)(g)(h) 87 1 ------------ Total Preferred Stock (Cost $0) 1 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
NUMBER OF WARRANTS VALUE WARRANTS 0.0%++ - ------------------------------------------------------------- MEDIA 0.0%++ ION Media Networks, Inc. Expires 12/12/39 (f)(g)(h) 11 $ 0 (m) Total Warrants (Cost $34) 0 (m) PRINCIPAL AMOUNT SHORT-TERM INVESTMENT 3.6% - ------------------------------------------------------------- REPURCHASE AGREEMENT 3.6% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $6,380,924 (Collateralized by a United States Treasury Note with a rate of 2.125% and a maturity date of 5/31/15, with a Principal Amount of $6,180,000 and a Market Value of $6,512,484) $ 6,380,919 6,380,919 ------------ Total Short-Term Investment (Cost $6,380,919) 6,380,919 ------------ Total Investments (Cost $166,350,969) (p) 98.8% 177,148,577 Other Assets, Less Liabilities 1.2 2,067,617 ------------ ------------ Net Assets 100.0% $179,216,194 ============ ============
CONTRACTS UNREALIZED SHORT DEPRECIATION (N) FUTURES CONTRACTS (0.2%) - --------------------------------------------------------- United States Treasury Note December 2010 (5 Year) (o) (160) $(332,900) --------- Total Futures Contracts (Settlement Value $19,452,500) $(332,900) =========
+++ On a daily basis New York Life Investments confirms that the value of the Fund's liquid assets (liquid portfolio securities and cash) is sufficient to cover its potential senior securities (e.g., futures, swaps, options). ++ Less than one-tenth of a percent. (a) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (b) Subprime mortgage investment and other asset-backed securities. The total market value of the securities at October 31, 2010 is $113,055, which represents 0.1% of the Fund's net assets. (c) Floating rate--Rate shown is the rate in effect at October 31, 2010. (d) Issue in default. (e) Restricted security. (f) Illiquid security. The total market value of these securities at October 31, 2010 is $495,554, which represents 0.3% of the Fund's net assets. (g) Fair valued security. The total market value of these securities at October 31, 2010 is $264,070, which represents 0.1% of the Fund's net assets. (h) Non-income producing security. (i) PIK ("Payment in Kind")--interest or dividend payment is made with additional securities. (j) Floating Rate Loan--generally pays interest at rates which are periodically re-determined at a margin above the London InterBank Offered Rate ("LIBOR") or other short-term rates. The rate shown is the rate(s) in effect at October 31, 2010. Floating Rate Loans are generally considered restrictive in that the Fund is ordinarily contractually obligated to receive consent from the Agent Bank and/or borrower prior to disposition of a Floating Rate Loan. (k) Collateral strip rate--Bond whose interest is based on the weighted net interest rate of the collateral. Coupon rate adjusts periodically based on a predetermined schedule. Rate shown is the rate in effect at October 31, 2010. (l) Yankee Bond--dollar-denominated bond issued in the United States by a foreign bank or corporation. (m) Less than one dollar. (n) Represents the difference between the value of the contracts at the time they were opened and the value at October 31, 2010. (o) At October 31, 2010, cash in the amount of $128,000 is on deposit with broker for futures transactions. (p) At October 31, 2010, cost is $166,479,749 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $13,052,687 Gross unrealized depreciation (2,383,859) ----------- Net unrealized appreciation $10,668,828 ===========
The following abbreviations are used in the above portfolio: L--British Pound Sterling E--Euro 22 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets and liabilities. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Long-Term Bonds Asset-Backed Securities $ -- $ 11,635,858 $ -- $ 11,635,858 Convertible Bonds (b) -- 4,097,546 50 4,097,596 Corporate Bonds (c) -- 89,651,990 142,789 89,794,779 Foreign Bonds -- 9,824,918 -- 9,824,918 Loan Assignments & Participations (d) -- 12,975,898 210 12,976,108 Mortgage-Backed Securities -- 2,328,850 -- 2,328,850 Municipal Bonds -- 277,777 -- 277,777 U.S. Government & Federal Agencies -- 14,120,338 -- 14,120,338 Yankee Bonds (e) -- 20,736,976 119,945 20,856,921 ---------- ------------ -------- ------------ Total Long-Term Bonds -- 165,650,151 262,994 165,913,145 ---------- ------------ -------- ------------ Common Stocks (f) 1,768,801 -- 1,075 1,769,876 Convertible Preferred Stocks 3,084,636 -- -- 3,084,636 Preferred Stock (g) -- -- 1 1 Warrants (h) -- -- -- (h) -- (h) Short-Term Investment Repurchase Agreement -- 6,380,919 -- 6,380,919 ---------- ------------ -------- ------------ Total Investments in Securities 4,853,437 172,031,070 264,070 177,148,577 ---------- ------------ -------- ------------ Other Financial Instruments Foreign Currency Forward Contracts (i) -- 27,531 -- 27,531 ---------- ------------ -------- ------------ Total Investments in Securities and Other Financial Instruments $4,853,437 $172,058,601 $264,070 $177,176,108 ========== ============ ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The level 3 security valued at $50 is held in Internet within the Convertible Bonds section of the Portfolio of Investments. (c) The level 3 securities valued at $260, $8,320, $40,192, $837 and $93,180 are held in Commercial Services, Commercial Services, Entertainment, Media and Retail, respectively, within the Corporate Bonds section of the Portfolio of Investments. (d) The level 3 security valued at $210 is held in Machinery within the Loan Assignments & Participations section of the Portfolio of investments. (e) The level 3 security valued at $119,945 is held in Leisure Time within the Yankee Bonds section of the Portfolio of Investments. (f) The level 3 securities valued at $72 and $1,003 are held in Machinery and Media, respectively, within the Common Stocks section of the Portfolio of Investments. (g) The level 3 security valued at $1 is held in Machinery within the Preferred Stock section of the Portfolio of Investments. (h) The level 3 security valued at less than one dollar is held in Media within the Warrants section of the Portfolio of Investments. (i) The value listed for these securities reflects unrealized appreciation as shown on the table of foreign currency forward contracts. (See Note 5) LIABILITY VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Other Financial Instruments Futures Contracts (a) $(332,900) $ -- $ -- $(332,900) Foreign Currency Forward Contracts (b) -- (148,152) -- (148,152) --------- --------- ---------- --------- Total Other Financial Instruments $(332,900) $(148,152) $-- $(481,052) ========= ========= ========== =========
(a) The value listed for these securities represents unrealized depreciation as shown on the Portfolio of Investments. (b) The value listed for these securities reflects unrealized depreciation as shown on the table of foreign currency forward contracts. (See Note 5) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED) The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE CHANGE IN AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS OCTOBER 31, DISCOUNTS GAIN APPRECIATION IN TO OUT OF INVESTMENTS IN SECURITIES 2009 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 Long-Term Bonds Convertible Bonds Internet $ 50 $ -- $ -- $ -- $ -- $ -- $ -- $ -- Corporate Bonds Commercial Services 8,580 -- -- -- -- -- -- -- Entertainment 39,498 1,258 1,293 6,557 -- (8,414) -- -- Media 9,455 -- (17,913) 19,030 92,347 (102,082) -- -- Retail 89,558 (138) (104) 7,523 -- (3,659) -- -- Loan Assignments & Participations Machinery 32,610 (25,488) (56,616) 85,409 2,442 (38,147) -- -- Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) 36,800 -- 8,125 (3,200) -- (41,725) -- -- Yankee Bonds Leisure Time 114,696 -- -- 5,249 -- -- -- -- Common Stocks Machinery 73 -- -- (1) -- -- -- -- Media 1,003 -- -- -- -- -- -- -- Preferred Stock Machinery 1 -- -- -- -- -- -- -- Warrant Media -- -- -- (34) 34 -- -- -- -------- -------- -------- -------- ------- --------- ----- ----- Total $332,324 $(24,368) $(65,215) $120,533 $94,823 $(194,027) $-- $-- ======== ======== ======== ======== ======= ========= ===== ===== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM BALANCE INVESTMENTS AS OF STILL HELD AT OCTOBER 31, OCTOBER 31, INVESTMENTS IN SECURITIES 2010 2010 (A) Long-Term Bonds Convertible Bonds Internet $ 50 $ -- Corporate Bonds Commercial Services 8,580 -- Entertainment 40,192 4,483 Media 837 (60,810) Retail 93,180 7,299 Loan Assignments & Participations Machinery 210 2,750 Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) -- -- Yankee Bonds Leisure Time 119,945 5,249 Common Stocks Machinery 72 (1) Media 1,003 -- Preferred Stock Machinery 1 -- Warrant Media -- (b) (34) -------- -------- Total $264,070 $(41,064) ======== ========
(a) Included in "change in unrealized appreciation (depreciation) on investments" in the Statement of Operations. (b) Less than one dollar. 24 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $166,350,969) $177,148,577 Cash denominated in foreign currencies (identified cost $308,099) 311,609 Cash collateral on deposit at broker 128,000 Receivables: Dividends and interest 2,878,597 Fund shares sold 764,219 Investment securities sold 27,534 Other assets 40,673 Unrealized appreciation on foreign currency forward contracts 27,531 ------------ Total assets 181,326,740 ------------ LIABILITIES - -------------------------------------------------- Payables: Fund shares redeemed 823,126 Investment securities purchased 564,909 Manager (See Note 3) 94,280 NYLIFE Distributors (See Note 3) 66,051 Transfer agent (See Note 3) 51,428 Variation margin on futures contracts 43,750 Shareholder communication 35,680 Custodian 22,873 Professional fees 16,807 Trustees 432 Accrued expenses 2,081 Dividend payable 240,977 Unrealized depreciation on foreign currency forward contracts 148,152 ------------ Total liabilities 2,110,546 ------------ Net assets $179,216,194 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 197,846 Additional paid-in capital 175,914,848 ------------ 176,112,694 Undistributed net investment income 517,070 Accumulated net realized loss on investments, futures transactions and foreign currency transactions (7,777,306) Net unrealized appreciation on investments and futures contracts 10,464,708 Net unrealized depreciation on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (100,972) ------------ Net assets $179,216,194 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 16,653,776 ============ Shares of beneficial interest outstanding 1,826,541 ============ Net asset value per share outstanding $ 9.12 Maximum sales charge (4.50% of offering price) 0.43 ------------ Maximum offering price per share outstanding $ 9.55 ============ CLASS A Net assets applicable to outstanding shares $109,693,651 ============ Shares of beneficial interest outstanding 12,104,390 ============ Net asset value per share outstanding $ 9.06 Maximum sales charge (4.50% of offering price) 0.43 ------------ Maximum offering price per share outstanding $ 9.49 ============ CLASS B Net assets applicable to outstanding shares $ 19,352,079 ============ Shares of beneficial interest outstanding 2,142,691 ============ Net asset value and offering price per share outstanding $ 9.03 ============ CLASS C Net assets applicable to outstanding shares $ 28,333,840 ============ Shares of beneficial interest outstanding 3,139,341 ============ Net asset value and offering price per share outstanding $ 9.03 ============ CLASS I Net assets applicable to outstanding shares $ 5,182,848 ============ Shares of beneficial interest outstanding 571,602 ============ Net asset value and offering price per share outstanding $ 9.07 ============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 25 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Interest $ 9,774,530 Dividends 273,018 ----------- Total income 10,047,548 ----------- EXPENSES Manager (See Note 3) 859,164 Distribution/Service--Investor Class (See Note 3) 34,631 Distribution/Service--Class A (See Note 3) 204,365 Distribution/Service--Class B (See Note 3) 190,600 Distribution/Service--Class C (See Note 3) 196,023 Transfer agent (See Note 3) 272,522 Registration 77,926 Custodian 72,209 Shareholder communication 71,335 Professional fees 68,275 Trustees 4,884 Miscellaneous 10,511 ----------- Total expenses before waiver/reimbursement 2,062,445 Expense waiver/reimbursement from Manager (See Note 3) (51,293) ----------- Net expenses 2,011,152 ----------- Net investment income 8,036,396 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - ------------------------------------------------- Net realized gain (loss) on: Security transactions 4,117,582 Futures transactions (383,275) Foreign currency transactions (896,908) ----------- Net realized gain on investments, futures transactions and foreign currency transactions 2,837,399 ----------- Net change in unrealized appreciation (depreciation) on: Investments 7,435,566 Futures contracts (302,849) Translation of other assets and liabilities in foreign currencies and foreign currency forward contracts 34,434 ----------- Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 7,167,151 ----------- Net realized and unrealized gain on investments, futures transactions and foreign currency transactions 10,004,550 ----------- Net increase in net assets resulting from operations $18,040,946 ===========
26 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - -------------------------------------------------------- Operations: Net investment income $ 8,036,396 $ 4,554,110 Net realized gain (loss) on investments, futures transactions and foreign currency transactions 2,837,399 (2,132,330) Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 7,167,151 19,901,354 -------------------------- Net increase in net assets resulting from operations 18,040,946 22,323,134 -------------------------- Dividends to shareholders: From net investment income: Investor Class (793,388) (867,386) Class A (4,998,542) (3,983,006) Class B (950,261) (1,390,031) Class C (1,018,364) (732,786) Class I (158,029) (23,636) -------------------------- (7,918,584) (6,996,845) -------------------------- Return of capital: Investor Class -- (49,062) Class A -- (225,290) Class B -- (78,624) Class C -- (41,448) Class I -- (1,337) -------------------------- -- (395,761) -------------------------- Total dividends to shareholders (7,918,584) (7,392,606) -------------------------- Capital share transactions: Net proceeds from sale of shares 86,351,173 20,813,801 Net asset value of shares issued to shareholders in reinvestment of dividends 5,927,118 5,602,002 Cost of shares redeemed (28,383,232) (19,740,811) -------------------------- Increase in net assets derived from capital share transactions 63,895,059 6,674,992 -------------------------- Net increase in net assets 74,017,421 21,605,520 NET ASSETS - -------------------------------------------------------- Beginning of year 105,198,773 83,593,253 -------------------------- End of year $179,216,194 $105,198,773 ========================== Undistributed (distributions in excess of) net investment income at end of year $ 517,070 $ (89,904) ==========================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 27 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 8.47 $ 7.20 $ 8.86 ------- ------- ------- Net investment income (a) 0.52 0.40 0.29 Net realized and unrealized gain (loss) on investments 0.68 1.50 (1.77) Net realized and unrealized gain (loss) on foreign currency transactions (0.05) 0.02 0.11 ------- ------- ------- Total from investment operations 1.15 1.92 (1.37) ------- ------- ------- Less dividends: From net investment income (0.50) (0.62) (0.29) Return of capital -- (0.03) -- ------- ------- ------- Total dividends (0.50) (0.65) (0.29) ------- ------- ------- Net asset value at end of period $ 9.12 $ 8.47 $ 7.20 ======= ======= ======= Total investment return (b) 13.97% 28.35% (15.88%)(c) Ratios (to average net assets)/Supplemental Data: Net investment income 5.93% 5.26% 5.07% ++ Net expenses 1.41% 1.42% 1.40% ++ Expenses (before waiver/reimbursement) 1.45% 1.70% 1.51% ++ Portfolio turnover rate 80% 154%(d) 81% (d) Net assets at end of period (in 000's) $16,654 $12,200 $ 9,990
CLASS B ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 8.39 $ 7.14 $ 8.99 $ 8.89 $ 8.78 ------- ------- ------- ------- ------- Net investment income (a) 0.45 0.34 0.37 0.38 0.34 Net realized and unrealized gain (loss) on investments 0.68 1.48 (1.95) 0.20 0.18 Net realized and unrealized gain (loss) on foreign currency transactions (0.05) 0.02 0.12 (0.04) (0.01) ------- ------- ------- ------- ------- Total from investment operations 1.08 1.84 (1.46) 0.54 0.51 ------- ------- ------- ------- ------- Less dividends: From net investment income (0.44) (0.56) (0.39) (0.44) (0.40) Return of capital -- (0.03) -- -- -- ------- ------- ------- ------- ------- Total dividends (0.44) (0.59) (0.39) (0.44) (0.40) ------- ------- ------- ------- ------- Net asset value at end of period $ 9.03 $ 8.39 $ 7.14 $ 8.99 $ 8.89 ======= ======= ======= ======= ======= Total investment return (b) 13.13% 27.35% (16.88%) 6.23% 6.01% Ratios (to average net assets)/Supplemental Data: Net investment income 5.15% 4.54% 4.32% 4.26% 3.85% Net expenses 2.16% 2.17% 2.11% 2.05% 2.05% Expenses (before waiver/reimbursement) 2.20% 2.46% 2.20% 2.13% 2.21% Portfolio turnover rate 80% 154%(d) 81% (d) 64% 87%(d) Net assets at end of period (in 000's) $19,352 $19,176 $18,567 $28,069 $34,148
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Total investment return is not annualized. (d) The portfolio turnover rates not including mortgage dollar rolls were 117%, 72% and 66% for the years ended October 31, 2009, 2008 and 2006, respectively.
28 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A ---------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 8.42 $ 7.16 $ 9.02 $ 8.91 $ 8.81 -------- ------- ------- ------- ------- 0.54 0.41 0.44 0.45 0.40 0.67 1.49 (1.96) 0.21 0.18 (0.05) 0.02 0.12 (0.04) (0.01) -------- ------- ------- ------- ------- 1.16 1.92 (1.40) 0.62 0.57 -------- ------- ------- ------- ------- (0.52) (0.62) (0.46) (0.51) (0.47) -- (0.04) -- -- -- -------- ------- ------- ------- ------- (0.52) (0.66) (0.46) (0.51) (0.47) -------- ------- ------- ------- ------- $ 9.06 $ 8.42 $ 7.16 $ 9.02 $ 8.91 ======== ======= ======= ======= ======= 14.19% 28.56% (16.27%) 7.14% 6.67% 6.19% 5.41% 5.13% 5.01% 4.60% 1.18% 1.27% 1.30% 1.30% 1.30% 1.21% 1.37% 1.34% 1.39% 1.46% 80% 154%(d) 81% (d) 64% 87%(d) $109,694 $60,555 $45,293 $68,637 $65,566
CLASS C --------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 8.39 $ 7.14 $ 8.99 $ 8.89 $ 8.78 ------- ------- ------- ------- ------- 0.46 0.34 0.37 0.38 0.34 0.67 1.48 (1.95) 0.20 0.18 (0.05) 0.02 0.12 (0.04) (0.01) ------- ------- ------- ------- ------- 1.08 1.84 (1.46) 0.54 0.51 ------- ------- ------- ------- ------- (0.44) (0.56) (0.39) (0.44) (0.40) -- (0.03) -- -- -- ------- ------- ------- ------- ------- (0.44) (0.59) (0.39) (0.44) (0.40) ------- ------- ------- ------- ------- $ 9.03 $ 8.39 $ 7.14 $ 8.99 $ 8.89 ======= ======= ======= ======= ======= 13.14% 27.36% (16.88%) 6.23% 6.01% 5.23% 4.50% 4.32% 4.26% 3.85% 2.16% 2.17% 2.11% 2.05% 2.05% 2.20% 2.45% 2.20% 2.13% 2.21% 80% 154%(d) 81% (d) 64% 87%(d) $28,334 $12,948 $ 9,484 $12,081 $12,355
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 29 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I --------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 8.42 $ 7.17 $ 9.02 $ 8.91 $ 8.81 ------ ------ ------- ------ ------ Net investment income (a) 0.58 0.43 0.47 0.48 0.43 Net realized and unrealized gain (loss) on investments 0.66 1.48 (1.94) 0.21 0.18 Net realized and unrealized gain (loss) on foreign currency transactions (0.05) 0.02 0.11 (0.04) (0.01) ------ ------ ------- ------ ------ Total from investment operations 1.19 1.93 (1.36) 0.65 0.60 ------ ------ ------- ------ ------ Less dividends: From net investment income (0.54) (0.64) (0.49) (0.54) (0.50) Return of capital -- (0.04) -- -- -- ------ ------ ------- ------ ------ Total dividends (0.54) (0.68) (0.49) (0.54) (0.50) ------ ------ ------- ------ ------ Net asset value at end of period $ 9.07 $ 8.42 $ 7.17 $ 9.02 $ 8.91 ====== ====== ======= ====== ====== Total investment return (b) 14.59% 28.78% (15.86%) 7.50% 7.09% Ratios (to average net assets)/Supplemental Data: Net investment income 6.57% 5.75% 5.49% 5.37% 4.94% Net expenses 0.92% 0.95% 0.96% 0.96% 0.96% Expenses (before waiver/reimbursement) 0.95% 1.12% 1.03% 1.04% 1.12% Portfolio turnover rate 80% 154%(c) 81% (c) 64% 87% (c) Net assets at end of period (in 000's) $5,183 $ 319 $ 259 $ 262 $ 199
(a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) The portfolio turnover rates not including mortgage dollar rolls were 117%, 72% and 66% for the years ended October 31, 2009, 2008 and 2006, respectively.
30 MainStay Diversified Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Diversified Income Fund (the "Fund"), a diversified fund. The Fund currently offers five classes of shares. Class A shares and Class B shares commenced operations on February 28, 1997. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on January 2, 2004. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to seek to provide current income and competitive overall return by investing primarily in domestic and foreign debt securities. At a meeting of the Board of Trustees ("Board") of the Trust on December 14, 2010, the Board approved a change to the name of the Fund, and modifications to its investment objective and principal investment strategies. Accordingly, effective February 28, 2011, the Fund's name will be changed to MainStay Flexible Bond Opportunities Fund. In addition, effective that same day, the Fund's investment objective will be revised to seek to provide current income and total return by investing primarily in domestic and foreign debt securities. NOTE 2--SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Futures contracts are valued at the last posted settlement price on the market where such futures are primarily traded. Options contracts are valued at the last posted settlement price on the market where such options are principally traded. Investments mainstayinvestments.com 31 NOTES TO FINANCIAL STATEMENTS (CONTINUED) in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Foreign currency forward contracts are valued at their fair market values determined on the basis of the mean between the last current bid and ask prices based on dealer or exchange quotations and are generally categorized as Level 2 in the hierarchy. Loan assignments, participations and commitments are valued at the average of bid quotations obtained from a pricing service, and are generally categorized as Level 2 in the hierarchy. The Fund has engaged an independent pricing service to provide market value quotations from dealers in loans. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund held securities with a value of $264,070 that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. 32 MainStay Diversified Income Fund (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Investment income received by the Fund from foreign sources may be subject to foreign income taxes. These foreign income taxes are generally withheld at the source. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) Purchased and Written Options. The Fund may write covered call and put options on its portfolio securities or foreign currencies. These securities are subject to interest rate risk in the normal course of investing in these transactions. Premiums received are recorded as assets, and the market value of the written options are recorded as liabilities. The liabilities are subsequently adjusted and unrealized appreciation or depreciation is recorded to reflect the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are exercised or are cancelled in closing purchase transactions are added to the proceeds or netted against the amount paid on the transaction to determine the realized gain or loss. By writing a covered call option, in exchange for the premium, the Fund foregoes the opportunity for capital appreciation above the exercise price should the price of the underlying security or foreign currency increase. The Fund, in exchange for the premium, accepts the risk of a decline in the market value of the underlying security or foreign currency below the exercise price. A call option may be covered by the call writer's owning the underlying security throughout the option period. A call option may also be covered by the call writer's maintaining liquid assets valued at greater than the exercise price of the call written. When writing a covered call option, the Fund, in return for the premium on the option, gives up the opportunity to profit from a price increase in the underlying securities above the exercise price. However, as long as the obligation as the writer continues, the Fund has retained the risk of loss should the price of the underlying security decline. After writing a put option, the Fund may incur risk exposure equal to the difference mainstayinvestments.com 33 NOTES TO FINANCIAL STATEMENTS (CONTINUED) between the exercise price of the option and the sum of the market value of the underlying security plus the premium received from the sale of the option. The Fund writes covered call options to try to realize greater return on the sale of a stock. The Fund writes put options to help protect against unanticipated adverse developments. The Fund may purchase call and put options on its portfolio securities or foreign currencies. The Fund may purchase call options to protect against an increase in the price of the security or foreign currency it anticipates purchasing. The Fund may purchase put options on its securities or foreign currencies to protect against a decline in the value of the security or foreign currency or to close out covered written put positions. The Fund may also purchase options to seek to enhance returns. Risks may arise from an imperfect correlation between the change in market value of the securities or foreign currencies held by the Fund and the prices of options relating to the securities or foreign currencies purchased or sold by the Fund and from the possible lack of a liquid secondary market for an option. The maximum risk exposure for any purchased option is limited to the premium initially paid for the option. The Fund did not invest in purchased or written options during the year ended October 31, 2010. (I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index.) The Fund is subject to equity price risk and interest rate risk in the normal course of investing in these transactions. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin." When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to help manage the duration and yield curve of the portfolio while minimizing the exposure to wider bid/ask spreads in traditional bonds. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. At October 31, the Fund had open futures contracts. (J) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan assignments and loan participations. Loan assignments and participations ("loans") are agreements to make money available (a "commitment") to a borrower in a specified amount, at a specified rate and within a specified time. Such loans are typically senior, secured and collateralized in nature. The Fund records an investment when the borrower withdraws money and records interest as earned. These loans pay interest at rates that are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate ("LIBOR"). The loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. For example, the Fund may be contractually obligated to receive approval from the agent bank and/or borrower prior to the sale of these investments. The Fund assumes the credit risk of the borrower, the selling participant and any other persons interpositioned between the Fund and the borrower ("intermediate participants"). In the event that the borrower, selling participant or intermediate participants become insolvent or enters into bankruptcy, the Fund may incur certain costs and delays in realizing payment, or may suffer a loss of principal and/or interest. Unfunded commitments represent the remaining obligation of the Fund to the borrower. At any point in time, up to the maturity date of the issue, the borrower may demand the unfunded portion. These unfunded amounts are marked to market and recorded in the Statement of Assets and Liabilities. At October 31, 2010, the Fund did not hold unfunded commitments. (K) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign currency forward contracts, which are agreements to buy or sell currencies of different countries on a specified future date at a specified rate. The Fund is subject to foreign currency exchange rate risk in the normal course of investing in these transactions. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. Cash movement occurs on settlement date. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into foreign currency forward contracts to reduce currency risk versus the benchmark or for trade settlement. The use of foreign currency forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. While a Fund may enter into forward contracts to reduce currency exchange risks, changes in currency exchange rates may result in poorer overall performance for the Fund than if it had not engaged in such transactions. Exchange rate movements can be large, depending on the currency, and can last for extended periods of time, affecting the value of the Fund's assets. Moreover, there may be an imperfect correlation between the Fund's holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may 34 MainStay Diversified Income Fund prevent the Fund from achieving the intended hedge or expose the Fund to the risk of currency exchange loss. The unrealized appreciation (depreciation) on forward contracts reflects the Fund's exposure at valuation date to credit loss in the event of a counterparty's failure to perform its obligations. (See Note 5.) (L) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (M) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR") transactions in which it sells mortgage-backed securities ("MBS") from its portfolio to a counterparty from whom it simultaneously agrees to buy a similar security on a delayed delivery basis. The MDR transactions of the Fund are classified as purchase and sale transactions. The securities sold in connection with the MDRs are removed from the portfolio and a realized gain or loss is recognized. The securities the Fund has agreed to acquire are included at market value in the Portfolio of Investments and liabilities for such purchase commitments are included as payables for investments purchased. During the roll period, the Fund foregoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future as well as by the earnings on the cash proceeds of the initial sale. MDRs may be renewed without physical delivery of the securities subject to the contract. The Fund maintains liquid assets from its portfolio having a value not less than the repurchase price, including accrued interest. MDR transactions involve certain risks, including the risk that the MBS returned to the Fund at the end of the roll, while substantially similar, could be inferior to what was initially sold to the counterparty. (N) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (O) RESTRICTED SECURITIES. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. The Fund may not have the right to demand that such securities be registered. Disposal of these securities may involve time-consuming negotiations and expenses and it may be difficult to obtain a prompt sale at an acceptable price. (See Note 6.) (P) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes called "junk bonds"), which are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a premium--a high interest rate or yield--because of the increased risk of loss. These securities can also be subject to greater price volatility. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (Q) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this mainstayinvestments.com 35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (R) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF FOREIGN INTEREST ASSETS AND EXCHANGE EQUITY RATE LIABILITIES CONTRACTS CONTRACTS CONTRACTS LOCATION RISK RISK RISK TOTAL Warrants Investments in securities, at value $ -- $0 (a) $ -- $ 0 (a) Forward Contracts Unrealized appreciation on foreign currency forward contracts 27,531 -- -- 27,531 ---------------------------------------------- Total Fair Value $27,531 $0 (a) $-- $27,531 ==============================================
LIABILITY DERIVATIVES
STATEMENT OF FOREIGN INTEREST ASSETS AND EXCHANGE EQUITY RATE LIABILITIES CONTRACTS CONTRACTS CONTRACTS LOCATION RISK RISK RISK TOTAL Futures Contracts (b) Net Assets--Unrealized depreciation on investments and futures contracts $ -- $ -- $(332,900) $(332,900) Forward Contracts Unrealized depreciation on foreign currency forward contracts (148,152) -- -- (148,152) ------------------------------------------------ Total Fair Value $(148,152) $-- $(332,900) $(481,052) ================================================
(a) Less than one dollar. (b) Includes cumulative depreciation of futures contracts as reported in Portfolio of Investments. Only current day's variation margin in reported within the Statement of Assets and Liabilities. The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
FOREIGN INTEREST STATEMENTS OF EXCHANGE EQUITY RATE OPERATIONS CONTRACTS CONTRACTS CONTRACTS LOCATION RISK RISK RISK TOTAL Warrants Net realized gain (loss) on security transactions $ -- $(18,819) $ -- $ (18,819) Futures Contracts Net realized gain (loss) on futures contracts -- -- (383,275) (383,275) Forward Contracts Net realized gain (loss) on foreign currency transactions: (819,131) -- -- (819,131) -------------------------------------------------- Total Realized Gain (Loss) $(819,131) $(18,819) $(383,275) $(1,221,225) ==================================================
36 MainStay Diversified Income Fund CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
FOREIGN INTEREST STATEMENTS OF EXCHANGE EQUITY RATE OPERATIONS CONTRACTS CONTRACTS CONTRACTS LOCATION RISK RISK RISK TOTAL Warrants Net change in unrealized appreciation (depreciation) on security transactions $ -- $18,976 $ -- $ 18,976 Futures contracts Net change in unrealized appreciation (depreciation) on futures contracts -- -- (302,849) (302,849) Forward Contracts Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts 28,973 -- -- 28,973 ------------------------------------------------ Total Change in Unrealized Appreciation (Depreciation) $28,973 $18,976 $(302,849) $(254,900) ================================================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
FOREIGN INTEREST EXCHANGE EQUITY RATE CONTRACTS CONTRACTS CONTRACTS RISK RISK RISK TOTAL Warrants (2) -- 8,700 -- 8,700 Futures Contracts Long (2) -- 22 -- 22 Futures Contracts Short (2) -- (101) -- (101) Forward Contracts Long (3) $ 4,908,339 -- -- $ 4,908,339 Forward Contracts Short (3) $(13,907,145) -- -- $(13,907,145) ======================================================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. (3) Amount(s) represent(s) notional amount. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.60% up to $500 million, 0.55% from $500 million to $1 billion and 0.50% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.63% for the year ended October 31, 2010, inclusive of the effective fund accounting services fee rate of 0.03% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement. For the period August 1, 2009 to July 31, 2010, New York Life Investments agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares did not exceed 1.19% of its average daily net assets. New York Life Investments applied an equivalent waiver or reimbursement, in an equal number of basis points, to the other classes of the Fund. Effective August 1, 2010, New York Life Investments agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares do not exceed 1.16% of its average daily net assets. New York Life Investments will apply an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This expense limitation agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory mainstayinvestments.com 37 NOTES TO FINANCIAL STATEMENTS (CONTINUED) agreements. Based on its review, the Board may agree to maintain or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. At the December 15, 2010, Board of Trustees meeting, the Board approved an extension of the current written expense limitation agreement through February 28, 2012. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $859,164 and waived/reimbursed its fees in the amount of $51,293. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Investor Class and Class A shares at an annual rate of 0.25% of the average daily net assets of the Investor Class and Class A shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $13,485 and $92,726 respectively for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Class A, Class B and Class C shares of $1,899 $15,618 and $3,890, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $46,948 - ---------------------------------------------- Class A 90,981 - ---------------------------------------------- Class B 65,119 - ---------------------------------------------- Class C 66,827 - ---------------------------------------------- Class I 2,647 - ----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $10,623,545 9.7% - ----------------------------------------------------- Class C 135 0.0++ - ----------------------------------------------------- Class I 1,475 0.0++ - -----------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $4,772. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED UNDISTRIBUTED CAPITAL OTHER UNREALIZED TOTAL NET INVESTMENT AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $739,665 $(7,975,565) $(240,977) $10,580,377 $3,103,500 - ------------------------------------------------------------ -----------------
The difference between book-basis and tax basis unrealized depreciation is primarily due to mark to market on foreign currency forward and futures contracts, partnership basis adjustments, and wash sales deferrals. The other temporary differences are primarily due to distributions payable. The following table discloses the current year reclassifications between undistributed net investment income, accumulated net realized loss on investments and additional paid-in capital arising from permanent differences; net assets at October 31, 2010 are not affected. 38 MainStay Diversified Income Fund
ACCUMULATED UNDISTRIBUTED NET REALIZED NET INVESTMENT GAIN (LOSS) ON ADDITIONAL INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL $489,162 $(479,045) $(10,117) - ---------------------------------------- ------------
The reclassifications for the Fund are primarily due to foreign currency gain/(loss), consent fee reclasses, modifications on debt instruments, and partnership adjustments. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $7,975,565 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2014 1,279 2016 4,026 2017 2,671 - ---------------------------------- ----- Total $7,976 - ---------------------------------- -----
The Fund had $1,855,580 of capital loss carryforwards that expired during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $7,918,584 $6,996,845 Return of Capital -- 395,761 - ----------------------------------------------------- Total $7,918,584 $7,392,606 - -----------------------------------------------------
NOTE 5-FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS As of October 31, 2010, the Fund held the following foreign currency forward contracts:
CONTRACT CONTRACT UNREALIZED AMOUNT AMOUNT APPRECIATION/ COUNTERPARTY SOLD PURCHASED (DEPRECIATION) Foreign Currency Sale Contracts: - ---------------------------------------------------------------------------------------------------------------- Euro vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank EUR 3,700,000 USD 5,175,560 USD 27,531 - ---------------------------------------------------------------------------------------------------------------- Pound Sterling vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank GBP 3,600,000 5,731,200 (36,129) - ---------------------------------------------------------------------------------------------------------------- Japanese Yen vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank JPY 600,000,000 7,345,739 (112,023) - ---------------------------------------------------------------------------------------------------------------- Net unrealized depreciation on foreign currency forward contracts USD(120,621) - ----------------------------------------------------------------------------------------------------------------
As of October 31, 2010, the Fund held the following foreign currencies:
CURRENCY COST VALUE Brazilian Real BRL 63,452 USD 34,682 USD 37,318 - ------------------------------------------------------------------------------------------------- Euro EUR 49,500 69,276 68,894 - ------------------------------------------------------------------------------------------------- Pound Sterling GBP128,185 204,141 205,397 - ------------------------------------------------------------------------------------------------- Total USD 308,099 USD 311,609 - -------------------------------------------------------------------------------------------------
NOTE 6-RESTRICTED SECURITY As of October 31, 2010, the Fund held the following restricted security:
DATE OF PRINCIPAL 10/31/10 PERCENTAGE OF SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS At Home Corp. Convertible Bond 4.75%, due 12/31/49 7/25/01 $504,238 $8,348 $50 0.0%++ - ---------------------------------------------------------------------------------------------------------
++ Less than one-tenth of a percent. mainstayinvestments.com 39 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 8-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 9-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of U.S. Government securities were $18,897 and $11,533, respectively. Purchases and sales of securities, other than U.S. Government securities and short-term securities, were $146,153 and $89,878, respectively. NOTE 10-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 573,513 $ 5,068,751 Shares issued to shareholders in reinvestment of dividends 84,589 745,421 Shares redeemed (276,444) (2,433,704) ------------------------ Net increase (decrease) in shares outstanding before conversion 381,658 3,380,468 Shares converted into Investor Class (See Note 1) 176,163 1,549,701 Shares converted from Investor Class (See Note 1) (172,275) (1,517,207) ------------------------ Net increase (decrease) 385,546 $ 3,412,962 ======================== Year ended October 31, 2009: Shares sold 217,043 $ 1,665,811 Shares issued to shareholders in reinvestment of dividends 114,218 842,674 Shares redeemed (299,081) (2,248,741) ------------------------ Net increase (decrease) in shares outstanding before conversion 32,180 259,744 Shares converted into Investor Class (See Note 1) 146,213 1,089,759 Shares converted from Investor Class (See Note 1) (124,403) (991,395) ------------------------ Net increase (decrease) 53,990 $ 358,108 ======================== CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 6,310,390 $ 55,286,644 Shares issued to shareholders in reinvestment of dividends 427,077 3,744,833 Shares redeemed (2,116,373) (18,539,960) ------------------------ Net increase (decrease) in shares outstanding before conversion 4,621,094 40,491,517 Shares converted into Class A (See Note 1) 448,506 3,925,520 Shares converted from Class A (See Note 1) (54,262) (484,933) Shares converted from Class A (a) (104,753) (900,875) ------------------------ Net increase (decrease) 4,910,585 $ 43,031,229 ======================== Year ended October 31, 2009: Shares sold 1,465,154 $ 11,304,022 Shares issued to shareholders in reinvestment of dividends 430,086 3,162,284 Shares redeemed (1,231,063) (9,142,296) ------------------------ Net increase (decrease) in shares outstanding before conversion 664,177 5,324,010 Shares converted into Class A (See Note 1) 276,610 2,159,198 Shares converted from Class A (See Note 1) (69,482) (512,125) ------------------------ Net increase (decrease) 871,305 $ 6,971,083 ========================
40 MainStay Diversified Income Fund
CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 540,436 $ 4,728,077 Shares issued to shareholders in reinvestment of dividends 85,993 749,784 Shares redeemed (369,358) (3,202,350) ------------------------ Net increase (decrease) in shares outstanding before conversion 257,071 2,275,511 Shares converted from Class B (See Note 1) (399,466) (3,473,081) ------------------------ Net increase (decrease) (142,395) $ (1,197,570) ======================== Year ended October 31, 2009: Shares sold 419,871 $ 3,148,237 Shares issued to shareholders in reinvestment of dividends 155,105 1,128,177 Shares redeemed (658,991) (4,925,067) ------------------------ Net increase (decrease) in shares outstanding before conversion (84,015) (648,653) Shares converted from Class B (See Note 1) (229,894) (1,745,437) ------------------------ Net increase (decrease) (313,909) $ (2,394,090) ======================== CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,956,274 $ 17,087,243 Shares issued to shareholders in reinvestment of dividends 69,657 609,351 Shares redeemed (430,620) (3,747,694) ------------------------ Net increase (decrease) 1,595,311 $ 13,948,900 ======================== Year ended October 31, 2009: Shares sold 610,922 $ 4,654,326 Shares issued to shareholders in reinvestment of dividends 61,342 447,865 Shares redeemed (456,544) (3,377,082) ------------------------ Net increase (decrease) 215,720 $ 1,725,109 ======================== CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 472,941 $ 4,180,458 Shares issued to shareholders in reinvestment of dividends 8,816 77,729 Shares redeemed (52,808) (459,524) ------------------------ Net increase (decrease) in shares outstanding before conversion 428,949 3,798,663 Shares converted into Class I (a) 104,753 900,875 ------------------------ Net increase (decrease) 533,702 $ 4,699,538 ======================== Year ended October 31, 2009: Shares sold 5,467 $ 41,405 Shares issued to shareholders in reinvestment of dividends 2,860 21,002 Shares redeemed (6,611) (47,625) ------------------------ Net increase (decrease) 1,716 $ 14,782 ========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 11-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. At the December 15, 2010 Board of Trustees meeting, the Board approved a change to the name of the MainStay Diversified Income Fund to MainStay Flexible Bond Opportunities Fund, and modifications to its investment objective and principal investment strategies effective February 28, 2011. No other subsequent events requiring financial statement adjustments or disclosure have been identified other than the extension of the written expense limitation as disclosed in Note 3(A) to these financial statements. mainstayinvestments.com 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Diversified Income Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Diversified Income Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 42 MainStay Diversified Income Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Diversified Income Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received informationon the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' mainstayinvestments.com 43 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to MacKay Shields from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to MacKay Shields in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships 44 MainStay Diversified Income Fund with the Fund supported the Board's determination to approve the Agreements. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty in determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, and following negotiations with the Board, the Board accepted New York Life Investments' proposal to modify the expense limitations on the Fund's share classes in order to increase the amount of class expenses subsidized by New York Life Investments. Based on these considerations, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 45 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $268,627 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 3.2% to arrive at the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 46 MainStay Diversified Income Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 47
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
48 MainStay Diversified Income Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 49
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
50 MainStay Diversified Income Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 51 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21369 MS333-10 MSDI11-12/10 16 (MAINSTAY INVESTMENTS LOGO) MAINSTAY EQUITY INDEX FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 8 - --------------------------------------------- Portfolio of Investments 9 - --------------------------------------------- Financial Statements 17 - --------------------------------------------- Notes to Financial Statements 21 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 27 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 28 - --------------------------------------------- Federal Income Tax Information 31 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 31 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 31 - --------------------------------------------- Board Members and Officers 32 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) LOGO (LINE GRAPH)
MAINSTAY EQUITY INDEX FUND CLASS A S&P 500(R) SHARES INDEX --------------- ---------- 10/31/00 24250 25000 18080 18774 15234 15938 18227 19253 19760 21067 21336 22904 24717 26647 28141 30526 17891 19507 19587 21420 10/31/10 22717 24958
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
GROSS EXPENSE CLASS SALES CHARGE ONE YEAR FIVE YEARS TEN YEARS RATIO(2) - ------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 3% Initial Sales Charge With sales charges 12.50% 0.65% -0.95% 0.92% Excluding sales charges 15.98 1.26 -0.65 0.92 - -------------------------------------------------------------------------------------------------------------------------------
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS S&P 500(R) Index(3) 16.52% 1.73% -0.02% - --------------------------------------------------------------------------- Average Lipper S&P 500 Index objective fund(4) 15.88 1.23 -0.51 - ---------------------------------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on the share class and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. Performance figures shown reflect nonrecurring reimbursements from affiliates for professional fees and losses attributable to shareholder trading arrangements. If these nonrecurring reimbursements had not been made the total return (excluding sales charges) would have been 1.24% for the five-year period ended October 31, 2010, and -0.66% for the ten-year period then ended. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. S&P 500(R) Index is a trademark of The McGraw Hill Companies, Inc. The S&P 500(R) Index is widely regarded as the standard for measuring large-cap U.S. stock market performance. Total returns assume reinvestment of all dividends and capital gains. The S&P 500(R) Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 4. The average Lipper S&P 500(R) Index objective fund is representative of funds that are passively managed, and commit by prospectus language to replicate the performance of the S&P 500(R) Index (including reinvested basis dividends). In addition, S&P 500(R) Index objective funds have limited expenses (advisory fee no higher than 0.50%). This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5 COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY EQUITY INDEX FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) CLASS A SHARES $1,000.00 $1,004.20 $3.03 $1,022.20 $3.06 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (0.60% for Class A) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. 6 MainStay Equity Index Fund INDUSTRY COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
Oil, Gas & Consumable Fuels 8.8% Pharmaceuticals 5.6 Computers & Peripherals 4.3 Software 3.9 Insurance 3.8 Diversified Financial Services 3.7 Media 3.1 IT Services 3.0 Diversified Telecommunication Services 2.7 Aerospace & Defense 2.6 Commercial Banks 2.6 Beverages 2.5 Semiconductors & Semiconductor Equipment 2.4 Capital Markets 2.3 Food & Staples Retailing 2.3 Household Products 2.3 Industrial Conglomerates 2.3 Communications Equipment 2.2 Chemicals 2.0 Internet Software & Services 2.0 Health Care Providers & Services 1.9 Machinery 1.9 Specialty Retail 1.9 Electric Utilities 1.8 Energy Equipment & Services 1.8 Food Products 1.8 Hotels, Restaurants & Leisure 1.7 Health Care Equipment & Supplies 1.6 Tobacco 1.6 Biotechnology 1.4 Real Estate Investment Trusts 1.4 Multi-Utilities 1.3 Metals & Mining 1.1 Air Freight & Logistics 1.0 Multiline Retail 0.8 Road & Rail 0.8 Consumer Finance 0.7 Internet & Catalog Retail 0.7 Automobiles 0.5 Commercial Services & Supplies 0.5 Electrical Equipment 0.5 Electronic Equipment & Instruments 0.5 Textiles, Apparel & Luxury Goods 0.5 Household Durables 0.4 Life Sciences Tools & Services 0.4 Wireless Telecommunication Services 0.3 Auto Components 0.2 Construction & Engineering 0.2 Containers & Packaging 0.2 Independent Power Producers & Energy Traders 0.2 Personal Products 0.2 Airlines 0.1 Distributors 0.1 Diversified Consumer Services 0.1 Gas Utilities 0.1 Health Care Technology 0.1 Leisure Equipment & Products 0.1 Office Electronics 0.1 Paper & Forest Products 0.1 Professional Services 0.1 Real Estate Management & Development 0.1 Thrifts & Mortgage Finance 0.1 Trading Companies & Distributors 0.1 Building Products 0.0++ Construction Materials 0.0++ Short-Term Investments 4.7 Other Assets, Less Liabilities -0.1 ----- 100.0% =====
See Portfolio of Investments beginning on page 9 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investments) 1. ExxonMobil Corp. 2. Apple, Inc. 3. Microsoft Corp. 4. International Business Machines Corp. 5. Procter & Gamble Co. (The) 6. Johnson & Johnson 7. General Electric Co. 8. AT&T, Inc. 9. Chevron Corp. 10. Google, Inc. Class A
mainstayinvestments.com 7 PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio manager Francis J. Ok of Madison Square Investors LLC, the Fund's Subadvisor. HOW DID MAINSTAY EQUITY INDEX FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Equity Index Fund returned 15.98% for Class A shares for the 12 months ended October 31, 2010. The Fund, which offers only one class of shares, outperformed the 15.88% return of the average Lipper(1) S&P 500 Index objective fund and underperformed the 16.52% return of the S&P 500(R) Index(2) for the 12 months ended Octo-ber 31, 2010. Because the Fund incurs operating expenses that the Index does not, the Fund's net performance will typically lag that of the Index. The S&P 500(R) Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. DURING THE REPORTING PERIOD, WHICH S&P 500(R) INDUSTRIES HAD THE HIGHEST TOTAL RETURNS AND WHICH INDUSTRIES HAD THE LOWEST TOTAL RETURNS? On the basis of total return, the strongest-performing S&P 500(R) industries during the reporting period were automobiles, real estate management & development and airlines. The industries with the lowest total returns were diversified consumer services, construction materials and thrifts & mortgage finance. DURING THE REPORTING PERIOD, WHICH INDUSTRIES MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH INDUSTRIES MADE THE WEAKEST CONTRIBUTIONS? On the basis of impact, which takes weightings and total returns into account, the industries that made the strongest positive contributions to the Fund's absolute performance during the reporting period were computers & peripherals, media and machinery. Over the same period, the industries that made the weakest contributions to the Fund's absolute performance were diversified financial services, capital markets and diversified consumer services. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS IN THE S&P 500(R) INDEX HAD THE HIGHEST TOTAL RETURNS AND WHICH S&P 500(R) STOCKS HAD THE LOWEST TOTAL RETURNS? During the reporting period, the S&P 500(R) stocks with the highest total returns were Internet retailer Priceline.com, Internet software & services company Akamai Technologies and metals & mining company Titanium Metals. Over the same period, the S&P 500(R) stocks with the lowest total returns were food products company Dean Foods and diversified consumer services companies H&R Block and Apollo Group. DURING THE REPORTING PERIOD, WHICH S&P 500(R) STOCKS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS MADE THE WEAKEST CONTRIBUTIONS? In terms of impact, which takes total returns and weightings into account, the strongest contributors to the Fund's absolute performance during the reporting period were computers & peripherals company Apple, auto manufacturer Ford Motor and software manufacturer Oracle. Over the same period, the S&P 500(R) Index stocks that made the weakest contributions to the Fund's absolute performance were oil company ExxonMobil and diversified financial services companies Bank of America and JPMorgan Chase. WERE THERE ANY CHANGES IN THE S&P 500(R) INDEX DURING THE REPORTING PERIOD? During the reporting period, there were 18 additions to and 18 deletions from to the Index. In terms of Index weight, significant additions included reinsurer Berkshire Hathaway and diversified manufacturer Tyco International. Significant deletions included road & rail company Burlington Northern Santa Fe and diversified manufacturer Smith International. 1. See footnote on page 5 for more information on Lipper Inc. 2. See footnote on page 5 for more information on the S&P 500(R) Index. The opinions expressed are those of the portfolio manager as of the date of this report and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 8 MainStay Equity Index Fund PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010
SHARES VALUE COMMON STOCKS 95.4%+ - ------------------------------------------------------- AEROSPACE & DEFENSE 2.6% Boeing Co. (The) 14,121 $ 997,507 General Dynamics Corp. 7,341 500,069 Goodrich Corp. 2,419 198,527 Honeywell International, Inc. 14,905 702,175 ITT Corp. 3,538 166,958 L-3 Communications Holdings, Inc. 2,208 159,395 Lockheed Martin Corp. 5,737 408,991 Northrop Grumman Corp. 5,678 358,906 Precision Castparts Corp. 2,746 375,049 Raytheon Co. 7,220 332,698 Rockwell Collins, Inc. 3,035 183,648 United Technologies Corp. 17,932 1,340,776 ------------ 5,724,699 ------------ AIR FREIGHT & LOGISTICS 1.0% C.H. Robinson Worldwide, Inc. 3,202 225,677 Expeditors International of Washington, Inc. 4,097 202,228 FedEx Corp. 6,072 532,636 United Parcel Service, Inc. Class B 19,120 1,287,540 ------------ 2,248,081 ------------ AIRLINES 0.1% Southwest Airlines Co. 14,403 198,185 ------------ AUTO COMPONENTS 0.2% Goodyear Tire & Rubber Co. (The) (a) 4,689 47,922 Johnson Controls, Inc. 12,994 456,349 ------------ 504,271 ------------ AUTOMOBILES 0.5% Ford Motor Co. (a) 66,380 937,950 Harley-Davidson, Inc. 4,543 139,379 ------------ 1,077,329 ------------ BEVERAGES 2.5% Brown-Forman Corp. Class B 2,002 121,742 Coca-Cola Co. (The) 44,575 2,733,339 Coca-Cola Enterprises, Inc. 6,412 153,952 Constellation Brands, Inc. Class A (a) 3,418 67,437 Dr. Pepper Snapple Group, Inc. 4,612 168,569 Molson Coors Brewing Co. Class B 3,048 143,957 PepsiCo., Inc. 30,705 2,005,036 ------------ 5,394,032 ------------ BIOTECHNOLOGY 1.4% Amgen, Inc. (a) 18,499 1,057,958 Biogen Idec, Inc. (a) 4,671 292,918 Celgene Corp. (a) 9,072 563,099 Cephalon, Inc. (a) 1,450 96,338 Genzyme Corp. (a) 4,919 354,808 Gilead Sciences, Inc. (a) 16,188 642,178 ------------ 3,007,299 ------------ BUILDING PRODUCTS 0.0%++ Masco Corp. 6,924 73,810 ------------ CAPITAL MARKETS 2.3% Ameriprise Financial, Inc. 4,846 250,490 Bank of New York Mellon Corp. (The) 23,435 587,281 Charles Schwab Corp. (The) 19,131 294,617 E*TRADE Financial Corp. (a) 3,902 55,799 Federated Investors, Inc. Class B 1,750 43,592 Franklin Resources, Inc. 2,828 324,372 Goldman Sachs Group, Inc. (The) 9,952 1,601,774 Invesco, Ltd. 9,031 207,713 Janus Capital Group, Inc. 3,621 38,238 Legg Mason, Inc. 2,983 92,562 Morgan Stanley 26,959 670,470 Northern Trust Corp. 4,674 231,971 State Street Corp. 9,685 404,446 T. Rowe Price Group, Inc. 4,948 273,476 ------------ 5,076,801 ------------ CHEMICALS 2.0% Air Products & Chemicals, Inc. 4,102 348,547 Airgas, Inc. 1,439 102,068 CF Industries Holdings, Inc. 1,371 167,989 Dow Chemical Co. (The) 22,384 690,099 E.I. du Pont de Nemours & Co. 17,495 827,163 Eastman Chemical Co. 1,396 109,684 Ecolab, Inc. 4,503 222,088 FMC Corp. 1,399 102,267 International Flavors & Fragrances, Inc. 1,541 77,296 Monsanto Co. 10,432 619,869 PPG Industries, Inc. 3,187 244,443 Praxair, Inc. 5,907 539,545 Sherwin-Williams Co. (The) 1,743 127,187 Sigma-Aldrich Corp. 2,342 148,530 ------------ 4,326,775 ------------ COMMERCIAL BANKS 2.6% BB&T Corp. 13,378 313,179 Comerica, Inc. 3,404 121,795 Fifth Third Bancorp 15,366 192,997 First Horizon National Corp. (a) 4,580 46,212 Huntington Bancshares, Inc. 13,840 78,473 KeyCorp 16,994 139,181 M&T Bank Corp. 1,654 123,637 Marshall & Ilsley Corp. 10,175 60,134
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investments. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 9 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) COMMERCIAL BANKS (CONTINUED) PNC Financial Services Group, Inc. 10,140 $ 546,546 Regions Financial Corp. 24,248 152,762 SunTrust Banks, Inc. 9,648 241,393 U.S. Bancorp 37,003 894,733 Wells Fargo & Co. 101,009 2,634,315 Zions Bancorp 3,343 69,066 ------------ 5,614,423 ------------ COMMERCIAL SERVICES & SUPPLIES 0.5% Avery Dennison Corp. 2,123 77,171 Cintas Corp. 2,592 71,202 Iron Mountain, Inc. 3,885 84,654 Pitney Bowes, Inc. 3,986 87,453 R.R. Donnelley & Sons Co. 3,984 73,505 Republic Services, Inc. 5,913 176,267 Stericycle, Inc. (a) 1,645 118,012 Waste Management, Inc. 9,213 329,088 ------------ 1,017,352 ------------ COMMUNICATIONS EQUIPMENT 2.2% Cisco Systems, Inc. (a) 110,232 2,516,597 Harris Corp. 2,489 112,478 JDS Uniphase Corp. (a) 4,275 44,930 Juniper Networks, Inc. (a) 10,037 325,098 Motorola, Inc. (a) 45,048 367,141 QUALCOMM, Inc. 30,984 1,398,308 Tellabs, Inc. 7,352 50,141 ------------ 4,814,693 ------------ COMPUTERS & PERIPHERALS 4.3% X Apple, Inc. (a) 17,633 5,305,241 Dell, Inc. (a) 32,654 469,565 EMC Corp. (a) 39,636 832,752 Hewlett-Packard Co. 43,770 1,840,966 Lexmark International, Inc. Class A (a) 1,516 57,653 NetApp, Inc. (a) 6,891 366,946 QLogic Corp. (a) 2,107 37,020 SanDisk Corp. (a) 4,499 169,072 Western Digital Corp. (a) 4,427 141,753 ------------ 9,220,968 ------------ CONSTRUCTION & ENGINEERING 0.2% Fluor Corp. 3,451 166,304 Jacobs Engineering Group, Inc. (a) 2,425 93,629 Quanta Services, Inc. (a) 4,073 80,075 ------------ 340,008 ------------ CONSTRUCTION MATERIALS 0.0%++ Vulcan Materials Co. 2,476 90,399 ------------ CONSUMER FINANCE 0.7% American Express Co. 20,203 837,616 Capital One Financial Corp. 8,814 328,498 Discover Financial Services 10,501 185,343 SLM Corp. (a) 9,367 111,467 ------------ 1,462,924 ------------ CONTAINERS & PACKAGING 0.2% Ball Corp. 1,768 113,788 Bemis Co., Inc. 2,109 66,982 Owens-Illinois, Inc. (a) 3,155 88,435 Pactiv Corp. (a) 2,619 86,898 Sealed Air Corp. 3,078 71,256 ------------ 427,359 ------------ DISTRIBUTORS 0.1% Genuine Parts Co. 3,041 145,542 ------------ DIVERSIFIED CONSUMER SERVICES 0.1% Apollo Group, Inc. Class A (a) 2,450 91,826 DeVry, Inc. 1,222 58,485 H&R Block, Inc. 5,948 70,127 ------------ 220,438 ------------ DIVERSIFIED FINANCIAL SERVICES 3.7% Bank of America Corp. 193,666 2,215,539 Citigroup, Inc. (a) 491,832 2,050,940 CME Group, Inc. 1,295 375,097 IntercontinentalExchange, Inc. (a) 1,428 164,034 JPMorgan Chase & Co. 76,532 2,879,899 Leucadia National Corp. (a) 3,801 96,621 Moody's Corp. 3,935 106,481 NASDAQ OMX Group, Inc. (The) (a) 2,777 58,373 NYSE Euronext 5,028 154,058 ------------ 8,101,042 ------------ DIVERSIFIED TELECOMMUNICATION SERVICES 2.7% X AT&T, Inc. 114,046 3,250,311 CenturyTel, Inc. 5,818 240,749 Frontier Communications Corp. 19,156 168,189 Qwest Communications International, Inc. 33,568 221,549 Verizon Communications, Inc. 54,559 1,771,531 Windstream Corp. 9,330 118,118 ------------ 5,770,447 ------------ ELECTRIC UTILITIES 1.8% Allegheny Energy, Inc. 3,271 75,887 American Electric Power Co., Inc. 9,256 346,545 Duke Energy Corp. 25,447 463,390 Edison International 6,287 231,990 Entergy Corp. 3,605 268,681 Exelon Corp. 12,760 520,863 FirstEnergy Corp. 5,885 213,743 NextEra Energy, Inc. 8,026 441,751
10 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) ELECTRIC UTILITIES (CONTINUED) Northeast Utilities 3,398 $ 106,289 Pepco Holdings, Inc. 4,321 83,223 Pinnacle West Capital Corp. 2,096 86,271 PPL Corp. 9,319 250,681 Progress Energy, Inc. 5,661 254,745 Southern Co. (The) 16,033 607,170 ------------ 3,951,229 ------------ ELECTRICAL EQUIPMENT 0.5% Emerson Electric Co. 14,524 797,367 Rockwell Automation, Inc. 2,737 170,707 Roper Industries, Inc. 1,818 126,224 ------------ 1,094,298 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS 0.5% Agilent Technologies, Inc. (a) 6,683 232,568 Amphenol Corp. Class A 3,353 168,086 Corning, Inc. 30,142 550,996 FLIR Systems, Inc. (a) 3,021 84,105 Jabil Circuit, Inc. 3,818 58,568 Molex, Inc. 2,675 54,302 ------------ 1,148,625 ------------ ENERGY EQUIPMENT & SERVICES 1.8% Baker Hughes, Inc. 8,323 385,604 Cameron International Corp. (a) 4,676 204,575 Diamond Offshore Drilling, Inc. 1,342 88,787 FMC Technologies, Inc. (a) 2,316 166,983 Halliburton Co. 17,578 560,035 Helmerich & Payne, Inc. 2,041 87,314 Nabors Industries, Ltd. (a) 5,501 114,971 National-Oilwell Varco, Inc. 8,088 434,811 Rowan Cos., Inc. (a) 2,214 72,841 Schlumberger, Ltd. 26,373 1,843,209 ------------ 3,959,130 ------------ FOOD & STAPLES RETAILING 2.3% Costco Wholesale Corp. 8,475 531,976 CVS Caremark Corp. 26,215 789,596 Kroger Co. (The) 12,388 272,536 Safeway, Inc. 7,367 168,704 SUPERVALU, Inc. 4,182 45,124 Sysco Corp. 11,358 334,607 Wal-Mart Stores, Inc. 38,603 2,091,124 Walgreen Co. 18,786 636,469 Whole Foods Market, Inc. (a) 2,821 112,135 ------------ 4,982,271 ------------ FOOD PRODUCTS 1.8% Archer-Daniels-Midland Co. 12,341 411,202 Campbell Soup Co. 3,737 135,466 ConAgra Foods, Inc. 8,488 190,895 Dean Foods Co. (a) 3,577 37,201 General Mills, Inc. 12,397 465,384 H.J. Heinz Co. 6,144 301,732 Hershey Co. (The) 2,982 147,579 Hormel Foods Corp. 1,337 61,395 J.M. Smucker Co. (The) 2,307 148,294 Kellogg Co. 5,026 252,607 Kraft Foods, Inc. Class A 33,664 1,086,337 McCormick & Co., Inc. 2,571 113,690 Mead Johnson Nutrition Co. 3,949 232,280 Sara Lee Corp. 12,786 183,223 Tyson Foods, Inc. Class A 5,760 89,568 ------------ 3,856,853 ------------ GAS UTILITIES 0.1% Nicor, Inc. 893 42,534 ONEOK, Inc. 2,055 102,380 ------------ 144,914 ------------ HEALTH CARE EQUIPMENT & SUPPLIES 1.6% Baxter International, Inc. 11,278 574,050 Becton, Dickinson & Co. 4,480 338,330 Boston Scientific Corp. (a) 29,294 186,896 C.R. Bard, Inc. 1,808 150,281 CareFusion Corp. (a) 4,289 103,537 DENTSPLY International, Inc. 2,755 86,479 Hospira, Inc. (a) 3,230 192,120 Intuitive Surgical, Inc. (a) 760 199,842 Medtronic, Inc. 20,843 733,882 St. Jude Medical, Inc. (a) 6,319 242,018 Stryker Corp. 6,590 326,139 Varian Medical Systems, Inc. (a) 2,347 148,377 Zimmer Holdings, Inc. (a) 3,878 183,972 ------------ 3,465,923 ------------ HEALTH CARE PROVIDERS & SERVICES 1.9% Aetna, Inc. 8,057 240,582 AmerisourceBergen Corp. 5,382 176,637 Cardinal Health, Inc. 6,777 235,094 CIGNA Corp. 5,251 184,783 Coventry Health Care, Inc. (a) 2,860 66,981 DaVita, Inc. (a) 1,982 142,209 Express Scripts, Inc. (a) 10,470 508,004 Humana, Inc. (a) 3,265 190,317 Laboratory Corp. of America Holdings (a) 1,984 161,339 McKesson Corp. 5,046 332,935 Medco Health Solutions, Inc. (a) 8,368 439,571 Patterson Cos., Inc. 1,839 50,848 Quest Diagnostics, Inc. 2,837 139,410 Tenet Healthcare Corp. (a) 9,371 40,858
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) HEALTH CARE PROVIDERS & SERVICES (CONTINUED) UnitedHealth Group, Inc. 21,698 $ 782,213 WellPoint, Inc. (a) 7,716 419,287 ------------ 4,111,068 ------------ HEALTH CARE TECHNOLOGY 0.1% Cerner Corp. (a) 1,369 120,239 ------------ HOTELS, RESTAURANTS & LEISURE 1.7% Carnival Corp. 8,391 362,239 Darden Restaurants, Inc. 2,674 122,229 International Game Technology 5,748 89,611 Marriott International, Inc. Class A 5,535 205,072 McDonald's Corp. 20,543 1,597,629 Starbucks Corp. 14,281 406,723 Starwood Hotels & Resorts Worldwide, Inc. 3,671 198,748 Wyndham Worldwide Corp. 3,449 99,159 Wynn Resorts, Ltd. 1,454 155,825 Yum! Brands, Inc. 9,014 446,734 ------------ 3,683,969 ------------ HOUSEHOLD DURABLES 0.4% D.R. Horton, Inc. 5,456 56,961 Fortune Brands, Inc. 2,941 158,961 Harman International Industries, Inc. (a) 1,370 45,963 Leggett & Platt, Inc. 2,824 57,553 Lennar Corp. Class A 3,066 44,488 Newell Rubbermaid, Inc. 6,104 107,736 Pulte Homes, Inc. (a) 6,511 51,111 Stanley Black & Decker, Inc. 3,196 198,056 Whirlpool Corp. 1,466 111,167 ------------ 831,996 ------------ HOUSEHOLD PRODUCTS 2.3% Clorox Co. (The) 2,680 178,354 Colgate-Palmolive Co. 9,381 723,463 Kimberly-Clark Corp. 7,900 500,386 X Procter & Gamble Co. (The) 54,784 3,482,619 ------------ 4,884,822 ------------ INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.2% AES Corp. (The) (a) 12,875 153,727 Constellation Energy Group, Inc. 3,895 117,785 NRG Energy, Inc. (a) 4,887 97,300 ------------ 368,812 ------------ INDUSTRIAL CONGLOMERATES 2.3% 3M Co. 13,764 1,159,204 X General Electric Co. 206,343 3,305,615 Textron, Inc. 5,292 110,180 Tyco International, Ltd. 9,608 367,794 ------------ 4,942,793 ------------ INSURANCE 3.8% ACE, Ltd. 6,541 388,666 Aflac, Inc. 9,089 507,984 Allstate Corp. (The) 10,387 316,700 American International Group, Inc. (a) 2,606 109,478 Aon Corp. 6,336 251,856 Assurant, Inc. 2,056 81,294 Berkshire Hathaway, Inc. Class B (a) 33,389 2,656,429 Chubb Corp. (The) 6,070 352,181 Cincinnati Financial Corp. 3,138 92,383 Genworth Financial, Inc. Class A (a) 9,449 107,152 Hartford Financial Services Group, Inc. (The) 8,578 205,701 Lincoln National Corp. 6,112 149,622 Loews Corp. 6,135 242,210 Marsh & McLennan Cos., Inc. 10,474 261,641 MetLife, Inc. 17,500 705,775 Principal Financial Group, Inc. 6,186 166,032 Progressive Corp. (The) 12,884 272,626 Prudential Financial, Inc. 9,014 473,956 Torchmark Corp. 1,562 89,471 Travelers Cos., Inc. (The) 9,072 500,774 Unum Group 6,310 141,470 XL Group PLC 6,602 139,632 ------------ 8,213,033 ------------ INTERNET & CATALOG RETAIL 0.7% Amazon.com, Inc. (a) 6,829 1,127,741 Expedia, Inc. 4,012 116,147 Priceline.com, Inc. (a) 934 351,941 ------------ 1,595,829 ------------ INTERNET SOFTWARE & SERVICES 2.0% Akamai Technologies, Inc. (a) 3,504 181,052 eBay, Inc. (a) 22,285 664,316 X Google, Inc. Class A (a) 4,798 2,941,126 Monster Worldwide, Inc. (a) 2,485 44,879 VeriSign, Inc. (a) 3,364 116,899 Yahoo!, Inc. (a) 26,017 429,540 ------------ 4,377,812 ------------ IT SERVICES 3.0% Automatic Data Processing, Inc. 9,497 421,857 Cognizant Technology Solutions Corp. Class A (a) 5,806 378,493 Computer Sciences Corp. 2,981 146,218 Fidelity National Information Services, Inc. 5,091 137,966 Fiserv, Inc. (a) 2,898 157,999 X International Business Machines Corp. 24,343 3,495,655 MasterCard, Inc. Class A 1,869 448,672 Paychex, Inc. 6,209 171,989 SAIC, Inc. (a) 5,668 88,081 Teradata Corp. (a) 3,232 127,211 Total System Services, Inc. 3,203 49,999
12 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) IT SERVICES (CONTINUED) Visa, Inc. Class A 9,592 $ 749,807 Western Union Co. (The) 12,742 224,259 ------------ 6,598,206 ------------ LEISURE EQUIPMENT & PRODUCTS 0.1% Eastman Kodak Co. (a) 5,296 24,944 Hasbro, Inc. 2,698 124,782 Mattel, Inc. 6,944 162,004 ------------ 311,730 ------------ LIFE SCIENCES TOOLS & SERVICES 0.4% Life Technologies Corp. (a) 3,536 177,436 PerkinElmer, Inc. 2,275 53,349 Thermo Fisher Scientific, Inc. (a) 7,864 404,367 Waters Corp. (a) 1,775 131,581 ------------ 766,733 ------------ MACHINERY 1.9% Caterpillar, Inc. 12,167 956,326 Cummins, Inc. 3,836 337,952 Danaher Corp. 10,329 447,865 Deere & Co. 8,181 628,301 Dover Corp. 3,601 191,213 Eaton Corp. 3,238 287,631 Flowserve Corp. 1,079 107,900 Illinois Tool Works, Inc. 9,720 444,204 PACCAR, Inc. 7,035 360,614 Pall Corp. 2,252 96,093 Parker Hannifin Corp. 3,112 238,224 Snap-On, Inc. 1,139 58,089 ------------ 4,154,412 ------------ MEDIA 3.1% CBS Corp. Class B 13,142 222,494 Comcast Corp. Class A 54,164 1,114,695 DIRECTV Class A (a) 16,730 727,086 Discovery Communications, Inc. Class A (a) 5,492 244,998 Gannett Co., Inc. 4,606 54,581 Interpublic Group of Cos., Inc. (The) (a) 9,440 97,704 McGraw-Hill Cos., Inc. (The) 5,964 224,545 Meredith Corp. 725 24,614 New York Times Co. (The) Class A (a) 2,296 17,610 News Corp. Class A 44,021 636,544 Omnicom Group, Inc. 5,814 255,583 Scripps Networks Interactive Class A 1,733 88,192 Time Warner Cable, Inc. 6,857 396,815 Time Warner, Inc. 21,702 705,532 Viacom, Inc. Class B 11,740 453,047 Walt Disney Co. (The) 36,916 1,333,037 Washington Post Co. Class B 115 46,247 ------------ 6,643,324 ------------ METALS & MINING 1.1% AK Steel Holding Corp. 2,166 27,270 Alcoa, Inc. 19,710 258,792 Allegheny Technologies, Inc. 1,902 100,216 Cliffs Natural Resources, Inc. 2,616 170,563 Freeport-McMoRan Copper & Gold, Inc. 9,079 859,600 Newmont Mining Corp. 9,505 578,569 Nucor Corp. 6,089 232,722 Titanium Metals Corp. (a) 1,735 34,110 United States Steel Corp. 2,769 118,486 ------------ 2,380,328 ------------ MULTI-UTILITIES 1.3% Ameren Corp. 4,614 133,714 CenterPoint Energy, Inc. 8,142 134,832 CMS Energy Corp. 4,439 81,589 Consolidated Edison, Inc. 5,457 271,322 Dominion Resources, Inc. 11,369 494,097 DTE Energy Co. 3,259 152,391 Integrys Energy Group, Inc. 1,492 79,359 NiSource, Inc. 5,369 92,937 PG&E Corp. 7,542 360,658 Public Service Enterprise Group, Inc. 9,763 315,833 SCANA Corp. 2,175 88,827 Sempra Energy 4,785 255,902 TECO Energy, Inc. 4,141 72,840 Wisconsin Energy Corp. 2,257 134,382 Xcel Energy, Inc. 8,872 211,686 ------------ 2,880,369 ------------ MULTILINE RETAIL 0.8% Big Lots, Inc. (a) 1,461 45,831 Family Dollar Stores, Inc. 2,558 118,103 J.C. Penney Co., Inc. 4,564 142,305 Kohl's Corp. (a) 5,945 304,384 Macy's, Inc. 8,159 192,879 Nordstrom, Inc. 3,282 126,390 Sears Holdings Corp. (a) 854 61,471 Target Corp. 13,923 723,161 ------------ 1,714,524 ------------ OFFICE ELECTRONICS 0.1% Xerox Corp. 26,687 312,238 ------------ OIL, GAS & CONSUMABLE FUELS 8.8% Anadarko Petroleum Corp. 9,554 588,240 Apache Corp. 7,030 710,171 Cabot Oil & Gas Corp. 2,048 59,351 Chesapeake Energy Corp. 12,624 273,941 X Chevron Corp. 38,805 3,205,681 ConocoPhillips 28,631 1,700,681 CONSOL Energy, Inc. 4,358 160,200 Denbury Resources, Inc. (a) 7,710 131,224
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) OIL, GAS & CONSUMABLE FUELS (CONTINUED) Devon Energy Corp. 8,394 $ 545,778 El Paso Corp. 13,595 180,270 EOG Resources, Inc. 4,893 468,358 EQT Corp. 2,880 107,827 X ExxonMobil Corp. 98,276 6,532,406 Hess Corp. 5,641 355,552 Marathon Oil Corp. 13,699 487,273 Massey Energy Co. 1,971 82,920 Murphy Oil Corp. 3,703 241,287 Noble Energy, Inc. 3,374 274,914 Occidental Petroleum Corp. 15,678 1,232,761 Peabody Energy Corp. 5,195 274,816 Pioneer Natural Resources Co. 2,239 156,282 QEP Resources, Inc. 3,384 111,774 Range Resources Corp. 3,091 115,573 Southwestern Energy Co. (a) 6,677 226,016 Spectra Energy Corp. 12,503 297,196 Sunoco, Inc. 2,326 87,155 Tesoro Corp. 2,783 36,068 Valero Energy Corp. 10,932 196,229 Williams Cos., Inc. 11,281 242,767 ------------ 19,082,711 ------------ PAPER & FOREST PRODUCTS 0.1% International Paper Co. 8,437 213,287 MeadWestvaco Corp. 3,293 84,729 ------------ 298,016 ------------ PERSONAL PRODUCTS 0.2% Avon Products, Inc. 8,276 252,004 Estee Lauder Cos., Inc. (The) Class A 2,202 156,716 ------------ 408,720 ------------ PHARMACEUTICALS 5.6% Abbott Laboratories 29,802 1,529,439 Allergan, Inc. 5,935 429,753 Bristol-Myers Squibb Co. 33,096 890,282 Eli Lilly & Co. 19,587 689,462 Forest Laboratories, Inc. (a) 5,509 182,072 X Johnson & Johnson 53,162 3,384,825 King Pharmaceuticals, Inc. (a) 4,919 69,555 Merck & Co., Inc. 59,398 2,154,959 Mylan, Inc. (a) 5,974 121,392 Pfizer, Inc. 155,149 2,699,593 Watson Pharmaceuticals, Inc. (a) 2,072 96,659 ------------ 12,247,991 ------------ PROFESSIONAL SERVICES 0.1% Dun & Bradstreet Corp. 966 71,880 Equifax, Inc. 2,413 79,943 Robert Half International, Inc. 2,846 77,155 ------------ 228,978 ------------ REAL ESTATE INVESTMENT TRUSTS 1.4% Apartment Investment & Management Co. Class A 2,302 53,660 AvalonBay Communities, Inc. 1,636 173,923 Boston Properties, Inc. 2,690 231,851 Equity Residential 5,471 266,055 HCP, Inc. 5,986 215,556 Health Care REIT, Inc. 2,561 130,867 Host Hotels & Resorts, Inc. 12,708 201,930 Kimco Realty Corp. 7,831 134,928 Plum Creek Timber Co., Inc. 3,119 114,904 ProLogis 10,747 146,696 Public Storage 2,691 267,001 Simon Property Group, Inc. 5,651 542,609 Ventas, Inc. 3,032 162,394 Vornado Realty Trust 3,120 272,657 Weyerhaeuser Co. 10,336 167,650 ------------ 3,082,681 ------------ REAL ESTATE MANAGEMENT & DEVELOPMENT 0.1% CB Richard Ellis Group, Inc. Class A (a) 5,592 102,613 ------------ ROAD & RAIL 0.8% CSX Corp. 7,328 450,306 Norfolk Southern Corp. 7,116 437,563 Ryder System, Inc. 1,009 44,144 Union Pacific Corp. 9,602 841,903 ------------ 1,773,916 ------------ SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.4% Advanced Micro Devices, Inc. (a) 10,945 80,227 Altera Corp. 5,946 185,575 Analog Devices, Inc. 5,757 193,838 Applied Materials, Inc. 25,793 318,801 Broadcom Corp. Class A 8,651 352,442 First Solar, Inc. (a) 1,040 143,187 Intel Corp. 107,464 2,156,803 KLA-Tencor Corp. 3,238 115,661 Linear Technology Corp. 4,334 139,685 LSI Corp. (a) 12,407 65,013 MEMC Electronic Materials, Inc. (a) 4,388 56,254 Microchip Technology, Inc. 3,588 115,462 Micron Technology, Inc. (a) 16,512 136,554 National Semiconductor Corp. 4,693 64,294 Novellus Systems, Inc. (a) 1,774 51,819 NVIDIA Corp. (a) 11,075 133,232 Teradyne, Inc. (a) 3,552 39,924
14 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT (CONTINUED) Texas Instruments, Inc. 23,070 $ 682,180 Xilinx, Inc. 4,999 134,023 ------------ 5,164,974 ------------ SOFTWARE 3.9% Adobe Systems, Inc. (a) 10,137 285,357 Autodesk, Inc. (a) 4,388 158,758 BMC Software, Inc. (a) 3,449 156,792 CA, Inc. 7,466 173,286 Citrix Systems, Inc. (a) 3,608 231,165 Compuware Corp. (a) 4,309 43,133 Electronic Arts, Inc. (a) 6,377 101,075 Intuit, Inc. (a) 5,458 261,984 McAfee, Inc. (a) 2,937 138,920 X Microsoft Corp. 146,975 3,915,414 Novell, Inc. (a) 6,896 40,893 Oracle Corp. 74,701 2,196,209 Red Hat, Inc. (a) 3,649 154,207 Salesforce.com, Inc. (a) 2,257 261,970 Symantec Corp. (a) 15,235 246,502 ------------ 8,365,665 ------------ SPECIALTY RETAIL 1.9% Abercrombie & Fitch Co. Class A 1,705 73,076 AutoNation, Inc. (a) 1,214 28,189 AutoZone, Inc. (a) 553 131,409 Bed Bath & Beyond, Inc. (a) 5,094 223,627 Best Buy Co., Inc. 6,676 286,935 Carmax, Inc. (a) 4,316 133,753 GameStop Corp. Class A (a) 2,903 57,073 Gap, Inc. (The) 8,480 161,205 Home Depot, Inc. (The) 32,140 992,483 Limited Brands, Inc. 5,108 150,124 Lowe's Cos., Inc. 27,088 577,787 O'Reilly Automotive, Inc. (a) 2,678 156,663 Office Depot, Inc. (a) 5,430 24,381 RadioShack Corp. 2,419 48,694 Ross Stores, Inc. 2,325 137,152 Staples, Inc. 14,092 288,463 Tiffany & Co. 2,436 129,108 TJX Cos., Inc. 7,735 354,959 Urban Outfitters, Inc. (a) 2,483 76,402 ------------ 4,031,483 ------------ TEXTILES, APPAREL & LUXURY GOODS 0.5% Coach, Inc. 5,738 286,900 NIKE, Inc. Class B 7,459 607,461 Polo Ralph Lauren Corp. 1,259 121,972 VF Corp. 1,668 138,844 ------------ 1,155,177 ------------ THRIFTS & MORTGAGE FINANCE 0.1% Hudson City Bancorp, Inc. 10,156 118,317 People's United Financial, Inc. 7,163 88,177 ------------ 206,494 ------------ TOBACCO 1.6% Altria Group, Inc. 40,219 1,022,367 Lorillard, Inc. 2,928 249,876 Philip Morris International, Inc. 35,377 2,069,554 Reynolds American, Inc. 3,264 211,834 ------------ 3,553,631 ------------ TRADING COMPANIES & DISTRIBUTORS 0.1% Fastenal Co. 2,846 146,512 W.W. Grainger, Inc. 1,150 142,635 ------------ 289,147 ------------ WIRELESS TELECOMMUNICATION SERVICES 0.3% American Tower Corp. Class A (a) 7,743 399,616 MetroPCS Communications, Inc. (a) 5,152 53,632 Sprint Nextel Corp. (a) 57,606 237,337 ------------ 690,585 ------------ Total Common Stocks (Cost $114,012,494) 207,035,139 ------------ PRINCIPAL AMOUNT SHORT-TERM INVESTMENTS 4.7% - ------------------------------------------------------- U.S. GOVERNMENT 4.7% United States Treasury Bills 0.107%, due 1/6/11 (b) $9,300,000 9,298,122 0.115%, due 1/27/11 (b)(c) 1,000,000 999,717 ------------ Total Short-Term Investments (Cost $10,296,664) 10,297,839 ------------ Total Investments (Cost $124,309,158) (e) 100.1% 217,332,978 Other Assets, Less Liabilities (0.1) (194,219) ---------- ------------ Net Assets 100.0% $217,138,759 ========== ============
CONTRACTS UNREALIZED LONG APPRECIATION (D) FUTURES CONTRACTS 0.2% - --------------------------------------------------------- Standard & Poor's 500 Index Mini December 2010 174 $455,088 -------- Total Futures Contracts (Settlement Value $10,263,390) $455,088 ========
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED) +++ On a daily basis New York Life Investments confirms that the value of the Fund's liquid assets (liquid portfolio securities and cash) is sufficient to cover its potential senior securities (e.g., futures, swaps, options). ++ Less than one-tenth of a percent. (a) Non-income producing security. (b) Interest rate presented is yield to maturity. (c) Represents a security, or a portion thereof, which is maintained at the broker as collateral for futures contracts. (d) Represents the difference between the value of the contracts at the time they were opened and the value at October 31, 2010. (e) At October 31, 2010, cost is $130,113,108 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $103,198,977 Gross unrealized depreciation (15,979,107) ------------ Net unrealized appreciation $ 87,219,870 ============
The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Common Stocks $207,035,139 $ -- $ -- $207,035,139 Short-Term Investments U.S. Government -- 10,297,839 -- 10,297,839 ------------ ----------- -------- ------------ Total Investments in Securities 207,035,139 10,297,839 -- 217,332,978 ------------ ----------- -------- ------------ Other Financial Instruments Futures Contracts Long (b) 455,088 -- -- 455,088 ------------ ----------- -------- ------------ Total Investments in Securities and Other Financial Instruments $207,490,227 $10,297,839 $ -- $217,788,066 ============ =========== ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The value listed for these securities reflects unrealized appreciation as shown on the Portfolio of Investments. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) 16 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $124,309,158) $217,332,978 Cash 4,442 Receivables: Dividends and interest 235,750 Variation margin on futures contracts 3,588 Other assets 14,421 ------------ Total assets 217,591,179 ------------ LIABILITIES - -------------------------------------------------- Payables: Fund shares redeemed 221,853 Transfer agent (See Note 3) 81,020 NYLIFE Distributors (See Note 3) 45,921 Shareholder communication 36,166 Manager (See Note 3) 28,718 Investment securities purchased 20,717 Professional fees 14,420 Custodian 1,710 Trustees 491 Accrued expenses 1,404 ------------ Total liabilities 452,420 ------------ Net assets $217,138,759 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 49,504 Additional paid-in capital 147,955,763 ------------ 148,005,267 Undistributed net investment income 3,061,220 Accumulated net realized loss on investments and futures transactions (27,406,636) Net unrealized appreciation on investments and futures contracts 93,478,908 ------------ Net assets applicable to outstanding shares $217,138,759 ============ Shares of beneficial interest outstanding 4,950,366 ============ Net asset value per share outstanding (a) $ 43.86 Maximum sales charge (3.00% of offering price) (a) 1.36 ------------ Maximum offering price per share outstanding (a) $ 45.22 ============
(a) Adjusted to reflect cumulative effects of the reverse stock split in each year, as well as the reverse stock split on December 13, 2010. (See Note 2(C)) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Dividends (a) $ 4,437,704 Interest 3,807 ----------- Total income 4,441,511 ----------- EXPENSES Manager (See Note 3) 612,568 Distribution/Service--Class A (See Note 3) 563,366 Transfer agent (See Note 3) 504,199 Professional fees 79,944 Shareholder communication 74,406 Custodian 29,812 Registration 22,980 Trustees 7,566 Miscellaneous 30,137 ----------- Total expenses before waiver 1,924,978 Expense waiver/reimbursement from Manager (See Note 3) (572,808) ----------- Net expenses 1,352,170 ----------- Net investment income 3,089,341 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS - ------------------------------------------------- Net realized gain on: Security transactions 11,714,201 Futures transactions 168,203 ----------- Net realized gain on investments and futures transactions 11,882,404 ----------- Net change in unrealized appreciation (depreciation) on: Investments 17,534,530 Futures contracts 926,606 ----------- Net change in unrealized appreciation (depreciation) on investments and futures contracts 18,461,136 ----------- Net realized and unrealized gain on investments and futures transactions 30,343,540 ----------- Net increase in net assets resulting from operations $33,432,881 ===========
(a) Dividends recorded net of foreign withholding taxes in the amount of $303. 18 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 DECREASE IN NET ASSETS - -------------------------------------------------------- Operations: Net investment income $ 3,089,341 $ 4,014,716 Net realized gain on investments and futures transactions 11,882,404 231,715 Net change in unrealized appreciation (depreciation) on investments and futures contracts 18,461,136 13,009,664 -------------------------- Net increase in net assets resulting from operations 33,432,881 17,256,095 -------------------------- Dividends to shareholders: From net investment income (3,930,323) (5,950,646) -------------------------- Capital share transactions: Net proceeds from sale of shares 218,356 385,343 Net asset value of shares issued to shareholders in reinvestment of dividends 3,768,663 5,718,581 Cost of shares redeemed (43,050,196) (32,712,323) -------------------------- Decrease in net assets derived from capital share transactions (39,063,177) (26,608,399) -------------------------- Net decrease in net assets (9,560,619) (15,302,950) NET ASSETS - -------------------------------------------------------- Beginning of year 226,699,378 242,002,328 -------------------------- End of year $217,138,759 $226,699,378 ========================== Undistributed net investment income at end of year $ 3,061,220 $ 3,930,318 ==========================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of year (a) $ 38.45 $ 36.12 $ 57.62 $ 51.38 $ 44.90 -------- -------- -------- -------- -------- Net investment income (a) 0.63 0.68 0.81 (c) 0.81 (c) 0.78 Net realized and unrealized gain (loss) on investments (a) 5.45 2.53 (21.56) 6.22 6.27 (d) -------- -------- -------- -------- -------- Total from investment operations (a) 6.08 3.21 (20.75) 7.03 7.05 -------- -------- -------- -------- -------- Less dividends: From net investment income (a) (0.67) (0.88) (0.75) (0.79) (0.57) -------- -------- -------- -------- -------- Net asset value at end of year (a) $ 43.86 $ 38.45 $ 36.12 $ 57.62 $ 51.38 ======== ======== ======== ======== ======== Total investment return (b) 15.98% 9.48% (36.44%) 13.83% 15.85%(d)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 1.37% 1.89% 1.67% 1.51% 1.45% Net expenses 0.60% 0.60% 0.60% 0.60% 0.64% Expenses (before waiver/reimbursement) 0.85% 0.92% 0.79% 0.74% 0.79%(e) Portfolio turnover rate 5% 14% 4% 5% 5% Net assets at end of year (in 000's) $217,139 $226,699 $242,002 $458,323 $494,971
(a) Adjusted to reflect cumulative effects of the reverse stock split in each year, as well as the reverse stock split on December 13, 2010. (See Note 2(C)) (b) Total return is calculated exclusive of sales charge and assumes the reinvestments of dividends and distributions. (c) Per share data based on average shares outstanding during the period. (d) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was $0.04 per share on net realized gains on investments and the effect on total investment return was 0.12%, respectively. (e) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent.
20 MainStay Equity Index Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Equity Index Fund (the "Fund"). The Fund has only one class of shares which is Class A shares. Effective January 1, 2002, the Fund was closed to new investors and new share purchases. No purchase orders, systematic investments or exchanges are being accepted. Existing shareholders are permitted to reinvest dividends and capital gains only. NYLIFE LLC ("NYLIFE") will continue to honor the unconditional guarantee associated with the Fund. (See Note 9.) The Fund's investment objective is to seek to provide investment results that correspond to the total return performance (reflecting reinvestment of dividends) of publicly traded common stocks represented by the S&P 500(R) Index. When formed, the Fund was sub-classified as a "non-diversified" fund, which meant that it could invest a greater percentage of its assets than other funds in a particular issuer. However, due to the Fund's principal investment strategy and investment process, it has historically operated as a "diversified" fund. Therefore, the Fund will not operate as a "non-diversified" fund without first obtaining shareholder approval. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Futures contracts are valued at the last posted settlement price on the market where such futures are primarily traded. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national mainstayinvestments.com 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. The Fund declared a dividend of $0.6256 per share, which was paid on December 13, 2010, and also underwent a reverse share split on that day. The reverse share split rate was 0.98624 per share outstanding, based on the number of fund shares outstanding immediately after reinvestment of dividends. Certain amounts in the Financial Highlights and Notes to Financial Statements (see Note 8) have been adjusted to reflect the cumulative effects of this reverse stock split and those that occurred in each of the years presented. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index.) The Fund is subject to equity rate risk in the normal course of investing in these transactions. The Fund enters into futures contracts for market exposure. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or 22 MainStay Equity Index Fund pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin". When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to provide an efficient means of maintaining liquidity while being fully invested in the market. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. (I) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (K) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF ASSETS AND EQUITY LIABILITIES CONTRACTS TOTAL LOCATION RISK RISKS Net Assets--Unrealized Futures Contracts appreciation on investments (a) and futures contracts $455,088 $455,088 ------------------- Total Fair Value $455,088 $455,088 ===================
(a) Includes cumulative appreciation (depreciation) of futures as reported in the Portfolio of Investments. Only current day's variation margin is report within the Statement of Assets and Liabilities. The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
STATEMENT OF EQUITY OPERATIONS CONTRACTS LOCATION RISK TOTAL Net realized gain Futures Contracts (loss) on futures transactions $168,203 $168,203 -------------------- Total Realized Gain $168,203 $ 168,203 ====================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
STATEMENT OF EQUITY OPERATIONS CONTRACTS LOCATION RISK TOTAL Net change in unrealized appreciation (depreciation) Futures Contracts on futures contracts $926,606 $926,606 ------------------- Total Change in Unrealized Appreciation (Depreciation) $926,606 $926,606 ===================
mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
EQUITY CONTRACTS TOTAL RISK RISK Futures Contracts (2) 224 224 ================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. Madison Square Investors LLC ("Madison Square Investors" or "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of a Subadvisory Agreement, as amended ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.25% up to $1 billion, 0.225% from $1 billion to $3 billion and 0.20% in excess of $3 billion. The Manager has contractually agreed to waive a portion of its management fee so that the management fee does not exceed 0.19% up to $1 billion, to 0.165% from $1 billion to $3 billion and to 0.14% in excess of $3 billion. The Fund also pays the Manager a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.21% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investment Management LLC under a separate fund accounting agreement. Additionally, effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it agreed to waive a portion of the Fund's management fee or reimburse the expenses of the Class A shares of the Fund so that the class' total ordinary operating expenses do not exceed 0.60% of the average daily net assets. This agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage and other transaction expenses relating to the purchase or sale of portfolio investments. At the December 15, 2010, Board of Trustees meeting, the Board approved an extension of the current written expense limitation agreement through February 28, 2012. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $612,568 and waived/reimbursed its fees in the amount of $572,808. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAV of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's NAV, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted a distribution plan, (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Plan, the Distributor receives a monthly distribution fee from the Fund at an annual rate of 0.25% of the Fund's average daily net assets, which is an expense of the Fund, for distribution or service activities as designated by the Distributor. The Plan provides that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Class A shares was $10 for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, amounted to $504,199. (E) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $8,055. 24 MainStay Equity Index Fund NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED OTHER UNREALIZED TOTAL ORDINARY CAPITAL AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $3,061,220 $(21,147,597) $-- $87,219,869 $69,133,492 - --------------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized appreciation is primarily due to wash sales deferrals, mark to market on futures contracts, real estate investment trusts ("REITs") basis adjustments, and class action payment basis adjustment. The following table discloses the current year reclassifications between undistributed net investment and accumulated net realized loss on investments arising from permanent differences; net assets at October 31, 2010 are not affected.
ACCUMULATED UNDISTRIBUTED NET UNDISTRIBUTED NET INVESTMENT REALIZED GAIN (LOSS) ADDITIONAL INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL $(28,116) $28,116 $-- - -------------------------------------------------------------
The reclassifications for the Fund are primarily due to return of capital and capital gain distributions from REITs. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $21,147,597 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2011 17,854 2012 3,294 - ---------------------------------- ------ Total $21,148 - ---------------------------------- ------
The Fund utilized $12,128,188 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $3,930,323 $5,950,646 - -----------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $10,951 and $41,964, respectively. NOTE 8-CAPITAL SHARE TRANSACTIONS
SHARES AMOUNT Year ended October 31, 2010: Shares sold 5,253 (a)$ 218,356 Shares issued to shareholders in reinvestment of dividends (4,031)(a) 3,768,663 Shares redeemed (946,519)(a) (43,050,196) ------------------------ Net increase (decrease) (945,297) $(39,063,177) ======================== Year ended October 31, 2009: Shares sold 4,280 (a)$ 385,343 Shares issued to shareholders in reinvestment of dividends and distributions 184,978 (a) 5,718,581 Shares redeemed (992,533)(a) (32,712,323) ------------------------ Net increase (decrease) (803,275) $(26,608,399) ========================
(a) Adjusted to reflect cumulative effects of the reverse stock split in each year, as well as the reverse stock split on December 13, 2010. (See Note 2(C)) NOTE 9-GUARANTEE NYLIFE, a wholly-owned subsidiary of New York Life, has guaranteed unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE and the Fund (the "Guarantee") that if, on the business day immediately after ten years from the date of purchase (the "Guarantee Date"), the NAV of a Fund share plus the value of all dividends and distributions paid, including cumulative reinvested dividends and distributions attributable to such share paid during that ten-year period ("Guaranteed Share"), is less than the price initially mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) paid for the Fund share ("Guaranteed Amount"), NYLIFE will pay shareholders an amount equal to the difference between the Guaranteed Amount and the net asset value of that share as of the close of business on the Guarantee Date. For the services that New York Life Investments and its affiliates provide to the Fund, they receive the fees described in the prospectus (see Note 3). Neither New York Life Investments nor its affiliates receive a separate fee for providing the Guarantee, although the Guarantee has been considered in connection with the annual renewal of the management fee. During the year ended October 31, 2010, NYLIFE made payments directly to shareholders totaling $6,572,863 related to the Guarantee. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified other than the extension of the written expense limitation agreement as disclosed in Note 3(A) to these financial statements. 26 MainStay Equity Index Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Equity Index Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Equity Index Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 27 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Equity Index Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and Madison Square Investors LLC ("MSI") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MSI on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MSI as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MSI; (ii) the investment performance of the Fund, New York Life Investments and MSI; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MSI as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MSI In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MSI's compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MSI provides to the Fund. The Board evaluated MSI's experience in serving as subadviser to the Fund and managing other portfolios. It examined MSI's track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MSI, and MSI's overall legal and compliance environment. The Board also reviewed MSI's willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio 28 MainStay Equity Index Fund managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MSI's experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MSI to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MSI The Board considered the costs of the services provided by New York Life Investments and MSI under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MSI is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MSI in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MSI, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MSI must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MSI) due to their relationships with the Fund supported the Board's determination to approve the Agreements. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules mainstayinvestments.com 29 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MSI are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MSI on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MSI about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. 30 MainStay Equity Index Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $4,324,489 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 100.0% to arrive at the amount eligible for the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). mainstayinvestments.com 31 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 32 MainStay Equity Index Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 33
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
34 MainStay Equity Index Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 35 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 36 MainStay Equity Index Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21193 MS333-10 MSEI11-12/10 06 (MAINSTAY INVESTMENTS LOGO) MAINSTAY GLOBAL HIGH INCOME FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 16 - --------------------------------------------- Notes to Financial Statements 23 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 33 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 34 - --------------------------------------------- Federal Income Tax Information 37 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 37 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 37 - --------------------------------------------- Board Members and Officers 38 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY GLOBAL HIGH INCOME JPMORGAN EMBI FUND CLASS GLOBAL DIVERSIFIED B SHARES INDEX --------------- ------------------ 10/31/00 10000 10000 10/31/01 10728 11188 10/31/02 12078 12286 10/31/03 15905 15222 10/31/04 18031 17122 10/31/05 19946 19135 10/31/06 22114 20985 10/31/07 23725 22605 10/31/08 17338 18033 10/31/09 25606 25527 10/31/10 30242 30139
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 4.5% Initial Sales Charge With sales charges 13.59% 8.48% Excluding sales charges 18.95 9.49 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 4.5% Initial Sales Charge With sales charges 13.73 8.59 Excluding sales charges 19.09 9.59 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 13.11 8.39 if Redeemed Within the First Six Years of Purchase Excluding sales charges 18.11 8.68 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 17.20 8.70 if Redeemed Within One Year of Purchase Excluding sales charges 18.20 8.70 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 19.48 9.87 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 12.01% 1.57% 12.52 1.57 - ------------------------------------------------- Class A Shares 12.06 1.40 12.58 1.40 - ------------------------------------------------- Class B Shares 11.70 2.32 11.70 2.32 - ------------------------------------------------- Class C Shares 11.71 2.31 11.71 2.31 - ------------------------------------------------- Class I Shares(4) 12.86 1.12 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on August 31, 2007, includes the historical performance of Class A shares through August 30, 2007 adjusted for certain fees and expenses. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS JPMorgan EMBI Global Diversified Index(5) 18.06% 9.82% 11.66% - ------------------------------------------------------------------------- Average Lipper Emerging Markets Debt Fund(6) 17.05 8.84 12.00 - -------------------------------------------------------------------------
5. The JPMorgan EMBI Global Diversified Index (formerly JPMorgan EMBI Global Constrained Index) is a market-capitalization weighted, total return index tracking the traded market for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans and local market debt instruments issued by sovereign and quasi-sovereign entities. The JPMorgan EMBI Global Diversified Index is the Fund's broad-based securities market index for comparison purposes. Total returns assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an Index. 6. The average Lipper emerging markets debt fund is representative of funds that seek either current income or total return by investing at least 65% of total assets in emerging market debt securities, where "emerging market" is defined by a country's GNP per capita or other economic measures. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Global High Income Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GLOBAL HIGH INCOME FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,096.60 $ 7.19 $1,018.30 $ 6.92 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,097.80 $ 6.56 $1,019.00 $ 6.31 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,093.30 $11.13 $1,014.60 $10.71 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,093.20 $11.13 $1,014.60 $10.71 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,099.10 $ 5.29 $1,020.20 $5.09 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.36% for Investor Class, 1.24% for Class A, 2.11% for Class B and Class C and 1.00% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Government & Federal Agencies 63.8 Corporate Bonds 32.1 Short-Term Investment 3.3 Other Assets, Less Liabilities 0.8 Futures Contracts Short (0.0)
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. Republic of Indonesia, 5.875%-6.625%, due 3/13/20-2/17/37 2. Republic of Turkey, 6.75%-16.00%, due 3/7/12-5/30/40 3. Gaz Capital S.A. for Gazprom, 9.25%, due 4/23/19 4. Republic of Argentina, 2.50%-8.28%, due 12/31/33-12/31/38 5. Ukraine Government, 6.75%-7.75%, due 6/11/13-9/23/20 6. Russian Federation, 7.50%, due 3/31/30 7. Republic of Panama, 6.70%-9.375%, due 9/30/27-1/26/36 8. Republic of Venezuela, 6.00%-9.25%, due 12/9/20-5/7/28 9. Republic of El Salvador, 7.375%-8.25%, due 12/1/19-6/15/35 10. Republic of Philippines, 4.95%-9.50%, due 1/15/21-2/2/30
8 MainStay Global High Income Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (Unaudited) Questions answered by portfolio managers Gary Goodenough, James Ramsay, CFA, and Howard Booth of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY GLOBAL HIGH INCOME FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Global High Income Fund returned 18.95% for Investor Class shares, 19.09% for Class A shares, 18.11% for Class B shares and 18.20% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 19.48%. All share classes outperformed the 17.05% return of the average Lipper(1) emerging markets debt fund and the 18.06% return of the JPMorgan EMBI Global Diversified Index(2) for the 12 months ended October 31, 2010. The JPMorgan EMBI Global Diversified Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund outperformed the JPMorgan EMBI Global Diversified Index during the reporting period by adding performance potential through exposure to corporate bonds and local currencies. High-quality corporate bonds and quasi-sovereign bonds (bonds that may have implicit backing by a foreign government) added substantial yield and benefited the Fund while the market traded in a relatively limited range. As the Federal Reserve held down yields, volatility was dampened. This tended to make corporate bonds and currencies more appealing to investors. WHAT WAS THE FUND'S DURATION(3) STRATEGY AND WHAT IMPACT DID THIS HAVE ON THE FUND'S PERFORMANCE? We sold U.S. Treasury futures because of recent Federal Reserve actions that we felt would ultimately increase inflation fears. This decision detracted modestly from the Fund's results, as interest rates declined during the reporting period. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? Slower economic growth and unprecedented monetary and fiscal stimulus led the Fund to maintain an overweight exposure to credit and currency risk. The extra yield generated from this positioning was a major contributor to the Fund's outperformance of the JPMorgan EMBI Global Diversified Index. HOW WAS THE FUND AFFECTED BY SHIFTING CURRENCY VALUES DURING THE REPORTING PERIOD? The Fund held varying exposures to foreign currencies. Doing so contributed modestly to performance during the reporting period. WHICH SECTORS OR SECURITIES WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH SECTORS OR SECURITIES WERE THE WEAKEST CONTRIBUTORS? The Fund's outperformance stemmed from our focus on the longer end of the yield curve, as longer-term securities offered higher rates than their short-term counterparts. The Fund also benefitted from the flattening of the yield curve as U.S. Treasury rates declined. The combination of slower growth and direct buying from the Federal Reserve put downward pressure on spreads(4) and yields. Corporate bonds, bonds denominated in local currencies and longer-dated securities were the strongest contributors to the Fund's performance. DURING THE REPORTING PERIOD, WHICH COUNTRIES WERE SIGNIFICANT CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH COUNTRIES WERE WEAK? The Fund benefited from buying securities from Argentina rather than Venezuela, buying securities from Indonesia rather than the Philippines, and underweighting Eastern Europe. Fund holdings from producers in Russia and Venezuela were a drag on overall performance. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? The Fund benefited by maintaining an overweight exposure relative to the JPMorgan EMBI Global Diversified Index in Argentine debt, which was purchased during the reporting period. During the reporting period, the Fund also purchased Belize and Ivory Coast sovereign bonds and Brazilian local-currency forwards. Significant sales included Treasury futures used to manage duration and currency futures used to manage currency exposure. HOW DID THE FUND'S SECTOR OR REGIONAL WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the second half of the reporting period, we increased the Fund's out-of- index exposures to corporate bonds and Caribbean and Middle East sovereign bonds. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund maintained an overweight positions relative to the JPMorgan EMBI Global Diversified Index in corporate bonds and had overweight foreign exchange exposure. From a geographic perspective, the Fund was overweight relative to the benchmark in Indonesia, Brazil, Argentina and Russia. 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the JPMorgan EMBI Global Diversified Index. 3. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 4. The terms "spread" and "yield spread" may refer to the difference in yield between a security or type of security and comparable U.S. Treasury issues. The terms may also refer to the difference in yield between two specific securities or types of securities at a given time. mainstayinvestments.com 9 As of the same date, the Fund was underweight Venezuela and Eastern Europe. The Fund's positioning in Eastern Europe reflected our concern about sensitivity to the European periphery. While we continued to expect volatility as 2010 draws to a close, we believed that efforts by European authorities are likely to be successful. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Global High Income Fund PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS 95.9%+ CORPORATE BONDS 32.1% - ------------------------------------------------------------------------------- BERMUDA 1.4% Asia Aluminum Holdings, Ltd. 8.00%, due 12/23/11 (a)(b) $ 985,000 $ 99 8.00%, due 12/23/11 (a)(b)(c) 500,000 50 Citic Resources Finance, Ltd. 6.75%, due 5/15/14 (c) 1,475,000 1,554,281 Noble Group, Ltd. 6.75%, due 1/29/20 (c) 3,000,000 3,335,073 ------------ 4,889,503 ------------ BRAZIL 2.2% CSN Resources S.A. 6.50%, due 7/21/20 (c) 3,000,000 3,243,750 Itau Unibanco Holding S.A. 6.20%, due 4/15/20 (c) 2,000,000 2,111,990 Voto-Votorantim, Ltd. 6.75%, due 4/5/21 (c) 2,000,000 2,202,500 ------------ 7,558,240 ------------ CAYMAN ISLANDS 4.4% ADCB Finance Cayman, Ltd. 4.75%, due 10/8/14 (c) 1,700,000 1,735,234 Braskem Finance, Ltd. 7.00%, due 5/7/20 (c) 3,000,000 3,222,000 CCL Finance, Ltd. 9.50%, due 8/15/14 (c) 2,500,000 2,915,625 Gol Finance 9.25%, due 7/20/20 (c) 2,000,000 2,100,000 Independencia International, Ltd. Series Reg S 12.00%, due 12/30/16 224,111 6,724 Odebrecht Finance, Ltd. 7.00%, due 4/21/20 (c) 3,000,000 3,292,500 Vale Overseas, Ltd. 6.875%, due 11/21/36 2,000,000 2,279,052 ------------ 15,551,135 ------------ COLOMBIA 1.0% Ecopetrol S.A. 7.625%, due 7/23/19 3,000,000 3,690,000 ------------ INDIA 1.2% ICICI Bank, Ltd. 5.00%, due 1/15/16 (c) 4,000,000 4,096,764 ------------ JAMAICA 0.9% KazMunaiGaz Finance Sub B.V. 11.75%, due 1/23/15 (c) 2,500,000 3,103,125 ------------ LUXEMBOURG 5.5% ALROSA Finance S.A. 7.75%, due 11/3/20 (c) 4,000,000 4,030,000 Series Reg S 8.875%, due 11/17/14 1,500,000 1,653,750 X Gaz Capital S.A. for Gazprom Series Reg S 9.25%, due 4/23/19 9,950,000 12,338,000 TNK-BP Finance S.A. 7.25%, due 2/2/20 (c) 1,000,000 1,095,000 ------------ 19,116,750 ------------ MEXICO 2.2% Controladora Mabe S.A. C.V. 7.875%, due 10/28/19 (c) 1,600,000 1,832,000 7.875%, due 10/28/19 1,160,000 1,328,200 Grupo Petrotemex S.A. de C.V. 9.50%, due 8/19/14 (c) 4,150,000 4,601,312 ------------ 7,761,512 ------------ NETHERLANDS 1.9% Majapahit Holding B.V. 8.00%, due 8/7/19 (c) 4,500,000 5,585,625 Paiton Energy Funding B.V. 9.34%, due 2/15/14 1,055,895 1,111,329 ------------ 6,696,954 ------------ QATAR 1.2% Qatari Diar Finance QSC 5.00%, due 7/21/20 (c) 4,000,000 4,186,548 ------------ RUSSIA 0.6% BOM Capital PLC 6.699%, due 3/11/15 (c) 2,000,000 2,020,000 ------------ TRINIDAD AND TOBAGO 1.4% Petroleum Co. of Trinidad & Tobago, Ltd. 9.75%, due 8/14/19 (c) 3,840,000 4,786,560 ------------ UNITED ARAB EMIRATES 1.9% Abu Dhabi National Energy Co. 6.25%, due 9/16/19 (c) 4,600,000 4,904,373 7.25%, due 8/1/18 (c) 1,425,000 1,607,767 ------------ 6,512,140 ------------ UNITED STATES 6.3% AgriBank FCB 9.125%, due 7/15/19 5,300,000 6,586,962 Allegheny Ludlum Corp. 6.95%, due 12/15/25 2,100,000 2,160,033
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest issuers held, as of October 31, 2010, excluding short-term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS (CONTINUED) UNITED STATES (CONTINUED) Frontier Communications Corp. 8.75%, due 4/15/22 $ 4,000,000 $ 4,650,000 Harley-Davidson Funding Corp. 6.80%, due 6/15/18 (c) 2,300,000 2,501,123 Rohm & Haas Co. 7.85%, due 7/15/29 5,400,000 6,068,169 ------------ 21,966,287 ------------ Total Corporate Bonds (Cost $103,716,154) 111,935,518 ------------ GOVERNMENT & FEDERAL AGENCIES 63.8% - ------------------------------------------------------------------------------- ARGENTINA 4.9% Provincia de Buenos Aires 11.75%, due 10/5/15 (c) 2,000,000 2,030,000 Provincia de Cordoba 12.375%, due 8/17/17 (c) 3,000,000 3,142,500 X Republic of Argentina 2.50%, due 12/31/38 17,360,000 7,950,880 8.28%, due 12/31/33 4,034,356 3,826,587 ------------ 16,949,967 ------------ BAHAMAS 0.9% Commonwealth of the Bahamas 6.95%, due 11/20/29 (c) 3,000,000 3,240,000 ------------ BAHRAIN 1.5% Kingdom of Bahrain 5.50%, due 3/31/20 (c) 5,000,000 5,268,440 ------------ BARBADOS 0.6% Barbados Government 7.00%, due 8/4/22 (c) 2,000,000 2,103,376 ------------ BELIZE 0.8% Belize Government Series Reg S 6.00%, due 2/20/29 3,000,000 2,677,500 ------------ BERMUDA 0.9% Government of Bermuda 5.603%, due 7/20/20 (c) 3,000,000 3,269,700 ------------ BRAZIL 2.7% Brazil Federative Republic 12.50%, due 1/5/16 B$ 5,000,000 3,406,752 Brazil Notas do Tesouro Nacional Series F 10.00%, due 1/1/14 B$10,210,000 5,903,041 ------------ 9,309,793 ------------ CAYMAN ISLANDS 3.8% Banco Bradesco S.A. 5.90%, due 1/16/21 (c) 5,500,000 5,630,625 Government of the Cayman Islands 5.95%, due 11/24/19 (c) 7,000,000 7,516,250 ------------ 13,146,875 ------------ CHILE 0.6% Empresa Nacional del Petroleo 5.25%, due 8/10/20 (c) 2,000,000 2,110,256 ------------ COLOMBIA 1.6% Republic of Colombia 6.125%, due 1/18/41 1,600,000 1,828,000 8.125%, due 5/21/24 2,830,000 3,862,950 ------------ 5,690,950 ------------ CROATIA 1.0% Republic of Croatia 6.625%, due 7/14/20 (c) 3,000,000 3,395,385 ------------ DOMINICAN REPUBLIC 1.1% Dominican Republic Series Reg S 7.50%, due 5/6/21 3,500,000 4,007,500 ------------ EGYPT 1.1% Arab Republic of Egypt 5.75%, due 4/29/20 (c) 3,500,000 3,775,625 ------------ EL SALVADOR 2.6% X Republic of El Salvador Series Reg S 7.375%, due 12/1/19 (c) 3,000,000 3,446,250 7.65%, due 6/15/35 2,450,000 2,783,812 8.25%, due 4/10/32 (c) 1,550,000 1,838,688 8.25%, due 4/10/32 900,000 1,067,625 ------------ 9,136,375 ------------ GABON 0.8% Gabonese Republic 8.20%, due 12/12/17 (c) 2,200,000 2,642,750 ------------
12 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE GOVERNMENT & FEDERAL AGENCIES (CONTINUED) GHANA 0.8% Republic of Ghana Series Reg S 8.50%, due 10/4/17 $ 2,500,000 $ 2,862,500 ------------ INDONESIA 7.7% X Republic of Indonesia 5.875%, due 3/13/20 (c) 21,000,000 24,360,000 6.625%, due 2/17/37 (c) 2,000,000 2,432,600 ------------ 26,792,600 ------------ IVORY COAST 0.9% Ivory Coast 2.50%, due 12/31/32 (c) 5,000,000 3,093,750 ------------ JAMAICA 0.2% Jamaica Government 8.00%, due 6/24/19 650,000 667,062 ------------ LITHUANIA 1.0% Republic of Lithuania 5.125%, due 9/14/17 (c) 3,500,000 3,592,400 ------------ MEXICO 2.2% United Mexican States 7.25%, due 12/15/16 M$86,250,000 7,573,767 ------------ NETHERLANDS 1.2% Kazakhstan Temir Zholy Finance B.V. 6.375%, due 10/6/20 (c) $ 1,000,000 1,045,000 WPE International Cooperatief UA 10.375%, due 9/30/20 (c) 3,000,000 2,985,000 ------------ 4,030,000 ------------ PANAMA 2.9% X Republic of Panama 6.70%, due 1/26/36 3,058,000 3,842,377 8.875%, due 9/30/27 920,000 1,373,100 9.375%, due 4/1/29 3,252,000 4,991,820 ------------ 10,207,297 ------------ PHILIPPINES 2.4% X Republic of Philippines 4.95%, due 1/15/21 PHP44,000,000 1,086,383 9.50%, due 2/2/30 $ 4,660,000 7,112,325 ------------ 8,198,708 ------------ RUSSIA 3.0% X Russian Federation 7.50%, due 3/31/30 8,815,526 10,577,750 ------------ SINGAPORE 0.1% Bumi Investment Pte, Ltd. 10.75%, due 10/6/17 (c) 500,000 521,665 ------------ SOUTH AFRICA 1.6% Republic of South Africa 5.50%, due 3/9/20 5,000,000 5,662,500 ------------ SRI LANKA 1.3% Republic of Sri Lanka 6.25%, due 10/4/20 (c) 4,500,000 4,674,375 ------------ THAILAND 1.1% Bangkok Bank PCL 4.80%, due 10/18/20 (c) 3,750,000 3,707,850 ------------ TURKEY 4.3% X Republic of Turkey 6.75%, due 5/30/40 3,200,000 3,792,000 7.375%, due 2/5/25 6,225,000 7,921,312 16.00%, due 3/7/12 YTL 4,050,000 3,124,290 ------------ 14,837,602 ------------ UKRAINE 3.9% Financing of Inrastrucural Projects State Enterprise 8.375%, due 11/3/17 $ 2,000,000 2,030,000 X Ukraine Government 6.75%, due 11/14/17 (c) 3,200,000 3,152,320 7.65%, due 6/11/13 (c) 5,300,000 5,478,875 7.75%, due 9/23/20 (c) 3,000,000 3,030,000 ------------ 13,691,195 ------------ URUGUAY 0.3% Republic of Uruguay 6.875%, due 9/28/25 800,000 996,000 ------------ VENEZUELA 2.7% X Republic of Venezuela 6.00%, due 12/9/20 7,800,000 4,648,800 Series Reg S 9.25%, due 5/7/28 7,270,000 4,820,010 ------------ 9,468,810 ------------ VIETNAM 1.3% Socialist Republic of Vietnam 6.75%, due 1/29/20 (c) 4,000,000 4,540,000 ------------ Total Government & Federal Agencies (Cost $196,887,104) 222,420,323 ------------ Total Long-Term Bonds (Cost $300,603,258) 334,355,841 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE SHORT-TERM INVESTMENT 3.3% - ------------------------------------------------------------------------------- REPURCHASE AGREEMENT 3.3% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $11,689,468 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $10,875,000 and a Market Value of $11,923,350) $11,689,459 $ 11,689,459 ------------ Total Short-Term Investment (Cost $11,689,459) 11,689,459 ------------ Total Investments (Cost $312,292,717) (f) 99.2% 346,045,300 Other Assets, Less Liabilities 0.8 2,721,447 ------------- ------------ Net Assets 100.0% $348,766,747 ============= ============
CONTRACTS UNREALIZED SHORT DEPRECIATION (D) FUTURES CONTRACTS (0.0%)++ - --------------------------------------------------------- United States Treasury Note December 2010 (10 Year) (e) (60) $(43,900) -------- Total Futures Contracts (Settlement Value $7,576,875) $(43,900) ========
+++ On a daily basis New York Life Investments confirms that the value of the Fund's liquid assets (liquid portfolio securities and cash) is sufficient to cover its potential senior securities (e.g., futures, swaps, options). ++ Less than one-tenth of a percent. (a) Issue in default. (b) Illiquid security. The total market value of these securities at October 31, 2010 is $149, which represents less than one- tenth of a percent of the Fund's net assets. (c) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (d) Represents the difference between the value of the contracts at the time they were opened and the value at October 31, 2010. (e) At October 31, 2010, cash in the amount of $84,000 is on deposit with broker for futures transactions. (f) At October 31, 2010, cost is $312,667,225 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $37,210,518 Gross unrealized depreciation (3,832,443) ----------- Net unrealized appreciation $33,378,075 ===========
The following abbreviations are used in the above portfolio: B$--Brazilian Real M$--Mexican Peso PHP--Philippine Peso YTL--Turkish Lira The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets and liabilities. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Long-Term Bonds Corporate Bonds $-- $111,935,518 $-- $111,935,518 Government & Federal Agencies -- 222,420,323 -- 222,420,323 --- ------------ --- ------------ Total Long-Term Bonds -- 334,355,841 -- 334,355,841 --- ------------ --- ------------ Short-Term Investment Repurchase Agreement -- 11,689,459 -- 11,689,459 --- ------------ --- ------------ Total Investments in Securities -- 346,045,300 -- 346,045,300 --- ------------ --- ------------ Other Financial Instruments Foreign Currency Forward Contracts (b) -- 78,317 -- 78,317 --- ------------ --- ------------ Total Investments in Securities and Other Financial Instruments $-- $346,123,617 $-- $346,123,617 === ============ === ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The value listed for these securities reflects unrealized appreciation as shown on the table of foreign currency forward contracts. (See Note 5) 14 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. LIABILITY VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Other Financial Instruments Futures Contracts Short (a) $(43,900) $ -- $-- $ (43,900) Foreign Currency Forward Contracts (b) -- (311,867) -- (311,867) -------- --------- --- --------- Total Other Financial Instruments $(43,900) $(311,867) $-- $(355,767) ======== ========= === =========
(a) The value listed for these securities reflects unrealized depreciation as shown on the Portfolio of Investments. (b) The value listed for these securities reflects unrealized depreciation as shown on the table of foreign currency forward contracts (See Note 5.) For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $312,292,717) $346,045,300 Cash denominated in foreign currencies (identified cost $525,575) 540,877 Cash collateral on deposit at broker 84,000 Receivables: Interest 5,009,012 Fund shares sold 2,649,525 Investment securities sold 2,098,692 Other assets 48,849 Unrealized appreciation on foreign currency forward contracts 78,317 ------------ Total assets 356,554,572 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 6,038,960 Fund shares redeemed 368,636 Manager (See Note 3) 205,980 NYLIFE Distributors (See Note 3) 133,056 Transfer agent (See Note 3) 96,623 Shareholder communication 30,563 Variation margin on futures contracts 25,313 Professional fees 21,711 Custodian 4,519 Trustees 885 Accrued expenses 2,344 Dividend payable 547,368 Unrealized depreciation on foreign currency forward contracts 311,867 ------------ Total liabilities 7,787,825 ------------ Net assets $348,766,747 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 281,679 Additional paid-in capital 309,779,161 ------------ 310,060,840 Undistributed net investment income 1,011,637 Accumulated net realized gain on investments, futures transactions and foreign currency transactions 4,198,298 Net unrealized appreciation on investments and futures contracts 33,708,683 Net unrealized depreciation on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (212,711) ------------ Net assets $348,766,747 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 21,833,751 ============ Shares of beneficial interest outstanding 1,747,511 ============ Net asset value per share outstanding $ 12.49 Maximum sales charge (4.50% of offering price) 0.59 ------------ Maximum offering price per share outstanding $ 13.08 ============ CLASS A Net assets applicable to outstanding shares $159,834,254 ============ Shares of beneficial interest outstanding 12,867,782 ============ Net asset value per share outstanding $ 12.42 Maximum sales charge (4.50% of offering price) 0.59 ------------ Maximum offering price per share outstanding $ 13.01 ============ CLASS B Net assets applicable to outstanding shares $ 27,313,621 ============ Shares of beneficial interest outstanding 2,224,701 ============ Net asset value and offering price per share outstanding $ 12.28 ============ CLASS C Net assets applicable to outstanding shares $ 87,597,428 ============ Shares of beneficial interest outstanding 7,129,350 ============ Net asset value and offering price per share outstanding $ 12.29 ============ CLASS I Net assets applicable to outstanding shares $ 52,187,693 ============ Shares of beneficial interest outstanding 4,198,581 ============ Net asset value and offering price per share outstanding $ 12.43 ============
16 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Interest $19,271,909 ----------- EXPENSES Manager (See Note 3) 1,980,771 Distribution/Service--Investor Class (See Note 3) 48,109 Distribution/Service--Class A (See Note 3) 334,754 Distribution/Service--Class B (See Note 3) 258,490 Distribution/Service--Class C (See Note 3) 714,900 Transfer agent (See Note 3) 557,689 Registration 93,660 Professional fees 91,019 Shareholder communication 71,711 Custodian 65,017 Trustees 9,774 Miscellaneous 14,474 ----------- Total expenses 4,240,368 ----------- Net investment income 15,031,541 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - ------------------------------------------------- Net realized gain (loss) on: Security transactions 12,058,949 Futures transactions (299,908) Foreign currency transactions 1,086,027 ----------- Net realized gain on investments, futures transactions and foreign currency transactions 12,845,068 ----------- Net change in unrealized appreciation (depreciation) on: Investments 20,136,311 Futures contracts (43,900) Translation of other assets and liabilities in foreign currencies and foreign currency forward contracts 111,825 ----------- Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 20,204,236 ----------- Net realized and unrealized gain on investments, futures transactions and foreign currency transactions 33,049,304 ----------- Net increase in net assets resulting from operations $48,080,845 ===========
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - -------------------------------------------------------- Operations: Net investment income $ 15,031,541 $ 9,799,994 Net realized gain (loss) on investments, futures transactions and foreign currency transactions 12,845,068 (66,008) Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 20,204,236 48,567,695 -------------------------- Net increase in net assets resulting from operations 48,080,845 58,301,681 -------------------------- Dividends to shareholders: From net investment income: Investor Class (1,167,322) (1,082,486) Class A (8,356,113) (5,584,414) Class B (1,407,051) (1,501,881) Class C (3,873,710) (2,307,007) Class I (1,561,687) (102,950) -------------------------- Total dividends to shareholders (16,365,883) (10,578,738) -------------------------- Capital share transactions: Net proceeds from sale of shares 158,458,944 88,487,380 Net asset value of shares issued to shareholders in reinvestment of dividends 10,080,950 7,219,407 Cost of shares redeemed (75,554,151) (40,279,078) -------------------------- Increase in net assets derived from capital share transactions 92,985,743 55,427,709 -------------------------- Net increase in net assets 124,700,705 103,150,652 NET ASSETS - -------------------------------------------------------- Beginning of year 224,066,042 120,915,390 -------------------------- End of year $348,766,747 $224,066,042 ========================== Undistributed net investment income at end of year $ 1,011,637 $ 1,411,576 ==========================
18 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 11.16 $ 8.07 $ 11.27 ------- ------- ------- Net investment income (a) 0.66 0.65 0.42 Net realized and unrealized gain (loss) on investments 1.33 3.00 (3.23) Net realized and unrealized gain on foreign currency transactions 0.05 0.13 0.02 ------- ------- ------- Total from investment operations 2.04 3.78 (2.79) ------- ------- ------- Less dividends and distributions: From net investment income (0.71) (0.69) (0.41) From net realized gain on investments -- -- -- ------- ------- ------- Total dividends and distributions (0.71) (0.69) (0.41) ------- ------- ------- Net asset value at end of period $ 12.49 $ 11.16 $ 8.07 ======= ======= ======= Total investment return (c) 18.95% 48.62% (25.54%)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 5.65% 6.69% 5.79% ++ Net expenses 1.37% 1.49% 1.50% ++ Expenses (before recoupment/waiver/reimburse- ment) 1.37% 1.57% 1.53% ++ Portfolio turnover rate 92% 133% 55% Net assets at end of period (in 000's) $21,834 $17,581 $12,662
CLASS B ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 10.97 $ 7.94 $ 11.70 $ 11.72 $ 11.36 ------- ------- ------- ------- ------- Net investment income (a) 0.56 0.57 0.56 0.58 0.60 Net realized and unrealized gain (loss) on investments 1.32 2.96 (3.54) 0.23 0.58 (b) Net realized and unrealized gain on foreign currency transactions 0.05 0.12 0.02 0.01 0.01 ------- ------- ------- ------- ------- Total from investment operations 1.93 3.65 (2.96) 0.82 1.19 ------- ------- ------- ------- ------- Less dividends and distributions: From net investment income (0.62) (0.62) (0.57) (0.58) (0.83) From net realized gain on investments -- -- (0.23) (0.26) -- ------- ------- ------- ------- ------- Total dividends and distributions (0.62) (0.62) (0.80) (0.84) (0.83) ------- ------- ------- ------- ------- Net asset value at end of period $ 12.28 $ 10.97 $ 7.94 $ 11.70 $ 11.72 ======= ======= ======= ======= ======= Total investment return (c) 18.11% 47.69% (26.92%) 7.28% 10.87%(b)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 4.90% 5.98% 5.21% 4.95% 5.22% Net expenses 2.12% 2.24% 2.20% 2.15% 2.15% Expenses (before recoupment/waiver/reimburse- ment) 2.12% 2.32% 2.19% 2.12% 2.18%(e) Portfolio turnover rate 92% 133% 55% 30% 33% Net assets at end of period (in 000's) $27,314 $25,651 $21,006 $37,913 $43,136
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than $0.01 per share on net realized gains on investments and the effect on total investment return was less than 0.01%, respectively. (c) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (d) Total investment return is not annualized. (e) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent.
20 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A ------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 11.09 $ 8.02 $ 11.81 $ 11.82 $ 11.44 -------- -------- ------- -------- -------- 0.67 0.66 0.67 0.67 0.69 1.33 2.99 (3.59) 0.24 0.59 (b) 0.05 0.12 0.02 0.01 0.01 -------- -------- ------- -------- -------- 2.05 3.77 (2.90) 0.92 1.29 -------- -------- ------- -------- -------- (0.72) (0.70) (0.66) (0.67) (0.91) -- -- (0.23) (0.26) -- -------- -------- ------- -------- -------- (0.72) (0.70) (0.89) (0.93) (0.91) -------- -------- ------- -------- -------- $ 12.42 $ 11.09 $ 8.02 $ 11.81 $ 11.82 ======== ======== ======= ======== ======== 19.09% 49.04% (26.29%) 8.11% 11.75%(b)(e) 5.77% 6.77% 6.08% 5.70% 5.97% 1.25% 1.32% 1.34% 1.40% 1.40% 1.25% 1.40% 1.37% 1.37% 1.43%(e) 92% 133% 55% 30% 33% $159,834 $119,132 $59,843 $135,321 $121,810
CLASS C --------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 10.98 $ 7.95 $ 11.70 $ 11.72 $ 11.36 ------- ------- ------- ------- ------- 0.56 0.56 0.57 0.58 0.60 1.32 2.97 (3.54) 0.23 0.58 (b) 0.05 0.12 0.02 0.01 0.01 ------- ------- ------- ------- ------- 1.93 3.65 (2.95) 0.82 1.19 ------- ------- ------- ------- ------- (0.62) (0.62) (0.57) (0.58) (0.83) -- -- (0.23) (0.26) -- ------- ------- ------- ------- ------- (0.62) (0.62) (0.80) (0.84) (0.83) ------- ------- ------- ------- ------- $ 12.29 $ 10.98 $ 7.95 $ 11.70 $ 11.72 ======= ======= ======= ======= ======= 18.20% 47.50% (26.83%) 7.28% 10.87%(b)(e) 4.89% 5.85% 5.22% 4.95% 5.22% 2.12% 2.23% 2.19% 2.15% 2.15% 2.12% 2.31% 2.20% 2.12% 2.18%(e) 92% 133% 55% 30% 33% $87,597 $57,731 $27,377 $45,786 $39,176
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ------------------------------------------------------- AUGUST 31, 2007** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 2007 Net asset value at beginning of period $ 11.10 $ 8.02 $ 11.81 $11.26 ------- ------ ------- ------ Net investment income (a) 0.69 0.66 0.69 0.11 Net realized and unrealized gain (loss) on investments 1.34 3.01 (3.58) 0.52 Net realized and unrealized gain on foreign currency transactions 0.05 0.13 0.02 0.04 ------- ------ ------- ------ Total from investment operations 2.08 3.80 (2.87) 0.67 ------- ------ ------- ------ Less dividends and distributions: From net investment income (0.75) (0.72) (0.69) (0.12) From net realized gain on investments -- -- (0.23) -- ------- ------ ------- ------ Total dividends and distributions (0.75) (0.72) (0.92) (0.12) ------- ------ ------- ------ Net asset value at end of period $ 12.43 $11.10 $ 8.02 $11.81 ======= ====== ======= ====== Total investment return (b) 19.48% 49.31% (26.11%) 5.95%(c) Ratios (to average net assets)/Supplemental Data: Net investment income 5.89% 6.32% 6.28% 6.12%++ Net expenses 1.00% 1.12% 1.14% 1.15%++ Expenses (before recoupment/waiver/reimburse- ment) 1.00% 1.12% 1.15% 0.99%++ Portfolio turnover rate 92% 133% 55% 30% Net assets at end of period (in 000's) $52,188 $3,972 $ 27 $ 57
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Total investment return is not annualized.
22 MainStay Global High Income Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Global High Income Fund (the "Fund"), a non-diversified fund. The Fund currently offers five classes of shares. Class A shares and Class B shares commenced operations on June 1, 1998. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on August 31, 2007. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to seek to provide maximum current income by investing in high-yield debt securities of non-U.S. issuers. Capital appreciation is a secondary objective. The Fund is "non-diversified," which means that it may invest a greater percentage of its assets than a diversified fund in a particular issuer. This may make the Fund more susceptible than a diversified fund to risks associated with an individual issuer, and to single economic, political or regulatory occurrences. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Futures contracts are valued at the last posted settlement price on the market where such futures are primarily traded. Options contracts are valued at the last posted settlement price on the market where such options are principally traded. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Foreign currency forward contracts are valued at their fair market values determined on the basis of the mean between the last current bid and ask prices based on dealer or exchange quotations and are generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgments that may be some what subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Investment income received by the Fund from foreign sources may be subject to foreign income taxes. These foreign income taxes are generally withheld at the source. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more 24 MainStay Global High Income Fund likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index). The Fund is subject to equity price risk and interest rate risk in the normal course of investing in these transactions. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin." When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to help manage the duration and yield curve of the portfolio while minimizing the exposure to wider bid/ask spreads in traditional bonds. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. (I) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign currency forward contracts, which are agreements to buy or sell currencies of different countries on a specified future date at a specified rate. The Fund is subject to foreign currency exchange rate risk in the normal course of investing in these transactions. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. Cash movement occurs on settlement date. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into foreign currency forward contracts to reduce currency risk versus the benchmark or for trade settlement. The use of foreign currency forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. While a Fund may enter into forward contracts to reduce currency exchange risks, changes in currency exchange rates may result in poorer overall performance for the Fund than if it had not engaged in such transactions. Exchange rate movements can be large, depending on the currency, and can last for extended periods of time, affecting the value of the Fund's assets. Moreover, there may be an imperfect correlation between the Fund's holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to the risk of currency exchange loss. The unrealized appreciation (depreciation) on forward contracts reflects the Fund's exposure at valuation date to credit loss in the event of a counterparty's failure to perform its obligations. (See Note 5.) (J) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (K) SWAP AGREEMENTS. The Fund may enter into credit default, interest rate, index and currency exchange rate swap agreements ("swaps") for purposes of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in an instrument that yielded the desired return or for other portfolio management purposes ("hedge protection"). In a standard swaps transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a notional amount. Credit default swaps are contracts whereby one party makes periodic payments to a counterparty in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. Credit default swaps may be used to provide a measure of protection against defaults of sovereign or corporate issuers. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. In a typical cap or floor agreement, one party agrees to make payments only under specified circumstances, usually in return for payment of a fee by the other party. For example, the buyer of an interest rate cap obtains the right to receive payments to the extent that a specified interest rate exceeds an agreed- upon level, while the seller of an interest rate floor is obligated to make payments to the extent that a specified interest rate falls below an agreed-upon level. An interest rate collar combines elements of buying a cap and selling a floor. The Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The Fund may be able to eliminate its exposure under a swap agreement either by assignment or other disposition, or by entering into an offsetting swap agreement with the same party or a similarly creditworthy party. The Fund intends to minimize the risk and use the liquidity advantage by generally not having a duration on the swap of more than one calendar quarter. Swaps are marked to market daily based upon quotations from market makers and vendors and the change in value, if any, is recorded as unrealized gain or loss. Payments received or made on swap contracts are recorded as realized gain or loss. Gains or losses are realized upon early termination of the swap agreements. These financial instruments are not actively traded on financial markets. Entering into these agreements involves elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements and that there may be unfavorable changes in interest rates or the price of the index or security underlying these transactions. The Fund did not invest in swaps during the year ended October 31, 2010. (L) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The 26 MainStay Global High Income Fund Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (M) CONCENTRATION OF RISK. The Fund's principal investments include high yield securities (sometimes called "junk bonds"), which are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a premium--a high interest rate or yield--because of the increased risk of loss. These securities can also be subject to greater price volatility. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (N) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (O) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE INTEREST LIABILITIES CONTRACTS RATE LOCATION RISK RISK TOTAL Forward Contracts Unrealized appreciation (depreciation) on foreign currency forward contracts $78,317 $ -- $78,317 -------------------------------- Total Fair Value $78,317 $-- $78,317 ================================
LIABILITY DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE INTEREST LIABILITIES CONTRACTS RATE LOCATION RISK RISK TOTAL Futures Contracts (a) Net Assets--Unrealized appreciation (depreciation) on investments and futures contracts $ -- $(43,900) $ (43,900) Forward Contracts Unrealized appreciation (depreciation) on foreign currency forward contracts (311,867) -- (311,867) ---------------------------------- Total Fair Value $(311,867) $(43,900) $(355,767) ==================================
(a) Includes cumulative appreciation (depreciation) of futures contracts which is reported in Portfolio of Investments. Only current day's variation margin is reported within the Statement of Assets and Liabilities. mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
FOREIGN STATEMENT OF EXCHANGE INTEREST OPERATIONS CONTRACTS RATE LOCATION RISK RISK TOTAL Futures Contracts Net realized gain (loss) on futures transactions $ -- $(299,908) $(299,908) Forward Contracts Net realized gain (loss) on foreign currency transactions 889,176 -- 889,176 ----------------------------------- Total Realized Gain (Loss) $889,176 $(299,908) $ 589,268 ===================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
FOREIGN STATEMENT OF EXCHANGE INTEREST OPERATIONS CONTRACTS RATE LOCATION RISK RISK TOTAL Futures Contracts Net change in unrealized appreciation (depreciation) on futures contracts $ -- $(43,900) $(43,900) Forward Contracts Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts 91,475 -- 91,475 --------------------------------- Total Change in Unrealized Appreciation (Depreciation) $91,475 $(43,900) $ 47,575 =================================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
FOREIGN EXCHANGE INTEREST CONTRACTS RATE RISK RISK TOTAL Futures Contracts Long (2) -- 35 35 Futures Contracts Short (2) -- (38) (38) Forward Contracts Long (3) $ 38,712,590 -- $ 38,712,590 Forward Contracts Short (3) $(13,663,874) -- $(13,663,874) ====================================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. (3) Amount(s) represent(s) notional amount. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.70% up to $500 million and 0.65% in excess of $500 million, plus a fee for fund accounting services furnished at an annual rate of the Fund's average net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate was 0.72% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares do not exceed 1.35% of its average daily net assets. New York Life Investments will apply an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This expense limitation agreement expires on February 28, 2011. Based on its review, the Board may agree to maintain, modify or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale 28 MainStay Global High Income Fund of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $1,980,771. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Investor Class and Class A shares at an annual rate of 0.25% of the average daily net assets of the Investor Class and Class A shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $11,840 and $77,281, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Class A, Class B and Class C shares of $852, $27,505 and $21,158, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $ 51,963 - ----------------------------------------------- Class A 205,271 - ----------------------------------------------- Class B 69,831 - ----------------------------------------------- Class C 192,943 - ----------------------------------------------- Class I 37,681 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $7,408,155 4.6% - ------------------------------------------------- Class C 429 0.0++ - ------------------------------------------------- Class I 34,757 0.1 - -------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $9,801. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain/(loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $2,864,416 $3,036,475 $(547,368) $33,352,384 $38,705,907 - --------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized appreciation (depreciation) is primarily due to wash sale deferrals and mark to market on future contracts. The other temporary differences are primarily due to dividends payable. mainstayinvestments.com 29 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized gain on investments arising from permanent differences; net assets at October 31, 2010 are not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED NET INVESTMENT GAIN (LOSS) ON ADDITIONAL INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL $934,403 $(934,403) $-- - ---------------------------------------- -----------
The reclassifications for the Fund are primarily due to foreign currency gain (loss). The Fund utilized $7,068,796 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $16,365,883 $10,578,738 - ------------------------------------------------------
NOTE 5-FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS As of October 31, 2010 the Fund held the following foreign currency forward contracts:
CONTRACT CONTRACT UNREALIZED AMOUNT AMOUNT APPRECIATION/ COUNTERPARTY PURCHASED SOLD (DEPRECIATION) Foreign Currency Buy Contracts: - ---------------------------------------------------------------------------------------------------------------- Canadian Dollar vs. U.S. Dollar, expiring 11/4/10 JPMorgan Chase Bank CAD 5,000,000 USD 4,893,086 USD 9,019 - ---------------------------------------------------------------------------------------------------------------- Canadian Dollar vs. U.S. Dollar, expiring 12/1/10 JPMorgan Chase Bank CAD 5,000,000 4,911,254 (12,175) - ---------------------------------------------------------------------------------------------------------------- Clilean Peso vs. U.S. Dollar, expiring 11/22/10 JPMorgan Chase Bank CLP 2,000,000,000 4,135,222 (52,707) - ---------------------------------------------------------------------------------------------------------------- Colombain Peso vs. U.S. Dollar, expiring 11/26/10 JPMorgan Chase Bank COP 5,500,000,000 3,024,970 (35,387) - ---------------------------------------------------------------------------------------------------------------- Indian Rupee vs. U.S. Dollar, expiring 12/6/10 JPMorgan Chase Bank INR 200,000,000 4,467,277 1,778 - ---------------------------------------------------------------------------------------------------------------- Indonesian Rupiah vs. U.S. Dollar, expiring 2/7/11 JPMorgan Chase Bank IDR 27,000,000,000 2,952,433 22,801 - ---------------------------------------------------------------------------------------------------------------- Indonesian Rupiah vs. U.S. Dollar, expiring 2/9/11 JPMorgan Chase Bank IDR60,000,000,000 6,615,215 (5,744) - ---------------------------------------------------------------------------------------------------------------- Malaysian Ringgit vs. U.S. Dollar, expiring 11/18/10 JPMorgan Chase Bank MYR 40,000,000 12,854,547 (12,659) - ---------------------------------------------------------------------------------------------------------------- Norwegian Krone vs. U.S. Dollar, expiring 11/8/10 JPMorgan Chase Bank NOK 50,000,000 8,588,800 (54,064) - ---------------------------------------------------------------------------------------------------------------- Polish Zloty vs. U.S. Dollar, expiring 11/15/10 JPMorgan Chase Bank PLN 12,000,000 4,271,983 (65,425) - ---------------------------------------------------------------------------------------------------------------- South African Rand vs. U.S. Dollar, expiring 11/8/10 JPMorgan Chase Bank ZAR 25,000,000 3,611,412 (45,862) - ---------------------------------------------------------------------------------------------------------------- South Korean Won vs. U.S. Dollar, expiring 11/8/10 JPMorgan Chase Bank KRW 4,000,000,000 3,581,662 (27,844) - ---------------------------------------------------------------------------------------------------------------- Yuan Renminbi vs. U.S. Dollar, expiring 11/16/10 JPMorgan Chase Bank CNY 25,000,000 3,715,815 32,819 - ----------------------------------------------------------------------------------------------------------------
CONTRACT CONTRACT UNREALIZED AMOUNT AMOUNT APPRECIATION/ SOLD PURCHASED (DEPRECIATION) Foreign Currency Sale Contracts: - ------------------------------------------------------------------------------------------------------------ Canadian Dollar vs. U.S. Dollar, expiring 11/4/10 JPMorgan Chase Bank CAD 5,000,000 4,914,005 11,900 - ------------------------------------------------------------------------------------------------------------ Net unrealized depreciation on foreign currency forward contracts USD (233,550) - ------------------------------------------------------------------------------------------------------------
30 MainStay Global High Income Fund As of October 31, 2010, the Fund held the following foreign currencies:
CURRENCY COST VALUE Australian Dollar AUD 1,108 USD 990 USD 1,086 - ------------------------------------------------------------------------------------------------ Euro EUR 69 95 97 - ------------------------------------------------------------------------------------------------ Mexican Peso MXN 4,599,923 362,542 372,524 - ------------------------------------------------------------------------------------------------ Turkish Lira YTL 239,781 161,948 167,170 - ------------------------------------------------------------------------------------------------ Total USD 525,575 USD 540,877 - ------------------------------------------------------------------------------------------------
NOTE 6-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 7-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of U.S. Government securities were $1,910 and $1,930, respectively. Purchases and sales of securities, other than U.S. Government securities and short-term securities, were $350,219 and $257,113, respectively. NOTE 9-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 371,119 $ 4,343,021 Shares issued to shareholders in reinvestment of dividends 98,368 1,138,845 Shares redeemed (268,529) (3,118,307) ------------------------ Net increase (decrease) in shares outstanding before conversion 200,958 2,363,559 Shares converted into Investor Class (See Note 1) 137,320 1,594,288 Shares converted from Investor Class (See Note 1) (166,602) (1,955,870) ------------------------ Net increase (decrease) 171,676 $ 2,001,977 ======================== Year ended October 31, 2009: Shares sold 214,269 $ 2,072,965 Shares issued to shareholders in reinvestment of dividends 110,654 1,051,399 Shares redeemed (295,230) (2,759,104) ------------------------ Net increase (decrease) in shares outstanding before conversion 29,693 365,260 Shares converted into Investor Class (See Note 1) 123,684 1,163,206 Shares converted from Investor Class (See Note 1) (147,335) (1,531,293) ------------------------ Net increase (decrease) 6,042 $ (2,827) ========================
mainstayinvestments.com 31 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 7,292,426 $ 84,691,593 Shares issued to shareholders in reinvestment of dividends 453,214 5,225,014 Shares redeemed (4,335,307) (49,826,408) ------------------------ Net increase (decrease) in shares outstanding before conversion 3,410,333 40,090,199 Shares converted into Class A (See Note 1) 360,595 4,178,468 Shares converted from Class A (See Note 1) (29,994) (356,670) Shares converted from Class A (a) (1,610,930) (17,881,323) ------------------------ Net increase (decrease) 2,130,004 $ 26,030,674 ======================== Year ended October 31, 2009: Shares sold 4,886,173 $ 50,787,761 Shares issued to shareholders in reinvestment of dividends 372,136 3,540,480 Shares redeemed (2,199,153) (21,143,948) ------------------------ Net increase (decrease) in shares outstanding before conversion 3,059,156 33,184,293 Shares converted into Class A (See Note 1) 270,327 2,699,414 Shares converted from Class A (See Note 1) (50,745) (476,185) ------------------------ Net increase (decrease) 3,278,738 $ 35,407,522 ======================== CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 455,475 $ 5,263,440 Shares issued to shareholders in reinvestment of dividends 98,048 1,113,582 Shares redeemed (361,454) (4,117,802) ------------------------ Net increase (decrease) in shares outstanding before conversion 192,069 2,259,220 Shares converted from Class B (See Note 1) (304,620) (3,460,216) ------------------------ Net increase (decrease) (112,551) $ (1,200,996) ======================== Year ended October 31, 2009: Shares sold 317,717 $ 3,090,164 Shares issued to shareholders in reinvestment of dividends 128,574 1,195,355 Shares redeemed (555,948) (5,146,836) ------------------------ Net increase (decrease) in shares outstanding before conversion (109,657) (861,317) Shares converted from Class B (See Note 1) (197,883) (1,855,142) ------------------------ Net increase (decrease) (307,540) $ (2,716,459) ======================== CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 2,685,921 $ 30,737,955 Shares issued to shareholders in reinvestment of dividends 174,967 1,995,386 Shares redeemed (988,281) (11,246,077) ------------------------ Net increase (decrease) 1,872,607 $ 21,487,264 ======================== Year ended October 31, 2009: Shares sold 2,886,858 $ 29,096,911 Shares issued to shareholders in reinvestment of dividends 141,385 1,330,159 Shares redeemed (1,216,447) (11,146,418) ------------------------ Net increase (decrease) 1,811,796 $ 19,280,652 ======================== CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 2,799,804 $ 33,422,935 Shares issued to shareholders in reinvestment of dividends 51,805 608,123 Shares redeemed (620,282) (7,245,557) ------------------------ Net increase in shares outstanding before conversion 2,231,327 26,785,501 Shares converted into Class I (a) 1,609,480 17,881,323 ------------------------ Net increase (decrease) 3,840,807 $ 44,666,824 ======================== Year ended October 31, 2009: Shares sold 352,539 $ 3,439,579 Shares issued to shareholders in reinvestment of dividends 9,862 102,014 Shares redeemed (7,951) (82,772) ------------------------ Net increase (decrease) 354,450 $ 3,458,821 ========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified. 32 MainStay Global High Income Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Global High Income Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Global High Income Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 33 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Global High Income Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' 34 MainStay Global High Income Fund willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships with the Fund supported the Board's determination to approve the Agreements. mainstayinvestments.com 35 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. 36 MainStay Global High Income Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). mainstayinvestments.com 37 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 38 MainStay Global High Income Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 39
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
40 MainStay Global High Income Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 41 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 42 MainStay Global High Income Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21140 MS333-10 MSGH11-12/10 20 (MAINSTAY INVESTMENTS LOGO) MAINSTAY GOVERNMENT FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 15 - --------------------------------------------- Notes to Financial Statements 21 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 28 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 29 - --------------------------------------------- Federal Income Tax Information 32 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 32 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 32 - --------------------------------------------- Board Members and Officers 33 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY GOVERNMENT BARCLAYS CAPITAL FUND CLASS U.S. GOVERNMENT B SHARES BOND INDEX ------------------- ---------------- 10/31/00 10000 10000 11333 11508 11777 12245 11901 12601 12248 13210 12227 13334 12667 13944 13144 14760 13461 15767 14756 16879 10/31/10 15496 18041
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 4.5% Initial Sales Charge With sales charges 0.91% 4.64% Excluding sales charges 5.67 5.61 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 4.5% Initial Sales Charge With sales charges 1.05 4.71 Excluding sales charges 5.81 5.68 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 0.02 4.52 if Redeemed Within the First Six Years of Purchase Excluding sales charges 5.02 4.85 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 4.02 4.85 if Redeemed Within One Year of Purchase Excluding sales charges 5.02 4.85 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 6.14 6.19 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 4.77% 1.34% 5.25 1.34 - ------------------------------------------------- Class A Shares 4.80 1.21 5.29 1.21 - ------------------------------------------------- Class B Shares 4.48 2.09 4.48 2.09 - ------------------------------------------------- Class C Shares 4.48 2.09 4.48 2.09 - ------------------------------------------------- Class I Shares(4) 5.70 0.97 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain expenses and fees. Unadjusted the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on January 2, 2004, includes the historical performance of Class B shares through January 1, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Barclays Capital U.S. Government Bond Index(5) 6.88% 6.23% 6.08% - ------------------------------------------------------------------------- Average Lipper General U.S. Government Fund(6) 7.12 5.44 5.25 - -------------------------------------------------------------------------
5. The Barclays Capital U.S. Government Bond Index is comprised of publicly issued, non-convertible, domestic debt of the U.S. government or any of its agencies, quasi-federal corporations, or corporate debt guaranteed by the U.S. government. Total returns assume the reinvestment of all income and capital gains. The Barclays Capital U.S. Government Bond Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an Index. 6. The average Lipper general U.S. government fund is representative of funds that invest primarily in U.S. government and agency issues. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Government Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY GOVERNMENT FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,042.50 $5.87 $1,019.50 $5.80 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,043.20 $5.30 $1,020.00 $5.24 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,038.70 $9.71 $1,015.70 $9.60 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,039.90 $9.72 $1,015.70 $9.60 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,045.30 $4.02 $1,021.30 $3.97 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.14% for Investor Class, 1.03% for Class A, 1.89% for Class B and Class C and 0.78% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) U.S. Government & Federal Agencies 86.7 Corporate Bonds 5.6 Short-Term Investment 2.8 Mortgage-Backed Securities 2.7 Asset-Backed Securities 2.2 Municipal Bond 1.0 Other Assets, Less Liabilities (1.0)
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. United States Treasury Notes, 1.50%, due 7/15/12 2. United States Treasury Bonds, 4.375%, due 5/15/40 3. United States Treasury Notes, 0.375%, due 8/31/12 4. United States Treasury Notes, 4.75%, due 8/15/17 5. Federal National Mortgage Association (Mortgage Pass-Through Securities), 5.50%, due 6/1/33 6. Overseas Private Investment Corporation, 5.142%, due 12/15/23 7. Federal National Mortgage Association (Mortgage Pass-Through Securities), 4.50%, due 7/1/18 8. Government National Mortgage Association (Mortgage Pass- Through Securities), 4.50%, due 5/20/40 9. Federal National Mortgage Association (Mortgage Pass-Through Securities), 5.50%, due 12/1/33 10. Tennessee Valley Authority, 4.65%, due 6/15/35
8 MainStay Government Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers Gary Goodenough and James Ramsay, CFA, of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY GOVERNMENT FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Government Fund returned 5.67% for Investor Class shares, 5.81% for Class A shares, 5.02% for Class B shares and 5.02% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 6.14%. All share classes underperformed the 7.12% return of the average Lipper(1) general U.S. government fund and the 6.88% return of the Barclays Capital U.S. Government Bond Index(2) for the 12 months ended October 31, 2010. The Barclays Capital U.S. Government Bond Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund's underperformance of its peers and the Barclays Capital U.S. Government Bond Index resulted primarily from the Fund's shorter duration(3) relative to the benchmark as U.S. Treasury yields declined. Funds with longer durations had superior performance. Less exposure to Treasury inflation- protected securities (TIPS) than the Fund's Lipper peers may have also detracted from the Fund's relative results. TIPS rallied in the latter months of the reporting period when members of the monetary policy committee of the Federal Reserve noted concerns about low levels of inflation. During the reporting period, the Fund also suffered relative to its peers because of its modest exposure (that is, less than 1% of total net assets) to securitizations of residential mortgages that do not conform to agency standards. These non-agency residential securitizations have been popular with many of the Fund's peers, even though the bonds are not government-related. In many instances, managers who were robust buyers of the product during 2006 and 2007 have chosen to hold the assets rather than sell into weak bids as the housing market faltered from 2008 onward. During the latter months of the reporting period, prices rebounded on strong technicals--or supply and demand factors--stemming from the attractiveness of loss-adjusted yields anticipated to be in the 5% to 8% range. On the positive side, the Fund gained from its heavier commitment to higher- coupon mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. DURING THE REPORTING PERIOD, HOW WAS THE FUND'S PERFORMANCE MATERIALLY AFFECTED BY INVESTMENTS IN DERIVATIVES? We used U.S. Treasury futures early in the reporting period to influence the yield-curve positioning(4) of the Fund. Specifically, the Treasury futures introduced a bias in the Fund toward a flattening of the yield spread(5) between the two-year and the 10-year segments of the U.S. Treasury curve. The trade proved too early and ran counter to the direction of yield curve changes at the time, and after several months, we reversed the trade. We later reestablished the flattening bias by redistributing the Fund's allocation of bond maturities across the yield curve. At that juncture, the trade had a positive effect, as investors expressed a willingness to purchase securities with longer maturities for higher yield as long as inflationary pressures remained subdued. WHAT WAS THE FUND'S DURATION STRATEGY DURING THE REPORTING PERIOD? The Fund normally maintained an intermediate duration near 4.0 years, making modest technical adjustments depending on the direction we felt interest rates were likely to move over the near- to medium-term. Given the decline in U.S. Treasury yields during the second half of the reporting period, peer funds with longer durations performed better. Lower mortgage rates make outstanding loans easier to refinance, and the durations of mortgage-backed securities usually shorten as mortgage rates follow Treasury yields lower. We often allow the Fund's duration to drift with the change in mortgage duration rather than compensate by buying or selling U.S. Treasury securities. Given the vagaries of Treasury yields, this approach typically avoids counterproductive actions where we swiftly react to rate changes and are then obliged to rapidly reverse the trade if Treasury yields turn around abruptly. In this instance, however, the strategy slowed performance, as lower yields persisted during the second half of the reporting period. To moderate this effect, we lengthened the Fund's duration by half a year toward the end of the reporting period. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? Tighter underwriting standards limited refinancing opportunities, even for homeowners with pristine credit and substantial equity in their homes. We expected the absence of credit availability to slow principal payment rates from loans that were issued 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the Barclays Capital U.S. Government Bond Index. 3. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 4. The yield curve is a line that plots the yields of various securities of similar quality--typically U.S. Treasury issues--across a range of maturities. The U.S. Treasury yield curve serves as a benchmark for other debt and is used in economic forecasting. The U.S. Treasury yield curve is said to flatten when the differential in yield between shorter-maturity and longer-maturity Treasury securities narrows. 5. The terms "spread" and "yield spread" may refer to the difference in yield between a security or type of security and comparable U.S. Treasury issues. The terms may also refer to the difference in yield between two specific securities or types of securities at a given time. mainstayinvestments.com 9 from 2003 through 2005, and this gave us confidence to emphasize higher-coupon mortgage-backed securities originated prior to 2006. The pending Basel III accords,(6) which establish international standards for bank capitalization, retained a differential between the risk weighting for Ginnie Mae mortgage-backed securities and mortgage-backed issues from Fannie Mae and Freddie Mac. The risk-weighting decision renewed the attractiveness of Ginnie Mae mortgages for overseas investors. We expected Ginnie Mae mortgage- backed securities to appreciate in value faster than Fannie Mae and Freddie Mac issues as the proposed Basel III accords percolated through global financial centers. We introduced more credit risk as a secondary driver of Fund performance. We expected that corporate bonds and commercial mortgage-backed securities would have an improving outlook during the reporting period. We had two reasons for this expectation. First, the prospects of the credit-related sectors were aligned with the decision of the Federal Reserve's monetary policymaking committee to maintain short-term interest rates near zero. Second, the low interest rate environment sparked healthy demand for higher yielding products. The Fund ended the reporting period with approximately 10% of its total net assets invested in non-government-related securities. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH MARKET SEGMENTS WERE PARTICULARLY WEAK? In residential mortgage-backed securities, overweight positions in Ginnie Mae securities and higher-coupon Fannie Mae and Freddie Mac issues benefited performance. Asset-backed and commercial mortgage-backed securities rebounded from prior months when thin market flows and illiquidity had hampered price action, so overweight allocations to these sectors also added value. On the other hand, the Fund would have benefited from a greater exposure to TIPS despite lower levels of coupon income. The performance of TIPS surged ahead of that of nominal, or non-inflation-protected, Treasurys toward the end of the reporting period. Also detracting from the Fund's performance were positions in two government- sponsored bonds issued under Title XI of the 1936 Maritime Act, each funding the construction of a crude oil tanker. Each of the bonds was called at par during the reporting period. Because of their generous coupons, the bonds had been trading at a premium to par. The bond call, and the subsequent loss of the premium, hurt the Fund's results. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? In early September 2010, we sold approximately one-third of the Fund's allocation to agency mortgage pass-through securities,(7) reducing the Fund's exposure from approximately 60% of total net assets to about 40% of total net assets. The reasons for this strategy were threefold. First, the average price of agency mortgage pass-throughs had risen substantially. Second, the risk of par calls eroding the premium prices increased as mortgage rates achieved new lows. Third, the Federal Reserve opted not to reinvest the principal payments from its $1.2 trillion mortgage portfolio, leaving to others the challenge of absorbing new supply as refinanced home loans are securitized. The Fund's sales proceeds from agency mortgage pass-through securities were mostly rotated into U.S. Treasury securities, with the balance going to cash and callable agency debentures. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? As mentioned earlier, we reduced the Fund's allocation to agency mortgage pass- through securities and increased its position in U.S. Treasury securities. As a result of this shift in sector weightings, the Fund's duration was modestly lengthened. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund had an overweight position in U.S. Treasury securities and more modestly overweight positions in asset-backed securities, corporate bonds and commercial mortgage-backed securities. On the same date, the Fund had an underweight position in agency debentures and agency mortgage pass- through securities. The majority of the Fund's assets at the end of the reporting period had maturities of between one and six years. To maintain a Fund duration near four years, about 10% of the Fund's total net assets were invested in longer-maturity Treasury securities and agency debentures to balance the Fund's concentration in shorter-maturity product. 6. The Basel III accords seek to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. 7. Mortgage pass-through securities consist of a pool of residential mortgage loans, in which homeowners' monthly payments of principal, interest and prepayments pass from the original bank through a government agency or investment bank to investors. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Government Fund PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS 98.2%+ ASSET-BACKED SECURITIES 2.2% - ------------------------------------------------------- CREDIT CARDS 0.3% Chase Issuance Trust Series 2006-C4, Class C4 0.546%, due 1/15/14 (a) $ 1,000,000 $ 992,525 ------------ DIVERSIFIED FINANCIAL SERVICES 0.7% Massachusetts RRB Special Purpose Trust Series 2001-1, Class A 6.53%, due 6/1/15 2,001,277 2,162,796 ------------ HOME EQUITY 0.3% Citicorp Residential Mortgage Securities, Inc. Series 2006-3, Class A3 5.61%, due 11/25/36 (b) 392,011 395,338 Series 2006-1, Class A3 5.706%, due 7/25/36 (b) 700,346 708,454 ------------ 1,103,792 ------------ UTILITIES 0.9% Atlantic City Electric Transition Funding LLC Series 2002-1, Class A4 5.55%, due 10/20/23 2,275,000 2,730,790 ------------ Total Asset-Backed Securities (Cost $6,367,241) 6,989,903 ------------ CORPORATE BONDS 5.6% - ------------------------------------------------------- AGRICULTURE 1.5% Altria Group, Inc. 9.70%, due 11/10/18 3,400,000 4,690,079 ------------ AUTO MANUFACTURERS 1.0% DaimlerChrysler N.A. Holding Corp. 6.50%, due 11/15/13 2,920,000 3,363,577 ------------ BEVERAGES 0.5% Coca-Cola Enterprises, Inc. 8.00%, due 9/15/22 1,253,000 1,728,527 ------------ ELECTRIC 0.9% Great Plains Energy, Inc. 2.75%, due 8/15/13 3,000,000 3,023,769 ------------ PIPELINES 0.7% Energy Transfer Partners, L.P. 9.00%, due 4/15/19 1,700,000 2,169,328 ------------ REAL ESTATE INVESTMENT TRUSTS 1.0% Duke Realty, L.P. 6.75%, due 3/15/20 2,150,000 2,425,241 ProLogis 7.375%, due 10/30/19 600,000 669,489 ------------ 3,094,730 ------------ Total Corporate Bonds (Cost $16,766,988) 18,070,010 ------------ MORTGAGE-BACKED SECURITIES 2.7% - ------------------------------------------------------- COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE OBLIGATIONS) 2.7% Banc of America Commercial Mortgage, Inc. Series 2005-5, Class A2 5.001%, due 10/10/45 232,167 232,807 Bear Stearns Commercial Mortgage Securities Series 2005-PW10, Class A4 5.405%, due 12/11/40 1,970,000 2,128,962 Citigroup Mortgage Loan Trust, Inc. Series 2006-AR6, Class 1A1 5.975%, due 8/25/36 (c) 791,778 722,798 Citigroup/Deutsche Bank Commercial Mortgage Trust Series 2006-CD3, Class A5 5.617%, due 10/15/48 710,000 768,423 Four Times Square Trust Series 2006-4TS, Class A 5.401%, due 12/13/28 (d) 620,000 674,644 GE Capital Commercial Mortgage Corp. Series 2004-C2, Class A4 4.893%, due 3/10/40 1,000,000 1,075,607 Merrill Lynch Mortgage Trust Series 2003-KEY1, Class A4 5.236%, due 11/12/35 950,000 1,028,846 Mortgage Equity Conversion Asset Trust Series 2007-FF2, Class A 0.74%, due 2/25/42 (a)(d)(e)(f) 1,486,499 1,412,917 RBSCF Trust Series 2010-MB1, Class A2 3.686%, due 4/15/15 (d) 800,000 844,950 ------------ Total Mortgage-Backed Securities (Cost $8,693,944) 8,889,954 ------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE MUNICIPAL BOND 1.0% - ------------------------------------------------------- MICHIGAN 1.0% Michigan Finance Authority Series E 4.75%, due 8/22/11 $ 3,250,000 $ 3,320,850 ------------ Total Municipal Bond (Cost $3,272,120) 3,320,850 ------------ U.S. GOVERNMENT & FEDERAL AGENCIES 86.7% - ------------------------------------------------------- FANNIE MAE (COLLATERALIZED MORTGAGE OBLIGATION) 0.2% Series 2006-B1, Class AB 6.00%, due 6/25/16 503,347 518,567 ------------ FANNIE MAE GRANTOR TRUST (COLLATERALIZED MORTGAGE OBLIGATION) 1.3% Series 2003-T1, Class B 4.491%, due 11/25/12 3,865,000 4,143,773 ------------ FANNIE MAE STRIP (COLLATERALIZED MORTGAGE OBLIGATIONS) 0.1% Series 360, Class 2, IO 5.00%, due 8/1/35 (g) 1,541,890 226,331 Series 361, Class 2, IO 6.00%, due 10/1/35 (g) 245,745 40,886 ------------ 267,217 ------------ FEDERAL HOME LOAN BANK 1.8% 5.125%, due 8/14/13 5,140,000 5,792,785 ------------ 5,792,785 ------------ FEDERAL HOME LOAN MORTGAGE CORPORATION 0.6% 4.75%, due 11/17/15 1,615,000 1,875,346 ------------ FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE PASS-THROUGH SECURITIES) 6.9% 2.56%, due 3/1/35 (a) 72,031 75,486 3.50%, due 10/1/25 1,304,721 1,351,145 4.00%, due 3/1/25 4,294,007 4,525,758 4.00%, due 7/1/25 1,763,558 1,858,739 5.00%, due 1/1/20 701,062 752,361 5.00%, due 6/1/33 2,948,463 3,156,647 5.00%, due 8/1/33 2,408,246 2,574,297 5.00%, due 5/1/36 2,604,290 2,772,465 5.033%, due 6/1/35 (a) 1,074,773 1,143,808 5.50%, due 1/1/21 1,513,931 1,642,265 5.50%, due 11/1/35 1,423,264 1,551,262 5.50%, due 11/1/36 528,164 578,800 5.65%, due 2/1/37 (a) 190,454 201,361 6.50%, due 4/1/37 353,497 389,928 ------------ 22,574,322 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION 8.4% 1.20%, due 9/27/13 3,900,000 3,920,729 2.50%, due 5/15/14 4,650,000 4,914,194 2.75%, due 3/13/14 5,025,000 5,356,168 4.625%, due 5/1/13 2,990,000 3,241,937 5.375%, due 6/12/17 4,675,000 5,640,345 6.625%, due 11/15/30 3,100,000 4,147,183 ------------ 27,220,556 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) 30.9% 2.047%, due 11/1/34 (a) 371,491 386,444 2.482%, due 4/1/34 (a) 847,847 886,716 3.50%, due 10/1/25 2,943,095 3,049,196 3.50%, due 11/1/25 2,200,000 2,279,312 X 4.50%, due 7/1/18 7,623,238 8,156,044 4.50%, due 11/1/18 4,990,134 5,338,906 4.50%, due 6/1/23 5,276,315 5,595,623 5.00%, due 9/1/17 2,507,157 2,698,408 5.00%, due 9/1/20 322,192 345,562 5.00%, due 11/1/33 2,293,975 2,456,806 5.00%, due 6/1/35 2,791,794 2,984,727 5.00%, due 1/1/36 684,385 731,253 5.00%, due 2/1/36 3,615,898 3,863,522 5.00%, due 5/1/36 3,501,715 3,741,520 5.00%, due 6/1/36 1,175,621 1,253,191 5.00%, due 9/1/36 881,100 941,439 5.50%, due 1/1/17 191,671 208,188 5.50%, due 2/1/17 3,796,635 4,122,521 5.50%, due 6/1/19 1,705,668 1,876,106 5.50%, due 11/1/19 1,769,656 1,946,488 5.50%, due 4/1/21 3,461,030 3,184,607 X 5.50%, due 6/1/33 8,756,504 9,493,380 5.50%, due 11/1/33 4,671,394 5,064,501 X 5.50%, due 12/1/33 5,494,185 5,956,531 5.50%, due 6/1/34 1,159,925 1,255,360 5.50%, due 12/1/34 676,675 732,349 5.50%, due 3/1/35 2,246,558 2,431,398 5.50%, due 12/1/35 632,446 683,296 5.50%, due 4/1/36 2,221,054 2,399,631 5.50%, due 7/1/37 688,599 756,229 6.00%, due 12/1/16 313,519 340,580 6.00%, due 11/1/32 1,262,729 1,404,701 6.00%, due 1/1/33 871,001 967,841 6.00%, due 3/1/33 978,419 1,084,145 6.00%, due 9/1/34 303,472 334,367 6.00%, due 9/1/35 3,179,701 3,511,520 6.00%, due 10/1/35 728,591 804,270 6.00%, due 6/1/36 2,153,768 2,346,117 6.00%, due 11/1/36 2,511,005 2,749,383 6.00%, due 4/1/37 557,730 601,265
12 MainStay Government Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED) FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED) 6.50%, due 10/1/31 $ 624,116 $ 705,404 6.50%, due 2/1/37 269,952 298,110 ------------ 100,243,380 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) 3.1% X 4.50%, due 5/20/40 6,395,153 6,806,724 6.00%, due 8/15/32 1,097,199 1,217,152 6.00%, due 12/15/32 512,414 568,435 6.50%, due 8/15/28 401,093 453,087 6.50%, due 4/15/31 943,684 1,072,678 ------------ 10,118,076 ------------ XOVERSEAS PRIVATE INVESTMENT CORPORATION 2.5% 5.142%, due 12/15/23 (h) 7,223,997 8,246,120 ------------ TENNESSEE VALLEY AUTHORITY 2.9% X 4.65%, due 6/15/35 (h) 5,605,000 5,816,706 6.25%, due 12/15/17 (h) 2,980,000 3,745,908 ------------ 9,562,614 ------------ UNITED STATES TREASURY BONDS 7.0% X 4.375%, due 5/15/40 15,580,000 16,595,193 6.25%, due 8/15/23 515,000 688,491 6.25%, due 5/15/30 455,000 622,923 8.75%, due 8/15/20 3,135,000 4,812,225 ------------ 22,718,832 ------------ UNITED STATES TREASURY NOTES 20.3% X 0.375%, due 8/31/12 9,900,000 9,906,187 X 1.50%, due 7/15/12 39,000,000 39,807,417 2.00%, due 7/15/14 T.I.P.S. (i) 4,632,480 5,063,518 2.625%, due 8/15/20 1,215,000 1,216,140 X 4.75%, due 8/15/17 8,345,000 9,897,304 ------------ 65,890,566 ------------ UNITED STATES TREASURY STRIP PRINCIPAL 0.7% (zero coupon), due 8/15/28 4,665,000 2,334,828 ------------ Total U.S. Government & Federal Agencies (Cost $267,237,302) 281,506,982 ------------ Total Long-Term Bonds (Cost $302,337,595) 318,777,699 ------------ SHORT-TERM INVESTMENT 2.8% - ------------------------------------------------------- REPURCHASE AGREEMENT 2.8% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $9,193,363 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $8,555,000 and a Market Value of $9,379,702) 9,193,355 9,193,355 ------------ Total Short-Term Investment (Cost $9,193,355) 9,193,355 ------------ Total Investments (Cost $311,530,950) (j) 101.0% 327,971,054 Other Assets, Less Liabilities (1.0) (3,127,815) ----------- ------------ Net Assets 100.0% $324,843,239 =========== ============
(a) Floating rate--Rate shown is the rate in effect at October 31, 2010. (b) Subprime mortgage investment and other asset-backed securities. The total market value of the securities at October 31, 2010 is $1,103,792, which represents 0.3% of the Fund's net assets. (c) Collateral strip rate--Bond whose interest is based on the weighted net interest rate of the collateral. Coupon rate adjusts periodically based on a predetermined schedule. Rate shown is the rate in effect at October 31, 2010. (d) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (e) Illiquid security--The total market value of this security at October 31, 2010 is $1,412,917, which represents 0.4% of the Fund's net assets. (f) Fair valued security--The total market value of this security at October 31, 2010 is $1,412,917, which represents 0.4% of the Fund's net assets. (g) Collateralized Mortgage Obligation Interest Only Strip--Pays a fixed or variable rate of interest based on mortgage loans or mortgage pass-through securities. The principal amount of the underlying pool represents the notional amount on which the current interest is calculated. The value of these stripped securities may be particularly sensitive to changes in prevailing interest rates and are typically more sensitive to changes in prepayment rates than traditional mortgage-backed securities. (h) United States Government Guaranteed Security. (i) Treasury Inflation Protected Security--Pays a fixed rate of interest on a principal amount that is continuously adjusted for inflation based on the Consumer Price Index-Urban Consumers.
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED) (j) At October 31, 2010, cost is $311,530,950 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $16,883,761 Gross unrealized depreciation (443,657) ----------- Net unrealized appreciation $16,440,104 ===========
The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Long-Term Bonds Asset-Backed Securities $ -- $ 6,989,903 $ -- $ 6,989,903 Corporate Bonds -- 18,070,010 -- 18,070,010 Mortgage-Backed Securities (b) -- 7,477,037 1,412,917 8,889,954 Municipal Bonds -- 3,320,850 -- 3,320,850 U.S. Government & Federal Agencies -- 281,506,982 -- 281,506,982 -------- ------------ ---------- ------------ Total Long-Term Bonds -- 317,364,782 1,412,917 318,777,699 -------- ------------ ---------- ------------ Short-Term Investment Repurchase Agreement -- 9,193,355 -- 9,193,355 -------- ------------ ---------- ------------ Total Investments in Securities $-- $326,558,137 $1,412,917 $327,971,054 ======== ============ ========== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The level 3 security valued at $1,412,917 is held in Commercial Mortgage Loans (Collateralized Mortgage Obligations) within the Mortgage-Backed Securities section of the Portfolio of Investments. The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE CHANGE IN AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS OCTOBER 31, DISCOUNTS GAIN APPRECIATION IN TO OUT OF INVESTMENTS IN SECURITIES 2009 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 Long-Term Bonds Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) $1,450,158 $615 $1,009 $25,608 $ -- $(64,473) $ -- $ -- ---------- ---- ------ ------- -------- -------- -------- -------- Total $1,450,158 $615 $1,009 $25,608 $-- $(64,473) $-- $-- ========== ==== ====== ======= ======== ======== ======== ======== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM BALANCE INVESTMENTS AS OF STILL HELD AT OCTOBER 31, OCTOBER 31, INVESTMENTS IN SECURITIES 2010 2010 (A) Long-Term Bonds Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) $1,412,917 $22,426 ---------- ------- Total $1,412,917 $22,426 ========== =======
(a) Included in "change in unrealized appreciation (depreciation) on investments" in the Statement of Operations. 14 MainStay Government Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $311,530,950) $327,971,054 Receivables: Interest 2,307,821 Fund shares sold 178,109 Investment securities sold 29,589 Other assets 38,644 ------------ Total assets 330,525,217 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 4,429,949 Fund shares redeemed 698,878 Transfer agent (See Note 3) 155,325 Manager (See Note 3) 137,010 NYLIFE Distributors (See Note 3) 113,962 Shareholder communication 39,054 Professional fees 18,379 Custodian 2,150 Trustees 1,008 Accrued expenses 2,413 Dividend payable 83,850 ------------ Total liabilities 5,681,978 ------------ Net assets $324,843,239 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 360,546 Additional paid-in capital 303,411,812 ------------ 303,772,358 Undistributed net investment income 1,431,993 Accumulated net realized gain on investments and futures transactions 3,198,784 Net unrealized appreciation on investments 16,440,104 ------------ Net assets $324,843,239 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 62,349,960 ============ Shares of beneficial interest outstanding 6,901,474 ============ Net asset value per share outstanding $ 9.03 Maximum sales charge (4.50% of offering price) 0.43 ------------ Maximum offering price per share outstanding $ 9.46 ============ CLASS A Net assets applicable to outstanding shares $187,827,992 ============ Shares of beneficial interest outstanding 20,859,987 ============ Net asset value per share outstanding $ 9.00 Maximum sales charge (4.50% of offering price) 0.42 ------------ Maximum offering price per share outstanding $ 9.42 ============ CLASS B Net assets applicable to outstanding shares $ 36,858,647 ============ Shares of beneficial interest outstanding 4,095,227 ============ Net asset value and offering price per share outstanding $ 9.00 ============ CLASS C Net assets applicable to outstanding shares $ 33,523,022 ============ Shares of beneficial interest outstanding 3,726,135 ============ Net asset value and offering price per share outstanding $ 9.00 ============ CLASS I Net assets applicable to outstanding shares $ 4,283,618 ============ Shares of beneficial interest outstanding 471,762 ============ Net asset value and offering price per share outstanding $ 9.08 ============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Interest $11,418,743 ----------- EXPENSES Manager (See Note 3) 2,004,911 Distribution/Service--Investor Class (See Note 3) 156,711 Distribution/Service--Class A (See Note 3) 462,490 Distribution/Service--Class B (See Note 3) 404,695 Distribution/Service--Class C (See Note 3) 330,392 Transfer agent (See Note 3) 914,691 Professional fees 88,681 Shareholder communication 87,257 Registration 84,468 Custodian 26,958 Trustees 11,185 Miscellaneous 17,558 ----------- Total expenses before waiver/reimbursement 4,589,997 Expense waiver/reimbursement from Manager (See Note 3) (548,437) ----------- Net expenses 4,041,560 ----------- Net investment income 7,377,183 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - ------------------------------------------------- Net realized gain (loss) on: Security transactions 5,322,937 Futures transactions (373,483) ----------- Net realized gain on investments and futures transactions 4,949,454 ----------- Net change in unrealized appreciation (depreciation) on: Investments 5,052,573 Futures contracts 242,761 ----------- Net change in unrealized appreciation (depreciation) on investments and futures contracts 5,295,334 ----------- Net realized and unrealized gain on investments and futures transactions 10,244,788 ----------- Net increase in net assets resulting from operations $17,621,971 ===========
16 MainStay Government Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE (DECREASE) IN NET ASSETS - --------------------------------------------------------- Operations: Net investment income $ 7,377,183 $ 9,950,898 Net realized gain on investments and futures transactions 4,949,454 6,176,195 Net change in unrealized appreciation (depreciation) on investments and futures contracts 5,295,334 16,945,609 --------------------------- Net increase in net assets resulting from operations 17,621,971 33,072,702 --------------------------- Dividends to shareholders: From net investment income: Investor Class (1,482,338) (1,944,256) Class A (4,608,640) (6,270,796) Class B (655,007) (1,196,023) Class C (537,566) (741,560) Class I (87,752) (56,363) --------------------------- Total dividends to shareholders (7,371,303) (10,208,998) --------------------------- Capital share transactions: Net proceeds from sale of shares 44,606,523 84,709,615 Net asset value of shares issued to shareholders in reinvestment of dividends 6,259,349 8,439,872 Cost of shares redeemed (67,218,092) (107,961,395) --------------------------- Decrease in net assets derived from capital share transactions (16,352,220) (14,811,908) --------------------------- Net increase (decrease) in net assets (6,101,552) 8,051,796 NET ASSETS - --------------------------------------------------------- Beginning of year 330,944,791 322,892,995 --------------------------- End of year $324,843,239 $ 330,944,791 =========================== Undistributed (distributions in excess of) net investment income at end of year $ 1,431,993 $ (115,095) ===========================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------ FEBRUARY 28, 2008** YEAR ENDED OCTOBER 31, THROUGH OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 8.75 $ 8.16 $ 8.41 ------- ------- ------- Net investment income (a) 0.21 0.26 0.22 Net realized and unrealized gain (loss) on investments 0.28 0.59 (0.26) ------- ------- ------- Total from investment operations 0.49 0.85 (0.04) ------- ------- ------- Less dividends: From net investment income (0.21) (0.26) (0.21) ------- ------- ------- Net asset value at end of period $ 9.03 $ 8.75 $ 8.16 ======= ======= ======= Total investment return (b) 5.67% 10.67% (0.57%)(c) Ratios (to average net assets)/Supplemental Data: Net investment income 2.37% 2.99% 3.89% ++ Net expenses 1.15% 1.04% 1.07% ++ Expenses (before waiver/reimbursement) 1.32% 1.34% 1.38% ++ Portfolio turnover rate 132%(d) 103%(d) 51% (d) Net assets at end of period (in 000's) $62,350 $63,591 $61,147
CLASS B ------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 8.71 $ 8.13 $ 8.20 $ 8.19 $ 8.17 ------- ------- ------- ------- ------- Net investment income (a) 0.14 0.19 0.26 0.28 0.26 Net realized and unrealized gain (loss) on investments 0.29 0.59 (0.06) 0.02 0.03 ------- ------- ------- ------- ------- Total from investment operations 0.43 0.78 0.20 0.30 0.29 ------- ------- ------- ------- ------- Less dividends: From net investment income (0.14) (0.20) (0.27) (0.29) (0.27) ------- ------- ------- ------- ------- Net asset value at end of period $ 9.00 $ 8.71 $ 8.13 $ 8.20 $ 8.19 ======= ======= ======= ======= ======= Total investment return (b) 5.02% 9.62% 2.41% 3.77% 3.60% Ratios (to average net assets)/Supplemental Data: Net investment income 1.62% 2.24% 3.18% 3.41% 3.29% Net expenses 1.90% 1.79% 1.79% 1.80% 1.80% Expenses (before waiver/reimbursement) 2.07% 2.09% 2.10% 2.10% 2.09% Portfolio turnover rate 132%(d) 103%(d) 51%(d) 11% 83%(d) Net assets at end of period (in 000's) $36,859 $45,178 $51,826 $50,123 $64,246
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Total investment return is not annualized. (d) The portfolio turnover rates not including mortgage dollar rolls were 19%, 45%, 43% and 32% for the years ended October 31, 2010, 2009, 2008 and 2006, respectively.
18 MainStay Government Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 8.72 $ 8.13 $ 8.21 $ 8.19 $ 8.18 -------- -------- -------- -------- -------- 0.22 0.27 0.33 0.34 0.33 0.28 0.59 (0.07) 0.03 0.01 -------- -------- -------- -------- -------- 0.50 0.86 0.26 0.37 0.34 -------- -------- -------- -------- -------- (0.22) (0.27) (0.34) (0.35) (0.33) -------- -------- -------- -------- -------- $ 9.00 $ 8.72 $ 8.13 $ 8.21 $ 8.19 ======== ======== ======== ======== ======== 5.81% 10.71% 3.12% 4.67% 4.26% 2.49% 3.11% 4.00% 4.16% 4.04% 1.03% 0.92% 0.97% 1.05% 1.05% 1.20% 1.21% 1.28% 1.35% 1.34% 132%(d) 103%(d) 51%(d) 11% 83%(d) $187,828 $187,771 $182,621 $227,896 $239,392
CLASS C ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 8.71 $ 8.12 $ 8.20 $ 8.18 $ 8.17 ------- ------- ------- ------ ------ 0.14 0.19 0.26 0.28 0.26 0.29 0.60 (0.07) 0.03 0.02 ------- ------- ------- ------ ------ 0.43 0.79 0.19 0.31 0.28 ------- ------- ------- ------ ------ (0.14) (0.20) (0.27) (0.29) (0.27) ------- ------- ------- ------ ------ $ 9.00 $ 8.71 $ 8.12 $ 8.20 $ 8.18 ======= ======= ======= ====== ====== 5.02% 9.75% 2.28% 3.89% 3.48% 1.62% 2.23% 3.16% 3.41% 3.29% 1.90% 1.80% 1.80% 1.80% 1.80% 2.07% 2.09% 2.11% 2.10% 2.09% 132%(d) 103%(d) 51%(d) 11% 83%(d) $33,523 $32,659 $25,967 $7,621 $5,684
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I -------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 8.79 $ 8.19 $ 8.26 $ 8.24 $ 8.21 ------ ------ ------ ------ ------ Net investment income (a) 0.24 0.30 0.35 0.40 0.35 Net realized and unrealized gain (loss) on investments 0.29 0.61 (0.04) 0.02 0.03 ------ ------ ------ ------ ------ Total from investment operations 0.53 0.91 0.31 0.42 0.38 ------ ------ ------ ------ ------ Less dividends: From net investment income (0.24) (0.31) (0.38) (0.40) (0.35) ------ ------ ------ ------ ------ Net asset value at end of period $ 9.08 $ 8.79 $ 8.19 $ 8.26 $ 8.24 ====== ====== ====== ====== ====== Total investment return (b) 6.14% 11.21% 3.68% 5.31% 4.78% Ratios (to average net assets)/Supplemental Data: Net investment income 2.74% 3.52% 4.24% 4.84% 4.52% Net expenses 0.78% 0.51% 0.40% 0.42% 0.57% Expenses (before waiver/reimbursement) 0.95% 0.97% 0.99% 1.00% 0.86% Portfolio turnover rate 132%(c) 103%(c) 51%(c) 11% 83%(c) Net assets at end of period (in 000's) $4,284 $1,746 $1,332 $ 7 $ 1
(a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) The portfolio turnover rates not including mortgage dollar rolls were 19%, 45%, 43% and 32% for the years ended October 31, 2010, 2009, 2008 and 2006, respectively.
20 MainStay Government Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Government Fund (the "Fund"), a diversified fund. The Fund currently offers five classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on May 1, 1986. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on January 2, 2004. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to seek a high level of current income, consistent with safety of principal. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. mainstayinvestments.com 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund held securities with a value of $1,412,917 that were valued in such a manner. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method and include gains and losses from repayments of principal on mortgage-backed securities. Interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. 22 MainStay Government Fund Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index). The Fund is subject to interest rate risk in the normal course of investing in these transactions. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin." When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to help manage the duration and yield curve of the portfolio while minimizing the exposure to wider bid/ask spreads in traditional bonds. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. (I) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR") transactions in which it sells mortgage-backed securities ("MBS") from its portfolio to a counterparty from whom it simultaneously agrees to buy a similar security on a delayed delivery basis. The MDR transactions of the Fund are classified as purchase and sale transactions. The securities sold in connection with the MDRs are removed from the portfolio and a realized gain or loss is recognized. The securities the Fund has agreed to acquire are included at market value in the Portfolio of Investments and liabilities for such purchase commitments are included as payables for investments purchased. During the roll period, the Fund foregoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future as well as by the earnings on the cash proceeds of the initial sale. MDRs may be renewed without physical delivery of the securities subject to the contract. The Fund maintains liquid assets from its portfolio having a value not less than the repurchase price, including accrued interest. MDR transactions involve certain risks, including the risk that the MBS returned to the Fund at the end of the roll, while substantially similar, could be inferior to what was initially sold to the counterparty. (J) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (K) CONCENTRATION OF RISK. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (L) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (M) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
INTEREST STATEMENT OF RATE OPERATIONS CONTRACTS LOCATION RISK TOTAL Net realized loss on futures Futures Contracts transactions $(373,483) $(373,483) -------------------- Total Realized Loss $(373,483) $(373,483) ====================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
INTEREST STATEMENT OF RATE OPERATIONS CONTRACTS LOCATION RISK TOTAL Net change in unrealized appreciation (depreciation) Futures Contracts on futures contracts $242,761 $242,761 ------------------- Total Change in Unrealized Appreciation (Depreciation) $242,761 $242,761 ===================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
INTEREST RATE CONTRACTS RISK TOTAL Futures Contracts Short (2) (177) (177) =====================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.60% up to $500 million; 0.575% from $500 million to $1 billion; and 0.55% in excess of $1 billion. New York Life Investments has contractually agreed to waive a portion of its management fee so that the management fee does not exceed 0.50% up to $500 million; 0.475% from $500 million to $1 billion; and 0.45% in excess of $1 billion. The Fund also pays the Manager a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.52% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement, under which it agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares do not exceed 1.03% of its average daily net assets. New York Life Investments will apply an equivalent waiver or 24 MainStay Government Fund reimbursement, in an equal number of basis points, to the other share classes of the Fund. This agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. At the December 15, 2010, Board of Trustees meeting, the Board approved an extension of the current written expense limitation agreement through February 28, 2012. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $2,004,911 and waived expenses/reimbursed fees in the amount of $548,437. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Investor Class and Class A shares at an annual rate of 0.25% of the average daily net assets of the Investor Class and Class A shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $12,542 and $23,477, respectively for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $19, $859, $53,364 and $6,614, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $219,255 - ----------------------------------------------- Class A 431,032 - ----------------------------------------------- Class B 141,695 - ----------------------------------------------- Class C 115,491 - ----------------------------------------------- Class I 7,218 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 217 0.0%++ - ----------------------------------------------- Class C 131 0.0++ - ----------------------------------------------- Class I 1,365 0.0++ - -----------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $11,657. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $3,308,099 $1,406,528 $(83,850) $16,440,104 $21,070,881 - --------------------------------------------------------------------------
The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized gain mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) on investments arising from permanent differences; net assets at October 31, 2010 are not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) PAID-IN INCOME (LOSS) ON INVESTMENTS CAPITAL $1,541,208 $(1,541,208) $-- - ----------------------------------------------
The reclassifications for the Fund are primarily due to premium amortization adjustments and reclassifications of mortgage dollar roll income. The Fund utilized $450,455 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distribution paid from: Ordinary Income $7,371,303 $10,208,998 - ------------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of U.S. Government securities were $402,718 and $399,263, respectively. Purchases and sales of securities, other than U.S. Government securities and short-term securities, were $37,400 and $17,369, respectively. NOTE 8-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 569,341 $ 5,062,853 Shares issued to shareholders in reinvestment of dividends 155,988 1,382,025 Shares redeemed (1,148,151) (10,141,750) ------------------------ Net increase (decrease) in shares outstanding before conversion (422,822) (3,696,872) Shares converted into Investor Class (See Note 1) 490,439 4,330,699 Shares converted from Investor Class (See Note 1) (436,619) (3,880,711) ------------------------ Net increase (decrease) (369,002) $ (3,246,884) ======================== Year ended October 31, 2009: Shares sold 807,031 $ 6,978,011 Shares issued to shareholders in reinvestment of dividends 208,230 1,800,449 Shares redeemed (1,299,088) (11,209,739) ------------------------ Net increase (decrease) in shares outstanding before conversion (283,827) (2,431,279) Shares converted into Investor Class (See Note 1) 449,634 3,874,448 Shares converted from Investor Class (See Note 1) (393,079) (3,424,421) ------------------------ Net increase (decrease) (227,272) $ (1,981,252) ======================== CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 2,181,501 $ 19,309,383 Shares issued to shareholders in reinvestment of dividends 443,278 3,915,689 Shares redeemed (3,905,060) (34,386,342) ------------------------ Net increase (decrease) in shares outstanding before conversion (1,280,281) (11,161,270) Shares converted into Class A (See Note 1) 876,130 7,737,236 Shares converted from Class A (See Note 1) (126,442) (1,111,827) Shares converted from Class A (a) (147,997) (1,284,614) ------------------------ Net increase (decrease) (678,590) $ (5,820,475) ======================== Year ended October 31, 2009: Shares sold 5,595,487 $ 48,373,913 Shares issued to shareholders in reinvestment of dividends 594,745 5,125,361 Shares redeemed (7,990,962) (68,713,916) ------------------------ Net increase (decrease) in shares outstanding before conversion (1,800,730) (15,214,642) Shares converted into Class A (See Note 1) 975,401 8,419,780 Shares converted from Class A (See Note 1) (99,773) (866,754) ------------------------ Net increase (decrease) (925,102) $ (7,661,616) ========================
26 MainStay Government Fund
CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 834,658 $ 7,352,568 Shares issued to shareholders in reinvestment of dividends 66,810 589,270 Shares redeemed (1,186,277) (10,396,840) ------------------------ Net increase (decrease) in shares outstanding before conversion (284,809) (2,455,002) Shares converted from Class B (See Note 1) (804,288) (7,075,397) ------------------------ Net increase (decrease) (1,089,097) $ (9,530,399) ======================== Year ended October 31, 2009: Shares sold 1,379,738 $ 11,849,845 Shares issued to shareholders in reinvestment of dividends 121,091 1,042,823 Shares redeemed (1,760,605) (15,118,893) ------------------------ Net increase (decrease) in shares outstanding before conversion (259,776) (2,226,225) Shares converted from Class B (See Note 1) (933,209) (8,003,053) ------------------------ Net increase (decrease) (1,192,985) $(10,229,278) ======================== CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,153,364 $ 10,172,156 Shares issued to shareholders in reinvestment of dividends 35,268 311,299 Shares redeemed (1,211,719) (10,664,364) ------------------------ Net increase (decrease) (23,087) $ (180,909) ======================== Year ended October 31, 2009: Shares sold 1,830,576 $ 15,752,695 Shares issued to shareholders in reinvestment of dividends 48,474 417,395 Shares redeemed (1,326,630) (11,406,279) ------------------------ Net increase (decrease) 552,420 $ 4,763,811 ======================== CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 301,914 $ 2,709,563 Shares issued to shareholders in reinvestment of dividends 6,836 61,066 Shares redeemed (182,429) (1,628,796) ------------------------ Net increase (decrease) in shares outstanding before conversion 126,321 1,141,833 Shares converted into Class I (a) 146,813 1,284,614 ------------------------ Net increase (decrease) 273,134 $ 2,426,447 ======================== Year ended October 31, 2009: Shares sold 204,101 $ 1,755,151 Shares issued to shareholders in reinvestment of dividends 6,201 53,844 Shares redeemed (174,284) (1,512,568) ------------------------ Net increase (decrease) 36,018 $ 296,427 ========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 9-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified other than the extension of the written expense limitation agreement as disclosed in Note 3(A) to these financial statements. mainstayinvestments.com 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Government Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Government Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 28 MainStay Government Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Government Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' mainstayinvestments.com 29 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships with the Fund supported the Board's determination to approve the Agreements. 30 MainStay Government Fund EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 31 FEDERAL INCOME TAX INFORMATION (UNAUDITED) In February 2011 shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute From 1099 will be the amounts you are to use on your federal income tax return. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 32 MainStay Government Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 33
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
34 MainStay Government Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 35
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
36 MainStay Government Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 37 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. (C) 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-A021195 MS333-10 MSG11-12/10 07 (MAINSTAY INVESTMENTS LOGO) MAINSTAY HIGH YIELD CORPORATE BOND FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 10 - --------------------------------------------- Financial Statements 25 - --------------------------------------------- Notes to Financial Statements 31 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 40 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 41 - --------------------------------------------- Federal Income Tax Information 44 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 44 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 44 - --------------------------------------------- Board Members and Officers 45 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
HIGH YIELD CORPORATE BOND CREDIT SUISSE FUND CLASS HIGH YIELD B SHARES INDEX -------------- ------------- 10/31/2000 10000 10000 9393 10037 8787 10030 12523 13186 13982 14895 14686 15528 15996 17008 17029 18317 13202 13761 17371 19629 10/31/2010 19770 23255
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 4.5% Initial Sales Charge With sales charges 9.56% 5.92% Excluding sales charges 14.73 6.90 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 4.5% Initial Sales Charge With sales charges 9.53 5.95 Excluding sales charges 14.69 6.93 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 8.81 5.82 if Redeemed Within the First Six Years of Purchase Excluding sales charges 13.81 6.12 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 12.81 6.12 if Redeemed Within One Year of Purchase Excluding sales charges 13.81 6.12 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 14.98 7.20 - ----------------------------------------------------------------------------------------------------------------------------------- Class R2 Shares(5) No Sales Charge 14.78 6.88 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 7.36% 1.15% 7.85 1.15 - ------------------------------------------------- Class A Shares 7.37 1.08 7.86 1.08 - ------------------------------------------------- Class B Shares 7.05 1.91 7.05 1.91 - ------------------------------------------------- Class C Shares 7.05 1.90 7.05 1.90 - ------------------------------------------------- Class I Shares(4) 8.13 0.83 - ------------------------------------------------- Class R2 Shares(5) 7.78 1.18 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, include the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on January 2, 2004, include the historical performance of Class B shares through January 1, 2004, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Class I shares might have been lower. 5. Class R2 shares, first offered on December 14, 2007, but did not commence investment operations until May 1, 2008. Performance figures for Class R2 shares include historic performance of Class B shares through April 30, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Class R2 shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Credit Suisse High Yield Index(6) 18.47% 8.56% 8.81% - --------------------------------------------------------------------- Average Lipper High Current Yield Fund(7) 17.82 6.79 6.65 - ---------------------------------------------------------------------
6. The Credit Suisse High Yield Index is a market-weighted index that includes publicly traded bonds rated below BBB by Standard & Poor's and below Baa by Moody's. Total returns assume reinvestment of all income and capital gains. The Credit Suisse High Yield Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 7. The average Lipper high current yield fund is representative of funds that aim at high (relative) current yield from fixed income securities, have no quality or maturity restrictions, and tend to invest in lower-grade debt issues. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay High Yield Corporate Bond Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY HIGH YIELD CORPORATE BOND FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,063.50 $5.62 $1,019.80 $5.50 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,064.10 $5.41 $1,020.00 $5.30 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,060.10 $9.50 $1,016.00 $9.30 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,060.00 $9.50 $1,016.00 $9.30 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,063.60 $4.11 $1,021.20 $4.02 - ------------------------------------------------------------------------------------------------------------- CLASS R2 SHARES $1,000.00 $1,063.60 $5.93 $1,019.50 $5.80 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.08% for Investor Class, 1.04% for Class A, 1.83% for Class B and Class C, 0.79% for Class I and 1.14% for Class R2) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Corporate Bonds 81.1 Yankee Bonds 10.0 Loan Assignments & Participations 3.5 Short-Term Investment 3.2 Convertible Bonds 0.9 Foreign Bond 0.4 Common Stocks 0.3 Other Assets, Less Liabilities 0.3 Preferred Stocks 0.3 Warrants 0.0
See Portfolio of Investments beginning on page 10 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. Ford Motor Credit Co. LLC, 5.542%-12.00%, due 6/15/11-1/15/20 2. HCA, Inc., 1.789%-9.875%, due 2/1/11-4/15/19 3. Intelsat Subsidiary Holding Co., Ltd., 8.50%-8.875%, due 1/15/13-1/15/15 4. GMAC, Inc., 6.75%-8.30%, due 9/15/11-11/1/31 5. Georgia-Pacific Corp., 7.00%-8.875%, due 5/15/11-5/15/31 6. Nova Chemicals Corp., 3.748%-8.625%, due 1/15/12-11/1/19 7. Reliant Energy, Inc., 7.625%-7.875%, due 6/15/14-6/15/17 8. MarkWest Energy Partners, L.P./MarkWest Energy Finance Corp., 6.75%-8.75%, due 11/1/14-11/1/20 9. Videotron Ltee, 6.375%-9.125%, due 1/15/14-4/15/18 10. Ford Motor Co., 3.038%-6.50%, due 12/16/13-8/1/18
8 MainStay High Yield Corporate Bond Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS Questions answered by portfolio manager J. Matthew Philo, CFA, of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY HIGH YIELD CORPORATE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay High Yield Corporate Bond Fund returned 14.73% for Investor Class shares, 14.69% for Class A shares and 13.81% for Class B and Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 14.98% and Class R2 shares returned 14.78%. All share classes underperformed the 17.82% return of the average Lipper(1) high current yield fund and the 18.47% return of the Credit Suisse High Yield Index(2) for the 12 months ended October 31, 2010. The Credit Suisse High Yield Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund's underperformance relative to the Credit Suisse High Yield Index resulted from our bottom-up investment style, which focuses on individual companies to determine risk-group weightings in the context of historical yield spreads.(3) The Fund remained conservatively positioned throughout the reporting period, based on our belief that the valuations of riskier high-yield bonds were unattractive and business fundamentals for many high-yield issuers were weak. WHAT SPECIFIC FACTORS, RISKS, OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? The Fund's positioning and outlook were relatively consistent throughout the reporting period. The Fund routinely sells investments that we believe represent inferior risk-adjusted value because of price appreciation or a change in fundamentals. In such cases, we seek to purchase investments that represent more attractive risk-adjusted value. DURING THE REPORTING PERIOD, WHICH INDUSTRY POSITIONS OR SPECIFIC HOLDINGS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH INDUSTRY POSITIONS AND SPECIFIC HOLDINGS WERE PARTICULARLY WEAK? The three most significant positive contributors to the Fund's performance were investments in the energy, financials and transportation industries. Automotive finance companies Ford Motor Credit and Ally Financial were notable contributors to performance, as were hospital operator HCA and forest products producer Georgia Pacific. Although no industries generated negative absolute returns during the reporting period, the Fund's investments in the retail, service and information technology industries contributed the least to performance. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? During the reporting period, the Fund purchased bonds of Consol Energy, the largest U.S. producer of high-BTU bituminous coal. The Fund also purchased bonds of TRW Automotive, a global supplier of automotive safety systems, and Treehouse Foods, a leading private label food producer. Each of these purchases had a positive impact on the Fund's performance. During the reporting period, the Fund sold positions in diagnostic imaging provider Alliance Imaging and global building-materials supplier Lafarge. Both positions were positive contributors to the Fund's performance during the portion of the reporting period they were held in the Fund. HOW DID THE FUND'S INDUSTRY WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, the Fund increased its weightings relative to the Credit Suisse High Yield Index in the financials and food/tobacco industries. The Fund decreased its weightings relative to the Credit Suisse High Yield Index in the communications and information technology industries. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund held overweight positions relative to the Credit Suisse High Yield Index in the transportation, health care and cable/wireless video industries. As of the same date, the Fund was underweight relative to the Credit Suisse High Yield Index in the service, retail and information technology industries. The Fund was generally overweight in industries that were more defensive and in companies that we believed were of higher quality in light of the uncertain economic outlook for many high-yield issuers. Another reason the Fund was overweight in what we believed to be higher-quality high-yield bonds at the end of the reporting period was that we viewed the valuations of many riskier bonds to be unattractive. 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the Credit Suisse High Yield Index. 3. The terms "spread" and "yield spread" may refer to the difference in yield between a security or type of security and comparable U.S. Treasury issues. The terms may also refer to the difference in yield between two specific securities or types of securities at a given time. The opinions expressed are those of the portfolio manager as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. mainstayinvestments.com 9 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS 95.9%+ CONVERTIBLE BONDS 0.9% - ---------------------------------------------------------- HEALTH CARE--PRODUCTS 0.1% Bio Rad Labs 8.00%, due 9/15/16 $ 7,810,000 $ 8,532,425 -------------- HOLDING COMPANIES--DIVERSIFIED 0.5% American Real Estate Partners, L.P./ American Real Estate Finance Corp. 4.00%, due 8/15/13 (a) 9,965,000 9,466,750 Icahn Enterprises, L.P. 4.00%, due 8/15/13 20,355,000 19,337,250 -------------- 28,804,000 -------------- INTERNET 0.0%++ At Home Corp. 4.75%, due 12/31/49 (b)(c)(d)(e) 61,533,853 6,154 -------------- RETAIL 0.2% Penske Auto Group, Inc. 3.50%, due 4/1/26 11,665,000 11,839,975 Sonic Automotive, Inc. 5.00%, due 10/1/29 2,500,000 2,828,125 -------------- 14,668,100 -------------- TELECOMMUNICATIONS 0.1% NII Holdings, Inc. 3.125%, due 6/15/12 7,385,000 7,237,300 -------------- Total Convertible Bonds (Cost $53,907,575) 59,247,979 -------------- CORPORATE BONDS 81.1% - ---------------------------------------------------------- ADVERTISING 0.8% Interpublic Group of Cos., Inc. 6.25%, due 11/15/14 11,880,000 12,904,650 Lamar Media Corp. 6.625%, due 8/15/15 16,883,000 17,326,178 Series C 6.625%, due 8/15/15 2,765,000 2,830,669 7.875%, due 4/15/18 7,490,000 7,995,575 9.75%, due 4/1/14 8,650,000 9,990,750 -------------- 51,047,822 -------------- AEROSPACE & DEFENSE 0.4% BE Aerospace, Inc. 8.50%, due 7/1/18 9,750,000 10,920,000 DAE Aviation Holdings, Inc. 11.25%, due 8/1/15 (a) 14,700,000 15,306,375 -------------- 26,226,375 -------------- AGRICULTURE 0.2% Alliance One International, Inc. 10.00%, due 7/15/16 11,440,000 12,584,000 -------------- AIRLINES 0.1% Delta Air Lines, Inc. (Escrow Shares) (zero coupon), due 12/27/49 (f) 5,175,000 135,895 2.875%, due 2/6/24 (c)(f) 7,201,000 192,699 2.875%, due 2/18/49 (a)(c)(f) 4,190,000 112,124 8.00%, due 6/3/23 (c)(f) 13,575,000 363,267 8.00%, due 6/3/49 (c)(f) 10,459,000 279,883 8.30%, due 12/15/29 (c)(f) 11,297,000 296,659 9.25%, due 3/15/49 (c)(f) 9,000,000 236,340 9.75%, due 5/15/49 (c)(f) 2,115,000 55,540 10.00%, due 8/15/49 (c)(f) 8,195,000 215,201 10.375%, due 12/15/22 (c)(f) 15,160,000 398,102 10.375%, due 2/1/49 (c)(f) 6,515,000 171,084 Northwest Airlines, Inc. Series 2001-1, Class 1B 7.691%, due 10/1/18 3,009,681 2,994,632 Northwest Airlines, Inc. (Escrow Shares) 7.625%, due 11/15/23 (c)(f) 11,810,900 29,645 7.875%, due 12/31/49 (c)(f) 8,723,000 10,991 8.70%, due 3/15/49 (c)(f) 445,000 561 8.875%, due 6/1/49 (c)(f) 5,229,300 6,589 9.875%, due 3/15/37 (c)(f) 18,534,200 23,353 10.00%, due 2/1/49 (c)(f) 14,683,200 18,501 -------------- 5,541,066 -------------- APPAREL 0.5% Hanesbrands, Inc. 8.00%, due 12/15/16 14,420,000 15,609,650 Unifi, Inc. 11.50%, due 5/15/14 18,056,000 19,003,940 -------------- 34,613,590 -------------- AUTO MANUFACTURERS 0.2% X Ford Motor Co. 6.50%, due 8/1/18 2,645,000 2,797,088 Oshkosh Corp. 8.25%, due 3/1/17 5,955,000 6,505,837 8.50%, due 3/1/20 5,960,000 6,600,700 -------------- 15,903,625 -------------- AUTO PARTS & EQUIPMENT 2.0% Allison Transmission, Inc. 11.25%, due 11/1/15 (a)(g) 5,151,800 5,583,263 Cooper Standard Automotive, Inc. 8.50%, due 5/1/18 (a) 13,020,000 13,947,675 Cooper Tire & Rubber Co. 7.625%, due 3/15/27 5,325,000 5,005,500
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest issuers held, as of October 31, 2010, excluding short-term investment. May be subject to change daily. 10 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) AUTO PARTS & EQUIPMENT (CONTINUED) FleetPride Corp. 11.50%, due 10/1/14 (a) $ 17,795,000 $ 16,905,250 Goodyear Tire & Rubber Co. (The) 8.25%, due 8/15/20 20,325,000 21,646,125 10.50%, due 5/15/16 11,415,000 13,070,175 Johnson Controls, Inc. 5.25%, due 1/15/11 7,520,000 7,589,996 Lear Corp. 8.125%, due 3/15/20 3,145,000 3,498,813 Lear Corp. (Escrow Shares) 8.75%, due 12/1/16 (b)(e)(f) 15,444,000 23,166 Tenneco, Inc. 8.125%, due 11/15/15 10,891,000 11,544,460 TRW Automotive, Inc. 7.00%, due 3/15/14 (a) 15,410,000 16,488,700 8.875%, due 12/1/17 (a) 11,595,000 12,870,450 -------------- 128,173,573 -------------- BANKS 2.2% Ally Financial, Inc. 7.50%, due 9/15/20 (a) 20,828,000 22,494,240 CapitalSource, Inc. 12.75%, due 7/15/14 (a) 17,975,000 21,210,500 X GMAC, Inc. 6.75%, due 12/1/14 26,445,000 27,701,137 6.875%, due 9/15/11 11,930,000 12,317,725 8.00%, due 11/1/31 13,970,000 15,262,225 8.30%, due 2/12/15 (a) 31,346,000 34,167,140 Provident Funding Associates 10.25%, due 4/15/17 (a) 12,155,000 12,641,200 -------------- 145,794,167 -------------- BEVERAGES 0.8% Constellation Brands, Inc. 7.25%, due 9/1/16 1,150,000 1,265,000 7.25%, due 5/15/17 4,554,000 4,992,323 8.375%, due 12/15/14 6,242,000 7,030,052 Cott Beverages, Inc. 8.125%, due 9/1/18 10,215,000 11,057,737 8.375%, due 11/15/17 25,982,000 28,190,470 -------------- 52,535,582 -------------- BIOTECHNOLOGY 0.0%++ Bio-Rad Laboratories, Inc. 7.50%, due 8/15/13 1,420,000 1,441,300 -------------- BUILDING MATERIALS 2.0% Associated Materials LLC 9.125%, due 11/1/17 (a) 10,696,000 11,230,800 Building Materials Corp. of America 6.875%, due 8/15/18 (a) 15,653,000 15,653,000 7.00%, due 2/15/20 (a) 15,565,000 16,226,512 7.50%, due 3/15/20 (a) 14,915,000 15,250,587 Compression Polymers Corp. 10.50%, due 7/1/13 5,660,000 5,801,500 CRH America, Inc. 5.625%, due 9/30/11 3,550,000 3,686,437 Goodman Global Group, Inc. (zero coupon), due 12/15/14 1,330,000 856,188 Goodman Global, Inc. 13.50%, due 2/15/16 13,075,000 14,398,844 Texas Industries, Inc. 9.25%, due 8/15/20 (a) 30,690,000 32,301,225 USG Corp. 9.75%, due 8/1/14 (a) 11,270,000 11,777,150 -------------- 127,182,243 -------------- CHEMICALS 1.8% CF Industries, Inc. 6.875%, due 5/1/18 9,615,000 10,961,100 7.125%, due 5/1/20 10,955,000 12,707,800 Georgia Gulf Corp. 9.00%, due 1/15/17 (a) 22,240,000 23,963,600 Huntsman International LLC 5.50%, due 6/30/16 11,846,000 11,771,962 Nalco Co. 8.25%, due 5/15/17 2,390,000 2,661,863 Olin Corp. 8.875%, due 8/15/19 7,788,000 8,527,860 Phibro Animal Health Corp. 9.25%, due 7/1/18 (a) 38,105,000 39,248,150 PolyOne Corp. 7.375%, due 9/15/20 726,000 770,468 Westlake Chemical Corp. 6.625%, due 1/15/16 8,035,000 8,255,962 -------------- 118,868,765 -------------- COAL 1.4% Arch Coal, Inc. 7.25%, due 10/1/20 7,475,000 8,185,125 8.75%, due 8/1/16 4,240,000 4,759,400 Consol Energy, Inc. 8.00%, due 4/1/17 (a) 29,310,000 32,094,450 Peabody Energy Corp. 5.875%, due 4/15/16 3,005,000 3,046,319 6.50%, due 9/15/20 28,970,000 32,373,975 7.375%, due 11/1/16 2,185,000 2,474,512 7.875%, due 11/1/26 7,080,000 8,000,400 -------------- 90,934,181 --------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) COMMERCIAL SERVICES 1.9% Cenveo Corp. 8.875%, due 2/1/18 $ 6,105,000 $ 6,135,525 Corrections Corp. of America 6.25%, due 3/15/13 2,339,000 2,362,390 6.75%, due 1/31/14 1,405,000 1,434,856 7.75%, due 6/1/17 6,990,000 7,601,625 El Comandante Capital Corp. (Escrow Shares) (zero coupon), due 12/31/50 (b)(c)(e)(f) 21,941,051 1,579,756 Ford Holdings LLC 9.30%, due 3/1/30 10,935,000 13,668,750 Ford Holdings, Inc. 9.375%, due 3/1/20 750,000 877,500 Global Cash Acceptance/Global Cash Finance Corp. 8.75%, due 3/15/12 684,000 683,145 Great Lakes Dredge & Dock Corp. 7.75%, due 12/15/13 17,235,000 17,450,438 iPayment, Inc. 9.75%, due 5/15/14 16,404,000 15,501,780 Knowledge Learning Corp., Inc. 7.75%, due 2/1/15 (a) 27,015,000 27,150,075 Lender Processing Services, Inc. 8.125%, due 7/1/16 17,236,000 17,753,080 PHH Corp. 9.25%, due 3/1/16 (a) 12,385,000 12,710,106 Quebecor World, Inc. (Litigation Recovery Trust--Escrow Shares) 6.50%, due 8/1/49 (b)(e)(f) 460,000 23,920 9.75%, due 1/15/49 (a)(b)(e)(f) 26,020,000 1,353,040 -------------- 126,285,986 -------------- COMPUTERS 0.5% SunGard Data Systems, Inc. 4.875%, due 1/15/14 12,070,000 11,858,775 9.125%, due 8/15/13 965,000 987,919 10.625%, due 5/15/15 19,260,000 21,523,050 -------------- 34,369,744 -------------- DISTRIBUTION & WHOLESALE 0.7% ACE Hardware Corp. 9.125%, due 6/1/16 (a) 20,618,000 22,267,440 American Tire Distributors, Inc. 9.75%, due 6/1/17 (a) 18,555,000 19,807,463 -------------- 42,074,903 -------------- ELECTRIC 4.5% AES Eastern Energy, L.P. Series 1999-A 9.00%, due 1/2/17 15,269,778 16,033,267 Calpine Construction Finance Co., L.P. and CCFC Finance Corp. 8.00%, due 6/1/16 (a) 49,185,000 53,242,763 Calpine Corp. 7.25%, due 10/15/17 (a) 37,579,000 39,082,160 Energy Future Intermediate Holding Co. LLC/EFIH Finance, Inc. 10.00%, due 12/1/20 15,525,000 16,260,916 GenOn Escrow Corp. 9.50%, due 10/15/18 (a) 22,300,000 21,742,500 Ipalco Enterprises, Inc. 7.25%, due 4/1/16 (a) 5,925,000 6,458,250 8.625%, due 11/14/11 15,090,000 15,957,675 NRG Energy, Inc. 7.25%, due 2/1/14 14,667,000 15,015,341 PNM Resources, Inc. 9.25%, due 5/15/15 8,710,000 9,428,575 Public Service Co. of New Mexico 7.95%, due 5/15/18 9,965,000 10,961,420 Reliant Energy Mid- Atlantic Power Holdings LLC Series B 9.237%, due 7/2/17 489,591 516,519 Series C 9.681%, due 7/2/26 6,425,000 6,874,750 X Reliant Energy, Inc. 7.625%, due 6/15/14 4,625,000 4,659,688 7.875%, due 6/15/17 66,835,000 61,822,375 RRI Energy, Inc. 6.75%, due 12/15/14 13,856,000 14,150,440 -------------- 292,206,639 -------------- ELECTRICAL COMPONENTS & EQUIPMENT 0.5% Belden, Inc. 7.00%, due 3/15/17 12,530,000 12,717,950 9.25%, due 6/15/19 15,000,000 16,593,750 -------------- 29,311,700 -------------- ENERGY--ALTERNATE SOURCES 0.3% Headwaters, Inc. 11.375%, due 11/1/14 16,435,000 17,421,100 -------------- ENGINEERING & CONSTRUCTION 0.6% New Enterprise Stone & Lime Co. 11.00%, due 9/1/18 (a) 27,285,000 26,057,175 Tutor Perini Corp. 7.625%, due 11/1/18 (a) 13,410,000 13,611,150 -------------- 39,668,325 --------------
12 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) ENTERTAINMENT 2.7% American Casino & Entertainment Properties LLC 11.00%, due 6/15/14 $ 10,720,000 $ 10,505,600 FireKeepers Development Authority 13.875%, due 5/1/15 (a) 2,410,000 2,825,725 Greektown Superholdings, Inc. 13.00%, due 7/1/15 (a) 19,645,000 21,644,212 Isle of Capri Casinos, Inc. 7.00%, due 3/1/14 7,361,000 6,974,548 Jacobs Entertainment, Inc. 9.75%, due 6/15/14 25,835,000 24,220,312 Mohegan Tribal Gaming Authority 6.125%, due 2/15/13 3,940,000 3,457,350 8.00%, due 4/1/12 6,913,000 6,022,951 Peninsula Gaming LLC 8.375%, due 8/15/15 10,095,000 10,700,700 10.75%, due 8/15/17 10,005,000 10,655,325 Penn National Gaming, Inc. 6.75%, due 3/1/15 27,185,000 27,728,700 Pinnacle Entertainment, Inc. 7.50%, due 6/15/15 6,157,000 6,126,215 8.625%, due 8/1/17 7,320,000 7,887,300 8.75%, due 5/15/20 7,450,000 7,440,688 Seneca Gaming Corp. 7.25%, due 5/1/12 4,357,000 4,248,075 Series B 7.25%, due 5/1/12 5,721,000 5,577,975 Speedway Motorsports, Inc. 6.75%, due 6/1/13 3,921,000 3,970,013 8.75%, due 6/1/16 11,035,000 12,028,150 United Artists Theatre Circuit, Inc. Series BA7 9.30%, due 7/1/15 (b)(e) 1,410,123 987,086 Vail Resorts, Inc. 6.75%, due 2/15/14 2,654,000 2,700,445 -------------- 175,701,370 -------------- ENVIRONMENTAL CONTROLS 0.6% Clean Harbors, Inc. 7.625%, due 8/15/16 8,658,000 9,145,013 Geo Sub Corp. 11.00%, due 5/15/12 28,640,000 26,348,800 -------------- 35,493,813 -------------- FINANCE--AUTO LOANS 2.9% AmeriCredit Corp. 8.50%, due 7/1/15 19,465,000 20,389,588 Credit Acceptance Corp. 9.125%, due 2/1/17 (a) 4,000,000 4,200,000 X Ford Motor Credit Co. LLC 5.542%, due 6/15/11 (h) 2,790,000 2,851,101 5.625%, due 9/15/15 11,960,000 12,687,706 6.625%, due 8/15/17 12,875,000 14,399,889 7.25%, due 10/25/11 27,690,000 29,066,719 7.50%, due 8/1/12 11,930,000 12,810,601 8.00%, due 6/1/14 33,730,000 37,763,771 8.125%, due 1/15/20 5,910,000 7,227,150 9.875%, due 8/10/11 6,000,000 6,359,904 12.00%, due 5/15/15 13,415,000 17,195,065 General Motors Acceptance Corp. LLC 6.75%, due 12/1/14 19,305,000 20,191,022 7.25%, due 3/2/11 3,340,000 3,383,190 -------------- 188,525,706 -------------- FINANCE--CONSUMER LOANS 0.4% SLM Corp. 8.00%, due 3/25/20 24,870,000 25,137,800 -------------- FINANCE--OTHER SERVICES 0.6% Nationstar Mortgage/Nationstar Capital Corp. 10.875%, due 4/1/15 (a) 28,512,000 25,803,360 Salton Sea Funding Corp. Series E 8.30%, due 5/30/11 (b) 10,565 10,730 SquareTwo Financial Corp. 11.625%, due 4/1/17 (a) 12,475,000 11,461,406 -------------- 37,275,496 -------------- FOOD 2.7% American Seafoods Group LLC/American Seafoods Finance, Inc. 10.75%, due 5/15/16 (a) 17,678,000 18,473,510 American Stores Co. 8.00%, due 6/1/26 18,999,000 16,196,648 ASG Consolidated LLC/ASG Finance, Inc. 15.00%, due 5/15/17 (a) 12,510,000 11,759,400 B&G Foods, Inc. 7.625%, due 1/15/18 13,720,000 14,611,800 C&S Group Enterprises LLC 8.375%, due 5/1/17 (a) 3,010,000 3,010,000 Simmons Foods, Inc. 10.50%, due 11/1/17 7,815,000 7,815,000 Smithfield Foods, Inc. 7.00%, due 8/1/11 10,160,000 10,502,900 10.00%, due 7/15/14 (a) 12,332,000 14,212,630 Stater Brothers Holdings 8.125%, due 6/15/12 1,433,000 1,434,791
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) FOOD (CONTINUED) TreeHouse Foods, Inc. 6.03%, due 9/30/13 (b)(e) $ 23,700,000 $ 23,759,250 7.75%, due 3/1/18 11,560,000 12,672,650 Tyson Foods, Inc. 8.25%, due 10/1/11 12,280,000 12,955,400 10.50%, due 3/1/14 22,683,000 27,276,307 -------------- 174,680,286 -------------- FOREST PRODUCTS & PAPER 2.9% ABI Escrow Corp. 10.25%, due 10/15/18 (a) 26,965,000 28,785,138 Bowater, Inc. 9.375%, due 12/15/21 (c) 11,908,000 3,825,445 Clearwater Paper Corp. 7.125%, due 11/1/18 (a) 9,720,000 10,157,400 Domtar Corp. 7.875%, due 10/15/11 28,579,000 30,293,740 X Georgia-Pacific Corp. 7.00%, due 1/15/15 (a) 5,760,000 6,012,000 7.125%, due 1/15/17 (a) 6,845,000 7,358,375 7.25%, due 6/1/28 2,370,000 2,607,000 7.75%, due 11/15/29 1,174,000 1,344,230 8.125%, due 5/15/11 31,872,000 32,907,840 8.875%, due 5/15/31 29,615,000 37,092,787 Georgia-Pacific LLC 8.25%, due 5/1/16 (a) 4,398,000 5,046,705 9.50%, due 12/1/11 3,000,000 3,232,500 Weyerhaeuser Co. 6.95%, due 10/1/27 3,695,000 3,682,093 7.375%, due 10/1/19 6,670,000 7,383,130 7.375%, due 3/15/32 1,655,000 1,678,215 8.50%, due 1/15/25 4,130,000 4,547,968 -------------- 185,954,566 -------------- GAS 0.2% Regency Energy Partners/Regency Energy Finance Corp. 8.375%, due 12/15/13 9,194,000 9,584,745 -------------- HAND & MACHINE TOOLS 0.1% Baldor Electric Co. 8.625%, due 2/15/17 8,521,000 9,096,168 -------------- HEALTH CARE--PRODUCTS 1.7% Alere, Inc. 8.625%, due 10/1/18 (a) 7,230,000 7,754,175 Biomet, Inc. 10.00%, due 10/15/17 12,100,000 13,431,000 10.375%, due 10/15/17 (g) 4,990,000 5,563,850 11.625%, due 10/15/17 16,490,000 18,571,862 Cooper Cos., Inc. (The) 7.125%, due 2/15/15 8,610,000 8,932,875 Hanger Orthopedic Group, Inc. 7.125%, due 11/15/18 (a) 16,145,000 16,225,725 10.25%, due 6/1/14 17,895,000 18,879,225 Invacare Corp. 9.75%, due 2/15/15 17,120,000 18,275,600 Universal Hospital Services, Inc. 4.134%, due 6/1/15 930,000 837,000 8.50%, due 6/1/15 (g) 1,705,000 1,777,463 -------------- 110,248,775 -------------- HEALTH CARE--SERVICES 4.1% American Renal Holdings 8.375%, due 5/15/18 (a) 10,555,000 11,188,300 Capella Healthcare, Inc. 9.25%, due 7/1/17 (a) 14,597,000 15,910,730 Centene Corp. 7.25%, due 4/1/14 6,047,000 6,288,880 Community Health Systems, Inc. 8.875%, due 7/15/15 17,590,000 18,821,300 DaVita, Inc. 6.375%, due 11/1/18 14,650,000 14,979,625 6.625%, due 11/1/20 6,850,000 7,046,938 Gentiva Health Services, Inc. 11.50%, due 9/1/18 (a) 14,235,000 15,551,737 X HCA, Inc. 5.75%, due 3/15/14 9,524,000 9,690,670 6.30%, due 10/1/12 23,321,000 24,078,932 6.75%, due 7/15/13 9,545,000 9,926,800 7.19%, due 11/15/15 5,697,000 5,611,545 7.875%, due 2/1/11 11,310,000 11,451,375 8.50%, due 4/15/19 15,775,000 17,746,875 9.00%, due 12/15/14 1,595,000 1,700,669 9.125%, due 11/15/14 1,815,000 1,902,347 9.875%, due 2/15/17 3,645,000 4,091,513 HealthSouth Corp. 8.125%, due 2/15/20 4,905,000 5,297,400 LifePoint Hospitals, Inc. 6.625%, due 10/1/20 (a) 7,765,000 8,172,663 MultiPlan, Inc. 9.875%, due 9/1/18 (a) 24,325,000 26,027,750 Psychiatric Solutions, Inc. 7.75%, due 7/15/15 8,832,000 9,185,280 Sun Healthcare Group, Inc. (zero coupon), due 10/15/16 13,320,000 13,170,150 9.125%, due 4/15/15 14,075,000 15,165,812
14 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) HEALTH CARE--SERVICES (CONTINUED) Vanguard Health Holding Co. II LLC/Vanguard Holding Co. II, Inc. 8.00%, due 2/1/18 $ 3,795,000 $ 3,998,981 8.00%, due 2/1/18 (a) 8,960,000 9,374,400 -------------- 266,380,672 -------------- HOLDING COMPANIES--DIVERSIFIED 0.5% Leucadia National Corp. 8.125%, due 9/15/15 14,255,000 15,555,769 Susser Holdings LLC/Susser Finance Corp. 8.50%, due 5/15/16 17,668,000 18,838,505 -------------- 34,394,274 -------------- HOME FURNISHING 0.1% Sealy Mattress Co. 10.875%, due 4/15/16 (a) 6,849,000 7,833,544 -------------- HOUSEHOLD PRODUCTS & WARES 1.2% Central Garden and Pet Co. 8.25%, due 3/1/18 18,075,000 18,978,750 Diversey, Inc. 8.25%, due 11/15/19 500,000 546,875 Jarden Corp. 7.50%, due 5/1/17 19,505,000 20,748,444 Prestige Brands, Inc. 8.25%, due 4/1/18 (a) 1,151,000 1,199,917 Rent A Center, Inc. 6.625%, due 11/15/20 9,300,000 9,393,000 Spectrum Brands, Inc. 9.50%, due 6/15/18 (a) 23,717,000 26,340,693 -------------- 77,207,679 -------------- HOUSEWARES 0.4% Libbey Glass, Inc. 10.00%, due 2/15/15 (a) 25,801,000 28,058,588 -------------- INSURANCE 1.7% AIG SunAmerica Global Financing VI 6.30%, due 5/10/11 (a) 14,221,000 14,576,525 Crum & Forster Holdings Corp. 7.75%, due 5/1/17 38,265,000 40,226,081 HUB International Holdings, Inc. 9.00%, due 12/15/14 (a) 19,301,000 19,469,884 Ironshore Holdings (US), Inc. 8.50%, due 5/15/20 (a) 16,890,000 17,583,503 Lumbermens Mutual Casualty Co. 8.30%, due 12/1/37 (a)(b)(c) 8,525,000 86,103 8.45%, due 12/1/97 (a)(b)(c) 2,575,000 26,008 9.15%, due 7/1/26 (a)(b)(c) 42,123,000 425,442 USI Holdings Corp. 4.251%, due 11/15/14 (a)(h) 1,675,000 1,448,875 9.75%, due 5/15/15 (a) 11,100,000 11,127,750 Willis North America, Inc. 6.20%, due 3/28/17 5,882,000 6,299,498 -------------- 111,269,669 -------------- INTERNET 0.3% Expedia, Inc. 8.50%, due 7/1/16 (a) 20,264,000 22,391,720 -------------- INVESTMENT MANAGEMENT/ADVISORY SERVICES 0.9% Janus Capital Group, Inc. 6.125%, due 9/15/11 2,020,000 2,041,745 6.50%, due 6/15/12 4,324,000 4,531,842 6.95%, due 6/15/17 26,050,000 27,281,748 Nuveen Investments, Inc. 10.50%, due 11/15/15 4,630,000 4,838,350 Pinafore LLC/Pinafore, Inc. 9.00%, due 10/1/18 (a) 18,275,000 19,554,250 -------------- 58,247,935 -------------- IRON & STEEL 0.5% Allegheny Ludlum Corp. 6.95%, due 12/15/25 6,860,000 7,056,107 Allegheny Technologies, Inc. 8.375%, due 12/15/11 2,460,000 2,582,446 9.375%, due 6/1/19 7,475,000 8,974,186 Ryerson, Inc. 7.841%, due 11/1/14 (a) 1,040,000 972,400 12.00%, due 11/1/15 13,784,000 14,335,360 -------------- 33,920,499 -------------- LEISURE TIME 0.6% Brunswick Corp. 11.25%, due 11/1/16 (a) 11,240,000 13,347,500 Harley-Davidson Funding Corp. 5.25%, due 12/15/12 (a) 250,000 263,614 6.80%, due 6/15/18 (a) 19,815,000 21,547,723 Town Sports International Holdings, Inc. 11.00%, due 2/1/14 4,645,000 4,581,131 -------------- 39,739,968 -------------- LODGING 1.1% Ameristar Casinos, Inc. 9.25%, due 6/1/14 1,895,000 2,051,338 Majestic Star Casino LLC 9.50%, due 10/15/10 (c) 7,690,000 4,844,700 MGM Mirage, Inc. 13.00%, due 11/15/13 5,364,000 6,376,455 San Pasqual Casino 8.00%, due 9/15/13 (a) 250,000 242,500
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) LODGING (CONTINUED) Seminole Hard Rock Entertainment, Inc./Seminole Hard Rock International LLC 2.792%, due 3/15/14 (a)(h) $ 16,105,000 $ 14,293,187 Sheraton Holding Corp. 7.375%, due 11/15/15 1,490,000 1,674,388 Starwood Hotels & Resorts Worldwide, Inc. 6.25%, due 2/15/13 7,995,000 8,514,675 6.75%, due 5/15/18 18,105,000 20,051,287 7.875%, due 5/1/12 12,615,000 13,529,587 -------------- 71,578,117 -------------- MACHINERY--CONSTRUCTION & MINING 0.1% Terex Corp. 10.875%, due 6/1/16 7,415,000 8,453,100 -------------- MACHINERY--DIVERSIFIED 0.3% Briggs & Stratton Corp. 8.875%, due 3/15/11 18,850,000 19,227,000 -------------- MEDIA 3.6% CCO Holdings LLC/CCO Holdings Capital Corp. 7.25%, due 10/30/17 (a) 5,405,000 5,580,663 7.875%, due 4/30/18 (a) 6,875,000 7,304,688 Charter Communications Operating LLC 8.00%, due 4/30/12 (a) 41,004,000 43,618,005 Charter Communications Operating LLC/Charter Communications Operating Capital 10.875%, due 9/15/14 (a) 410,000 467,400 CSC Holdings, Inc. 6.75%, due 4/15/12 25,745,000 26,935,706 8.50%, due 4/15/14 7,185,000 8,011,275 CW Media Holdings, Inc. 13.50%, due 8/15/15 (a)(g) 5,290,000 6,070,275 Echostar DBS Corp. 6.375%, due 10/1/11 11,491,000 11,893,185 HSN, Inc. 11.25%, due 8/1/16 23,375,000 26,998,125 Morris Publishing Group LLC 10.00%, due 9/1/14 (b) 6,729,529 6,569,703 Nielsen Finance LLC/Nielsen Finance Co. 7.75%, due 10/15/18 (a) 30,638,000 31,748,627 10.00%, due 8/1/14 8,105,000 8,520,381 11.50%, due 5/1/16 1,305,000 1,500,750 ProQuest LLC/ProQuest Notes Co. 9.00%, due 10/15/18 (a) 15,135,000 15,456,619 Rainbow National Services LLC 8.75%, due 9/1/12 (a) 10,205,000 10,268,781 10.375%, due 9/1/14 (a) 24,935,000 25,963,569 Ziff Davis Media, Inc. (Escrow Shares) 8.788%, due 7/15/11 (b)(e)(f) 2,923,149 76,294 -------------- 236,984,046 -------------- METAL FABRICATE & HARDWARE 0.5% Mueller Water Products, Inc. 7.375%, due 6/1/17 17,140,000 15,511,700 8.75%, due 9/1/20 (a) 13,000,000 14,088,750 Neenah Foundry Co. 15.00%, due 7/29/15 (b)(e) 3,699,999 3,699,999 -------------- 33,300,449 -------------- MINING 0.5% Freeport-McMoRan Copper & Gold, Inc. 8.25%, due 4/1/15 5,026,000 5,384,103 8.375%, due 4/1/17 22,905,000 25,911,281 -------------- 31,295,384 -------------- MISCELLANEOUS--MANUFACTURING 1.5% Actuant Corp. 6.875%, due 6/15/17 15,850,000 16,186,812 Amsted Industries, Inc. 8.125%, due 3/15/18 (a) 31,385,000 33,111,175 Koppers, Inc. 7.875%, due 12/1/19 12,155,000 13,157,788 SPX Corp. 6.875%, due 9/1/17 (a) 25,425,000 27,713,250 7.625%, due 12/15/14 5,235,000 5,810,850 -------------- 95,979,875 -------------- OFFICE FURNISHINGS 0.2% Interface, Inc. 11.375%, due 11/1/13 8,690,000 10,080,400 -------------- OIL & GAS 9.5% Anadarko Petroleum Corp. 6.375%, due 9/15/17 11,145,000 12,381,114 Atlas Energy Operating Co. LLC/Atlas Energy Finance Corp. 12.125%, due 8/1/17 8,475,000 9,915,750 Berry Petroleum Co. 6.75%, due 11/1/20 7,800,000 8,053,500 10.25%, due 6/1/14 9,915,000 11,439,431 BreitBurn Energy Partners, L.P. 8.625%, due 10/15/20 (a) 15,285,000 15,437,850 Chaparral Energy, Inc. 8.50%, due 12/1/15 19,939,000 19,889,152
16 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) OIL & GAS (CONTINUED) Chesapeake Energy Corp. 6.50%, due 8/15/17 $ 30,590,000 $ 31,890,075 6.875%, due 8/15/18 12,360,000 13,070,700 Comstock Resources, Inc. 6.875%, due 3/1/12 13,560,000 13,576,950 Concho Resources, Inc./Midland TX 8.625%, due 10/1/17 8,441,000 9,137,383 Continental Resources, Inc. 7.125%, due 4/1/21 (a) 4,440,000 4,795,200 7.375%, due 10/1/20 (a) 14,605,000 15,809,912 Denbury Resources, Inc. 7.50%, due 12/15/15 1,715,000 1,779,313 8.25%, due 2/15/20 23,900,000 26,648,500 9.75%, due 3/1/16 6,980,000 7,904,850 Forest Oil Corp. 8.00%, due 12/15/11 13,030,000 13,681,500 Frontier Oil Corp. 6.625%, due 10/1/11 5,735,000 5,742,169 8.50%, due 9/15/16 13,825,000 14,550,812 Hilcorp Energy I, L.P./Hilcorp Finance Co. 7.75%, due 11/1/15 (a) 27,256,000 28,073,680 9.00%, due 6/1/16 (a) 10,350,000 10,919,250 Holly Corp. 9.875%, due 6/15/17 18,512,000 20,270,640 KCS Energy, Inc. 7.125%, due 4/1/12 22,555,000 22,611,387 Linn Energy LLC 9.875%, due 7/1/18 6,710,000 7,448,100 Linn Energy LLC/Linn Energy Finance Corp. 11.75%, due 5/15/17 13,400,000 15,544,000 Mariner Energy, Inc. 7.50%, due 4/15/13 17,480,000 18,004,400 Newfield Exploration Co. 6.625%, due 9/1/14 13,765,174 14,074,890 6.625%, due 4/15/16 11,040,000 11,481,600 7.125%, due 5/15/18 14,620,000 15,643,400 Penn Virginia Corp. 10.375%, due 6/15/16 11,560,000 12,716,000 PetroHawk Energy Corp. 7.875%, due 6/1/15 8,390,000 8,893,400 10.50%, due 8/1/14 7,425,000 8,483,063 Petroquest Energy, Inc. 10.00%, due 9/1/17 29,400,000 30,135,000 Pioneer Drilling Co. 9.875%, due 3/15/18 14,295,000 15,009,750 Plains Exploration & Production Co. 7.75%, due 6/15/15 2,840,000 2,996,200 10.00%, due 3/1/16 16,825,000 19,201,531 Pride International, Inc. 6.875%, due 8/15/20 11,595,000 13,131,338 Range Resources Corp. 6.375%, due 3/15/15 5,000,000 5,100,000 7.25%, due 5/1/18 2,500,000 2,687,500 7.50%, due 5/15/16 4,485,000 4,698,038 8.00%, due 5/15/19 11,655,000 12,907,913 Rosetta Resources, Inc. 9.50%, due 4/15/18 12,250,000 12,770,625 Stone Energy Corp. 6.75%, due 12/15/14 13,375,000 12,605,938 8.625%, due 2/1/17 10,470,000 10,522,350 W&T Offshore, Inc. 8.25%, due 6/15/14 (a) 9,585,000 9,297,450 Whiting Petroleum Corp. 6.50%, due 10/1/18 10,120,000 10,853,700 7.00%, due 2/1/14 27,634,000 29,395,667 -------------- 621,180,971 -------------- OIL & GAS SERVICES 0.5% American Petroleum Tankers LLC/AP Tankers Co. 10.25%, due 5/1/15 (a) 12,730,000 13,239,200 Complete Production Services, Inc. 8.00%, due 12/15/16 15,290,000 16,092,725 -------------- 29,331,925 -------------- PACKAGING & CONTAINERS 1.7% Ball Corp. 6.75%, due 9/15/20 5,830,000 6,413,000 7.125%, due 9/1/16 10,625,000 11,581,250 7.375%, due 9/1/19 10,356,000 11,546,940 Greif, Inc. 6.75%, due 2/1/17 170,000 177,225 7.75%, due 8/1/19 8,100,000 8,829,000 Owens-Brockway Glass Container, Inc. 6.75%, due 12/1/14 22,565,000 23,072,712 7.375%, due 5/15/16 4,910,000 5,351,900 Plastipak Holdings, Inc. 10.625%, due 8/15/19 (a) 27,845,000 30,907,950 Silgan Holdings, Inc. 6.75%, due 11/15/13 2,315,000 2,349,725 7.25%, due 8/15/16 8,740,000 9,319,025 -------------- 109,548,727 -------------- PHARMACEUTICALS 2.2% BioScrip, Inc. 10.25%, due 10/1/15 3,785,000 4,002,637 Catalent Pharma Solutions, Inc. 10.25%, due 4/15/15 (g) 26,423,575 26,819,929 Lantheus Medical Imaging, Inc. 9.75%, due 5/15/17 (a) 12,415,000 12,973,675
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) PHARMACEUTICALS (CONTINUED) Mylan, Inc. 7.625%, due 7/15/17 (a) $ 15,860,000 $ 17,446,000 7.875%, due 7/15/20 (a) 12,120,000 13,513,800 NBTY, Inc. 7.125%, due 10/1/15 22,824,000 23,394,600 9.00%, due 10/1/18 (a) 7,840,000 8,330,000 Quintiles Transnational Corp. 10.25%, due 12/30/14 (a)(g) 18,310,000 18,676,200 Valeant Pharmaceuticals International 6.75%, due 10/1/17 (a) 7,875,000 8,219,531 7.00%, due 10/1/20 (a) 7,875,000 8,268,750 -------------- 141,645,122 -------------- PIPELINES 2.4% ANR Pipeline Co. 7.375%, due 2/15/24 11.50%, beginning 11/1/11 2,555,000 3,324,101 9.625%, due 11/1/21 19,281,000 28,171,199 Cedar Brakes II LLC 9.875%, due 9/1/13 (a) 11,290,565 12,172,132 Copano Energy LLC 8.125%, due 3/1/16 4,186,000 4,322,045 Copano Energy LLC/Copano Energy Finance Corp. 7.75%, due 6/1/18 28,125,000 28,757,813 Crosstex Energy, L.P. /Crosstex Energy Finance Corp. 8.875%, due 2/15/18 8,590,000 9,277,200 El Paso Natural Gas Co. 7.50%, due 11/15/26 6,029,000 6,657,475 8.375%, due 6/15/32 7,435,000 8,800,653 X MarkWest Energy Partners, L.P./MarkWest Energy Finance Corp. 6.75%, due 11/1/20 12,580,000 12,863,050 6.875%, due 11/1/14 8,855,000 9,076,375 8.50%, due 7/15/16 27,430,000 29,144,375 8.75%, due 4/15/18 5,688,000 6,242,580 -------------- 158,808,998 -------------- REAL ESTATE INVESTMENT TRUSTS 1.2% Host Hotels & Resorts, Inc. 6.00%, due 11/1/20 (a) 4,655,000 4,655,000 Host Hotels & Resorts, L.P. 6.875%, due 11/1/14 6,500,000 6,707,188 Host Marriott, L.P. 6.375%, due 3/15/15 5,645,000 5,786,125 Series Q 6.75%, due 6/1/16 36,455,000 37,867,631 7.125%, due 11/1/13 1,568,000 1,587,600 Omega Healthcare Investors, Inc. 7.00%, due 4/1/14 10,140,000 10,342,800 Sabra Health Care, L.P./Sabra Capital Corp. 8.125%, due 11/1/18 (a) 11,951,000 12,369,285 -------------- 79,315,629 -------------- RETAIL 3.1% AmeriGas Partners, L.P. 7.25%, due 5/20/15 6,430,000 6,638,975 AmeriGas Partners, L.P./AmeriGas Eagle Finance Corp. 7.125%, due 5/20/16 2,925,000 3,049,313 Asbury Automotive Group, Inc. 7.625%, due 3/15/17 3,343,000 3,276,140 8.00%, due 3/15/14 18,896,000 19,179,440 AutoNation, Inc. 6.75%, due 4/15/18 20,176,000 20,882,160 DineEquity, Inc. 9.50%, due 10/30/18 (a) 27,780,000 29,585,700 J.C. Penney Corp., Inc. 7.125%, due 11/15/23 16,185,000 16,913,325 Limited Brands, Inc. 8.50%, due 6/15/19 7,740,000 9,133,200 Penske Auto Group, Inc. 7.75%, due 12/15/16 17,096,000 17,266,960 Phillips-Van Heusen Corp. 7.375%, due 5/15/20 12,330,000 13,362,637 QVC, Inc. 7.125%, due 4/15/17 (a) 5,090,000 5,420,850 Roadhouse Financing, Inc. 10.75%, due 10/15/17 (a) 3,370,000 3,648,025 Sally Holdings LLC 9.25%, due 11/15/14 17,265,000 18,149,831 Sears Holding Corp. 6.625%, due 10/15/18 (a) 6,429,000 6,412,927 Sonic Automotive, Inc. 8.625%, due 8/15/13 1,970,000 2,002,013 9.00%, due 3/15/18 10,320,000 10,823,100 Star Gas Partners, L.P./Star Gas Finance Co. Series B 10.25%, due 2/15/13 14,172,000 14,420,010 -------------- 200,164,606 -------------- SOFTWARE 0.4% Fidelity National Information Services, Inc. 7.625%, due 7/15/17 (a) 10,800,000 11,691,000 7.875%, due 7/15/20 (a) 3,565,000 3,894,763
18 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) SOFTWARE (CONTINUED) SS&C Technologies, Inc. 11.75%, due 12/1/13 $ 10,036,000 $ 10,412,350 -------------- 25,998,113 -------------- TELECOMMUNICATIONS 4.2% Alcatel-Lucent USA, Inc. 6.45%, due 3/15/29 22,464,000 18,757,440 American Tower Corp. 7.25%, due 5/15/19 7,425,000 8,891,437 CC Holdings GS V LLC/Crown Castle GS III Corp. 7.75%, due 5/1/17 (a) 33,700,000 37,828,250 Clearwire Communications LLC/Clearwire Finance, Inc. 12.00%, due 12/1/15 (a) 19,415,000 21,550,650 Crown Castle International Corp. 7.125%, due 11/1/19 26,105,000 28,715,500 9.00%, due 1/15/15 10,080,000 11,264,400 DigitalGlobe, Inc. 10.50%, due 5/1/14 11,280,000 12,746,400 GCI, Inc. 7.25%, due 2/15/14 12,360,000 12,607,200 8.625%, due 11/15/19 20,585,000 22,643,500 GeoEye, Inc. 8.625%, due 10/1/16 4,345,000 4,551,388 9.625%, due 10/1/15 7,830,000 8,720,663 Lucent Technologies, Inc. 6.50%, due 1/15/28 13,865,000 11,542,612 MetroPCS Wireless, Inc. 7.875%, due 9/1/18 11,274,000 12,091,365 NII Capital Corp. 10.00%, due 8/15/16 7,095,000 8,043,956 Qwest Corp. 7.50%, due 10/1/14 4,400,000 5,027,000 SBA Telecommunications, Inc. 8.25%, due 8/15/19 14,955,000 16,824,375 Sprint Capital Corp. 6.875%, due 11/15/28 5,805,000 5,471,213 8.75%, due 3/15/32 8,680,000 9,526,300 Sprint Nextel Corp. 8.375%, due 8/15/17 16,850,000 18,577,125 -------------- 275,380,774 -------------- TEXTILES 0.3% INVISTA 9.25%, due 5/1/12 (a) 20,959,000 21,299,584 -------------- TRANSPORTATION 1.1% AMGH Merger Sub, Inc. 9.25%, due 11/1/18 (a) 9,620,000 9,956,700 KAR Holdings, Inc. 4.466%, due 5/1/14 11,780,000 11,014,300 8.75%, due 5/1/14 14,245,000 14,796,994 10.00%, due 5/1/15 23,250,000 24,586,875 Syncreon Global Ireland, Ltd./Syncreon Global Finance US, Inc. 9.50%, due 5/1/18 (a) 12,750,000 13,196,250 -------------- 73,551,119 -------------- TRUCKING & LEASING 0.2% Greenbrier Cos., Inc. 8.375%, due 5/15/15 13,126,000 13,060,370 -------------- Total Corporate Bonds (Cost $4,882,616,230) 5,279,512,268 -------------- FOREIGN BOND 0.4% - ---------------------------------------------------------- MEDIA 0.4% Shaw Communications, Inc. 7.50%, due 11/20/13 C$ 22,825,000 25,537,413 -------------- Total Foreign Bond (Cost $18,181,410) 25,537,413 -------------- LOAN ASSIGNMENTS & PARTICIPATIONS 3.5% (I) - ---------------------------------------------------------- AEROSPACE & DEFENSE 0.2% DAE Aviation Holdings, Inc. Tranche B1 Term Loan 4.04%, due 7/31/14 $ 5,520,497 5,299,677 Tranche B2 Term Loan 4.04%, due 7/31/14 5,306,868 5,094,593 -------------- 10,394,270 -------------- AUTO MANUFACTURERS 0.8% X Ford Motor Co. Term Loan B1 3.038%, due 12/16/13 52,171,753 51,628,019 -------------- AUTO PARTS & EQUIPMENT 0.1% FleetPride Corp. Term Loan 2.789%, due 6/6/13 7,684,375 6,915,938 -------------- COMMERCIAL SERVICES 0.5% Lender Processing Services, Inc. Term Loan A 2.255%, due 7/2/13 7,422,000 7,310,670 Ocwen Financial Corp. Term Loan 9.00%, due 7/28/15 24,418,875 24,296,781 -------------- 31,607,451 --------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED) ELECTRIC 0.0%++ Calpine Corp. 1st Priority Term Loan 3.165%, due 3/29/14 $ 2,060,334 $ 2,047,199 -------------- FOOD 0.1% American Seafoods Group LLC/American Seafoods Finance, Inc. Term Loan B 5.50%, due 5/7/15 8,952,563 8,932,867 -------------- HEALTH CARE--SERVICES 0.4% X HCA, Inc. Term Loan A 1.789%, due 11/16/12 4,970,287 4,862,595 Term Loan B 2.539%, due 11/18/13 19,964,937 19,519,799 -------------- 24,382,394 -------------- MACHINERY 0.0%++ BHM Technologies LLC Exit Term Loan B 8.50%, due 9/30/13 (b)(c)(e) 5,772,379 15,585 -------------- MEDIA 0.4% Nielsen Finance LLC Class A Term Loan 2.256%, due 8/9/13 29,020,310 28,355,252 -------------- METAL FABRICATE & HARDWARE 0.3% Neenah Corp. Exit Term Loan 11.00%, due 1/2/15 (b)(e) 18,600,000 18,600,000 -------------- UTILITIES 0.7% Texas Competitive Electric Holdings Co. LLC Term Loan B3 3.756%, due 10/10/14 13,842,493 10,853,774 Term Loan B2 3.923%, due 10/10/14 46,663,537 36,566,715 -------------- 47,420,489 -------------- Total Loan Assignments & Participations (Cost $237,790,122) 230,299,464 -------------- YANKEE BONDS 10.0% (J) - ---------------------------------------------------------- CHEMICALS 1.2% X Nova Chemicals Corp. 3.748%, due 11/15/13 24,840,000 24,187,950 6.50%, due 1/15/12 8,385,000 8,720,400 8.375%, due 11/1/16 13,850,000 15,131,125 8.625%, due 11/1/19 27,935,000 31,007,850 -------------- 79,047,325 -------------- COMMERCIAL SERVICES 0.4% National Money Mart Co. 10.375%, due 12/15/16 23,490,000 25,604,100 -------------- DIVERSIFIED FINANCIAL SERVICES 0.5% Smurfit Capital Funding PLC 7.50%, due 11/20/25 34,850,000 31,974,875 -------------- ENTERTAINMENT 0.3% MU Finance PLC 8.375%, due 2/1/17 (a) 17,945,000 17,900,138 -------------- FOREST PRODUCTS & PAPER 0.2% PE Paper Escrow GmbH 12.00%, due 8/1/14 (a) 10,805,000 12,531,963 -------------- HEALTH CARE--PRODUCTS 0.5% DJO Finance LLC/DJO Finance Corp. 9.75%, due 10/15/17 (a) 11,830,000 12,303,200 10.875%, due 11/15/14 20,197,000 22,140,961 -------------- 34,444,161 -------------- INSURANCE 0.4% Allied World Assurance Co. Holdings, Ltd. 7.50%, due 8/1/16 6,540,000 7,454,194 Fairfax Financial Holdings, Ltd. 7.375%, due 4/15/18 9,497,000 9,983,721 7.75%, due 7/15/37 4,810,000 4,767,912 8.30%, due 4/15/26 5,395,000 5,563,594 -------------- 27,769,421 -------------- LEISURE TIME 0.3% Willis Group Holdings, Ltd. (Trinity Acquisition, Ltd.) 12.875%, due 12/31/16 (a)(b)(e) 12,185,000 17,194,461 -------------- MEDIA 1.5% Quebecor Media, Inc. 7.75%, due 3/15/16 39,000,000 40,706,250 X Videotron Ltee 6.375%, due 12/15/15 2,200,000 2,257,750
20 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE YANKEE BONDS (CONTINUED) MEDIA (CONTINUED) Videotron Ltee (continued) 6.875%, due 1/15/14 $ 14,341,000 $ 14,538,189 9.125%, due 4/15/18 35,235,000 39,683,419 -------------- 97,185,608 -------------- MISCELLANEOUS--MANUFACTURING 0.1% Tyco Electronics Group S.A. 6.00%, due 10/1/12 6,810,000 7,374,617 -------------- OIL & GAS SERVICES 0.5% Expro Finance Luxembourg SCA 8.50%, due 12/15/16 (a) 31,610,000 31,135,850 -------------- PHARMACEUTICALS 0.5% Warner Chilcott Co. LLC/Warner Chilcott Finance LLC 7.75%, due 9/15/18 (a) 28,345,000 29,478,800 -------------- TELECOMMUNICATIONS 3.5% Inmarsat Finance PLC 7.375%, due 12/1/17 (a) 4,400,000 4,708,000 X Intelsat Subsidiary Holding Co., Ltd. 8.50%, due 1/15/13 54,265,000 54,739,819 8.875%, due 1/15/15 15,700,000 16,249,500 8.875%, due 1/15/15 (a) 20,210,000 20,816,300 Millicom International Cellular S.A. 10.00%, due 12/1/13 25,130,000 25,548,917 Nortel Networks, Ltd. 10.125%, due 7/15/13 (c) 3,780,000 3,189,375 10.75%, due 7/15/16 (c) 5,047,000 4,264,715 Sable International Finance, Ltd. 7.75%, due 2/15/17 (a) 23,755,000 25,506,931 Virgin Media Finance PLC 8.375%, due 10/15/19 14,815,000 16,518,725 9.125%, due 8/15/16 9,745,000 10,414,969 9.50%, due 8/15/16 10,315,000 11,720,419 Virgin Media Secured Finance PLC 6.50%, due 1/15/18 34,341,000 36,830,722 -------------- 230,508,392 -------------- TRANSPORTATION 0.1% Kansas City Southern de Mexico S.A. de C.V. 7.375%, due 6/1/14 6,619,000 6,916,855 -------------- Total Yankee Bonds (Cost $596,135,873) 649,066,566 -------------- Total Long-Term Bonds (Cost $5,788,631,210) 6,243,663,690 -------------- SHARES COMMON STOCKS 0.3% - ---------------------------------------------------------- AIRLINES 0.0%++ Delta Air Lines, Inc. (f) 11,653 161,860 -------------- BEVERAGES 0.0%++ Cott Corp. (f) 55,400 454,280 -------------- COMMERCIAL SERVICES 0.0%++ Quad/Graphics, Inc. (f) 40,952 1,830,964 -------------- MACHINERY 0.0%++ BHM Technologies Holdings, Inc. (b)(e)(f) 537,143 5,371 -------------- MEDIA 0.0%++ Adelphia Contingent Value Vehicle (b)(e)(f) 15,507,390 155,074 -------------- METAL FABRICATE & HARDWARE 0.1% Neenah Enterprises, Inc. (b)(e) 717,799 6,079,758 -------------- TELECOMMUNICATIONS 0.2% Loral Space & Communications, Ltd.(f) 157,362 8,754,048 -------------- Total Common Stocks (Cost $18,372,926) 17,441,355 -------------- PREFERRED STOCKS 0.3% - ---------------------------------------------------------- MACHINERY 0.0%++ BHM Technologies Holdings, Inc. 10.00% (b)(c)(e) 6,430 64 -------------- REAL ESTATE INVESTMENT TRUSTS 0.3% Sovereign Real Estate Investment Corp. 12.00% (a)(b) 18,108 21,095,820 -------------- Total Preferred Stocks (Cost $16,260,073) 21,095,884 -------------- NUMBER OF WARRANTS WARRANTS 0.0%++ - ---------------------------------------------------------- FOOD 0.0%++ ASG Corp. Expires 5/15/18 (b)(f) 12,510 1,565,314 --------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
NUMBER OF WARRANTS VALUE WARRANTS (CONTINUED) MEDIA 0.0%++ ION Media Networks, Inc. Expires 12/12/39 (b)(e)(f) 1,126 $ 12 -------------- Total Warrants (Cost $3,435) 1,565,326 -------------- PRINCIPAL AMOUNT SHORT-TERM INVESTMENT 3.2% - ---------------------------------------------------------- REPURCHASE AGREEMENT 3.2% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $208,088,723 (Collateralized by a United States Treasury Note with a rate of 2.125% and a maturity date of 5/31/15, with a Principal Amount of $201,415,000 and a Market Value of $212,251,127) $ 208,088,549 208,088,549 -------------- Total Short-Term Investment (Cost $208,088,549) 208,088,549 -------------- Total Investments (Cost $6,031,356,193) (k) 99.7% 6,491,854,804 Other Assets, Less Liabilities 0.3 19,396,772 -------------- -------------- Net Assets 100.0% $6,511,251,576 ============== ==============
++ Less than one-tenth of a percent. (a) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (b) Illiquid security. The total market value of these securities at October 31, 2010 is $103,338,110, which represents 1.6% of the Fund's net assets. (c) Issue in default. (d) Restricted security. (e) Fair valued security. The total market value of these securities at October 31, 2010 is $73,558,990, which represents 1.1% of the Fund's net assets. (f) Non-income producing security. (g) PIK ("Payment in Kind")--interest or dividend payment is made with additional securities. (h) Floating rate--Rate shown is the rate in effect at October 31, 2010. (i) Floating Rate Loan--generally pays interest at rates which are periodically re-determined at a margin above the London InterBank Offered Rate ("LIBOR") or other short-term rates. The rate shown is the rate(s) in effect at October 31, 2010. Floating Rate Loans are generally considered restrictive in that the Fund is ordinarily contractually obligated to receive consent from the Agent Bank and/or borrower prior to disposition of a Floating Rate Loan. (j) Yankee Bond--dollar-denominated bond issued in the United States by a foreign bank or corporation. (k) At October 31, 2010, cost is $6,040,366,309 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $529,119,120 Gross unrealized depreciation (77,630,625) ------------ Net unrealized appreciation $451,488,495 ============
The following abbreviation is used in the above portfolio: C$--Canadian Dollar 22 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Long-Term Bonds Convertible Bonds (b) $ -- $ 59,241,825 $ 6,154 $ 59,247,979 Corporate Bonds (c) -- 5,248,009,757 31,502,511 5,279,512,268 Foreign Bond -- 25,537,413 -- 25,537,413 Loan Assignments & Participations (d) -- 211,683,879 18,615,585 230,299,464 Yankee Bonds (e) -- 631,872,105 17,194,461 649,066,566 ----------- -------------- ----------- -------------- Total Long-Term Bonds -- 6,176,344,979 67,318,711 6,243,663,690 ----------- -------------- ----------- -------------- Common Stocks (f) 11,201,152 -- 6,240,203 17,441,355 Preferred Stocks (g) 21,095,820 -- 64 21,095,884 Warrants (h) 1,565,314 -- 12 1,565,326 Short-Term Investment Repurchase Agreement -- 208,088,549 -- 208,088,549 ----------- -------------- ----------- -------------- Total Investments in Securities $33,862,286 $6,384,433,528 $73,558,990 $6,491,854,804 =========== ============== =========== ==============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The level 3 security valued at $6,154 is held in Internet within the Convertible Bonds section of the Portfolio of Investments. (c) The level 3 securities valued at $23,166, $2,956,716, $987,086, $23,759,250, $76,294 and $3,699,999 are held in Auto Parts & Equipment, Commercial Services, Entertainment, Food, Media and Metal Fabricate & Hardware, respectively, within the Corporate Bonds section of the Portfolio of Investments. (d) The level 3 securities valued at $15,585 and $18,600,000 are held in Machinery and Metal Fabricate & Hardware, respectively, within the Loan Assignments & Participations section of the Portfolio of Investments. (e) The level 3 security valued at $17,194,461 is held in Leisure Time within the Yankee Bonds section of the Portfolio of Investments. (f) The level 3 securities valued at $5,371, $155,074 and $6,079,758 are held in Machinery, Media and Metal Fabricate & Hardware, respectively, within the Common Stocks section of the Portfolio of Investments. (g) The level 3 security valued at $64 is held in Machinery within the Preferred Stocks section of the Portfolio of Investments. (h) The level 3 security valued at $12 is held in Media within the Warrants section of the Portfolio of Investments. The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE AS OF ACCRUED REALIZED OCTOBER 31, DISCOUNTS GAIN INVESTMENTS IN SECURITIES 2009 (PREMIUMS) (LOSS) Long-Term Bonds Convertible Bonds Internet $ 6,154 $ -- $ -- Corporate Bonds Auto Parts & Equipment -- -- -- Commercial Services 2,956,716 -- -- Entertainment 970,052 36,728 38,791 Food -- -- -- Media 861,595 -- (1,624,794) Metal, Fabricate & Hardware -- -- -- Loan Assignments & Participations Machinery 2,421,868 (2,000,666) (3,967,539) Metal, Fabricate & Hardware -- -- -- Yankee Bonds Leisure Time 16,442,013 -- -- Common Stocks Machinery 5,371 -- -- Media 155,074 -- -- Metal, Fabricate & Hardware -- -- -- Preferred Stocks Machinery 64 -- -- Warrants Media -- -- -- ----------- ----------- ----------- Total $23,818,907 $(1,963,938) $(5,553,542) =========== =========== =========== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM CHANGE IN BALANCE INVESTMENTS UNREALIZED TRANSFERS TRANSFERS AS OF STILL HELD AT APPRECIATION IN TO OUT OF OCTOBER 31, OCTOBER 31, INVESTMENTS IN SECURITIES (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2010 2010 (A) Long-Term Bonds Convertible Bonds Internet $ -- $ -- $ -- $ -- $ -- $ 6,154 $ -- Corporate Bonds Auto Parts & Equipment 23,166 -- -- -- -- 23,166 23,166 Commercial Services -- -- -- -- -- 2,956,716 -- Entertainment 148,146 -- (206,631) -- -- 987,086 26,703 Food 414,750 23,344,500 -- -- -- 23,759,250 414,750 Media 1,707,901 8,402,286 (9,270,694) -- -- 76,294 (5,535,948) Metal, Fabricate & Hardware -- 3,699,999 -- -- -- 3,699,999 -- Loan Assignments & Participations Machinery 5,999,265 181,344 (2,618,687) -- -- 15,585 8,120,630 Metal, Fabricate & Hardware -- 18,600,000 -- -- -- 18,600,000 -- Yankee Bonds Leisure Time 752,448 -- -- -- -- 17,194,461 752,448 Common Stocks Machinery -- -- -- -- -- 5,371 -- Media -- -- -- -- -- 155,074 -- Metal, Fabricate & Hardware -- 6,079,758 -- -- -- 6,079,758 -- Preferred Stocks Machinery -- -- -- -- -- 64 -- Warrants Media (3,423) 3,435 -- -- -- 12 (3,423) ---------- ----------- ------------ -------- -------- ----------- ----------- Total $9,042,253 $60,311,322 $(12,096,012) $-- $-- $73,558,990 $ 3,798,326 ========== =========== ============ ======== ======== =========== ===========
(a) Included in "change in unrealized appreciation (depreciation) on investments and unfunded commitments" in the Statement of Operations. 24 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - --------------------------------------------------- Investment in securities, at value (identified cost $6,031,356,193) $6,491,854,804 Cash denominated in foreign currencies (identified cost $2,307,925) 2,518,310 Receivables: Dividends and interest 134,638,499 Fund shares sold 17,655,397 Investment securities sold 14,230,992 Other assets 123,023 -------------- Total assets 6,661,021,025 -------------- LIABILITIES - --------------------------------------------------- Unrealized depreciation on unfunded commitments 258,333 Payables: Investment securities purchased 121,589,214 Fund shares redeemed 9,802,599 Manager (See Note 3) 3,059,020 Transfer agent (See Note 3) 1,843,354 NYLIFE Distributors (See Note 3) 1,688,450 Shareholder communication 299,980 Professional fees 196,341 Trustees 19,342 Custodian 13,342 Accrued expenses 12,230 Dividend payable 10,987,244 -------------- Total liabilities 149,769,449 -------------- Net assets $6,511,251,576 ============== COMPOSITION OF NET ASSETS - --------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 10,998,804 Additional paid-in capital 6,758,916,495 -------------- 6,769,915,299 Distributions in excess of net investment income (20,170,376) Accumulated net realized loss on investments and foreign currency transactions (698,955,762) Net unrealized appreciation on investments 460,498,611 Net unrealized depreciation on unfunded commitments (258,333) Net unrealized appreciation on translation of other assets and liabilities in foreign currencies 222,137 -------------- Net assets $6,511,251,576 ============== INVESTOR CLASS Net assets applicable to outstanding shares $ 282,489,031 ============== Shares of beneficial interest outstanding 47,320,372 ============== Net asset value per share outstanding $ 5.97 Maximum sales charge (4.50% of offering price) 0.28 -------------- Maximum offering price per share outstanding $ 6.25 ============== CLASS A Net assets applicable to outstanding shares $3,409,419,259 ============== Shares of beneficial interest outstanding 575,812,382 ============== Net asset value per share outstanding $ 5.92 Maximum sales charge (4.50% of offering price) 0.28 -------------- Maximum offering price per share outstanding $ 6.20 ============== CLASS B Net assets applicable to outstanding shares $ 375,367,781 ============== Shares of beneficial interest outstanding 63,650,138 ============== Net asset value and offering price per share outstanding $ 5.90 ============== CLASS C Net assets applicable to outstanding shares $ 698,490,863 ============== Shares of beneficial interest outstanding 118,395,461 ============== Net asset value and offering price per share outstanding $ 5.90 ============== CLASS I Net assets applicable to outstanding shares $1,736,364,637 ============== Shares of beneficial interest outstanding 293,163,095 ============== Net asset value and offering price per share outstanding $ 5.92 ============== CLASS R2 Net assets applicable to outstanding shares $ 9,120,005 ============== Shares of beneficial interest outstanding 1,538,943 ============== Net asset value and offering price per share outstanding $ 5.93 ==============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 25 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Interest $491,582,874 Dividends 2,642,935 ------------ Total income 494,225,809 ------------ EXPENSES Manager (See Note 3) 34,136,769 Distribution/Service--Investor Class (See Note 3) 680,815 Distribution/Service--Class A (See Note 3) 8,078,020 Distribution/Service--Class B (See Note 3) 4,107,173 Distribution/Service--Class C (See Note 3) 6,826,541 Distribution/Service--Class R2 (See Note 3) 19,651 Transfer agent (See Note 3) 10,919,834 Shareholder communication 1,457,407 Professional fees 786,424 Registration 372,083 Trustees 214,546 Custodian 167,291 Shareholder service (See Note 3) 7,852 Miscellaneous 193,572 ------------ Total expenses 67,967,978 ------------ Net investment income 426,257,831 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - -------------------------------------------------- Net realized gain on: Security transactions 10,114,952 Foreign currency transactions 40,648 ------------ Net realized gain on investments and foreign currency transactions 10,155,600 ------------ Net change in unrealized appreciation (depreciation) on: Investments and unfunded commitments 399,595,879 Translation of other assets and liabilities in foreign currencies 117,333 ------------ Net change in unrealized appreciation (depreciation) on investments, unfunded commitments and foreign currency transactions 399,713,212 ------------ Net realized and unrealized gain on investments, unfunded commitments and foreign currency transactions 409,868,812 ------------ Net increase in net assets resulting from operations $836,126,643 ============
26 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - ------------------------------------------------------------ Operations: Net investment income $ 426,257,831 $ 337,812,008 Net realized gain (loss) on investments and foreign currency transactions 10,155,600 (269,384,292) Net change in unrealized appreciation (depreciation) on investments, unfunded commitments and foreign currency transactions 399,713,212 1,213,420,299 -------------------------------- Net increase in net assets resulting from operations 836,126,643 1,281,848,015 -------------------------------- Dividends and distributions to shareholders: From net investment income: Investor Class (19,325,360) (18,662,710) Class A (232,081,403) (201,436,732) Class B (26,142,919) (31,927,411) Class C (43,795,220) (33,178,703) Class I (112,088,514) (64,555,801) Class R2 (560,236) (195,078) -------------------------------- (433,993,652) (349,956,435) -------------------------------- Return of capital: Investor Class (674,626) (1,357,164) Class A (8,101,696) (14,648,602) Class B (912,619) (2,321,781) Class C (1,528,842) (2,412,776) Class I (3,912,882) (4,694,537) Class R2 (19,557) (14,186) -------------------------------- (15,150,222) (25,449,046) -------------------------------- Total dividends and distributions to shareholders (449,143,874) (375,405,481) -------------------------------- Capital share transactions: Net proceeds from sale of shares 1,907,190,051 2,292,373,937 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 320,715,014 265,187,116 Cost of shares redeemed (a) (1,792,360,922) (1,028,314,564) -------------------------------- Increase in net assets derived from capital share transactions 435,544,143 1,529,246,489 -------------------------------- Net increase in net assets 822,526,912 2,435,689,023 NET ASSETS - ------------------------------------------------------------ Beginning of year 5,688,724,664 3,253,035,641 -------------------------------- End of year $ 6,511,251,576 $ 5,688,724,664 ================================ Distributions in excess of net investment income at end of year $ (20,170,376) $ (28,095,666) ================================
(a) Cost of shares redeemed net of redemption fees of $59,904 for the year ended October 31, 2010 and $323,837 for the year ended October 31, 2009 (See Note 2(M)). The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 27 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS -------------------------------------------- FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 5.60 $ 4.63 $ 5.97 -------- -------- -------- Net investment income (a) 0.41 0.40 0.28 Net realized and unrealized gain (loss) on investments 0.38 1.01 (1.33) Net realized and unrealized gain (loss) on foreign currency transactions 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- Total from investment operations 0.79 1.41 (1.05) -------- -------- -------- Less dividends and distributions: From net investment income (0.41) (0.41) (0.28) Return of capital (0.01) (0.03) (0.01) -------- -------- -------- Total dividends and distributions (0.42) (0.44) (0.29) -------- -------- -------- Redemption fee (a)(f) 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- Net asset value at end of period $ 5.97 $ 5.60 $ 4.63 ======== ======== ======== Total investment return (b) 14.73% 32.60% (18.54%)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 7.03% 8.18% 7.31% ++ Net expenses 1.08% 1.15% 1.16% ++ Expenses (before waiver/reimbursement) 1.08% 1.15% 1.16% ++ Portfolio turnover rate 41% 41% 29% Net assets at end of period (in 000's) $282,489 $265,507 $201,850
CLASS B -------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 5.54 $ 4.57 $ 6.31 $ 6.30 $ 6.19 -------- -------- -------- -------- ---------- Net investment income (a) 0.36 0.36 0.38 0.40 0.38 Net realized and unrealized gain (loss) on investments 0.38 1.00 (1.73) 0.00 ++ 0.15 (d) Net realized and unrealized gain (loss) on foreign currency transactions 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ -------- -------- -------- -------- ---------- Total from investment operations 0.74 1.36 (1.35) 0.40 0.53 -------- -------- -------- -------- ---------- Less dividends and distributions: From net investment income (0.37) (0.36) (0.38) (0.39) (0.37) Return of capital (0.01) (0.03) (0.01) -- (0.05) -------- -------- -------- -------- ---------- Total dividends and distributions (0.38) (0.39) (0.39) (0.39) (0.42) -------- -------- -------- -------- ---------- Redemption fee (a)(f) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- -------- ---------- Net asset value at end of period $ 5.90 $ 5.54 $ 4.57 $ 6.31 $ 6.30 ======== ======== ======== ======== ========== Total investment return (b) 13.81% 31.57% (22.47%) 6.46% 8.92%(c)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 6.27% 7.49% 6.53% 6.19% 6.02% Net expenses 1.83% 1.91% 1.86% 1.79% 1.81% Expenses (before waiver/reimbursement) 1.83% 1.91% 1.86% 1.79% 1.82%(c) Portfolio turnover rate 41% 41% 29% 49% 58% Net assets at end of period (in 000's) $375,368 $453,918 $431,398 $811,937 $1,067,018
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I and Class R2 shares are not subject to sales charges. (c) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (d) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than $0.01 per share on net realized gains on investments and the effect on total investment return was less than 0.01%, respectively. (e) Total investment return is not annualized. (f) The redemption fee was discontinued as of April 1, 2010.
28 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A ------------------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.56 $ 4.60 $ 6.35 $ 6.33 $ 6.22 ---------- ---------- ---------- ---------- ---------- 0.40 0.40 0.43 0.45 0.42 0.39 1.00 (1.74) 0.01 0.15 (d) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ ---------- ---------- ---------- ---------- ---------- 0.79 1.40 (1.31) 0.46 0.57 ---------- ---------- ---------- ---------- ---------- (0.42) (0.41) (0.43) (0.44) (0.41) (0.01) (0.03) (0.01) -- (0.05) ---------- ---------- ---------- ---------- ---------- (0.43) (0.44) (0.44) (0.44) (0.46) ---------- ---------- ---------- ---------- ---------- 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ---------- ---------- ---------- ---------- ---------- $ 5.92 $ 5.56 $ 4.60 $ 6.35 $ 6.33 ========== ========== ========== ========== ========== 14.69% 32.74% (22.00%) 7.41% 9.58%(c)(d) 7.07% 8.19% 7.33% 6.95% 6.77% 1.03% 1.08% 1.07% 1.04% 1.06% 1.03% 1.08% 1.07% 1.04% 1.07%(c) 41% 41% 29% 49% 58% $3,409,419 $3,169,962 $1,835,090 $2,887,965 $2,806,800
CLASS C -------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.54 $ 4.57 $ 6.31 $ 6.30 $ 6.19 -------- -------- -------- -------- -------- 0.36 0.36 0.38 0.40 0.38 0.38 1.00 (1.73) 0.00 ++ 0.15 (d) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ -------- -------- -------- -------- -------- 0.74 1.36 (1.35) 0.40 0.53 -------- -------- -------- -------- -------- (0.37) (0.36) (0.38) (0.39) (0.37) (0.01) (0.03) (0.01) -- (0.05) -------- -------- -------- -------- -------- (0.38) (0.39) (0.39) (0.39) (0.42) -------- -------- -------- -------- -------- 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- -------- -------- $ 5.90 $ 5.54 $ 4.57 $ 6.31 $ 6.30 ======== ======== ======== ======== ======== 13.81% 31.57% (22.60%) 6.63% 8.91%(c)(d) 6.28% 7.29% 6.54% 6.20% 6.02% 1.83% 1.90% 1.86% 1.79% 1.81% 1.83% 1.90% 1.86% 1.79% 1.82%(c) 41% 41% 29% 49% 58% $698,491 $651,209 $276,418 $422,348 $421,855
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 29 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ---------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 5.56 $ 4.60 $ 6.35 $ 6.34 $ 6.22 ---------- ---------- -------- -------- -------- Net investment income (a) 0.42 0.41 0.44 0.47 0.44 Net realized and unrealized gain (loss) on investments 0.38 1.00 (1.73) 0.00 ++ 0.16 Net realized and unrealized gain (loss) on foreign currency transactions 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ (0.00)++ ---------- ---------- -------- -------- -------- Total from investment operations 0.80 1.41 (1.29) 0.47 0.60 ---------- ---------- -------- -------- -------- Less dividends and distributions: From net investment income (0.43) (0.42) (0.45) (0.46) (0.43) Return of capital (0.01) (0.03) (0.01) -- (0.05) ---------- ---------- -------- -------- -------- Total dividends and distributions (0.44) (0.45) (0.46) (0.46) (0.48) ---------- ---------- -------- -------- -------- Redemption fee (a)(f) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ---------- ---------- -------- -------- -------- Net asset value at end of period $ 5.92 $ 5.56 $ 4.60 $ 6.35 $ 6.34 ========== ========== ======== ======== ======== Total investment return (b) 14.98% 32.84% (21.63%) 7.49% 10.02%(c)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 7.34% 8.38% 7.57% 7.26% 7.03% Net expenses 0.78% 0.83% 0.87% 0.79% 0.80% Expenses (before waiver/reimbursement) 0.78% 0.83% 0.87% 0.79% 0.81%(c) Portfolio turnover rate 41% 41% 29% 49% 58% Net assets at end of period (in 000's) $1,736,365 $1,141,889 $508,239 $440,002 $117,032
CLASS R2 --------------------------------------- MAY 1, 2008** YEAR ENDED OCTOBER THROUGH 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 5.56 $ 4.60 $ 5.99 ------ ------ ------- Net investment income (a) 0.40 0.39 0.21 Net realized and unrealized gain (loss) on investments 0.39 1.01 (1.38) Net realized and unrealized gain on foreign currency transactions 0.00 ++ 0.00 ++ 0.00 ++ ------ ------ ------- Total from investment operations 0.79 1.40 (1.17) ------ ------ ------- Less dividends and distributions: From net investment income (0.41) (0.41) (0.21) Return of capital (0.01) (0.03) (0.01) ------ ------ ------- Total dividends and distributions (0.42) (0.44) (0.22) ------ ------ ------- Redemption fee (a)(f) 0.00 ++ 0.00 ++ 0.00 ++ ------ ------ ------- Net asset value at end of period $ 5.93 $ 5.56 $ 4.60 ====== ====== ======= Total investment return (b) 14.78% 32.31% (20.13%)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 6.99% 7.59% 7.48% ++ Net expenses 1.13% 1.18% 1.20% ++ Expenses (before waiver/reimbursement) 1.13% 1.18% 1.20% ++ Portfolio turnover rate 41% 41% 29% Net assets at end of period (in 000's) $9,120 $6,240 $ 41
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I and Class R2 shares are not subject to sales charges. (c) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (d) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than $0.01 per share on net realized gains on investments and the effect on total investment return was less than 0.01%, respectively. (e) Total investment return is not annualized. (f) The redemption fee was discontinued as of April 1, 2010.
30 MainStay High Yield Corporate Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay High Yield Corporate Bond Fund (the "Fund"), a diversified fund. The Fund currently offers six classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on May 1, 1986. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on January 2, 2004. Class R2 shares were first offered to the public on December 14, 2007, but did not commence operations until May 1, 2008. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I and Class R2 shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The six classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class, Class A and Class R2 shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. Class R2 shares are authorized to pay a shareholder service fee to the Manager, as defined in Note 3(A), its affiliates, or third-party service providers, as compensation for services rendered to shareholders of Class R2 shares. This is in addition to any fees paid under a distribution plan, where applicable. The Fund's investment objective is to seek maximum current income through investment in a diversified portfolio of high-yield debt securities. Capital appreciation is a secondary objective. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. mainstayinvestments.com 31 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Loan assignments, participations and commitments are valued at the average of bid quotations obtained from a pricing service, and are generally categorized as Level 2 in the hierarchy. The Fund has engaged an independent pricing service to provide market value quotations from dealers in loans. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund held securities with a value of $73,558,990 that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection 32 MainStay High Yield Corporate Bond Fund with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. The Fund may place a debt obligation on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectibility of interest is reasonably assured. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan assignments and loan participations. Loan assignments and participations ("loans") are agreements to make money available (a "commitment") to a borrower in a specified amount, at a specified rate and within a specified time. Such loans are typically senior, secured and collateralized in nature. The Fund records an investment when the borrower withdraws money and records interest as earned. These loans pay interest at rates that are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate ("LIBOR"). The loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. For example, the Fund may be contractually obligated to receive approval from the agent bank and/or borrower prior to the sale of these investments. The Fund assumes the credit risk of the borrower, the selling participant and any other persons interpositioned between the Fund and the borrower ("intermediate participants"). In the event that the borrower, selling participant or intermediate participants become insolvent or enters into bankruptcy, the Fund may incur certain costs and delays in realizing payment, or may suffer a loss of principal and/or interest. Unfunded commitments represent the remaining obligation of the Fund to the borrower. At any point in time, up to the maturity date of the issue, the borrower may demand the unfunded portion. These unfunded amounts are marked to market and recorded in the Statement of Assets and Liabilities. (See Note 5.) mainstayinvestments.com 33 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (I) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (J) RIGHTS/WARRANTS. A right is a certificate that permits the holder to purchase a certain number of shares, or a fractional share, of a new stock from the issuer at a specific price. A warrant is an instrument that entitles the holder to buy an equity security at a specific price for a specific period of time. The Fund generally enters into rights and warrants when securities are acquired through a corporate action. With respect to warrants in international markets, the securities are only purchased when the underlying security can not be purchased due to the many restrictions an industry and/or country might place on foreign investors. These investments can provide a greater potential for profit or loss than an equivalent investment in the underlying security. Prices of these investments do not necessarily move in tandem with the prices of the underlying securities, and are speculative investments. There is risk involved in the purchase of rights and warrants in that these investments are speculative investments. The Fund could also lose the entire value of the investment in warrants if the warrant is not exercised by the date of its expiration. The securities are sold as soon as the opportunity becomes available. The Fund is exposed to risk until each sale is completed. (K) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (L) RESTRICTED SECURITIES. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. The Fund may not have the right to demand that such securities be registered. Disposal of these securities may involve time-consuming negotiations and expenses and it may be difficult to obtain a prompt sale at an acceptable price. (See Note 7.) (M) REDEMPTION FEE. Prior to April 1, 2010, the Fund imposed a 2.00% redemption fee on redemptions (including exchanges) of Fund shares made within 60 days of their date of purchase for any class. The redemption fee was designed to offset brokerage commissions and other costs associated with short-term trading and was not assessed on shares acquired through the reinvestment of dividends or distributions paid by the Fund. The redemption fees are included in the Statement of Changes in Net Assets' shares redeemed amount and retained by the Fund. (N) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes called "junk bonds"), which are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a premium--a high interest rate or yield--because of the increased risk of loss. These securities can also be subject to greater price volatility. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (O) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with 34 MainStay High Yield Corporate Bond Fund third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (P) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF EQUITY ASSETS AND LIABILITIES CONTRACTS LOCATION RISK TOTAL Warrants Investment in securities, at value $1,565,326 $1,565,326 ---------------------- Total Fair Value $1,565,326 $1,565,326 ======================
The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
STATEMENT OF EQUITY OPERATIONS CONTRACTS LOCATION RISK TOTAL Warrants Net realized loss on security transactions $(3,568,827) $(3,568,827) ------------------------ Total Realized Loss $(3,568,827) $(3,568,827) ========================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
STATEMENT OF EQUITY OPERATIONS CONTRACTS LOCATION RISK TOTAL Net change in unrealized appreciation (depreciation) on security Warrants transactions $4,690,667 $4,690,667 ---------------------- Total Change in Unrealized Appreciation (Depreciation) $4,690,667 $4,690,667 ======================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS
EQUITY CONTRACTS RISK TOTAL Rights (1)(2) 0-2,408,384 0-2,408,384 Warrants (1)(3) 816,598 816,598 ========================
(1) Amount(s) represent(s) number of contracts or number of shares/units. (2) Amount disclosed represents the minimum and maximum held during the year ended October 31, 2010. (3) Amount disclosed represents the weighted average held during the year ended October 31, 2010. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. Effective August 1, 2010, the Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.60% up to $500 million, 0.55% from $500 million up to $5 billion, 0.525% from $5 billion up to $7 billion and 0.50% in excess of $7 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.56% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Prior to August 1, 2010, the Fund paid Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.60% up to $500 million, 0.55% from $500 million up to $5 billion and 0.525% in excess of $5 billion. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $34,136,769. mainstayinvestments.com 35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor receives a monthly distribution fee from the Investor Class, Class A and Class R2 shares at an annual rate of 0.25% of the average daily net assets of the Investor Class, Class A and Class R2 shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. In accordance with the Shareholder Services Plan for the Class R2 shares, the Manager has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R2 shares. For its services, the Manager is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R2 shares. This fee is in addition to any fees paid under a distribution plan, where applicable. For the year ended October 31, 2010, the Fund incurred shareholder service fees of $7,852. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $105,027 and $784,290, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $376, $42,959 $397,519 and $203,075 respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $ 587,667 - ------------------------------------------------ Class A 5,442,440 - ------------------------------------------------ Class B 886,397 - ------------------------------------------------ Class C 1,472,964 - ------------------------------------------------ Class I 2,517,108 - ------------------------------------------------ Class R2 13,258 - ------------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 219 0.0%++ - -------------------------------------------------- Class C 130 0.0++ - -------------------------------------------------- Class I 3,371,654 0.2 - -------------------------------------------------- Class R2 30,146 0.3 - --------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $217,219. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $-- $(694,079,278) $(16,036,744) $451,452,299 $(258,663,723) - ----------------------------------------------------------- -----------------
The difference between book-basis and tax basis unrealized depreciation is primarily due to wash sales deferrals, premium amortization adjustments, class action payments basis adjustments and security lending adjustments. The other temporary differences are primarily due to distributions payable and interest income on defaulted securities. 36 MainStay High Yield Corporate Bond Fund The following table discloses the current year reclassifications between distributions in excess of net investment income, accumulated net realized loss on investments and additional paid-in capital arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) ON PAID-IN INCOME (LOSS) INVESTMENTS CAPITAL $30,811,333 $158,176,942 $(188,988,275) - -------------------------------------- -----------
The reclassifications for the Fund are primarily due to premium amortization adjustments, foreign currency gain (loss), reclassification of consent fee, partnership adjustments and return of capital distributions. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $694,079,278 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2011 $306,034 2014 34,845 2016 84,576 2017 268,624 - ---------------------------------- ------ Total $694,079 - ---------------------------------- ------
The Fund utilized $19,491,789 of capital loss carryforwards during the year ended October 31, 2010. The Fund had $149,627,652 of capital loss carryforwards that expired during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $433,993,652 $349,956,435 Return of Capital 15,150,222 25,449,046 - ------------------------------------------------------- Total $449,143,874 $375,405,481 - -------------------------------------------------------
NOTE 5-COMMITMENTS AND CONTINGENCIES At October 31, 2010, the Fund had an unfunded loan commitment pursuant to the following loan agreement:
UNFUNDED UNREALIZED BORROWER COMMITMENT DEPRECIATION Lender Processing Services, Inc. Revolver due 7/2/13 $5,166,667 $(258,333) - ------------------------------------------------------
The commitment is available until maturity date of the security. NOTE 6-FOREIGN CURRENCY TRANSACTIONS As of October 31, 2010, the Fund held the following foreign currency:
CURRENCY COST VALUE Canadian Dollar CAD 2,568,424 USD 2,307,925 USD 2,518,310 - ----------------------------------------------------------------
NOTE 7-RESTRICTED SECURITIES As of October 31, 2010, the Fund held the following restricted security:
DATE OF PRINCIPAL 10/31/10 PERCENTAGE OF SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS At Home Corp. Convertible Bond 4.75%, due 12/31/49 7/25/01 $61,533,853 $ -- $6,154 0.0%++ - -----------------------------------------------------------------------------------------------------------
++ Less than one-tenth of a percent. NOTE 8-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 9-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 10-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $3,158,708 and $2,298,330, respectively. mainstayinvestments.com 37 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 5,768,719 $ 33,286,337 Shares issued to shareholders in reinvestment of dividends 3,047,560 17,548,122 Shares redeemed (6,570,148) (37,855,377) ---------------------------- Net increase (decrease) in shares outstanding before conversion 2,246,131 12,979,082 Shares converted into Investor Class (See Note 1) 4,237,726 24,405,039 Shares converted from Investor Class (See Note 1) (6,568,480) (37,940,584) ---------------------------- Net increase (decrease) (84,623) $ (556,463) ============================ Year ended October 31, 2009: Shares sold 7,474,779 $ 36,392,998 Shares issued to shareholders in reinvestment of dividends 3,560,027 17,263,693 Shares redeemed (7,329,380) (35,058,492) ---------------------------- Net increase (decrease) in shares outstanding before conversion 3,705,426 18,598,199 Shares converted into Investor Class (See Note 1) 5,370,988 25,224,728 Shares converted from Investor Class (See Note 1) (5,295,364) (27,168,518) ---------------------------- Net increase (decrease) 3,781,050 $ 16,654,409 ============================ CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 122,223,064 $ 699,332,152 Shares issued to shareholders in reinvestment of dividends 30,095,540 171,942,068 Shares redeemed (141,930,654) (810,364,294) ---------------------------- Net increase (decrease) in shares outstanding before conversion 10,387,950 60,909,926 Shares converted into Class A (See Note 1) 18,861,181 107,796,944 Shares converted from Class A (See Note 1) (1,284,741) (7,456,058) Shares converted from Class A (a) (22,498,098) (127,339,233) ---------------------------- Net increase (decrease) 5,466,292 $ 33,911,579 ============================ Year ended October 31, 2009: Shares sold 242,801,884 $1,165,347,013 Shares issued to shareholders in reinvestment of dividends 31,379,867 152,076,855 Shares redeemed (117,461,324) (566,849,942) ---------------------------- Net increase (decrease) in shares outstanding before conversion 156,720,427 750,573,926 Shares converted into Class A (See Note 1) 16,413,917 80,507,811 Shares converted from Class A (See Note 1) (2,089,045) (9,581,698) ---------------------------- Net increase (decrease) 171,045,299 $ 821,500,039 ============================ CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 7,565,312 $ 43,154,532 Shares issued to shareholders in reinvestment of dividends 3,436,326 19,534,373 Shares redeemed (14,048,312) (79,802,350) ---------------------------- Net increase (decrease) in shares outstanding before conversion (3,046,674) (17,113,445) Shares converted from Class B (See Note 1) (15,298,936) (86,805,341) ---------------------------- Net increase (decrease) (18,345,610) $ (103,918,786) ============================ Year ended October 31, 2009: Shares sold 14,445,487 $ 68,012,697 Shares issued to shareholders in reinvestment of dividends 5,009,794 23,866,848 Shares redeemed (17,356,879) (81,542,132) ---------------------------- Net increase (decrease) in shares outstanding before conversion 2,098,402 10,337,413 Shares converted from Class B (See Note 1) (14,473,228) (68,982,323) ---------------------------- Net increase (decrease) (12,374,826) $ (58,644,910) ============================ CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 26,285,161 $ 149,653,012 Shares issued to shareholders in reinvestment of dividends 4,766,392 27,131,710 Shares redeemed (30,249,231) (172,299,013) ---------------------------- Net increase (decrease) 802,322 $ 4,485,709 ============================ Year ended October 31, 2009: Shares sold 68,447,828 $ 328,094,877 Shares issued to shareholders in reinvestment of dividends 4,426,577 21,598,153 Shares redeemed (15,724,607) (75,733,952) ---------------------------- Net increase (decrease) 57,149,798 $ 273,959,078 ============================ CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 170,407,461 $ 975,568,493 Shares issued to shareholders in reinvestment of dividends 14,691,967 84,030,355 Shares redeemed (119,844,424) (687,727,488) ---------------------------- Net increase (decrease) in shares outstanding before conversion 65,255,004 371,871,360 Shares converted into Class I (a) 22,498,098 127,339,233 ---------------------------- Net increase (decrease) 87,753,102 $ 499,210,593 ============================ Year ended October 31, 2009: Shares sold 139,507,704 $ 688,573,602 Shares issued to shareholders in reinvestment of dividends 10,230,251 50,186,636 Shares redeemed (54,838,101) (268,508,467) ---------------------------- Net increase (decrease) 94,899,854 $ 470,251,771 ============================
38 MainStay High Yield Corporate Bond Fund
CLASS R2 SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,082,211 $ 6,195,525 Shares issued to shareholders in reinvestment of dividends 92,287 528,386 Shares redeemed (757,125) (4,312,400) ---------------------------- Net increase (decrease) 417,373 $ 2,411,511 ============================ Year ended October 31, 2009: Shares sold 1,195,469 $ 5,952,750 Shares issued to shareholders in reinvestment of dividends 37,614 194,931 Shares redeemed (120,361) (621,579) ---------------------------- Net increase (decrease) 1,112,722 $ 5,526,102 ============================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 12-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified. mainstayinvestments.com 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay High Yield Corporate Bond Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay High Yield Corporate Bond Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 40 MainStay High Yield Corporate Bond Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay High Yield Corporate Bond Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' mainstayinvestments.com 41 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to MacKay Shields from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to MacKay Shields in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships 42 MainStay High Yield Corporate Bond Fund with the Fund supported the Board's determination to approve the Agreements. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board took note of New York Life Investments' agreement to institute a new contractual management fee breakpoint for the Fund. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 43 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $2,370,916 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 0.5% to arrive at the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2009. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 44 MainStay High Yield Corporate Bond Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 45
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
46 MainStay High Yield Corporate Bond Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 47
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
48 MainStay High Yield Corporate Bond Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 49 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
MYLIM-AO21405 MS333-10 MSHY11-12/10 08 (MAINSTAY INVESTMENTS LOGO) MAINSTAY INCOME BUILDER FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 12 - --------------------------------------------- Financial Statements 26 - --------------------------------------------- Notes to Financial Statements 33 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 45 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 46 - --------------------------------------------- Federal Income Tax Information 50 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 50 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 50 - --------------------------------------------- Board Members and Officers 51 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY INCOME BUILDER FUND BARCLAYS CAPITAL CLASS MSCI WORLD RUSSELL 1000(R) INCOME BUILDER U.S. AGGREGATE B SHARES INDEX INDEX COMPOSITE INDEX BOND INDEX --------------- ---------- --------------- --------------- ---------------- 10/31/00 10000 10000 10000 10000 10000 7831 7449 7396 9288 11456 6809 6342 6316 8878 12130 7707 7846 7726 10235 12725 7959 8886 8447 11100 13429 8568 10065 9331 11898 13581 9403 12210 10826 13452 14286 10471 14700 12454 15166 15055 7484 8548 7871 11499 15101 8440 10123 8752 13659 17183 10/31/10 9750 11412 10298 15148 18560
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 9.99% 2.22% Excluding sales charges 16.39 3.39 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 5.5% Initial Sales Charge With sales charges 10.38 2.35 Excluding sales charges 16.80 3.52 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 10.53 2.32 if Redeemed Within the First Six Years of Purchase Excluding sales charges 15.53 2.62 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 14.55 2.61 if Redeemed Within One Year of Purchase Excluding sales charges 15.55 2.61 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 17.07 3.90 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) -0.07% 1.72% 0.49 1.72 - ------------------------------------------------- Class A Shares -0.01 1.23 0.56 1.23 - ------------------------------------------------- Class B Shares -0.25 2.47 -0.25 2.47 - ------------------------------------------------- Class C Shares -0.26 2.47 -0.26 2.47 - ------------------------------------------------- Class I Shares(4) 0.94 0.97 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, include the performance of Class A shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on January 2, 2004, include the historical performance of Class B shares through January 1, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS MSCI World Index(5) 12.74% 2.54% 1.33% - --------------------------------------------------------------------------------------- Russell 1000(R) Index(6) 17.67 1.99 0.29 - --------------------------------------------------------------------------------------- Income Builder Composite Index(7) 10.90 4.95 4.24 - --------------------------------------------------------------------------------------- Barclays Capital U.S. Aggregate Bond Index(8) 8.01 6.45 6.38 - --------------------------------------------------------------------------------------- Average Lipper Mixed-Asset Target Allocation Growth Fund(9) 14.38 3.21 2.54 - ---------------------------------------------------------------------------------------
5. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of May 27, 2010, the MSCI World Index consisted of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. Total returns assume reinvestment of all dividends and capital gains. The MSCI World Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 6. The Russell 1000(R) Index measures the performance of the 1,000 largest companies in the Russell 3000(R) Index, which represents approximately 92% of the total market capitalization of the Russell 3000(R) Index. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Total returns assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. 7. The Income Builder Index is comprised of the MSCI World Index and the Barclays Capital U.S. Aggregate Bond Index weighted 50%/50% respectively. The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of 23 developed markets. Returns assume reinvestment of all dividends and capital gains. The Barclays Capital U.S. Aggregate Bond Index consists of the following other unmanaged Barclays Capital indices: the Government Bond Index, Corporate Bond Index, MBS Index, and ABS Index. To qualify for inclusion in the Barclays Capital U.S. Aggregate Bond Index, securities must be U.S. dollar denominated and investment grade and have a fixed rate coupon, a remaining maturity of at least one year, and a par amount outstanding of at least $250 million. An investment cannot be made directly in an index. 8. The Barclays Capital U.S. Aggregate Bond Index consists of the following other unmanaged Barclays Capital U.S. indices: the Government Bond Index, Corporate Bond Index, MBS Index, and ABS Index. To qualify for inclusion in the Barclays Capital U.S. Aggregate Bond Index, securities must be U.S. dollar denominated and investment grade and have a fixed rate coupon, a remaining maturity of at least one year, and a par amount outstanding of at least $250 million. Results assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. 9. The average Lipper mixed-asset target allocation growth fund is representative of funds that, by portfolio practice, maintain a mix of between 60%-80% equity securities, with the reminder invested in bonds, cash, and cash equivalents. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital-gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Income Builder Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INCOME BUILDER FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,039.50 $ 7.71 $1,017.60 $ 7.63 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,041.30 $ 5.97 $1,019.40 $ 5.90 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,035.20 $11.54 $1,013.90 $11.42 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,035.30 $11.54 $1,013.90 $11.42 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,042.30 $ 4.68 $1,020.60 $ 4.63 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.50% for Investor Class, 1.16% for Class A, 2.25% for Class B and Class C and 0.91% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Common Stocks 50.2 Corporate Bonds 20.8 Convertible Bonds 8.1 Short-Term Investment 5.9 Asset-Backed Securities 3.8 Convertible Preferred Stocks 1.8 Mortgage-Backed Securities 1.8 Other Assets, Less Liabilities 1.7 Foreign Bonds 1.4 Futures Contracts Long 1.4 Loan Assignments & Participations 1.3 U.S. Government & Federal Agencies 0.9 Yankee Bonds 0.8 Foreign Government Bonds 0.1 Preferred Stock 0.0 Warrants 0.0
See Portfolio of Investments beginning on page 12 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN HOLDINGS OR ISSUERS HELD AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. MGM Mirage, Inc., 7.50%, due 6/1/16 2. Northern Rock Asset Management PLC, 9.375%, due 10/17/21 3. InBev N.V. 4. Linn Energy LLC, 8.625%, due 4/15/20 5. Swisscom A.G. 6. K Hovnanian Enterprises, Inc., 10.625%, due 10/15/16 7. Philip Morris International, Inc. 8. Imperial Tobacco Group PLC 9. Nestle S.A. Registered 10. BCE, Inc.
8 MainStay Income Builder Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS Questions answered by Dan Roberts, Gary Goodenough, James Ramsay, Louis N. Cohen, Michael Kimble and Taylor Wagenseil of MacKay Shields LLC, the Fund's Co- Subadvisor, and Eric Sappenfield, Michael A. Welhoelter, CFA, and William W. Priest, CFA, of Epoch Investment Partners, Inc., the Fund's Co-Subadvisor. HOW DID MAINSTAY INCOME BUILDER FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Income Builder Fund returned 16.39% for Investor Class shares, 16.80% for Class A shares, 15.53% for Class B shares and 15.55% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 17.07%. All share classes outperformed the 14.38% return of the average Lipper(1) mixed-asset target allocation growth fund and the 12.74% return of the MSCI World Index(2) for the 12 months ended October 31, 2010. The MSCI World Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. DURING THE REPORTING PERIOD, HOW WAS THE FUND MATERIALLY AFFECTED BY INVESTMENTS IN DERIVATIVES? During the reporting period, co-Subadvisor Epoch did not use any derivatives. To increase the Fund's equity exposure and sensitivity, however, co-Subadvisor MacKay Shields added equity futures to the Fund, which had a positive impact on the Fund's overall performance. WHAT FACTORS AFFECTED THE RELATIVE PERFORMANCE OF THE EQUITY PORTION OF THE FUND DURING THE REPORTING PERIOD? The equity portion of the Fund significantly outperformed the MSCI World Index during the reporting period. The outperformance was due to strong stock selection in a number of sectors, including utilities, consumer staples, information technology and materials. Returns were also helped by good sector allocation. The equity portion of the Fund was significantly underweight in financials relative to the MSCI World Index during the reporting period, which was beneficial because the sector performed poorly. Overweight positions relative to the MSCI World Index in tele- communication services and consumer staples were also beneficial, as these sectors posted strong returns during the reporting period. At the global market level, strong stock selection and a slight overweight in the United States relative to the MSCI World Index helped the equity portion of the Fund's performance, as did a significant overweight position in U.K. stocks, which performed well. The equity portion of the Fund had no exposure to Japan, which underperformed during the reporting period. IN THE EQUITY PORTION OF THE FUND, WHICH SECTORS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS DETRACTED THE MOST? In the equity portion of the Fund, the strongest sector contributions to the Fund's performance relative to the MSCI World Index came from financials, utilities and consumer staples. The Fund benefited from strong stock selection and a significantly underweight position in financials, strong stock selection in utilities and strong stock selection and an overweight position in consumer staples. During the reporting period, the equity sectors that detracted the most from the Fund's performance relative to the MSCI World Index were consumer discretionary and industrials. Although the equity portion of the Fund's return in the consumer discretionary sector was positive, the Fund's holdings trailed those of the benchmark. The negative effect was compounded by a slightly underweight position in this top-performing sector. An underweight position in the industrials sector detracted from the Fund's equity performance because the sector rose sharply during the reporting period. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED THE MOST? Altria Group, a holding company that engages in the manufacture and sale of a range of consumer products both domestically and internationally, made the strongest contribution to absolute performance in the equity portion of the Fund. BCE Inc., which provides a full range of communications services to residential and business customers in Canada was also up sharply, as the company reported continued good results and improved its dividend payout. The third strongest contributor to absolute performance in the equity portion of the Fund was Taiwan-based smart phone maker, HTC Corp., whose stock rose on increased market penetration of the company's Android phones in the United States and other wireless markets. Global offshore oil and gas drilling contractor Diamond Off- shore Drilling had a negative total return and was the leading detractor from absolute performance in the equity portion of the Fund. The company suffered from softer rig revenue and from the impact of the Gulf of Mexico drilling moratorium on expected cash flows. Spanish financial group Banco Santander S.A. also provided a negative total return and detracted from performance in the equity portion of the Fund. The company was hurt by Europe's sovereign debt crisis and growing eco- nomic stress in Spain. Australian transport and logistics provider Toll Holdings Ltd. saw its shares decline after in-line results disappointed following a sharp run up in the company's stock price. 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the MSCI World Index. mainstayinvestments.com 9 DID THE EQUITY PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? Among the stocks that the equity portion of the Fund purchased during the reporting period were U.K.-based transport operator First Group PLC, U.S.-based semiconductor company Microchip Technology and U.S.-based cable services provider Comcast. In each case, the commitment of management to provide significant shareholder yield combined with the capacity for free cash flow growth drove the decision to add the stock to the equity portion of the Fund. During the reporting period, the equity portion of the Fund sold positions in international oil and gas company BP PLC, south central U.S. energy and energy services provider OGE Energy and European electricity and gas company, RWE AG. BP PLC was eliminated after the Gulf of Mexico disaster put the com- pany's dividend at risk. Our decision to sell the stock was affirmed when management ultimately canceled the stock's dividend. OGE Energy and RWE AG were sold when the stocks reached their respective price targets, and the proceeds were reallocated elsewhere. HOW DID THE FUND'S EQUITY SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we increased the Fund's equity weighting in the information technology sector, but the equity portion of the Fund remained significantly underweight relative to the MSCI World Index in the sector. We added to the equity portion of the Fund's industrials holdings, decreasing the amount by which the Fund was underweight relative to the benchmark. Exposure to financials was increased over the reporting period, but the equity portion of the Fund remained significantly underweight relative to the MSCI World Index in the sector. We reduced the Fund's equity exposure to the consumer staples sector, but the equity portion of the Fund remained significantly overweight relative to the MSCI World Index in the sector. We also reduced the Fund's exposure to energy from a neutral position relative to the benchmark to an underweight position. HOW WAS THE EQUITY PORTION OF THE FUND POSITIONED AT THE END OF OCTOBER 2010? As of October 31, 2010, the equity portion of the Fund was most significantly overweight relative to the MSCI World Index in utilities, telecommunication services and consumer staples. On the same date, the equity portion of the Fund was most significantly underweight relative to the Index in financials, information technology and materials. WHAT FACTORS AFFECTED RELATIVE PERFORMANCE IN THE FIXED-INCOME PORTION OF THE FUND DURING THE REPORTING PERIOD? We believe that the performance of the fixed-income portion of the Fund relative to the Barclays Capital U.S. Aggregate Bond Index(3) was a function of our efforts to increase the beta(4) of the Fund prior to and at the beginning of the reporting period. We achieved this by increasing the Fund's exposure to lower- quality issues within the fixed-income portion of the Fund by holding bonds that were less defensive and by increasing exposure to cyclicals and financials, specifically banking. To increase the Fund's weighting in high-yield corporate bonds, we decreased positions in Treasurys and mortgage-backed securities. WHAT WAS THE FIXED-INCOME PORTION OF THE FUND'S DURATION(5) STRATEGY DURING THE REPORTING PERIOD? The Fund's duration was shorter than that of the Barclays Capital U.S. Aggregate Bond Index, in large part because of an overweight position in high-yield corporate bonds, which tend to have shorter durations. In addition, these bonds tend to have a low correlation to Treasurys and thus have a lower sensitivity to interest rates. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS IN THE FIXED-INCOME PORTION OF THE FUND DURING THE REPORTING PERIOD? At the beginning of the reporting period, we viewed the Federal Reserve's accommodative monetary policy and increasing market liquidity as suggestive that the corporate bond markets, especially the high-yield corporate bond market, would rally. We adjusted the fixed-income portion of the Fund to be well- positioned to take advantage of the market's upside by increasing its beta. Though we have since stopped increasing beta, we believed that Federal Reserve policy continued to favor a rally in high-yield corporate bonds. If spreads(6) continue to tighten and inflation becomes more of a reality than a fear, we may con- sider repositioning the fixed-income portion of the Fund more defensively. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST CONTRIBUTORS TO PERFORMANCE IN THE FIXED-INCOME PORTION OF THE FUND, AND WHICH MARKET SEGMENTS WERE PARTICULARLY WEAK? During the reporting period, the Fund's position in high-yield corporate bonds was the strongest contributor to the Fund's absolute fixed-income performance. Within the high-yield corporate bond market, as well as the investment-grade corporate bond market, the financials sector was a leading performer. Our overweight position relative to the Barclays Capital U.S. 3. See page 6 for more information on the Barclays Capital U.S. Aggregate Bond Index. 4. Beta is a measure of volatility in relation to the market as a whole. A beta higher than 1 indicates that a security or portfolio will tend to exhibit higher volatility than the market. A beta lower than 1 indicates that a security or portfolio will tend to exhibit lower volatility than the market. 5. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 6. The terms "spread" and "yield spread" may refer to the difference in yield between a security or type of security and comparable U.S. Treasury issues. The terms may also refer to the difference in yield between two specific securities or types of securities at a given time. 10 MainStay Income Builder Fund Aggregate Bond Index in financials was the largest positive contributor to relative performance in the fixed-income portion of the Fund. As banks around the world continued to report good results (albeit with slower growth rates and some concerns about new capital requirements under the Basel III accords),(7) we continued to see value in the sector and the fixed-income portion of the Fund remained overweight relative to the Index at the end of October 2010. The Fund's positions within the auto industry were also strong performers. Automakers have seen a recovery in their market. General Motors has reorganized through bankruptcy, and Ford Motor has experienced a significant operational rebound. At the end of 2009, Ford Motor reported its first annual profit in four years. Also, the company's bonds were recently upgraded. The rally in the high-yield corporate bond market continued to be led by lower- quality credits. Therefore, the Fund's positions in higher-quality credits, though positive contributors during the reporting period, did not keep up with the returns of the noninvestment grade portion of the Fund. Consistent with this theme, defensive sectors (such as energy) lagged other sectors within the credit markets during the reporting period. DID THE FIXED-INCOME PORTION OF THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? The largest purchases within the fixed-income portion of the Fund were in high- yield corporate bonds. Names that were significant purchases included Ford Motor, Freescale Semiconductor and American International Group (AIG). We swapped the Fund's fixed-income holdings in Ford Motor for a convertible bond that we believed represented a better risk-reward opportunity. Freescale Semiconductor was benefiting from the cyclical recovery. We purchased AIG as part of our effort to increase the Fund's exposure to the financials sector. The largest sales within the fixed-income portion of the Fund were in mortgages. Although we increased the Fund's high-yield corporate bond exposure, significant sales in that sector included mining company Teck Resources, automaker Ford Motor and lodging company Harrah's. We sold Teck Resources when the company's debt was upgraded to investment grade status and traded at very tight spreads. We sold part of the Fund's position in Ford Motor bonds to swap into other bonds within the company that we felt offered a better risk-reward opportunity. The Harrah's sale was due to relative value concerns. HOW DID THE FIXED-INCOME PORTION OF THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we increased the Fund's hold- ings in high-yield corporate bonds and floating-rate notes and decreased the Fund's exposure to Treasurys, mortgages, investment-grade corporate bonds and agencies. With a positive expectation for the economy and improving fundamentals, we increased exposure to cyclical names within the Fund's credit positions. Auto-related companies received a substantial lift from the economy's revival and financials have realized gains from the steep yield curve and improving economy. We decreased the Fund's holdings in the metals & mining, health services and support services sectors. We reduced the Fund's holdings in these defensive sectors to increase the beta of the fixed-income portion of the Fund. HOW WAS THE FIXED-INCOME PORTION OF THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the most substantially overweight positions relative to the Barclays Capital U.S. Aggregate Bond Index in the fixed-income portion of the Fund were in high-yield corporate bonds, floating-rate notes and convertibles. We favored cyclical sectors because we had positive expectations for the economy and the high-yield corporate bond market. We also favored financials--specifically banks--in light of the governmental support they have received and the steepness of the yield curve, which is conducive to earnings for these companies. As of October 31, 2010, the fixed-income portion of the Fund was underweight in securities that have a higher degree of interest-rate sensitivity, such as Treasurys, agencies and investment-grade corporate bonds. 7. The Basel III accords seek to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE LONG-TERM BONDS 39.0%+ ASSET-BACKED SECURITIES 3.8% - -------------------------------------------------------- AIRLINES 0.7% Continental Airlines, Inc. Series A 7.25%, due 11/10/19 $ 2,230,000 $ 2,475,300 UAL 2009-1 Pass Through Trust 10.40%, due 5/1/18 1,622,582 1,833,517 ------------ 4,308,817 ------------ HOME EQUITY 3.1% Ameriquest Mortgage Securities, Inc. Series 2003-8, Class AF5 5.14%, due 10/25/33 332,853 334,187 Chase Funding Mortgage Loan Asset-Backed Certificates Series 2002-2, Class 1A5 5.833%, due 4/25/32 250,798 256,043 CIT Group Home Equity Loan Trust Series 2003-1, Class A4 3.93%, due 3/20/32 56,272 56,478 Citicorp Residential Mortgage Securities, Inc. Series 2006-3, Class A3 5.61%, due 11/25/36 (a) 204,258 205,992 Series 2006-1, Class A3 5.706%, due 7/25/36 (a) 797,453 806,685 Citifinancial Mortgage Securities, Inc. Series 2003-3, Class AF5 4.553%, due 8/25/33 378,911 382,807 Citigroup Mortgage Loan Trust, Inc. Series 2007-AHL2, Class A3A 0.326%, due 5/25/37 (b) 2,746,915 2,210,192 Countrywide Asset-Backed Certificates Series 2003-5, Class AF5 5.739%, due 2/25/34 493,139 451,225 Equity One ABS, Inc. Series 2003-4, Class AF6 4.833%, due 10/25/34 482,167 490,741 Series 2003-3, Class AF4 4.995%, due 12/25/33 496,169 508,990 GSAA Home Equity Trust Series 2006-14, Class A1 0.306%, due 9/25/36 (b) 8,338,675 3,859,706 HSI Asset Securitization Corp. Trust Series 2006-HE2, Class 2A1 0.306%, due 12/25/36 (b) 896,872 879,086 JP Morgan Mortgage Acquisition Corp. Series 2007-HE1, Class AF1 0.356%, due 3/25/47 (b) 1,923,168 1,391,864 Master Asset Backed Securities Trust Series 2006-HE4, Class A1 0.306%, due 11/25/36 (b) 1,117,273 759,926 Merrill Lynch Mortgage Investors Trust Series 2007-MLN1, Class A2A 0.366%, due 3/25/37 (b) 5,775,778 3,994,603 Residential Asset Mortgage Products, Inc. Series 2003-RZ5, Class A7 4.97%, due 9/25/33 330,055 337,948 Series 2003-RS7, Class AI6 5.34%, due 8/25/33 (b) 307,542 311,292 Residential Asset Securities Corp. Series 2002-KS2, Class AI6 6.228%, due 4/25/32 (b) 211,682 216,902 Saxon Asset Securities Trust Series 2003-1, Class AF5 5.455%, due 6/25/33 96,707 93,116 Soundview Home Equity Loan Trust Series 2006-EQ2, Class A2 0.366%, due 1/25/37 (b) 3,178,642 2,836,589 Terwin Mortgage Trust Series 2005-14HE, Class AF2 4.849%, due 8/25/36 217,537 203,481 ------------ 20,587,853 ------------ Total Asset-Backed Securities (Cost $24,521,849) 24,896,670 ------------ CONVERTIBLE BONDS 8.1% - -------------------------------------------------------- AEROSPACE & DEFENSE 0.4% L-3 Communications Corp. 3.00%, due 8/1/35 1,326,000 1,339,260 Triumph Group, Inc. 2.625%, due 10/1/26 872,000 1,366,860 ------------ 2,706,120 ------------ AUTO PARTS & EQUIPMENT 0.4% ArvinMeritor, Inc. 4.00%, due 2/15/27 1,390,000 1,358,725 BorgWarner, Inc. 3.50%, due 4/15/12 798,000 1,416,450 ------------ 2,775,175 ------------ BIOTECHNOLOGY 0.2% Life Technologies Corp. 1.50%, due 2/15/24 1,179,000 1,377,956 ------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings or issuers held, as of October 31, 2010, excluding short-term investment. May be subject to change daily. 12 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) COAL 0.2% Peabody Energy Corp. 4.75%, due 12/15/66 $ 1,143,000 $ 1,364,456 ------------ COMPUTERS 0.5% EMC Corp. 1.75%, due 12/1/13 1,676,000 2,398,775 SanDisk Corp. 1.50%, due 8/15/17 896,000 875,840 ------------ 3,274,615 ------------ ELECTRONICS 0.2% TTM Technologies, Inc. 3.25%, due 5/15/15 1,356,000 1,362,780 ------------ HEALTH CARE--SERVICES 0.5% Fisher Scientific International, Inc. 3.25%, due 3/1/24 2,452,000 3,261,160 ------------ IRON & STEEL 1.1% Allegheny Technologies, Inc. 4.25%, due 6/1/14 1,951,000 2,880,164 ArcelorMittal 5.00%, due 5/15/14 975,000 1,283,344 Steel Dynamics, Inc. 5.125%, due 6/15/14 1,168,000 1,350,500 United States Steel Corp. 4.00%, due 5/15/14 885,000 1,350,731 ------------ 6,864,739 ------------ MINING 0.5% Newmont Mining Corp. 1.25%, due 7/15/14 2,247,000 3,216,019 ------------ MISCELLANEOUS--MANUFACTURING 1.1% Danaher Corp. (zero coupon), due 1/22/21 3,262,000 4,122,352 Ingersoll-Rand Co. 4.50%, due 4/15/12 608,000 1,359,640 Textron, Inc. 4.50%, due 5/1/13 774,000 1,341,923 ------------ 6,823,915 ------------ OIL & GAS 0.3% Chesapeake Energy Corp. 2.50%, due 5/15/37 588,000 509,355 St. Mary Land & Exploration Co. 3.50%, due 4/1/27 1,264,000 1,354,060 ------------ 1,863,415 ------------ OIL & GAS SERVICES 0.8% Cameron International Corp. 2.50%, due 6/15/26 3,374,000 4,373,548 Core Laboratories, L.P. 0.25%, due 10/31/11 631,000 1,075,066 ------------ 5,448,614 ------------ PHARMACEUTICALS 0.7% ALZA Corp. (zero coupon), due 7/28/20 1,205,000 1,102,575 Teva Pharmaceutical Finance Co. B.V. Series D 1.75%, due 2/1/26 2,984,000 3,360,730 ------------ 4,463,305 ------------ REAL ESTATE INVESTMENT TRUSTS 0.2% SL Green Operating Partnership, L.P. 3.00%, due 10/15/17 (c) 1,305,000 1,319,681 ------------ RETAIL 0.2% Costco Wholesale Corp. (zero coupon), due 8/19/17 926,000 1,324,180 ------------ SEMICONDUCTORS 0.6% Intel Corp. 3.25%, due 8/1/39 (c) 1,131,000 1,347,304 Microchip Technology, Inc. 2.125%, due 12/15/37 1,214,000 1,399,135 ON Semiconductor Corp. 2.625%, due 12/15/26 1,313,000 1,378,650 ------------ 4,125,089 ------------ SOFTWARE 0.2% SYNNEX Corp. 4.00%, due 5/15/18 (c) 1,121,000 1,342,397 ------------ Total Convertible Bonds (Cost $50,767,219) 52,913,616 ------------ CORPORATE BONDS 20.8% - -------------------------------------------------------- ADVERTISING 0.1% Lamar Media Corp. Series C 6.625%, due 8/15/15 300,000 307,125 ------------ AGRICULTURE 0.0%++ Lorillard Tobacco Co. 8.125%, due 6/23/19 255,000 294,625 ------------ AIRLINES 1.1% Continental Airlines, Inc. 7.875%, due 1/2/20 1,809,033 1,795,465
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) AIRLINES (CONTINUED) Delta Air Lines, Inc. 12.25%, due 3/15/15 (c) $ 4,605,000 $ 5,243,944 ------------ 7,039,409 ------------ AUTO MANUFACTURERS 0.3% Ford Motor Co. 6.625%, due 10/1/28 1,500,000 1,560,000 8.90%, due 1/15/32 215,000 255,312 ------------ 1,815,312 ------------ AUTO PARTS & EQUIPMENT 0.1% Goodyear Tire & Rubber Co. (The) 10.50%, due 5/15/16 120,000 137,400 Tenneco, Inc. 8.625%, due 11/15/14 270,000 279,450 ------------ 416,850 ------------ BANKS 1.3% AgriBank FCB 9.125%, due 7/15/19 300,000 372,847 BAC Capital Trust VI 5.625%, due 3/8/35 1,200,000 1,087,289 Bank of America Corp. 6.50%, due 8/1/16 135,000 150,536 8.00%, due 12/29/49 (b) 1,500,000 1,513,755 CIT Group, Inc. 7.00%, due 5/1/14 708,000 711,540 7.00%, due 5/1/16 800,000 797,000 Citigroup, Inc. 8.50%, due 5/22/19 200,000 251,135 Fifth Third Bancorp 6.25%, due 5/1/13 255,000 280,899 GMAC, Inc. 6.875%, due 9/15/11 305,000 314,913 8.00%, due 11/1/31 1,411,000 1,541,517 Wells Fargo & Co. 7.98%, due 3/29/49 (b) 1,200,000 1,260,000 ------------ 8,281,431 ------------ BUILDING MATERIALS 1.0% Boise Cascade LLC 7.125%, due 10/15/14 1,255,000 1,211,075 USG Corp. 6.30%, due 11/15/16 4,695,000 4,202,025 9.50%, due 1/15/18 1,330,000 1,310,050 ------------ 6,723,150 ------------ CHEMICALS 0.7% Dow Chemical Co. (The) 8.55%, due 5/15/19 375,000 481,626 Hexion U.S. Finance Corp./Hexion Nova Scotia Finance ULC 9.75%, due 11/15/14 3,495,000 3,678,488 Huntsman International LLC 5.50%, due 6/30/16 80,000 79,500 Incitec Pivot Finance LLC 6.00%, due 12/10/19 (c) 300,000 318,014 Nalco Finance Holdings, Inc. 9.00%, due 2/1/14 72,000 74,250 Solutia, Inc. 8.75%, due 11/1/17 105,000 117,600 ------------ 4,749,478 ------------ COAL 0.0%++ Arch Western Finance LLC 6.75%, due 7/1/13 118,000 119,180 ------------ COMMERCIAL SERVICES 0.8% Avis Budget Car Rental LLC 7.625%, due 5/15/14 955,000 981,263 9.625%, due 3/15/18 2,545,000 2,735,875 Global Cash Acceptance/Global Cash Finance Corp. 8.75%, due 3/15/12 251,000 250,686 Quebecor World, Inc. (Litigation Recovery Trust--Escrow Shares) 9.75%, due 11/15/49 (c)(d)(e)(f) 110,000 5,720 ServiceMaster Co. (The) 10.75%, due 7/15/15 (c)(g) 240,000 257,400 United Rentals North America, Inc. 9.25%, due 12/15/19 1,100,000 1,221,000 ------------ 5,451,944 ------------ COMPUTERS 0.1% SunGard Data Systems, Inc. 9.125%, due 8/15/13 400,000 409,500 Unisys Corp. 14.25%, due 9/15/15 (c) 425,000 512,125 ------------ 921,625 ------------ DIVERSIFIED FINANCIAL SERVICES 0.3% Alterra Finance LLC 6.25%, due 9/30/20 200,000 200,415 GE Capital Trust II 5.50%, due 9/15/67 (b) E 640,000 791,878 General Electric Capital Corp. 6.50%, due 9/15/67 (b) L 760,000 1,132,542 ------------ 2,124,835 ------------ ELECTRIC 1.1% Allegheny Energy Supply Co. LLC 5.75%, due 10/15/19 (c) $ 305,000 319,899
14 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) ELECTRIC (CONTINUED) Ameren Energy Generating Co. 6.30%, due 4/1/20 $ 270,000 $ 273,535 Edison Mission Energy 7.00%, due 5/15/17 600,000 442,500 Energy Future Intermediate Holding Co. LLC/EFIH Finance, Inc. 10.00%, due 12/1/20 5,543,000 5,805,749 Texas Competitive Electric Holdings Co. LLC 10.25%, due 11/1/15 430,000 266,600 ------------ 7,108,283 ------------ ENTERTAINMENT 0.4% Cinemark USA, Inc. 8.625%, due 6/15/19 140,000 151,025 Isle of Capri Casinos, Inc. 7.00%, due 3/1/14 240,000 227,400 Mohegan Tribal Gaming Authority 6.125%, due 2/15/13 1,370,000 1,202,175 Pinnacle Entertainment, Inc. 8.625%, due 8/1/17 120,000 129,300 Pokagon Gaming Authority 10.375%, due 6/15/14 (c) 373,000 387,920 Shingle Springs Tribal Gaming Authority 9.375%, due 6/15/15 (c) 400,000 272,000 Tunica-Biloxi Gaming Authority 9.00%, due 11/15/15 (c) 123,000 111,776 Warner Music Group 7.375%, due 4/15/14 100,000 92,875 ------------ 2,574,471 ------------ ENVIRONMENTAL CONTROLS 0.2% EnergySolutions, Inc./EnergySolutions LLC 10.75%, due 8/15/18 (c) 1,400,000 1,529,500 ------------ FINANCE--AUTO LOANS 0.0%++ Ford Motor Credit Co. LLC 9.875%, due 8/10/11 200,000 211,997 ------------ FINANCE--CONSUMER LOANS 0.3% American General Finance Corp. 6.90%, due 12/15/17 1,965,000 1,635,863 ------------ FINANCE--CREDIT CARD 0.2% American Express Co. 6.80%, due 9/1/66 (b) 1,600,000 1,606,000 ------------ FINANCE--OTHER SERVICES 0.3% Cantor Fitzgerald, L.P. 7.875%, due 10/15/19 (c) 1,200,000 1,253,226 Pinnacle Foods Finance LLC/Pinnacle Foods Finance Corp. 9.25%, due 4/1/15 350,000 368,813 ------------ 1,622,039 ------------ FOOD 0.2% Smithfield Foods, Inc. 7.75%, due 7/1/17 1,500,000 1,535,625 ------------ FOREST PRODUCTS & PAPER 0.3% Boise Paper Holdings LLC/Boise Co-Issuer Co. 8.00%, due 4/1/20 1,400,000 1,512,000 Cellu Tissue Holdings, Inc. 11.50%, due 6/1/14 70,000 81,550 Clearwater Paper Corp. 10.625%, due 6/15/16 155,000 178,637 NewPage Corp. 11.375%, due 12/31/14 300,000 288,000 ------------ 2,060,187 ------------ HEALTH CARE--PRODUCTS 0.6% Bausch & Lomb, Inc. 9.875%, due 11/1/15 3,355,000 3,648,562 ------------ HEALTH CARE--SERVICES 0.1% CIGNA Corp. 8.50%, due 5/1/19 270,000 352,224 ------------ HOME BUILDERS 1.4% X K Hovnanian Enterprises, Inc. 10.625%, due 10/15/16 6,530,000 6,644,275 MDC Holdings, Inc. 5.625%, due 2/1/20 2,750,000 2,772,407 ------------ 9,416,682 ------------ HOUSEHOLD PRODUCTS & WARES 0.1% Yankee Acquisition Corp. 8.50%, due 2/15/15 300,000 311,625 ------------ INSURANCE 2.6% Allstate Corp. (The) 6.50%, due 5/15/67 (b) 3,790,000 3,761,575 Hartford Financial Services Group, Inc. (The) 6.10%, due 10/1/41 4,100,000 3,692,308 Hartford Life, Inc. 7.65%, due 6/15/27 355,000 375,259 Liberty Mutual Group, Inc. 7.80%, due 3/7/87 (c) 1,760,000 1,760,000 Pacific Life Insurance Co. 7.90%, due 12/30/23 (c) 2,575,000 3,119,880
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) INSURANCE (CONTINUED) Progressive Corp. (The) 6.70%, due 6/15/37 (b) $ 3,700,000 $ 3,783,250 Teachers Insurance & Annuity Association of America 6.85%, due 12/16/39 (c) 300,000 352,560 ------------ 16,844,832 ------------ LEISURE TIME 0.1% Travelport LLC 9.875%, due 9/1/14 400,000 417,000 ------------ LODGING 1.5% Harrah's Operating Co., Inc. 10.00%, due 12/15/18 1,800,000 1,561,500 11.25%, due 6/1/17 240,000 265,200 X MGM Mirage, Inc. 7.50%, due 6/1/16 8,530,000 7,591,700 MGM Resorts International 10.375%, due 5/15/14 40,000 45,000 11.125%, due 11/15/17 80,000 92,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp. 7.875%, due 11/1/17 240,000 261,000 ------------ 9,816,400 ------------ MACHINERY--CONSTRUCTION & MINING 0.1% Terex Corp. 8.00%, due 11/15/17 300,000 299,250 ------------ MACHINERY--DIVERSIFIED 0.0%++ Manitowoc Co., Inc. (The) 7.125%, due 11/1/13 240,000 241,800 ------------ MEDIA 1.9% Cequel Communications Holdings/LLC and Cequel Capital Corp. 8.625%, due 11/15/17 (c) 3,625,000 3,878,750 Clear Channel Communications, Inc. 5.50%, due 12/15/16 10,610,000 5,755,925 6.875%, due 6/15/18 2,490,000 1,282,350 Mediacom Broadband LLC 8.50%, due 10/15/15 300,000 313,500 Morris Publishing Group LLC 10.00%, due 9/1/14 (e) 23,833 23,267 NBC Universal, Inc. 5.15%, due 4/30/20 (c) 160,000 173,623 Nielsen Finance LLC/Nielsen Finance Co. 10.00%, due 8/1/14 120,000 126,150 11.50%, due 5/1/16 215,000 247,250 Time Warner Cable, Inc. 8.25%, due 2/14/14 340,000 405,911 Time Warner, Inc. 7.70%, due 5/1/32 300,000 369,221 Univision Communications, Inc. 12.00%, due 7/1/14 (c) 145,000 160,406 Ziff Davis Media, Inc. (Escrow Shares) 8.788%, due 7/15/11 (b)(e)(f)(g) 16,556 432 ------------ 12,736,785 ------------ MINING 0.2% Century Aluminum Co. 8.00%, due 5/15/14 1,313,000 1,332,695 ------------ MISCELLANEOUS--MANUFACTURING 0.6% Amsted Industries, Inc. 8.125%, due 3/15/18 (c) 3,500,000 3,692,500 ------------ OFFICE & BUSINESS EQUIPMENT 0.1% Xerox Corp. 4.25%, due 2/15/15 300,000 323,063 ------------ OFFICE FURNISHINGS 0.0%++ Interface, Inc. 11.375%, due 11/1/13 120,000 139,200 ------------ OIL & GAS 1.2% Connacher Oil & Gas 10.25%, due 12/15/15 (c) 200,000 199,500 11.75%, due 7/15/14 (c) 105,000 113,400 X Linn Energy LLC 8.625%, due 4/15/20 (c) 6,190,000 6,685,200 Nabors Industries, Inc. 5.00%, due 9/15/20 (c) 1,000,000 1,020,242 Pemex Project Funding Master Trust 6.625%, due 6/15/35 110,000 122,008 ------------ 8,140,350 ------------ OIL & GAS SERVICES 0.9% Basic Energy Services, Inc. 7.125%, due 4/15/16 3,500,000 3,325,000 Geokinetics Holdings USA, Inc. 9.75%, due 12/15/14 2,600,000 2,392,000 ------------ 5,717,000 ------------ PACKAGING & CONTAINERS 0.1% Berry Plastics Corp. 8.875%, due 9/15/14 400,000 407,000 Pregis Corp. 12.375%, due 10/15/13 245,000 250,513
16 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE CORPORATE BONDS (CONTINUED) PACKAGING & CONTAINERS (CONTINUED) Solo Cup Co. 10.50%, due 11/1/13 $ 165,000 $ 172,425 ------------ 829,938 ------------ PIPELINES 0.2% MarkWest Energy Partners, L.P./MarkWest Energy Finance Corp. 6.875%, due 11/1/14 150,000 153,750 8.75%, due 4/15/18 140,000 153,650 NGPL Pipeco LLC 7.768%, due 12/15/37 (c) 225,000 240,750 ONEOK Partners, L.P. 8.625%, due 3/1/19 100,000 130,127 ONEOK, Inc. 6.00%, due 6/15/35 350,000 347,880 ------------ 1,026,157 ------------ REAL ESTATE INVESTMENT TRUSTS 0.0%++ ProLogis 7.375%, due 10/30/19 195,000 217,584 ------------ RETAIL 0.2% CVS Caremark Corp. 5.789%, due 1/10/26 (c)(f) 279,033 292,245 Nebraska Book Co., Inc. 10.00%, due 12/1/11 240,000 243,300 Neiman Marcus Group, Inc. (The) 9.00%, due 10/15/15 (g) 429,967 449,316 Wal-Mart Stores, Inc. 6.75%, due 10/15/23 314,000 404,303 ------------ 1,389,164 ------------ SOFTWARE 0.0%++ Vangent, Inc. 9.625%, due 2/15/15 300,000 273,375 ------------ STORAGE & WAREHOUSING 0.0%++ Mobile Mini, Inc. 6.875%, due 5/1/15 300,000 295,125 ------------ TELECOMMUNICATIONS 0.1% Cricket Communications, Inc. 9.375%, due 11/1/14 300,000 314,250 MetroPCS Wireless, Inc. 9.25%, due 11/1/14 400,000 419,000 Qwest Communications International, Inc. Series B 7.50%, due 2/15/14 200,000 204,000 ------------ 937,250 ------------ Total Corporate Bonds (Cost $126,898,305) 136,527,490 ------------ FOREIGN BONDS 1.4% - -------------------------------------------------------- BANKS 0.3% EGG Banking PLC 6.875%, due 12/29/21 (b) L 1,200,000 1,849,116 FINANCE--MORTGAGE LOAN/BANKER 1.1% X Northern Rock Asset Management PLC 9.375%, due 10/17/21 5,000,000 7,210,579 ------------ Total Foreign Bonds (Cost $7,148,887) 9,059,695 ------------ FOREIGN GOVERNMENT BONDS 0.1% - -------------------------------------------------------- FOREIGN SOVEREIGN 0.1% Republic of Panama 9.375%, due 4/1/29 $ 260,000 399,100 Republic of Venezuela 6.00%, due 12/9/20 309,000 184,164 ------------ Total Foreign Government Bonds (Cost $523,753) 583,264 ------------ LOAN ASSIGNMENTS & PARTICIPATIONS 1.3% (H) - -------------------------------------------------------- AEROSPACE & DEFENSE 0.9% Hawker Beechcraft Acquisition Co. LLC Term Loan 2.264%, due 3/26/14 6,557,028 5,473,073 LC Facility Deposits 2.289%, due 3/26/14 392,010 327,206 ------------ 5,800,279 ------------ CHEMICALS 0.2% Lyondell Chemical Co. Exit Term Loan 5.50%, due 4/8/16 1,246,875 1,256,733 ------------ ELECTRIC 0.1% Calpine Corp. 1st Priority Term Loan 3.165%, due 3/29/14 383,967 381,519 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE LOAN ASSIGNMENTS & PARTICIPATIONS (CONTINUED) MACHINERY 0.0%++ BHM Technologies LLC Exit Term Loan B 8.50%, due 9/30/13 (e)(f)(i) $ 46,635 $ 126 ------------ PACKAGING & CONTAINERS 0.1% Reynolds Group Holdings, Inc. Incremental Term Loan 6.25%, due 5/5/16 993,750 998,300 ------------ Total Loan Assignments & Participations (Cost $8,635,790) 8,436,957 ------------ MORTGAGE-BACKED SECURITIES 1.8% - -------------------------------------------------------- COMMERCIAL MORTGAGE LOANS (COLLATERALIZED MORTGAGE OBLIGATIONS) 1.8% Banc of America Commercial Mortgage, Inc. Series 2007-2, Class A4 5.867%, due 4/10/49 (j) 400,000 419,307 Bayview Commercial Asset Trust Series 2006-4A, Class A1 0.486%, due 12/25/36 (b)(c)(e) 338,218 257,290 Bear Stearns Commercial Mortgage Securities Series 2006-PW12, Class AAB 5.698%, due 9/11/38 (j) 250,000 272,081 Series 2007-PW16, Class A4 5.717%, due 6/11/40 (j) 400,000 433,216 Citigroup Commercial Mortgage Trust Series 2008-C7, Class A4 6.091%, due 12/10/49 (j) 200,000 216,866 Citigroup/Deutsche Bank Commercial Mortgage Trust Series 2005-CD1, Class AM 5.222%, due 7/15/44 (j) 1,000,000 1,024,734 Commercial Mortgage Pass- Through Certificates Series 2006-C8, Class AAB 5.291%, due 12/10/46 500,000 548,829 Four Times Square Trust Series 2006-4TS, Class A 5.401%, due 12/13/28 (c) 860,000 935,797 JP Morgan Chase Commercial Mortgage Securities Corp. Series 2004-C3, Class A5 4.878%, due 1/15/42 510,000 545,144 Series 2007-CB20, Class A3 5.819%, due 2/12/51 500,000 534,259 Series 2007-LD12, Class A3 5.99%, due 2/15/51 (j) 500,000 533,066 LB-UBS Commercial Mortgage Trust Series 2006-C7, Class A3 5.347%, due 11/15/38 500,000 535,924 Series 2007-C6, Class AAB 5.855%, due 7/15/40 500,000 546,056 Series 2007-C6, Class A3 5.933%, due 7/15/40 500,000 528,328 Merrill Lynch/Countrywide Commercial Mortgage Trust Series 2007-8, Class A2 5.928%, due 8/12/49 (j) 500,000 541,364 Morgan Stanley Capital I Series 2007-IQ14, Class AAB 5.654%, due 4/15/49 (b) 500,000 539,586 Series 2006-HQ9, Class AM 5.773%, due 7/12/44 (b) 500,000 511,299 Mortgage Equity Conversion Asset Trust Series 2007-FF2, Class A 0.72%, due 2/25/42 (b)(c)(e)(f) 734,401 698,048 Timberstar Trust Series 2006-1, Class A 5.668%, due 10/15/36 (c) 280,000 312,778 Wachovia Bank Commercial Mortgage Trust Series 2006-C29, Class AM 5.339%, due 11/15/48 500,000 483,469 WaMu Mortgage Pass Through Certificates Series 2006-AR14, Class 1A1 5.501%, due 11/25/36 (j) 1,703,929 1,568,435 ------------ Total Mortgage-Backed Securities (Cost $11,165,570) 11,985,876 ------------ U.S. GOVERNMENT & FEDERAL AGENCIES 0.9% - -------------------------------------------------------- FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE PASS-THROUGH SECURITIES) 0.1% 6.50%, due 11/1/16 36,268 39,770 6.50%, due 2/1/27 396 441 6.50%, due 5/1/29 39,302 44,385 6.50%, due 6/1/29 60,616 68,455 6.50%, due 7/1/29 91,762 103,626 6.50%, due 8/1/29 39,681 44,812 6.50%, due 9/1/29 3,919 4,426 6.50%, due 10/1/29 594 671 6.50%, due 6/1/32 26,083 29,407 6.50%, due 1/1/37 19,341 21,425 7.00%, due 3/1/26 393 445 7.00%, due 9/1/26 13,887 15,718 7.00%, due 10/1/26 18 19 7.00%, due 7/1/30 2,003 2,275 7.00%, due 7/1/32 50,579 57,448
18 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE U.S. GOVERNMENT & FEDERAL AGENCIES (CONTINUED) FEDERAL HOME LOAN MORTGAGE CORPORATION (MORTGAGE PASS-THROUGH SECURITIES) (CONTINUED) 7.50%, due 1/1/16 $ 5,422 $ 5,837 7.50%, due 5/1/32 32,408 37,066 8.00%, due 11/1/12 672 679 ------------ 476,905 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) 0.0%++ 4.50%, due 7/1/20 24,428 26,075 4.50%, due 3/1/21 40,390 43,112 6.00%, due 4/1/19 4,753 5,172 7.00%, due 10/1/37 6,328 7,128 7.00%, due 11/1/37 48,950 55,135 7.50%, due 10/1/11 289 290 7.50%, due 10/1/15 32,105 35,200 8.00%, due 8/1/11 81 83 8.00%, due 11/1/11 349 359 ------------ 172,554 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (MORTGAGE PASS-THROUGH SECURITIES) 0.1% 5.00%, due 12/15/37 35,662 38,332 5.50%, due 9/15/35 74,148 80,728 6.50%, due 4/15/29 210 239 6.50%, due 5/15/29 482 547 6.50%, due 8/15/29 30 34 6.50%, due 10/15/31 10,139 11,516 7.00%, due 7/15/11 107 108 7.00%, due 10/15/11 6,347 6,381 7.00%, due 9/15/23 4,023 4,627 7.00%, due 7/15/25 2,204 2,544 7.00%, due 12/15/25 4,813 5,554 7.00%, due 5/15/26 9,976 11,540 7.00%, due 11/15/27 15,564 18,009 7.00%, due 12/15/27 81,497 94,296 7.00%, due 6/15/28 4,989 5,779 7.50%, due 3/15/26 9,774 11,312 7.50%, due 6/15/26 556 643 7.50%, due 10/15/30 30,444 35,421 8.00%, due 8/15/26 2,093 2,237 8.00%, due 9/15/26 164 196 8.00%, due 10/15/26 17,410 20,776 8.50%, due 11/15/26 24,663 29,855 ------------ 380,674 ------------ UNITED STATES TREASURY BONDS 0.6% 3.875%, due 8/15/40 4,100,000 4,012,875 4.375%, due 5/15/40 475,000 505,951 ------------ 4,518,826 ------------ UNITED STATES TREASURY NOTES 0.1% 1.25%, due 10/31/15 260,000 260,894 2.625%, due 8/15/20 85,000 85,080 ------------ 345,974 ------------ Total U.S. Government & Federal Agencies (Cost $5,960,260) 5,894,933 ------------ YANKEE BONDS 0.8% (K) - -------------------------------------------------------- BANKS 0.1% Lloyds TSB Bank PLC 4.375%, due 1/12/15 (c) 500,000 524,216 Royal Bank of Scotland PLC (The) 4.875%, due 8/25/14 (c) 475,000 508,386 ------------ 1,032,602 ------------ BUILDING MATERIALS 0.0%++ Asia Aluminum Holdings, Ltd. 8.00%, due 12/23/11 (c)(e)(i) 645,000 65 ------------ DIVERSIFIED FINANCIAL SERVICES 0.1% Irish Life & Permanent Group Holdings PLC 3.60%, due 1/14/13 (c) 400,000 374,767 ------------ ENTERTAINMENT 0.1% Great Canadian Gaming Corp. 7.25%, due 2/15/15 (c) 400,000 408,000 ------------ HOLDING COMPANY--DIVERSIFIED 0.0%++ Hutchison Whampoa International, Ltd. 7.625%, due 4/9/19 (c) 215,000 267,455 ------------ INSURANCE 0.1% Oil Insurance, Ltd. 7.558%, due 12/29/49 (b)(c) 1,320,000 1,185,822 ------------ INTERNET 0.0%++ UPC Holding B.V. 9.875%, due 4/15/18 (c) 240,000 262,200 ------------ MINING 0.1% Anglo American Capital PLC 9.375%, due 4/8/19 (c) 250,000 340,744 ------------ MISCELLANEOUS--MANUFACTURING 0.1% Siemens Financieringsmaatschappij N.V. 6.125%, due 8/17/26 (c) 300,000 343,734 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE YANKEE BONDS (CONTINUED) OIL & GAS 0.1% ENI S.p.A 4.15%, due 10/1/20 (c) $ 175,000 $ 180,687 Gazprom International S.A. 7.201%, due 2/1/20 (c) 327,532 351,278 OPTI Canada, Inc. 8.25%, due 12/15/14 265,000 200,737 TNK-BP Finance S.A. 7.50%, due 7/18/16 (c) 200,000 222,000 ------------ 954,702 ------------ TRANSPORTATION 0.1% Hapag-Lloyd A.G. 9.75%, due 10/15/17 (c) 375,000 393,281 ------------ Total Yankee Bonds (Cost $5,951,494) 5,563,372 ------------ Total Long-Term Bonds (Cost $241,573,127) 255,861,873 ------------ SHARES COMMON STOCKS 50.2% - -------------------------------------------------------- AEROSPACE & DEFENSE 1.1% BAE Systems PLC 495,750 2,738,178 Meggitt PLC 845,900 4,474,270 ------------ 7,212,448 ------------ AGRICULTURE 4.0% Altria Group, Inc. 196,048 4,983,540 British American Tobacco PLC 43,397 1,654,986 X Imperial Tobacco Group PLC 195,500 6,262,060 Lorillard, Inc. 61,940 5,285,960 X Philip Morris International, Inc. 108,013 6,318,760 Reynolds American, Inc. 31,885 2,069,336 ------------ 26,574,642 ------------ AUTO MANUFACTURERS 0.5% Daimler A.G. (d) 25,200 1,663,530 Ford Motor Co. (d) 125,000 1,766,250 ------------ 3,429,780 ------------ BANKS 1.0% CIT Group, Inc. (d) 69,000 2,989,770 Citigroup, Inc. (d) 410,000 1,709,700 Westpac Banking Corp. 81,356 1,809,014 ------------ 6,508,484 ------------ BEVERAGES 2.7% Coca-Cola Co. (The) 30,010 1,840,213 Coca-Cola Enterprises, Inc. 73,250 1,758,733 Diageo PLC, Sponsored ADR (l) 78,500 5,809,000 X InBev N.V. 107,547 6,741,015 PepsiCo., Inc. 27,300 1,782,690 ------------ 17,931,651 ------------ BUILDING MATERIALS 0.1% U.S. Concrete, Inc. (d)(e) 83,147 692,615 ------------ CHEMICALS 1.3% Air Liquide S.A. 15,013 1,941,990 BASF A.G. 46,544 3,386,695 E.I. du Pont de Nemours & Co. 68,816 3,253,621 ------------ 8,582,306 ------------ COMMERCIAL SERVICES 0.3% Automatic Data Processing, Inc. 41,000 1,821,220 Quad/Graphics, Inc. (d) 13 581 ------------ 1,821,801 ------------ COMPUTERS 0.7% HTC Corp. 104,200 2,351,361 Quanta Computer, Inc. 1,270,000 2,330,846 ------------ 4,682,207 ------------ DISTRIBUTION & WHOLESALE 0.3% Genuine Parts Co. 39,700 1,900,042 ------------ ELECTRIC 5.8% CMS Energy Corp. 130,700 2,402,266 CPFL Energia S.A. 126,100 2,958,377 DPL, Inc. 60,550 1,580,355 Duke Energy Corp. 190,322 3,465,764 E.ON A.G. 80,200 2,511,503 Entergy Corp. 23,200 1,729,096 National Grid PLC 502,200 4,747,734 NSTAR 44,150 1,841,496 Progress Energy, Inc. 36,484 1,641,780 SCANA Corp. 43,858 1,791,161 Scottish & Southern Energy PLC 177,450 3,278,408 Southern Co. (The) 86,400 3,271,968 TECO Energy, Inc. 179,500 3,157,405 Terna S.p.A. 735,450 3,393,232 ------------ 37,770,545 ------------ ELECTRICAL COMPONENTS & EQUIPMENT 0.3% Emerson Electric Co. 31,073 1,705,908 ------------ ENGINEERING & CONSTRUCTION 0.7% Vinci S.A. 82,145 4,387,963 ------------ ENVIRONMENTAL CONTROLS 0.2% Waste Management, Inc. 43,850 1,566,322 ------------
20 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) FINANCE--OTHER SERVICES 0.3% NYSE Euronext 61,700 $ 1,890,488 ------------ FOOD 2.1% H.J. Heinz Co. 37,250 1,829,347 Kellogg Co. 41,750 2,098,355 X Nestle S.A. Registered 112,155 6,143,138 Orkla ASA 174,050 1,685,045 WM Morrison Supermarkets PLC 373,500 1,758,329 ------------ 13,514,214 ------------ FOOD SERVICES 0.3% Compass Group PLC 268,100 2,197,354 ------------ GAS 1.8% Nicor, Inc. 52,100 2,481,523 NiSource, Inc. 268,841 4,653,638 Vectren Corp. 92,950 2,544,971 WGL Holdings, Inc. 56,150 2,164,582 ------------ 11,844,714 ------------ HEALTH CARE--PRODUCTS 0.7% Johnson & Johnson 75,667 4,817,718 ------------ HOUSEHOLD PRODUCTS & WARES 1.1% Kimberly-Clark Corp. 60,495 3,831,753 Tupperware Brands Corp. 71,800 3,217,358 ------------ 7,049,111 ------------ INSURANCE 1.8% Arthur J. Gallagher & Co. 182,700 5,144,832 Muenchener Rueckversicherungs- Gesellschaft A.G. Registered 16,200 2,533,174 SCOR SE 105,550 2,595,802 Travelers Cos., Inc. (The) 33,800 1,865,760 ------------ 12,139,568 ------------ INVESTMENT COMPANY 0.0%++ BGP Holdings PLC (e)(f) 20,068 3 ------------ MACHINERY 0.0%++ BHM Technologies Holdings, Inc. (d)(e)(f) 4,340 43 ------------ MEDIA 2.3% Comcast Corp. Class A 177,750 3,435,908 Dex One Corp. (d) 2,323 16,284 Pearson PLC 351,950 5,382,878 Shaw Communications, Inc. 73,700 1,580,370 Vivendi S.A. 175,479 5,005,528 ------------ 15,420,968 ------------ METAL FABRICATE & HARDWARE 0.5% Assa Abloy AB 124,350 3,187,101 ------------ MINING 0.3% BHP Billiton, Ltd., Sponsored ADR (l) 24,000 1,982,160 ------------ MISCELLANEOUS--MANUFACTURING 0.4% Honeywell International, Inc. 58,100 2,737,091 ------------ OFFICE EQUIPMENT/SUPPLIES 0.5% Pitney Bowes, Inc. 154,327 3,385,934 ------------ OIL & GAS 3.5% Canadian Oil Sands Trust 68,500 1,716,698 Chevron Corp. 27,124 2,240,714 ConocoPhillips 26,400 1,568,160 Diamond Offshore Drilling, Inc. 45,400 3,003,664 ExxonMobil Corp. 35,505 2,360,017 Royal Dutch Shell PLC Class A, ADR (l) 78,050 5,067,787 StatoilHydro A.S.A., Sponsored ADR (l) 150,500 3,285,415 Total S.A. 62,918 3,419,142 ------------ 22,661,597 ------------ PACKAGING & CONTAINERS 0.3% Bemis Co., Inc. 53,050 1,684,868 ------------ PHARMACEUTICALS 2.7% Abbott Laboratories 40,100 2,057,932 AstraZeneca PLC, Sponsored ADR (l) 104,200 5,257,932 Bristol-Myers Squibb Co. 147,885 3,978,106 Merck & Co., Inc. 101,059 3,666,421 Roche Holding A.G., Genusscheine 17,050 2,503,658 ------------ 17,464,049 ------------ PIPELINES 0.8% Kinder Morgan Energy Partners, L.P. 51,150 3,553,391 Spectra Energy Corp. 70,450 1,674,597 ------------ 5,227,988 ------------ RETAIL 0.7% McDonald's Corp. 24,492 1,904,743 Next PLC 72,950 2,670,971 ------------ 4,575,714 ------------ SAVINGS & LOANS 0.2% Hudson City Bancorp, Inc. 138,200 1,610,030 ------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) SEMICONDUCTORS 1.1% Microchip Technology, Inc. 134,950 $ 4,342,691 Taiwan Semiconductor Manufacturing Co, Ltd., Sponsored ADR (l) 238,450 2,601,490 ------------ 6,944,181 ------------ SOFTWARE 1.2% Microsoft Corp. 154,573 4,117,825 Oracle Corp. 122,903 3,613,348 ------------ 7,731,173 ------------ TELECOMMUNICATIONS 7.4% AT&T, Inc. 136,327 3,885,319 X BCE, Inc. 177,150 5,942,055 CenturyTel, Inc. 140,201 5,801,517 China Mobile, Ltd., Sponsored ADR (l) 33,650 1,728,601 France Telecom S.A. 161,290 3,875,706 Mobistar S.A. 41,050 2,717,264 Philippine Long Distance Telephone Co., Sponsored ADR (l) 28,100 1,745,853 Rogers Communications, Inc. Class B 83,250 3,033,209 X Swisscom A.G. 15,950 6,663,325 Telefonica S.A. 159,175 4,297,872 Verizon Communications, Inc. 124,174 4,031,930 Vodafone Group PLC 1,892,877 5,151,641 ------------ 48,874,292 ------------ TRANSPORTATION 0.8% FirstGroup PLC 853,300 5,577,160 ------------ WATER 0.4% United Utilities Group PLC 262,150 2,566,544 ------------ Total Common Stocks (Cost $295,618,593) 329,850,777 ------------ CONVERTIBLE PREFERRED STOCKS 1.8% - -------------------------------------------------------- AUTO MANUFACTURERS 0.6% Ford Motor Co. Capital Trust II 6.50% 86,000 4,274,200 ------------ BANKS 0.3% Ally Financial, Inc. (c) 7.00% 40 35,550 Citigroup, Inc. 7.50% 14,100 1,741,914 ------------ 1,777,464 ------------ INSURANCE 0.7% Hartford Financial Services Group, Inc. 7.25% 75,400 1,851,070 MetLife, Inc. 6.50% 100,850 2,521,250 ------------ 4,372,320 ------------ INVESTMENT MANAGEMENT/ADVISORY SERVICES 0.2% Affiliated Managers Group, Inc. 5.10% 30,100 1,411,690 ------------ Total Convertible Preferred Stocks (Cost $11,576,483) 11,835,674 ------------ PREFERRED STOCK 0.0%++ - -------------------------------------------------------- MACHINERY 0.0%++ BHM Technologies Holdings, Inc. 10.00% (d)(e)(f) 52 1 ------------ Total Preferred Stock (Cost $0) 1 ------------ NUMBER OF WARRANTS WARRANTS 0.0%++ - -------------------------------------------------------- MEDIA 0.0%++ ION Media Networks, Inc. Expires 12/12/39 (d)(e)(f) 6 0 (o) ------------ Total Warrants (Cost $20) 0 (o) ------------ PRINCIPAL AMOUNT SHORT-TERM INVESTMENT 5.9% - -------------------------------------------------------- REPURCHASE AGREEMENT 5.9% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $38,702,410 (Collateralized by United States Treasury Note with a rate of 2.125% and a maturity date of 5/31/15, with Principal Amount of $37,465,000 and a Market Value of $39,480,617) $ 38,702,377 38,702,377 ------------ Total Short-Term Investment (Cost $38,702,377) 38,702,377 ------------ Total Investments (Cost $587,470,600) (p) 96.9% 636,250,702 Other Assets, Less Liabilities 3.1 20,109,310 ------------ ------------ Net Assets 100.0% $656,360,012 ============ ============
22 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
CONTRACTS UNREALIZED LONG APPRECIATION (M) FUTURES CONTRACTS 1.4% - --------------------------------------------------------- Standard & Poor's 500 Index Mini December 2010 (n) 2,230 $9,148,575 ---------- Total Futures Contracts (Settlement Value $131,536,550) $9,148,575 ==========
+++ On a daily basis New York Life Investments confirms that the value of the Fund's liquid assets (liquid portfolio securities and cash) is sufficient to cover its potential senior securities (e.g., futures, swaps, options). ++ Less than one-tenth of a percent. (a) Subprime mortgage investment and other asset-backed securities. The total market value of the securities at October 31, 2010 is $1,012,677, which represents 0.2% of the Fund's net assets. (b) Floating rate--Rate shown is the rate in effect at October 31, 2010. (c) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (d) Non-income producing security. (e) Illiquid security. The total market value of these securities at October 31, 2010 is $1,677,610, which represents 0.3% of the Fund's net assets. (f) Fair valued security. The total market value of these securities at October 31, 2010 is $996,618, which represents 0.2% of the Fund's net assets. (g) PIK ("Payment in Kind")--interest or dividend payment is made with additional securities. (h) Floating Rate Loan--generally pays interest at rates which are periodically re-determined at a margin above the London InterBank Offered Rate ("LIBOR") or other short-term rates. The rate shown is the rate(s) in effect at October 31, 2010. Floating Rate Loans are generally considered restrictive in that the Fund is ordinarily contractually obligated to receive consent from the Agent Bank and/or borrower prior to disposition of a Floating Rate Loan. (i) Issue in default. (j) Collateral strip rate--Bond whose interest is based on the weighted net interest rate of the collateral. Coupon rate adjusts periodically based on a predetermined schedule. Rate shown is the rate in effect at October 31, 2010. (k) Yankee Bond--dollar-denominated bond issued in the United States by a foreign bank or corporation. (l) ADR--American Depositary Receipt. (m) Represents the difference between the value of the contracts at the time they were opened and the value at October 31, 2010. (n) At October 31, 2010, cash in the amount of $10,035,000 is on deposit with the broker for futures transactions. (o) Less than one dollar. (p) At October 31, 2010, cost is $587,802,419 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $58,525,915 Gross unrealized depreciation 10,077,632 ----------- Net unrealized appreciation $48,448,283 ===========
The following abbreviations are used in the above portfolio: L--British Pound Sterling E--Euro The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED) The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets and liabilities. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Long-Term Bonds Asset-Backed Securities $ -- $ 24,896,670 $ -- $ 24,896,670 Convertible Bonds -- 52,913,616 -- 52,913,616 Corporate Bonds (b) -- 136,229,093 298,397 136,527,490 Foreign Bonds -- 9,059,695 -- 9,059,695 Foreign Government Bonds -- 583,264 -- 583,264 Loan Assignments & Participations (c) -- 8,436,831 126 8,436,957 Mortgage-Backed Securities (d) -- 11,287,828 698,048 11,985,876 U.S. Government & Federal Agencies -- 5,894,933 -- 5,894,933 Yankee Bonds -- 5,563,372 -- 5,563,372 ------------ ------------ -------- ------------ Total Long-Term Bonds -- 254,865,302 996,571 255,861,873 ------------ ------------ -------- ------------ Common Stocks (e) 329,850,731 -- 46 329,850,777 Convertible Preferred Stocks 11,835,674 -- -- 11,835,674 Preferred Stocks (f) -- -- 1 1 Warrants (g) -- -- 0 (g) 0 (g) Short-Term Investment Repurchase Agreement -- 38,702,377 -- 38,702,377 ------------ ------------ -------- ------------ Total Investments in Securities 341,686,405 293,567,679 996,618 636,250,702 ------------ ------------ -------- ------------ Other Financial Instruments Foreign Currency Forward Contracts (h) -- 334,843 -- 334,843 Futures Contracts Long (i) 9,148,575 -- -- 9,148,575 ------------ ------------ -------- ------------ Total Investments in Securities and Other Financial Instruments $350,834,980 $293,902,522 $996,618 $645,734,120 ============ ============ ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The level 3 securities valued at $5,720, $432 and $292,245 are held in Commercial Services, Media and Retail, respectively, within the Corporate Bonds section of the Portfolio of Investments. (c) The level 3 security valued at $126 is held in Machinery within the Loan Assignments & Participations section of the Portfolio of Investments. (d) The level 3 security valued at $698,048 is held in Commercial Mortgage Loans (Collateralized Mortgage Obligations) within the Mortgage-Backed Securities section of the Portfolio of Investments. (e) The level 3 securities valued at $3 and $43 are held in Investment Company and Machinery respectively, within the Common Stocks section of the Portfolio of Investments. (f) The level 3 security valued at $1 is held in Machinery within the Preferred Stock section of the Portfolio of Investments. (g) The level 3 security valued at less than one dollar is held in Media within the Warrants section of the Portfolio of Investments. (h) The value listed for these securities reflects unrealized appreciation as shown on the table of foreign currency forward contracts. (See Note 5) (i) The value listed for these securities reflects unrealized appreciation as shown on the Portfolio of Investments. LIABILITY VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Other Financial Instruments Foreign Currency Forward Contracts (a) $ -- $(779,281) $ -- $(779,281) -------- --------- -------- --------- Total Other Financial Instruments $-- $(779,281) $-- $(779,281) ======== ========= ======== =========
(a) The value listed for these securities reflects unrealized depreciation as shown on the table of foreign currency forward contracts. (See Note 5) 24 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE AS OF ACCRUED REALIZED OCTOBER 31, DISCOUNTS GAIN INVESTMENTS IN SECURITIES 2009 (PREMIUMS) (LOSS) Long-Term Bonds Asset-Backed Securities Credit Cards $ 567,175 $ (92) $ (370) Corporate Bonds Commercial Services 5,720 -- -- Media 4,881 -- (8,930) Retail 280,885 384 (246) Loan Assignments & Participations Machinery 19,566 (15,804) (33,970) Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) 716,447 -- -- Common Stocks Investment Company 3 -- -- Machinery 43 -- -- Preferred Stocks Machinery 1 -- -- Warrants Airlines 13 -- -- Media -- -- -- ---------- -------- -------- Total $1,594,734 $(15,512) $(43,516) ========== ======== ======== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM CHANGE IN BALANCE INVESTMENTS UNREALIZED TRANSFERS TRANSFERS AS OF STILL HELD AT APPRECIATION IN TO OUT OF OCTOBER 31, OCTOBER 31, INVESTMENTS IN SECURITIES (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2010 2010 (A) Long-Term Bonds Asset-Backed Securities Credit Cards $ 8,743 $ -- $(575,456) $ -- $ -- $ -- $ -- Corporate Bonds Commercial Services -- -- -- -- -- 5,720 -- Media 9,460 46,788 (51,767) -- -- 432 (30,820) Retail 22,699 -- (11,477) -- -- 292,245 20,812 Loan Assignments & Participations Machinery 51,757 1,465 (22,888) -- -- 126 1,479 Mortgage-Backed Securities Commercial Mortgage Loans (Collateralized Mortgage Obligations) 13,454 -- (31,853) -- -- 698,048 11,384 Common Stocks Investment Company -- -- -- -- -- 3 -- Machinery -- -- -- -- -- 43 -- Preferred Stocks Machinery -- -- -- -- -- 1 -- Warrants Airlines -- -- (13) -- -- -- -- Media (21) 21 -- -- -- 0(b) (21) -------- ------- --------- -------- -------- -------- -------- Total $106,092 $48,274 $(693,454) $-- $-- $996,618 $ 2,834 ======== ======= ========= ======== ======== ======== ========
(a) Included in "change in unrealized appreciation (depreciation) on investments" in the Statement of Operations. (b) Less than one dollar. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 25 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - --------------------------------------------------- Investment in securities, at value (identified cost $587,470,600) $ 636,250,702 Cash collateral on deposit at broker 10,035,000 Cash denominated in foreign currencies (identified cost $851,374) 855,981 Receivables: Investment securities sold 7,414,255 Dividends and interest 4,739,342 Fund shares sold 116,546 Variation margin on futures contracts 44,600 Other assets 39,422 Unrealized appreciation on foreign currency forward contracts 334,843 ------------- Total assets 659,830,691 ------------- LIABILITIES - --------------------------------------------------- Payables: Investment securities purchased 1,095,039 Fund shares redeemed 652,556 Manager (See Note 3) 356,636 Transfer agent (See Note 3) 314,713 NYLIFE Distributors (See Note 3) 155,064 Shareholder communication 76,941 Professional fees 22,442 Custodian 11,117 Trustees 1,627 Accrued expenses 5,263 Unrealized depreciation on foreign currency forward contracts 779,281 ------------- Total liabilities 3,470,679 ------------- Net assets $ 656,360,012 ============= COMPOSITION OF NET ASSETS - --------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 420,509 Additional paid-in capital 698,723,960 ------------- 699,144,469 Undistributed net investment income 905,719 Accumulated net realized loss on investments, futures transactions and foreign currency transactions (101,197,634) Net unrealized appreciation on investments and futures contracts 57,928,677 Net unrealized depreciation on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (421,219) ------------- Net assets $ 656,360,012 ============= INVESTOR CLASS Net assets applicable to outstanding shares $ 170,851,867 ============= Shares of beneficial interest outstanding 10,966,373 ============= Net asset value per share outstanding $ 15.58 Maximum sales charge (5.50% of offering price) 0.91 ------------- Maximum offering price per share outstanding $ 16.49 ============= CLASS A Net assets applicable to outstanding shares $ 239,564,273 ============= Shares of beneficial interest outstanding 15,379,473 ============= Net asset value per share outstanding $ 15.58 Maximum sales charge (5.50% of offering price) 0.91 ------------- Maximum offering price per share outstanding $ 16.49 ============= CLASS B Net assets applicable to outstanding shares $ 71,238,695 ============= Shares of beneficial interest outstanding 4,555,447 ============= Net asset value and offering price per share outstanding $ 15.64 ============= CLASS C Net assets applicable to outstanding shares $ 10,311,816 ============= Shares of beneficial interest outstanding 660,278 ============= Net asset value and offering price per share outstanding $ 15.62 ============= CLASS I Net assets applicable to outstanding shares $ 164,393,361 ============= Shares of beneficial interest outstanding 10,489,334 ============= Net asset value and offering price per share outstanding $ 15.67 =============
26 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Interest $ 19,581,470 Dividends (a) 16,896,812 ------------ Total income 36,478,282 ------------ EXPENSES Manager (See Note 3) 4,267,082 Transfer agent (See Note 3) 1,906,451 Distribution/Service--Investor Class (See Note 3) 414,513 Distribution/Service--Class A (See Note 3) 575,028 Distribution/Service--Class B (See Note 3) 751,023 Distribution/Service--Class C (See Note 3) 98,556 Shareholder communication 216,512 Custodian 154,034 Professional fees 117,442 Registration 104,523 Trustees 22,392 Miscellaneous 15,995 ------------ Total expenses 8,643,551 ------------ Net investment income 27,834,731 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - -------------------------------------------------- Net realized gain (loss) on: Security transactions $ 25,533,391 Futures transactions 3,015,388 Foreign currency transactions (6,969,727) ------------ Net realized gain on investments, futures transactions and foreign currency transactions 21,579,052 ------------ Net change in unrealized appreciation (depreciation) on: Investments 43,123,103 Futures contracts 10,513,755 Translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (428,551) ------------ Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 53,208,307 ------------ Net realized and unrealized gain on investments, futures transactions and foreign currency transactions 74,787,359 ------------ Net increase in net assets resulting from operations $102,622,090 ============
(a) Dividends recorded net of foreign withholding taxes in the amount of $838,698. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 27 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE (DECREASE) IN NET ASSETS - --------------------------------------------------------- Operations: Net investment income $ 27,834,731 $ 9,023,377 Net realized gain (loss) on investments, futures transactions and foreign currency transactions 21,579,052 (48,303,798) Net change in unrealized appreciation (depreciation) on investments, futures contracts and foreign currency transactions 53,208,307 85,466,565 --------------------------- Net increase in net assets resulting from operations 102,622,090 46,186,144 --------------------------- Dividends to shareholders: From net investment income: Investor Class (6,170,095) (3,762,283) Class A (9,381,903) (5,225,038) Class B (2,138,828) (1,232,591) Class C (291,114) (31,920) Class I (7,728,545) (1,543) --------------------------- Total dividends to shareholders (25,710,485) (10,253,375) --------------------------- Capital share transactions: Net proceeds from sale of shares 40,354,493 14,666,352 Net asset value of shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) -- 266,679,188 Net asset value of shares issued to shareholders in reinvestment of dividends 25,008,836 9,981,914 Cost of shares redeemed (149,084,523) (64,466,172) --------------------------- Increase (decrease) in net assets derived from capital share transactions (83,721,194) 226,861,282 --------------------------- Net increase (decrease) in net assets (6,809,589) 262,794,051 NET ASSETS - --------------------------------------------------------- Beginning of year 663,169,601 400,375,550 --------------------------- End of year $ 656,360,012 $663,169,601 =========================== Undistributed net investment income at end of year $ 905,719 $ 41,861 ===========================
28 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 29 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS -------------------------------------------------- FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 13.89 $ 12.58 $ 16.50 -------- -------- -------- Net investment income (a) 0.59 0.30 0.19 Net realized and unrealized gain (loss) on investments 1.81 1.36 (3.89) Net realized and unrealized gain (loss) on foreign currency transactions (0.16) 0.00 ++ 0.01 -------- -------- -------- Total from investment operations 2.24 1.66 (3.69) -------- -------- -------- Less dividends and distributions: From net investment income (0.55) (0.35) (0.23) From net realized gain on investments -- -- -- -------- -------- -------- Total dividends and distributions (0.55) (0.35) (0.23) -------- -------- -------- Net asset value at end of period $ 15.58 $ 13.89 $ 12.58 ======== ======== ======== Total investment return (b) 16.39% 13.57% (22.65%)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 4.02% 2.40% 1.84% ++ Net expenses 1.50% 1.40% 1.29% ++ Expenses (before waiver/reimbursement) 1.50% 1.72% 1.50% ++ Portfolio turnover rate 76% 182%(f) 101%(f) Net assets at end of period (in 000's) $170,852 $161,824 $136,858
CLASS B --------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 13.93 $ 12.61 $ 20.15 $ 19.86 $ 18.95 ------- ------- ------- -------- -------- Net investment income (a) 0.48 0.21 0.18 0.21 0.11 Net realized and unrealized gain (loss) on investments 1.84 1.35 (5.28) 1.89 1.69 (d) Net realized and unrealized gain (loss) on foreign currency transactions (0.17) 0.00 ++ 0.01 -- -- ------- ------- ------- -------- -------- Total from investment operations 2.15 1.56 (5.09) 2.10 1.80 ------- ------- ------- -------- -------- Less dividends and distributions: From net investment income (0.44) (0.24) (0.18) (0.21) (0.12) From net realized gain on investments -- -- (2.27) (1.60) (0.77) ------- ------- ------- -------- -------- Total dividends and distributions (0.44) (0.24) (2.45) (1.81) (0.89) ------- ------- ------- -------- -------- Net asset value at end of period $ 15.64 $ 13.93 $ 12.61 $ 20.15 $ 19.86 ======= ======= ======= ======== ======== Total investment return (b) 15.53% 12.77% (28.53%) 11.37% 9.74%(c)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 3.25% 1.65% 1.12% 1.06% 0.55% Net expenses 2.24% 2.14% 1.99% 1.94% 1.94% Expenses (before waiver/reimbursement) 2.24% 2.47% 2.15% 2.02% 2.09%(c) Portfolio turnover rate 76% 182%(f) 101%(f) 68% 70%(f) Net assets at end of period (in 000's) $71,239 $79,742 $76,420 $156,346 $202,149
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (d) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than $0.01 per share on net realized gains on investments and the effect on total investment return was less than 0.02%, respectively. (e) Total investment return is not annualized. (f) The portfolio turnover rates not including mortgage dollar rolls were 151%, 86% and 55% for the years ended October 31, 2009, 2008 and 2006, respectively.
30 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 13.88 $ 12.57 $ 20.10 $ 19.82 $ 18.92 -------- -------- -------- -------- -------- 0.64 0.33 0.32 0.35 0.27 1.82 1.36 (5.27) 1.88 1.67 (d) (0.16) 0.00 ++ 0.01 -- -- -------- -------- -------- -------- -------- 2.30 1.69 (4.94) 2.23 1.94 -------- -------- -------- -------- -------- (0.60) (0.38) (0.32) (0.35) (0.27) -- -- (2.27) (1.60) (0.77) -------- -------- -------- -------- -------- (0.60) (0.38) (2.59) (1.95) (1.04) -------- -------- -------- -------- -------- $ 15.58 $ 13.88 $ 12.57 $ 20.10 $ 19.82 ======== ======== ======== ======== ======== 16.80% 13.82% (27.88%) 12.18% 10.53%(c)(d) 4.37% 2.60% 1.93% 1.81% 1.42% 1.15% 1.20% 1.18% 1.19% 1.19% 1.15% 1.23% 1.26% 1.27% 1.34%(c) 76% 182%(f) 101%(f) 68% 70%(f) $239,564 $222,648 $185,491 $518,547 $502,340
CLASS C ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 13.92 $12.59 $ 20.12 $19.84 $18.94 ------- ------ ------- ------ ------ 0.48 0.22 0.18 0.21 0.12 1.82 1.35 (5.27) 1.88 1.67 (d) (0.16) 0.00 ++ 0.01 -- -- ------- ------ ------- ------ ------ 2.14 1.57 (5.08) 2.09 1.79 ------- ------ ------- ------ ------ (0.44) (0.24) (0.18) (0.21) (0.12) -- -- (2.27) (1.60) (0.77) ------- ------ ------- ------ ------ (0.44) (0.24) (2.45) (1.81) (0.89) ------- ------ ------- ------ ------ $ 15.62 $13.92 $ 12.59 $20.12 $19.84 ======= ====== ======= ====== ====== 15.55% 12.69% (28.47%) 11.33% 9.69%(c)(d) 3.27% 1.67% 1.12% 1.06% 0.62% 2.24% 2.17% 1.99% 1.94% 1.94% 2.24% 2.47% 2.15% 2.02% 2.09%(c) 76% 182%(f) 101%(f) 68% 70%(f) $10,312 $9,622 $ 1,563 $2,980 $3,175
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 31 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 13.97 $ 12.65 $ 20.25 $19.90 $18.98 -------- -------- ------- ------ ------ Net investment income (a) 0.68 0.77 0.37 0.44 0.36 Net realized and unrealized gain (loss) on investments 1.82 0.97 (5.33) 1.93 1.69 (d) Net realized and unrealized gain (loss) on foreign currency transactions (0.16) 0.00 ++ 0.01 -- -- -------- -------- ------- ------ ------ Total from investment operations 2.34 1.74 (4.95) 2.37 2.05 -------- -------- ------- ------ ------ Less dividends and distributions: From net investment income (0.64) (0.42) (0.38) (0.42) (0.36) From net realized gain on investments -- -- (2.27) (1.60) (0.77) -------- -------- ------- ------ ------ Total dividends and distributions (0.64) (0.42) (2.65) (2.02) (1.13) -------- -------- ------- ------ ------ Net asset value at end of period $ 15.67 $ 13.97 $ 12.65 $20.25 $19.90 ======== ======== ======= ====== ====== Total investment return (b) 17.07% 14.14% (27.60%) 12.65% 11.11%(c)(d) Ratios (to average net assets)/Supplemental Data: Net investment income 4.60% 3.74% 2.31% 2.23% 1.86% Net expenses 0.89% 0.97% 0.79% 0.81% 0.74% Expenses (before waiver/reimbursement) 0.89% 0.97% 0.97% 0.93% 0.89%(c) Portfolio turnover rate 76% 182%(e) 101%(e) 68% 70%(e) Net assets at end of period (in 000's) $164,393 $189,333 $ 43 $ 29 $ 13
++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (d) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than $0.01 per share on net realized gains on investments and the effect on total investment return was less than 0.02%, respectively. (e) The portfolio turnover rates not including mortgage dollar rolls were 151%, 86% and 55% for the years ended October 31, 2009, 2008 and 2006, respectively.
32 MainStay Income Builder Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Income Builder Fund (the "Fund"), a diversified fund. The Fund currently offers five classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on December 29, 1987. Class C shares commenced operations on September 1, 1998. Class I shares commenced operations on January 2, 2004. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to seek to realize current income consistent with reasonable opportunity for future growth of capital and income. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Futures contracts are valued at the last posted settlement price on the market where such futures are primarily traded. Options contracts are valued at the last posted settlement price on the market where such options are principally traded. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in mainstayinvestments.com 33 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Foreign currency forward contracts are valued at their fair market values determined on the basis of the mean between the last current bid and ask prices based on dealer or exchange quotations and are generally categorized as Level 2 in the hierarchy. Loan assignments, participations and commitments are valued at the average of bid quotations obtained from a pricing service, and are generally categorized as Level 2 in the hierarchy. The Fund has engaged an independent pricing service to provide market value quotations from dealers in loans. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund held securities with a value of $996,618 that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. Generally, a security is considered illiquid if it cannot be sold or disposed of in the ordinary course of business at approximately the price at which it is valued. Its illiquidity might prevent the sale of such security at a time when the Manager or Subadvisor might wish to sell, and these securities could have the effect of decreasing the overall level of a Fund's liquidity. Further, the lack of an established secondary market may make it more difficult to value illiquid securities, requiring the Fund to rely on judgments that may be somewhat subjective in determining value, which could vary from the amount that the Fund could realize upon disposition. Difficulty in selling illiquid securities may result in a loss or may be costly to the Fund. Under the supervision of the Board, the Manager or Subadvisor determines the liquidity of the Fund's investments; in doing so, the Manager or Subadvisor may consider various factors, including (1) the frequency of trades and quotations, (2) the number of dealers and prospective purchasers, (3) dealer undertakings to make a market, and (4) the nature of the security and the market in which it trades (e.g., the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer). Illiquid securities generally will be valued in such manner as the Board in good faith deems appropriate to reflect their fair market value. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. 34 MainStay Income Builder Fund Investment income received by the Fund from foreign sources may be subject to foreign income taxes. These foreign income taxes are generally withheld at the source. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income, if any, quarterly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method and include gains and losses from repayments of principal on mortgage-backed securities. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put options on its portfolio securities or foreign currencies. These securities are subject to equity price risk and interest rate risk in the normal course of investing in these transactions. Premiums received are recorded as assets, and the market value of the written options are recorded as liabilities. The liabilities are subsequently adjusted and unrealized appreciation or depreciation is recorded to reflect the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are exercised or are cancelled in closing purchase transactions are added to the proceeds or netted against the amount paid on the transaction to determine the realized gain or loss. By writing a covered call option, in exchange for the premium, the Fund foregoes the opportunity for capital appreciation above the exercise price should the price of the underlying security or foreign currency increase. The Fund, in exchange for the premium, accepts the risk of a decline in the market value of the underlying security or foreign currency below the exercise price. A call option may be covered by the call writer's owning the underlying security throughout the option period. A call option may also be covered by the call writer's maintaining liquid assets valued at greater than the exercise price of the call written. When writing a covered call option, the Fund, in return for the premium on the option, gives up the opportunity to profit from a price increase in the underlying securities above the exercise price. However, as long as the obligation as the writer continues, the Fund has retained the risk of loss should the price of the underlying security decline. After writing a put option, the Fund may incur risk exposure equal to the difference between the exercise price of the option and the sum of the market value of the underlying security plus the premium received from the sale of the option. The Fund writes covered call options to try to realize greater return on the sale of a stock. The Fund writes put options to help protect against unanticipated adverse developments. The Fund may purchase call and put options on its portfolio securities or foreign currencies. The Fund may purchase call options to protect against an increase in the price of the security or foreign currency it anticipates purchasing. The Fund may purchase put options on its securities or foreign currencies to protect against a decline in the value of the security or foreign currency or to close out covered written put positions. The Fund may also purchase options to seek to enhance returns. Risks may arise from an imperfect correlation between the change in market value of the securities or foreign currencies held by the Fund and the prices of options relating to the securities or foreign currencies purchased or sold by the Fund and from the possible lack of a liquid secondary market for an option. The maximum risk exposure for any purchased option is limited to the premium initially paid for the option. The Fund did not invest in purchased or written options during the year ended October 31, 2010. (H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by mainstayinvestments.com 35 NOTES TO FINANCIAL STATEMENTS (CONTINUED) the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (I) LOAN ASSIGNMENTS, PARTICIPATIONS AND COMMITMENTS. The Fund invests in loan assignments and loan participations. Loan assignments and participations ("loans") are agreements to make money available (a "commitment") to a borrower in a specified amount, at a specified rate and within a specified time. Such loans are typically senior, secured and collateralized in nature. The Fund records an investment when the borrower withdraws money and records interest as earned. These loans pay interest at rates that are periodically reset by reference to a base lending rate plus a spread. These base lending rates are generally the prime rate offered by a designated U.S. bank or the London InterBank Offered Rate ("LIBOR"). The loans in which the Fund invests are generally readily marketable, but may be subject to some restrictions on resale. For example, the Fund may be contractually obligated to receive approval from the agent bank and/or borrower prior to the sale of these investments. The Fund assumes the credit risk of the borrower, the selling participant and any other persons interpositioned between the Fund and the borrower ("intermediate participants"). In the event that the borrower, selling participant or intermediate participants become insolvent or enters into bankruptcy, the Fund may incur certain costs and delays in realizing payment, or may suffer a loss of principal and/or interest. Unfunded commitments represent the remaining obligation of the Fund to the borrower. At any point in time, up to the maturity date of the issue, the borrower may demand the unfunded portion. These unfunded amounts are marked to market and recorded in the Statement of Assets and Liabilities. At October 31, 2010, the Fund did not hold unfunded commitments. (J) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index.) The Fund is subject to equity price risk and interest rate risk in the normal course of investing in these transactions. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin." When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to help manage the duration and yield curve of the portfolio while minimizing the exposure to wider bid/ask spreads in traditional bonds. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. (K) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign currency forward contracts, which are agreements to buy or sell currencies of different countries on a specified future date at a specified rate. The Fund is subject to foreign currency exchange rate risk in the normal course of investing in these transactions. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. Cash movement occurs on settlement date. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into foreign currency forward contracts to reduce currency risk versus the benchmark or for trade settlement. The use of foreign currency forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. While a Fund may enter into forward contracts to reduce currency exchange risks, changes in currency exchange rates may result in poorer overall performance for the Fund than if it had not engaged in such transactions. Exchange rate movements can be large, depending on the currency, and can last for extended periods of time, affecting the value of the Fund's assets. Moreover, there may be an imperfect correlation between the Fund's holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to the risk of currency exchange loss. The unrealized appreciation (depreciation) on forward contracts reflects the Fund's exposure at valuation date to credit loss in the event of a counterparty's failure to perform its obligations. (See Note 5.) 36 MainStay Income Builder Fund (L) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (M) MORTGAGE DOLLAR ROLLS. The Fund may enter into mortgage dollar roll ("MDR") transactions in which it sells mortgage-backed securities ("MBS") from its portfolio to a counterparty from whom it simultaneously agrees to buy a similar security on a delayed delivery basis. The MDR transactions of the Fund are classified as purchase and sale transactions. The securities sold in connection with the MDRs are removed from the portfolio and a realized gain or loss is recognized. The securities the Fund has agreed to acquire are included at market value in the Portfolio of Investments and liabilities for such purchase commitments are included as payables for investments purchased. During the roll period, the Fund foregoes principal and interest paid on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future as well as by the earnings on the cash proceeds of the initial sale. MDRs may be renewed without physical delivery of the securities subject to the contract. The Fund maintains liquid assets from its portfolio having a value not less than the repurchase price, including accrued interest. MDR transactions involve certain risks, including the risk that the MBS returned to the Fund at the end of the roll, while substantially similar, could be inferior to what was initially sold to the counterparty. (N) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (O) RESTRICTED SECURITIES. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. The Fund may not have the right to demand that such securities be registered. Disposal of these securities may involve time-consuming negotiations and expenses and it may be difficult to obtain a prompt sale at an acceptable price. (P) CONCENTRATION OF RISK. The Fund invests in high-yield securities (sometimes called "junk bonds"), which are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a premium--a high interest rate or yield--because of the increased risk of loss. These securities can also be subject to greater price volatility. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. The Fund invests in floating rate loans. The floating rate loans in which the Fund principally invests are usually rated less than investment grade and are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities. These securities pay investors a higher interest rate because of the increased risk of loss. Although certain floating rate loans are collateralized, there is no guarantee that the value of the collateral will be sufficient to repay the loan. In a recession or serious credit event, the Fund's NAV could go down and you could lose money. (Q) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations mainstayinvestments.com 37 NOTES TO FINANCIAL STATEMENTS (CONTINUED) and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (R) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE EQUITY INTEREST LIABILITIES CONTRACTS CONTRACTS RATE LOCATION RISK RISK RISK TOTAL Warrants Investments in securities, at value $ -- $ 0 (a) $-- $ 0 (a) Futures Contracts Net Assets--Unrealized appreciation on investments and futures contracts (b) -- 9,148,575 -- 9,148,575 Forward Contracts Unrealized appreciation on foreign currency forward contracts 334,843 -- -- 334,843 ------------------------------------------------- Total Fair Value $334,843 $9,148,575 $-- $9,483,418 =================================================
(a) Less than one dollar. (b) Includes cumulative depreciation of futures contracts as reported in Portfolio of Investments. Only current day's variation margin in reported within the Statement of Assets and Liabilities. LIABILITY DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE EQUITY INTEREST LIABILITIES CONTRACTS CONTRACTS RATE LOCATION RISK RISK RISK TOTAL Forward Contracts Unrealized depreciation on foreign currency forward contracts $(779,281) $-- $-- $(779,281) ----------------------------------------------- Total Fair Value $(779,281) $-- $-- $(779,281) ===============================================
The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
FOREIGN STATEMENTS OF EXCHANGE EQUITY INTEREST OPERATIONS CONTRACTS CONTRACTS RATE LOCATION RISK RISK RISK TOTAL Rights Net realized gain on security transactions $ -- $ 177 $ -- $ 177 Warrants Net realized gain on security transactions -- 50,301 -- 50,301 Futures Contracts Net realized gain on futures transactions -- 2,488,926 526,462 3,015,388 Forward Contracts Net realized loss on foreign currency transactions (6,573,768) -- -- (6,573,768) ---------------------------------------------------- Total Realized Gain (Loss) $(6,573,768) $2,539,404 $526,462 $(3,507,902) ====================================================
38 MainStay Income Builder Fund CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
FOREIGN STATEMENTS OF EXCHANGE EQUITY INTEREST OPERATIONS CONTRACTS CONTRACTS RATE LOCATION RISK RISK RISK TOTAL Warrants Net change in unrealized appreciation (depreciation) on security transactions $ -- $ (17,025) $ -- $ (17,025) Futures contracts Net change in unrealized appreciation (depreciation) on futures contracts -- 10,935,188 (421,433) 10,513,755 Forward Contracts Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (444,438) -- -- (444,438) ---------------------------------------------------- Total Change in Unrealized Appreciation (Depreciation) $(444,438) $10,918,163 $(421,433) $10,052,292 ====================================================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
FOREIGN INTEREST EXCHANGE EQUITY RATE CONTRACTS CONTRACTS CONTRACTS RISK RISK RISK TOTAL Rights (2) -- 372 -- 372 Warrants (2) -- 19,043 -- 19,043 Futures Contracts Long (2) -- 1,893 140 2,033 Futures Contracts Short (2) -- (63) -- (63) Forward Contracts Long (3) $ 85,829,100 -- -- $ 85,829,100 Forward Contracts Short (3) $(142,298,838) -- -- $(142,298,838) ========================================================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. (3) Amount(s) represent(s) notional amount. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC ("MacKay Shields" or "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the fixed-income portion of the Fund and is responsible for the overall asset allocation decisions of the Fund and is responsible for the day-to-day portfolio management of the fixed-income portion of the Fund. Epoch Investment Partners, Inc. ("Epoch" or "Subadvisor"), a registered investment advisor, serves as Subadvisor to the equity portion of the Fund and is responsible for the day-to- day portfolio management of the equity portion of the Fund. Pursuant to the terms of separate Subadvisory Agreements between New York Life Investments and each Subadvisor, New York Life Investments pays for the services of the Subadvisors. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.64% up to $500 million; 0.60% from $500 million to $1 billion; and 0.575% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.64% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $4,267,082. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. mainstayinvestments.com 39 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Investor Class and Class A shares at an annual rate of 0.25% of the average daily net assets of the Investor Class and Class A shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Class I shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $20,331 and $10,149, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Class A, Class B and Class C shares of $399, $83,131 and $271, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $836,515 - ----------------------------------------------- Class A 357,482 - ----------------------------------------------- Class B 379,435 - ----------------------------------------------- Class C 49,715 - ----------------------------------------------- Class I 283,304 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 1,593 0.0%++ - ---------------------------------------------------- Class B 1,291 0.0++ - ---------------------------------------------------- Class C 1,601 0.0++ - ---------------------------------------------------- Class I 67,334,524 41.0 - ----------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $23,766. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
UNDISTRIBUTED ACCUMULATED NET CAPITAL OTHER UNREALIZED TOTAL INVESTMENT AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $-- $(91,235,339) $-- $48,450,882 $(42,784,457) - ------------------------------------------------------------- -----------------
The difference between book-basis and tax basis unrealized appreciation is primarily due to wash sales deferrals and mark to market on forward contracts and futures contracts, class action payments basis adjustments, premium amortization adjustments and partnership basis adjustments. The following table discloses the current year reclassifications between undistributed net investment income, accumulated net realized loss on investments and additional paid-in capital arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) ON PAID-IN INCOME (LOSS) INVESTMENTS CAPITAL $(1,260,388) $7,054,694 $(5,794,306) - ------------------------------------ -----------
The reclassifications for the Fund are primarily due to foreign currency gain (loss), capital gain distributions from real estate investment trusts ("REITs"), reclassification of consent fee and distributions in excess of current earnings. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $91,235,339 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. 40 MainStay Income Builder Fund No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2015 $19,979 2016 22,045 2017 49,211 - ---------------------------------- ------ Total $91,235 - ---------------------------------- ------
The tax character of distributions paid during the year ended October 31, 2010, shown in the Statement of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $25,710,486 $10,253,375 - ------------------------------------------------------
The Fund utilized $38,810,655 of capital loss carryfowards during the year ended October 31, 2010. NOTE 5-FOREIGN CURRENCY FORWARD CONTRACTS AND FOREIGN CURRENCY TRANSACTIONS As of October 31, 2010, the Fund held the following foreign currency forward contracts:
CONTRACT CONTRACT UNREALIZED AMOUNT AMOUNT APPRECIATION/ COUNTERPARTY SOLD PURCHASED (DEPRECIATION) Foreign Currency Sale Contracts: - ----------------------------------------------------------------------------------------------------------------- Euro vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank EUR 45,000,000 USD 62,946,000 USD 334,843 - ----------------------------------------------------------------------------------------------------------------- Japanese Yen vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank JPY 2,400,000,000 29,382,958 (448,094) - ----------------------------------------------------------------------------------------------------------------- Pound Sterling vs. U.S. Dollar, expiring 11/29/10 JPMorgan Chase Bank GBP 33,000,000 52,536,000 (331,187) - ----------------------------------------------------------------------------------------------------------------- Net unrealized depreciation on foreign currency forward contracts USD (444,438) - -----------------------------------------------------------------------------------------------------------------
As of October 31, 2010, the Fund held the following foreign currencies:
CURRENCY COST VALUE Canadian Dollar CAD 9,132 USD 8,919 USD 8,954 - ----------------------------------------------------------------------------------------------- Euro EUR 37,560 52,565 52,276 - ----------------------------------------------------------------------------------------------- Japanese Yen (a) JPY (1) -- (b) -- (b) - ----------------------------------------------------------------------------------------------- Pound Sterling GBP 495,991 789,890 794,751 - ----------------------------------------------------------------------------------------------- Total USD 851,374 USD 855,981 - -----------------------------------------------------------------------------------------------
(a) Currency was overdrawn as of October 31, 2010. (b) Less than one dollar. NOTE 6-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 7-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. mainstayinvestments.com 41 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of U.S. Government securities were $42,911 and $102,925, respectively. Purchases and sales of securities, other than U.S. Government securities and short-term securities, were $411,255 and $436,913, respectively. NOTE 9-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 269,030 $ 3,980,277 Shares issued to shareholders in reinvestment of dividends 419,736 6,123,130 Shares redeemed (1,460,056) (21,510,484) ------------------------ Net increase (decrease) in shares outstanding before conversion (771,290) (11,407,077) Shares converted into Investor Class (See Note 1) 620,638 9,166,706 Shares converted from Investor Class (See Note 1) (537,045) (8,004,721) ------------------------ Net increase (decrease) (687,697) $(10,245,092) ======================== Year ended October 31, 2009: Shares sold 242,005 $ 3,023,144 Shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) 1,097,321 15,304,886 Shares issued to shareholders in reinvestment of dividends 294,290 3,729,724 Shares redeemed (1,533,799) (19,165,714) ------------------------ Net increase (decrease) in shares outstanding before conversion 99,817 2,892,040 Shares converted into Investor Class (See Note 1) 941,486 11,555,184 Shares converted from Investor Class (See Note 1) (270,255) (3,666,254) ------------------------ Net increase (decrease) 771,048 $ 10,780,970 ======================== CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 633,963 $ 9,341,576 Shares issued to shareholders in reinvestment of dividends 608,065 8,870,850 Shares redeemed (2,628,874) (38,687,886) ------------------------ Net increase (decrease) in shares outstanding before conversion (1,386,846) (20,475,460) Shares converted into Class A (See Note 1) 841,510 12,520,687 Shares converted from Class A (See Note 1) (97,123) (1,477,723) Shares converted from Class A (a) (14,502) (211,583) ------------------------ Net increase (decrease) (656,961) $ (9,644,079) ======================== Year ended October 31, 2009: Shares sold 504,555 $ 6,329,236 Shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) 2,609,124 36,385,533 Shares issued to shareholders in reinvestment of dividends 394,482 5,006,163 Shares redeemed (2,577,635) (32,282,652) ------------------------ Net increase (decrease) in shares outstanding before conversion 930,526 15,438,280 Shares converted into Class A (See Note 1) 635,513 8,236,154 Shares converted from Class A (See Note 1) (281,191) (3,456,525) ------------------------ Net increase (decrease) 1,284,848 $ 20,217,909 ======================== CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 320,395 $ 4,739,788 Shares issued to shareholders in reinvestment of dividends 143,193 2,095,655 Shares redeemed (805,011) (11,888,593) ------------------------ Net increase (decrease) in shares outstanding before conversion (341,423) (5,053,150) Shares converted from Class B (See Note 1) (825,665) (12,204,949) ------------------------ Net increase (decrease) (1,167,088) $(17,258,099) ======================== Year ended October 31, 2009: Shares sold 378,313 $ 4,744,010 Shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) 1,219,526 17,070,676 Shares issued to shareholders in reinvestment of dividends 96,269 1,216,560 Shares redeemed (1,008,696) (12,550,150) ------------------------ Net increase (decrease) in shares outstanding before conversion 685,412 10,481,096 Shares converted from Class B (See Note 1) (1,023,431) (12,668,559) ------------------------ Net increase (decrease) (338,019) $ (2,187,463) ========================
42 MainStay Income Builder Fund
CLASS B SHARES AMOUNT CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 78,242 $ 1,161,750 Shares issued to shareholders in reinvestment of dividends 13,968 204,126 Shares redeemed (123,353) (1,820,970) ------------------------ Net increase (decrease) (31,143) $ (455,094) ======================== Year ended October 31, 2009: Shares sold 35,299 $ 459,828 Shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) 557,265 7,790,170 Shares issued to shareholders in reinvestment of dividends 2,214 28,356 Shares redeemed (27,458) (348,595) ------------------------ Net increase (decrease) 567,320 $ 7,929,759 ======================== CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,432,293 $ 21,131,102 Shares issued to shareholders in reinvestment of dividends 525,824 7,715,075 Shares redeemed (5,040,461) (75,176,590) ------------------------ Net increase (decrease) in shares outstanding before conversion (3,082,344) (46,330,413) Shares converted into Class I (a) 14,413 211,583 ------------------------ Net increase (decrease) (3,067,931) $(46,118,830) ======================== Year ended October 31, 2009: Shares sold 7,904 $ 110,134 Shares issued in connection with the acquisition of MainStay Income Manager Fund (See Note 10) 13,554,329 190,127,923 Shares issued to shareholders in reinvestment of dividends 87 1,111 Shares redeemed (8,480) (119,061) ------------------------ Net increase (decrease) 13,553,840 $190,120,107 ========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 10-FUND ACQUISITION: At a meeting held on June 23, 2009, the Board of Trustees approved a plan of reorganization whereby the Fund would acquire the assets, including the investments, and assume the liabilities on MainStay Income Manager Fund, a series of Eclipse Funds Inc. Shareholders of MainStay Income Manager Fund approved this reorganization on October 16, 2009, which was then completed on October 28, 2009. The aggregate net assets of the Fund immediately before the acquisition were $399,978,528 and the combined net assets after the acquisition were $666,657,716. The acquisition was accomplished by a tax-free exchange of the following:
SHARES VALUE MainStay Income Manager Fund - ------------------------------------------------------ Investor Class 1,391,480 $ 15,304,886 - ------------------------------------------------------ Class A 3,311,840 36,385,533 - ------------------------------------------------------ Class B 1,572,885 17,070,676 - ------------------------------------------------------ Class C 717,340 7,790,170 - ------------------------------------------------------ Class I 17,166,377 190,127,923 - ------------------------------------------------------
In exchange for the MainStay Income Manager Fund shares and net assets, the Fund issued 1,097,321 Investor Class Shares; 2,609,124 Class A shares; 1,219,526 Class B shares; 557,265 Class C shares and 13,554,329 Class I shares. MainStay Income Manager Fund's net assets after adjustments for any permanent book-to-tax differences at the acquisition date were as follows, which include the following amounts of capital stock, unrealized depreciation, accumulated net realized loss and undistributed net investment loss:
DISTRIBUTIONS ACCUMULATED IN EXCESS OF TOTAL NET CAPITAL UNREALIZED NET REALIZED NET INVESTMENT ASSETS STOCK DEPRECIATION LOSS INCOME MainStay Income Manager Fund $266,679,188 $321,505,238 $(496,554) $(54,299,460) $(30,036) - ----------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 43 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 11-SUBSEQUENT EVENT In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified. 44 MainStay Income Builder Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Income Builder Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Income Builder Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 45 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENTS (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Income Builder Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreements between New York Life Investments and MacKay Shields LLC ("MacKay Shields") and Epoch Investment Partners, Inc. ("Epoch") (each a "Subadivser" and, collectively, the "Subadvisers") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and the Subadvisers on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields, and Epoch, as Subadvisers, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and the Subadvisers; (ii) the investment performance of the Fund, New York Life Investments and the Subadvisers; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields, and by Epoch, as Subadvisers, from their relationships with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND EACH SUBADVISER In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing each Subadviser's compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that each Subadviser provides to the Fund. The Board evaluated each Subadviser's experience in serving as subadviser to the Fund and managing other portfolios. It examined each Subadviser's track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative 46 MainStay Income Builder Fund personnel at each Subadviser, and each Subadviser's overall legal and compliance environment. The Board also reviewed each Subadviser's willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and each Subadviser's experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and the Subadvisers to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND EACH SUBADVISER The Board considered the costs of the services provided by New York Life Investments and the Subadvisers under the Agreements, and the profits realized by New York Life Investments, its affiliates and Epoch due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, and Epoch, as Subadvisers, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and the Subadvisers must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, although the Board did not receive specific profitability information from Epoch (due to the fact that Epoch was appointed as Subadviser only recently), the Board considered representations from Epoch and New York Life Investments that the subadvisory fee paid by New York Life Investments to Epoch for services provided to the Fund was the result of arm's-length negotiations. Because Epoch is not affiliated with New York Life Investments, and Epoch's fees are paid directly by New York Life Investments, the Board focused primarily on the profitability of the relationship between New York Life Investments, its affiliates and the Fund. The Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments, its affiliates and Epoch due to their relationships with the Fund. The Board recognized, for example, the benefits to the Subadvisers from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to the Subadvisers in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board also requested and received information from Epoch and New York Life Investments concerning other business relationships between Epoch and its affiliates and New York Life Investments and its affiliates. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various mainstayinvestments.com 47 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENTS (UNAUDITED) (CONTINUED) other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) and Epoch due to their relationships with the Fund supported the Board's determination to approve the Agreements. With respect to Epoch, the Board concluded that any profits realized by Epoch due to its relationship with the Fund are the result of arm's-length negotiations between New York Life Investments and Epoch, and are based on subadvisory fees paid to Epoch by New York Life Investments, not the Fund. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to the Subadvisers are paid by New York Life Investments, not the Fund. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and the Subadvisers on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and the Subadvisers about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. 48 MainStay Income Builder Fund After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 49 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $15,777,554 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 41.4% to arrive at the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling (1-800-SEC-0330). 50 MainStay Income Builder Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 51
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
52 MainStay Income Builder Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 53
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
54 MainStay Income Builder Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 55 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. (C) 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-A021404 MS333-10 MSIB11-12/10 14 (MAINSTAY INVESTMENTS LOGO) MAINSTAY INTERNATIONAL EQUITY FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 16 - --------------------------------------------- Notes to Financial Statements 24 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 35 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 36 - --------------------------------------------- Federal Income Tax Information 39 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 39 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 39 - --------------------------------------------- Board Members and Officers 40 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY INTERNATIONAL EQUITY FUND CLASS B MSCI EAFE(R) SHARES INDEX ---------------------- ------------ 10/31/00 10000 10000 10/31/01 8114 7507 10/31/02 8150 6515 10/31/03 9675 8276 10/31/04 11044 9835 10/31/05 12435 11615 10/31/06 15932 14812 10/31/07 18398 18502 10/31/08 12260 9875 10/31/09 14749 12612 10/31/10 15512 13666
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 0.27% 4.17% Excluding sales charges 6.11 5.35 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 5.5% Initial Sales Charge With sales charges 0.47 4.31 Excluding sales charges 6.31 5.50 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 0.17 4.22 if Redeemed Within the First Six Years of Purchase Excluding sales charges 5.17 4.52 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 4.23 4.55 if Redeemed Within One Year of Purchase Excluding sales charges 5.23 4.55 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 6.61 5.96 - ----------------------------------------------------------------------------------------------------------------------------------- Class R1 Shares(4) No Sales Charge 6.58 5.86 - ----------------------------------------------------------------------------------------------------------------------------------- Class R2 Shares(4) No Sales Charge 6.32 5.60 - ----------------------------------------------------------------------------------------------------------------------------------- Class R3 Shares(5) No Sales Charge 5.99 5.29 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 4.70% 1.88% 5.29 1.88 - ------------------------------------------------- Class A Shares 4.77 1.44 5.36 1.44 - ------------------------------------------------- Class B Shares 4.49 2.64 4.49 2.64 - ------------------------------------------------- Class C Shares 4.50 2.62 4.50 2.62 - ------------------------------------------------- Class I Shares(4) 5.74 1.19 - ------------------------------------------------- Class R1 Shares(4) 5.61 1.29 - ------------------------------------------------- Class R2 Shares(4) 5.39 1.56 - ------------------------------------------------- Class R3 Shares(5) 5.08 1.79 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the periods of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. If these non-recurring reimbursements had not been made the total return (excluding sales charges) would have been 5.45% for Class A, 4.47% for Class B, 4.51% for Class C, 5.91% for Class I, 5.81% for Class R1 and 5.56% for Class R2 for the five-year period ended October 31, 2010, and 5.34% for Class A, 4.46% for Class B, 4.47% for Class C, 5.72% for Class I, 5.58% for Class R1 and 5.37% for Class R2 for the ten-year period then ended. Investor Class and Class R3 shares were not affected, because the reimbursement occurred prior to the launch of these share classes. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I, R1 and R2 shares, each of which was first offered on January 2, 2004, include the historical performance of Class B shares through January 1, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class I, R1 and R2 shares might have been lower. 5. Performance figures for Class R3 shares which were first offered on April 28, 2006, include the historical performance of Class B shares through April 27, 2006, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class R3 shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS MSCI EAFE(R) Index(6) 8.36% 3.31% 3.17% - ------------------------------------------------------------------------------- Average Lipper International Multi-Cap Core Fund(7) 13.45 4.59 5.06 - -------------------------------------------------------------------------------
6. The Morgan Stanley Capital International Europe, Australasia and Far East ("MSCI EAFE(R)") Index consists of international stocks representing the developed world outside of North America. Results assume reinvestment of all income and capital gains. The MSCI EAFE(R) Index is the Fund's broad-based securities market index for comparison purposes. An investment cannot be made directly in an index. 7. The average Lipper international multi-cap core fund is representative 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. International multi-cap core funds typically have an 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. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay International Equity Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY INTERNATIONAL EQUITY FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,036.10 $ 9.08 $1,016.30 $ 9.00 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,036.90 $ 7.55 $1,017.80 $ 7.48 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,031.80 $12.91 $1,012.50 $12.78 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,032.70 $12.91 $1,012.50 $12.78 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,039.10 $ 6.27 $1,019.10 $ 6.21 - ------------------------------------------------------------------------------------------------------------- CLASS R1 SHARES $1,000.00 $1,038.50 $ 6.78 $1,018.60 $ 6.72 - ------------------------------------------------------------------------------------------------------------- CLASS R2 SHARES $1,000.00 $1,037.60 $ 8.01 $1,017.30 $ 7.93 - ------------------------------------------------------------------------------------------------------------- CLASS R3 SHARES $1,000.00 $1,036.00 $ 9.29 $1,016.10 $ 9.20 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.77% for Investor Class, 1.47% for Class A, 2.52% for Class B and Class C, 1.22% for Class I, 1.32% for Class R1, 1.56% for Class R2 and 1.81% for Class R3) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Common Stocks 90.5 Other Assets, Less Liabilities 4.2 Warrants 4.1 Short-Term Investment 1.1 Futures Contracts Long 0.1
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. Roche Holding A.G., Genusscheine 2. Man Group PLC 3. Ryanair Holdings PLC Class A 4. Nokia Oyj, Sponsored ADR 5. Tesco PLC 6. NTT DoCoMo, Inc. 7. Nintendo Co., Ltd. 8. Syngenta A.G., ADR 9. Koninklijke Ahold N.V. 10. Scottish & Southern Energy PLC
8 MainStay International Equity Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio manager Rupal J. Bhansali of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY INTERNATIONAL EQUITY FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay International Equity Fund returned 6.11% for Investor Class shares, 6.31% for Class A shares, 5.17% for Class B shares and 5.23% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 6.61%, Class R1 shares returned 6.58%, Class R2 shares returned 6.32% and Class R3 shares returned 5.99%. All share classes underperformed the 13.45% return of the average Lipper(1) international multi-cap core fund and the 8.36% return of the MSCI EAFE(R) Index(2) for the 12 months ended October 31, 2010. The MSCI EAFE(R) Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund employs a bottom-up investment approach, selecting stocks on their individual strengths rather than focusing on the underlying sectors or industries of those stocks or on general economic trends. Country allocations in the Fund are a result of the bottom-up stock selection process. Throughout the reporting period, we remained focused on the analysis of individual business models and sought to invest in quality companies at reasonable valuations rather than base our decisions on market perceptions. This approach directed the Fund toward information technology, telecommunication services and consumer staples at the expense of materials and industrials. We attribute the Fund's relative performance to multiple factors. First, security selection in the consumer discretionary sector detracted from the Fund's performance relative to the MSCI EAFE(R) Index. An underweight position in the materials sector also detracted. An overweight position in the pharmaceuticals industry and stock selection in this industry further detracted. On the positive side, an underweight position in the banks industry group helped performance. In addition, stock selection in the transportation industry group contributed positively to the Fund's relative performance during the reporting period. DURING THE REPORTING PERIOD, HOW WAS THE FUND'S PERFORMANCE MATERIALLY AFFECTED BY INVESTMENTS IN DERIVATIVES? Around the beginning of the reporting period, we started purchasing equity futures contracts to reduce the Fund's return volatility. The Fund's use of futures contracts added to performance. The Fund also held currency forwards that were used to mitigate any over- or underweight positions relative to the MSCI EAFE(R) Index. The use of currency forwards was also a positive contributor to the Fund's performance. DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS WERE PARTICULARLY WEAK? Taking weightings and total returns into account, the financials, industrials and utilities sectors were the strongest positive contributors to the Fund's performance relative to the MSCI EAFE(R) Index. During the reporting period, the weakest contributor to the Fund's performance relative to the benchmark was consumer discretionary, where security selection suffered. Materials was also a weak contributor because the Fund held an underweight position in the sector. Other areas that detracted from the Fund's relative performance were pharmaceuticals and energy. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST POSITIVE CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED THE MOST? Taking weightings and total returns into account, the stock that made the strongest positive contribution to the Fund's absolute performance was Ryanair, an Ireland-based low-fare airline that provides service to Europe. The company grew strongly throughout Europe during the reporting period, and with upward pressure on fares, margins have been surprisingly good. Another strong contributor was Japanese telecommunications firm NTT DoCoMo. The company exceeded expectations as costs came in lower than forecasted, and during the reporting period, the company's mobile subscriber numbers increased. Switzerland-based global food manufacturer Nestle was also a strong contributor to the Fund's performance during the reporting period. Nestle benefited from growing sales in many of its units and in many emerging markets and developed countries. The strength of the Swiss franc, however, was a drag on the company's earnings. On an absolute basis, a major detractor from the Fund's performance was BP, the U.K.-based energy exploration company. After the explosion and oil leak into the Gulf of Mexico, we reevaluated the company and decided to eliminate the position from the Fund. Broadly speaking, financials was the only sector with a negative total return within the MSCI EAFE(R) Index during the reporting period. In the financials sector, the Fund's positions in banks Piraeus of Greece and Banco Popular of Spain detracted from performance. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? The Fund increased its exposure to the financials sector during the reporting period by adding to positions in Man Group, a U.K.-based alternative investment manager, and Credit Suisse Group, a Switzerland-based capital markets firm. At the time, we felt that these companies provided the highest quality within 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the MSCI EAFE(R) Index. mainstayinvestments.com 9 the sector, and when international markets sold off during the early part of the reporting period, we used the opportunity to increase the Fund's overall exposure to financials. Given events in Greece during the reporting period, our views on Piraeus changed, and we sold the Fund's position. We also either sold or trimmed a number of other positions in the Fund during the reporting period, including Switzerland-based global food manufacturer Nestle, Denmark-based pharmaceutical company Novartis Novo Nordisk and Italian utility Snam Rete Gas. These stocks performed well during the reporting period, and in our view, each was either headed toward or had exceeded its intrinsic value. HOW WAS THE FUND POSITIONED AT THE END OF OCTOBER 2010? Industry, sector and regional weightings result from our rigorous bottom-up research on individual companies and do not reflect top-down economic, regional or industry group opinions. As of October 31, 2010, the Fund held overweight positions relative to the MSCI EAFE(R) Index in diversified financials, software, health care and telecommunication services. As of the same date, the Fund was underweight in banks, materials and industrials. From a regional perspective, we increased the Fund's exposure to Japan and other Asian nations. As a result, weightings in those regions increased in relation to the Fund's European holdings. The opinions expressed are those of the portfolio manager as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay International Equity Fund PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010
SHARES VALUE COMMON STOCKS 90.5%+ - ----------------------------------------------------------------------- AUSTRALIA 1.6% BHP Billiton, Ltd., Sponsored ADR (Metals & Mining) (a) 111,500 $ 9,208,785 ------------ BELGIUM 1.8% Belgacom S.A. (Diversified Telecommunication Services) 114,000 4,472,772 Mobistar S.A. (Wireless Telecommunication Services) 95,363 6,312,460 ------------ 10,785,232 ------------ BERMUDA 1.3% Esprit Holdings, Ltd. (Specialty Retail) 1,464,969 7,843,408 ------------ BRAZIL 0.8% Cia Siderurgica Nacional S.A., Sponsored ADR (Metals & Mining) (a) 119,100 2,010,408 Vale S.A., Sponsored ADR (Metals & Mining) (a) 86,700 2,786,538 ------------ 4,796,946 ------------ CANADA 2.7% Fairfax Financial Holdings, Ltd. (Insurance) 7,200 2,923,276 IGM Financial, Inc. (Capital Markets) 91,000 3,850,926 Tim Hortons, Inc. (Hotels, Restaurants & Leisure) 237,900 8,943,118 ------------ 15,717,320 ------------ CHINA 0.3% China Construction Bank Corp. Class H (Commercial Banks) 1,996,600 1,903,548 ------------ CZECH REPUBLIC 0.5% CEZ AS (Electric Utilities) 69,100 3,061,306 ------------ DENMARK 0.4% Topdanmark A/S (Insurance) (b) 18,905 2,265,170 ------------ FINLAND 3.9% X Nokia Oyj, Sponsored ADR (Communications Equipment) (a) 1,976,100 21,104,748 Sampo Oyj (Insurance) 67,500 1,891,143 ------------ 22,995,891 ------------ FRANCE 5.1% Alstom S.A. (Electrical Equipment) 134,300 6,777,674 BNP Paribas S.A. (Commercial Banks) 80,030 5,853,321 Bouygues S.A. (Construction & Engineering) 169,000 7,448,058 Neopost S.A. (Office Electronics) 65,135 5,411,191 Total S.A. (Oil, Gas & Consumable Fuels) 78,300 4,255,044 ------------ 29,745,288 ------------ GERMANY 4.6% Allianz SE (Insurance) 13,900 1,741,916 Allianz SE, ADR (Insurance) (a) 384,800 4,821,544 Deutsche Boerse A.G. (Diversified Financial Services) 174,600 12,286,499 Hannover Rueckversicherung A.G. (Insurance) 161,686 8,180,007 ------------ 27,029,966 ------------ GREECE 1.4% OPAP S.A. (Hotels, Restaurants & Leisure) 417,548 7,874,492 ------------ HONG KONG 2.2% China Mobile, Ltd., Sponsored ADR (Wireless Telecommunication Services) (a) 215,900 11,090,783 CNOOC, Ltd., ADR (Oil, Gas & Consumable Fuels) (a) 9,100 1,901,172 ------------ 12,991,955 ------------ IRELAND 0.4% Ryanair Holdings PLC, Sponsored ADR (Airlines) (a) 78,400 2,558,192 ------------ ITALY 2.7% Assicurazioni Generali S.p.A. (Insurance) 85,540 1,875,110 ENI S.p.A. (Oil, Gas & Consumable Fuels) 250,100 5,635,564 Intesa Sanpaolo S.p.A. (Commercial Banks) 302,700 1,064,830 MediaSet S.p.A. (Media) 401,110 2,958,804 Mediolanum S.p.A. (Insurance) 347,766 1,634,780 Snam Rete Gas S.p.A. (Gas Utilities) 478,086 2,590,070 ------------ 15,759,158 ------------ JAPAN 18.8% Astellas Pharma, Inc. (Pharmaceuticals) 160,700 5,979,070 Capcom Co., Ltd. (Software) 264,000 4,150,118 Daito Trust Construction Co., Ltd. (Real Estate Management & Development) 97,400 5,882,490 Daiwa Securities Group, Inc. (Capital Markets) 1,475,100 6,012,586 Hirose Electric Co., Ltd. (Electronic Equipment & Instruments) 29,400 2,959,364 Japan Tobacco, Inc. (Tobacco) 1,686 5,244,262 MISUMI Group, Inc. (Trading Companies & Distributors) 30,600 655,959 X Nintendo Co., Ltd. (Software) 68,410 17,725,221 Nissin Foods Holdings Co., Ltd. (Food Products) 250,100 9,062,900
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investment. Any of the ten largest holdings may be a security traded on more than one exchange. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE JAPAN (CONTINUED) X NTT DoCoMo, Inc. (Wireless Telecommunication Services) 12,304 $ 20,718,181 Sankyo Co., Ltd. (Leisure Equipment & Products) 141,800 7,559,612 Shin-Etsu Chemical Co., Ltd. (Chemicals) 99,000 5,013,359 Square Enix Holdings Co., Ltd. (Software) 216,100 4,519,651 Suruga Bank, Ltd. (Commercial Banks) 439,500 3,965,167 Tokio Marine Holdings, Inc. (Insurance) 101,100 2,849,445 Toyota Motor Corp., Sponsored ADR (Automobiles) (a) 80,900 5,729,338 Toyota Motor Corp. (Automobiles) 64,500 2,291,606 ------------ 110,318,329 ------------ MEXICO 1.9% Grupo Televisa S.A., Sponsored ADR (Media) (a) 484,100 10,868,045 ------------ NETHERLANDS 2.3% X Koninklijke Ahold N.V. (Food & Staples Retailing) 977,600 13,510,994 ------------ NORWAY 0.4% StatoilHydro ASA (Oil, Gas & Consumable Fuels) 115,500 2,522,359 ------------ REPUBLIC OF KOREA 0.3% SK Telecom Co., Ltd., ADR (Wireless Telecommunication Services) (a) 85,800 1,581,294 ------------ SINGAPORE 0.6% DBS Group Holdings, Ltd. (Commercial Banks) 155,200 1,666,754 Singapore Airport Terminal Services, Ltd. (Transportation Infrastructure) 814,600 1,793,719 ------------ 3,460,473 ------------ SPAIN 5.4% Enagas (Gas Utilities) 410,500 9,047,073 Gestevision Telecinco S.A. (Media) 413,300 5,272,567 Grifols S.A. (Biotechnology) 606,000 9,813,318 Indra Sistemas S.A. (IT Services) 388,000 7,595,359 ------------ 31,728,317 ------------ SWITZERLAND 15.6% ABB, Ltd., Sponsored ADR (Electrical Equipment) (a)(b) 201,800 4,175,242 Actelion, Ltd. Registered (Biotechnology) (b) 180,900 9,027,995 Credit Suisse Group A.G., Sponsored ADR (Capital Markets) (a) 218,800 9,080,200 Nestle S.A. Registered (Food Products) 183,200 10,034,531 Nobel Biocare Holding A.G. (Health Care Equipment & Supplies) 402,600 6,656,473 X Roche Holding A.G., Genusscheine (Pharmaceuticals) 181,025 26,582,097 X Syngenta A.G., ADR (Chemicals) (a) 280,300 15,523,014 UBS A.G. (Capital Markets) (b) 599,000 10,194,980 ------------ 91,274,532 ------------ UNITED KINGDOM 15.2% Barclays PLC (Commercial Banks) 522,200 2,297,709 De La Rue PLC (Commercial Services & Supplies) 388,900 3,975,724 Johnson Matthey PLC (Chemicals) 239,500 7,345,225 Lloyds TSB Group PLC (Commercial Banks) (b) 3,131,744 3,459,515 X Man Group PLC (Capital Markets) 6,290,300 26,286,732 Royal Dutch Shell PLC Class A, ADR (Oil, Gas & Consumable Fuels) (a) 179,100 11,628,963 X Scottish & Southern Energy PLC (Electric Utilities) 706,400 13,050,815 X Tesco PLC (Food & Staples Retailing) 3,066,535 20,973,981 ------------ 89,018,664 ------------ UNITED STATES 0.3% Philip Morris International, Inc. (Tobacco) 27,500 1,608,750 ------------ Total Common Stocks (Cost $515,761,343) 530,428,414 ------------ NUMBER OF WARRANTS VALUE WARRANTS 4.1% - ----------------------------------------------------------------------- IRELAND 4.1% X Ryanair Holdings PLC Class A Strike Price E 0.000001 Expires 4/3/18 (Airlines) (c) 4,185,220 24,039,732 ------------ Total Warrants (Cost $18,706,975) 24,039,732 ------------
12 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE SHORT-TERM INVESTMENT 1.1% - ----------------------------------------------------------------------- REPURCHASE AGREEMENT 1.1% UNITED STATES 1.1% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $6,352,296 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $5,910,000 and a Market Value of $6,479,724) (Capital Markets) $6,352,290 $ 6,352,290 ------------ Total Short-Term Investment (Cost $6,352,290) 6,352,290 ------------ Total Investments (Cost $540,820,608) (f) 95.7% 560,820,436 Other Assets, Less Liabilities 4.3 24,982,824 ---------- ------------ Net Assets 100.0% $585,803,260 ========== ============
UNREALIZED CONTRACTS APPRECIATION LONG (DEPRECIATION) (D) FUTURES CONTRACTS 0.1% - --------------------------------------------------------------------------------- Dow Jones EURO STOXX 50 Index December 2010 (10 Year) (e) 761 580,515 FTSE 100 Index December 2010 (10 Year) (e) 167 297,914 Topix Index December 2010 (10 Year) (e) 135 (137,567) --------- Total Futures Contracts (Settlement Value $58,739,775) $ 740,862 =========
+++ On a daily basis New York Life Investments confirms that the value of the Fund's liquid assets (liquid portfolio securities and cash) is sufficient to cover its potential senior securities (e.g., futures, swaps, options). (a) ADR--American Depositary Receipt. (b) Non-income producing security. (c) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (d) Represents the difference between the value of the contracts at the time they were opened and the value at October 31, 2010. (e) At October 31, 2010, cash in the amount of $3,551,235 is on deposit with the broker for futures transactions. (f) At October 31, 2010, cost is $543,203,788 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $ 46,291,856 Gross unrealized depreciation (28,675,208) ------------ Net unrealized appreciation $ 17,616,648 ============
The following abbreviations are used in the above portfolio: E--Euro The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets and liabilities. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Common Stocks $530,428,414 $ -- $ -- $530,428,414 Warrants 24,039,732 -- -- 24,039,732 Short-Term Investment Repurchase Agreement -- 6,352,290 -- 6,352,290 ------------ ---------- -------- ------------ Total Investments in Securities 554,468,146 6,352,290 -- 560,820,436 ------------ ---------- -------- ------------ Other Financial Instruments Futures Contracts Long (b) 878,429 -- -- 878,429 Foreign Currency Forward Contracts (c) -- 863,278 -- 863,278 ------------ ---------- -------- ------------ Total Investments in Securities and Other Financial Instruments $555,346,575 $7,215,568 $ -- $562,562,143 ============ ========== ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. (b) The value listed for these securities reflects unrealized appreciation as shown on the Portfolio of Investments. (c) The value listed for these securities reflects unrealized appreciation as shown on the table of foreign currency forward contracts. (See Note 5) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS(+++) OCTOBER 31, 2010 (CONTINUED) LIABILITY VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Other Financial Instruments Futures Contracts Long (a) $(137,567) $ -- $ -- $(137,567) Foreign Currency Forward Contracts (b) -- (34,344) -- (34,344) --------- -------- -------- --------- Total Other Financial Instruments $(137,567) $(34,344) $ -- $(171,911) ========= ======== ======== =========
(a) The value listed for these securities reflects unrealized depreciation as shown on the Portfolio of Investments. (b) The value listed for these securities reflects unrealized depreciation as shown on the table of foreign currency forward contracts. (See Note 5) The Fund recognizes transfers between the levels as of the beginning of the period. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
BALANCE CHANGE IN BALANCE AS OF ACCRUED REALIZED UNREALIZED TRANSFERS TRANSFERS AS OF INVESTMENTS IN OCTOBER 31, DISCOUNTS GAIN APPRECIATION IN TO OUT OF OCTOBER 31, SECURITIES 2009 (PREMIUMS) (LOSS) (DEPRECIATION) PURCHASES SALES LEVEL 3 LEVEL 3 2010 Common Stock $18,809 $ -- $(74) $(47) $ -- $(18,688) $ -- $ -- $ -- ------- -------- ---- ---- -------- -------- -------- -------- -------- Total $18,809 $ -- $(74) $(47) $ -- $(18,688) $ -- $ -- $ -- ======= ======== ==== ==== ======== ======== ======== ======== ======== CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) FROM INVESTMENTS STILL HELD AT INVESTMENTS IN OCTOBER 31, SECURITIES 2010 (A) Common Stock $ -- -------- Total $ -- ========
(a) Included in "change in unrealized appreciation (depreciation) on investments" in the Statement of Operations. 14 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The table below sets forth the diversification of the MainStay International Equity Fund investments by industry. INDUSTRY DIVERSIFICATION (UNAUDITED)
VALUE PERCENT + Airlines $ 26,597,924 4.5% Automobiles 8,020,944 1.4 Biotechnology 18,841,313 3.3 Capital Markets 61,777,714 10.6 Chemicals 27,881,598 4.8 Commercial Banks 20,210,844 3.5 Commercial Services & Supplies 3,975,724 0.7 Communications Equipment 21,104,748 3.6 Construction & Engineering 7,448,058 1.3 Diversified Financial Services 12,286,499 2.1 Diversified Telecommunication Services 4,472,772 0.7 Electric Utilities 16,112,121 2.7 Electrical Equipment 10,952,916 1.9 Electronic Equipment & Instruments 2,959,364 0.5 Food & Staples Retailing 34,484,975 5.9 Food Products 19,097,431 3.2 Gas Utilities 11,637,143 1.9 Health Care Equipment & Supplies 6,656,473 1.1 Hotels, Restaurants & Leisure 16,817,610 2.9 IT Services 7,595,359 1.3 Insurance 28,182,391 4.8 Leisure Equipment & Products 7,559,612 1.3 Media 19,099,416 3.3 Metals & Mining 14,005,731 2.4 Office Electronics 5,411,191 0.9 Oil, Gas & Consumable Fuels 25,943,102 4.4 Pharmaceuticals 32,561,167 5.5 Real Estate Management & Development 5,882,490 1.0 Software 26,394,990 4.5 Specialty Retail 7,843,408 1.3 Tobacco 6,853,012 1.2 Trading Companies & Distributors 655,959 0.1 Transportation Infrastructure 1,793,719 0.3 Wireless Telecommunication Services 39,702,718 6.8 ------------ ----- 560,820,436 95.7 Other Assets, Less Liabilities 24,982,824 4.3 ------------ ----- Net Assets $585,803,260 100.0% ============ =====
+ Percentages indicated are based on Fund net assets.
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $540,820,608) $560,820,436 Cash denominated in foreign currencies (identified cost $14,586,615) 14,936,715 Foreign cash collateral on deposit at broker (identified cost $3,525,301) (See Note 5) 3,551,235 Cash 1,691,938 Receivables: Investment securities sold 6,672,665 Dividends and interest 490,507 Fund shares sold 391,441 Variation margin on futures contracts 10,161 Other assets 65,989 Unrealized appreciation on foreign currency forward contracts 863,278 ------------ Total assets 589,494,365 ------------ LIABILITIES - -------------------------------------------------- Payables: Fund shares redeemed 1,415,296 Investment securities purchased 1,235,524 Manager (See Note 3) 458,243 Transfer agent (See Note 3) 207,390 Variation margin on futures contracts 161,291 NYLIFE Distributors (See Note 3) 75,747 Shareholder communication 60,323 Professional fees 25,644 Custodian 14,175 Trustees 1,442 Accrued expenses 1,686 Unrealized depreciation on foreign currency forward contracts 34,344 ------------ Total liabilities 3,691,105 ------------ Net assets $585,803,260 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 463,956 Additional paid-in capital 634,664,487 ------------ 635,128,443 Undistributed net investment income 14,830,408 Accumulated net realized loss on investments, futures transactions, written option transactions and foreign currency transactions (86,231,935) Net unrealized appreciation on investments and futures contracts 20,740,690 Net unrealized appreciation on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts 1,335,654 ------------ Net assets $585,803,260 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 39,842,929 ============ Shares of beneficial interest outstanding 3,148,196 ============ Net asset value per share outstanding $ 12.66 Maximum sales charge (5.50% of offering price) 0.74 ------------ Maximum offering price per share outstanding $ 13.40 ============ CLASS A Net assets applicable to outstanding shares $104,168,706 ============ Shares of beneficial interest outstanding 8,225,446 ============ Net asset value per share outstanding $ 12.66 Maximum sales charge (5.50% of offering price) 0.74 ------------ Maximum offering price per share outstanding $ 13.40 ============ CLASS B Net assets applicable to outstanding shares $ 31,313,506 ============ Shares of beneficial interest outstanding 2,682,187 ============ Net asset value and offering price per share outstanding $ 11.67 ============ CLASS C Net assets applicable to outstanding shares $ 19,241,870 ============ Shares of beneficial interest outstanding 1,647,881 ============ Net asset value and offering price per share outstanding $ 11.68 ============ CLASS I Net assets applicable to outstanding shares $373,331,556 ============ Shares of beneficial interest outstanding 29,279,576 ============ Net asset value and offering price per share outstanding $ 12.75 ============ CLASS R1 Net assets applicable to outstanding shares $ 6,225,185 ============ Shares of beneficial interest outstanding 491,522 ============ Net asset value and offering price per share outstanding $ 12.67 ============ CLASS R2 Net assets applicable to outstanding shares $ 10,942,490 ============ Shares of beneficial interest outstanding 862,535 ============ Net asset value and offering price per share outstanding $ 12.69 ============ CLASS R3 Net assets applicable to outstanding shares $ 737,018 ============ Shares of beneficial interest outstanding 58,305 ============ Net asset value and offering price per share outstanding $ 12.64 ============
16 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Dividends (a) $21,588,563 Interest 26,235 ----------- Total income 21,614,798 ----------- EXPENSES Manager (See Note 3) 5,471,612 Transfer agent (See Note 3) 1,227,753 Distribution/Service--Investor Class (See Note 3) 97,088 Distribution/Service--Class A (See Note 3) 271,466 Distribution/Service--Class B (See Note 3) 329,961 Distribution/Service--Class C (See Note 3) 194,288 Distribution/Service--Class R2 (See Note 3) 25,310 Distribution/Service--Class R3 (See Note 3) 2,504 Custodian 262,430 Shareholder communication 156,978 Professional fees 135,130 Registration 134,513 Trustees 20,355 Shareholder service (See Note 3) 16,415 Miscellaneous 38,121 ----------- Total expenses 8,383,924 ----------- Net investment income 13,230,874 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, WRITTEN OPTIONS AND FOREIGN CURRENCY TRANSACTIONS - ------------------------------------------------- Net realized gain on: Security transactions $15,881,135 Futures transactions 776,696 Written option transactions 86,507 Foreign currency transactions 3,729,383 ----------- Net realized gain on investments, futures transactions, written option transactions and foreign currency transactions 20,473,721 ----------- Net change in unrealized appreciation (depreciation) on: Investments (1,423,579) Futures contracts 2,709,781 Written option contracts (1,955) Translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (602,208) ----------- Net change in unrealized appreciation (depreciation) on investments, futures contracts, written options and foreign currency transactions 682,039 ----------- Net realized and unrealized gain on investments, futures transactions, written options and foreign currency transactions 21,155,760 ----------- Net increase in net assets resulting from operations $34,386,634 ===========
(a) Dividends recorded net of foreign withholding taxes in the amount of $2,040,939. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE (DECREASE) IN NET ASSETS - ---------------------------------------------------------------------- Operations: Net investment income $ 13,230,874 $ 12,501,788 Net realized gain (loss) on investments, futures transactions, written option transactions and foreign currency transactions 20,473,721 (36,878,903) Net change in unrealized appreciation (depreciation) on investments, futures contracts, written options and foreign currency transactions 682,039 123,851,517 ---------------------------- Net increase in net assets resulting from operations 34,386,634 99,474,402 ---------------------------- Dividends to shareholders: From net investment income: Investor Class (1,038,451) (2,784,161) Class A (3,373,550) (5,375,025) Class B (746,981) (2,657,407) Class C (413,731) (835,870) Class I (12,028,290) (31,109,639) Class R1 (171,522) (230,732) Class R2 (235,960) (22,362) Class R3 (8,861) (2,952) ---------------------------- Total dividends to shareholders (18,017,346) (43,018,148) ---------------------------- Capital share transactions: Net proceeds from sale of shares 148,463,186 212,035,458 Net asset value of shares issued to shareholders in reinvestment of dividends 14,768,171 30,703,329 Cost of shares redeemed (a) (207,005,556) (207,999,568) ---------------------------- Increase (decrease) in net assets derived from capital share transactions (43,774,199) 34,739,219 ---------------------------- Net increase (decrease) in net assets (27,404,911) 91,195,473 NET ASSETS - ---------------------------------------------------------------------- Beginning of year 613,208,171 522,012,698 ---------------------------- End of year $ 585,803,260 $ 613,208,171 ============================ Undistributed net investment income at end of year $ 14,830,408 $ 15,684,834 ============================
(a) Cost of shares redeemed net of redemption fee of $24,691 and $48,399 for the years ended October 31, 2010, and 2009, respectively. (See Note 2(M)) 18 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 12.24 $ 10.96 $ 14.70 ------- ------- ------- Net investment income (a) 0.22 (b) 0.23 0.36 Net realized and unrealized gain (loss) on investments 0.44 1.73 (4.31) Net realized and unrealized gain on foreign currency transactions 0.08 0.18 0.21 ------- ------- ------- Total from investment operations 0.74 2.14 (3.74) ------- ------- ------- Less dividends and distributions: From net investment income (0.32) (0.86) -- From net realized gain on investments -- -- -- ------- ------- ------- Total dividends and distributions (0.32) (0.86) -- ------- ------- ------- Redemption fee (a)(d) 0.00 ++ 0.00 ++ 0.00 ++ ------- ------- ------- Net asset value at end of period $ 12.66 $ 12.24 $ 10.96 ======= ======= ======= Total investment return (e) 6.11% 21.20% (25.44%)(g) Ratios (to average net assets)/Supplemental Data: Net investment income 1.82%(b) 2.19% 3.91% ++ Net expenses 1.75% 1.71% 1.70% ++ Expenses (before recoupment/waiver/reimburse- ment) 1.75% 1.86% 1.73% ++ Portfolio turnover rate 54% 88% 82% Net assets at end of period (in 000's) $39,843 $39,969 $35,429
CLASS B ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 11.33 $ 10.17 $ 16.99 $ 15.78 $ 12.88 ------- ------- ------- ------- ------- Net investment income (a) 0.12 (b) 0.14 0.28 0.09 0.15 Net realized and unrealized gain (loss) on investments 0.39 1.61 (5.70) 2.40 3.43 (c) Net realized and unrealized gain (loss) on foreign currency transactions 0.07 0.16 0.28 (0.16) (0.09) ------- ------- ------- ------- ------- Total from investment operations 0.58 1.91 (5.14) 2.33 3.49 ------- ------- ------- ------- ------- Less dividends and distributions: From net investment income (0.24) (0.75) -- -- -- From net realized gain on investments -- -- (1.68) (1.12) (0.59) ------- ------- ------- ------- ------- Total dividends and distributions (0.24) (0.75) (1.68) (1.12) (0.59) ------- ------- ------- ------- ------- Redemption fee (a)(d) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------- ------- ------- ------- ------- Net asset value at end of period $ 11.67 $ 11.33 $ 10.17 $ 16.99 $ 15.78 ======= ======= ======= ======= ======= Total investment return (e) 5.17% 20.31% (33.36%) 15.48% 28.13%(c)(f) Ratios (to average net assets)/Supplemental Data: Net investment income 1.04%(b) 1.41% 2.10% 0.52% 1.11% Net expenses 2.50% 2.46% 2.40% 2.35% 2.37% Expenses (before recoupment/waiver/reimburse- ment) 2.50% 2.62% 2.42% 2.30% 2.41%(f) Portfolio turnover rate 54% 88% 82% 49% 50% Net assets at end of period (in 000's) $31,314 $36,397 $37,098 $76,081 $67,150
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Included in net investment income per share and the ratio of net investment income to average net assets are $0.03 per share and 0.29%, respectively, resulting from a special one-time dividend from Ryanair Holdings PLC that paid $0.30 per share. (c) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was $0.02 per share on net realized gains on investments and the effect on total investment return was less than 0.01%, respectively. (d) The redemption fee was discontinued as of April 1, 2010. (e) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (f) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (g) Total investment return is not annualized.
20 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A ------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 12.24 $ 10.97 $ 18.09 $ 16.69 $ 13.53 -------- -------- ------- -------- -------- 0.25 (b) 0.26 0.41 0.22 0.24 0.44 1.73 (6.10) 2.54 3.65 (c) 0.08 0.18 0.30 (0.17) (0.10) -------- -------- ------- -------- -------- 0.77 2.17 (5.39) 2.59 3.79 -------- -------- ------- -------- -------- (0.35) (0.90) (0.05) (0.07) (0.04) -- -- (1.68) (1.12) (0.59) -------- -------- ------- -------- -------- (0.35) (0.90) (1.73) (1.19) (0.63) -------- -------- ------- -------- -------- 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- ------- -------- -------- $ 12.66 $ 12.24 $ 10.97 $ 18.09 $ 16.69 ======== ======== ======= ======== ======== 6.31% 21.57% (32.67%) 16.30% 29.11%(c)(f) 2.11%(b) 2.40% 2.79% 1.25% 1.65% 1.44% 1.39% 1.47% 1.58% 1.62% 1.44% 1.42% 1.47% 1.55% 1.67%(f) 54% 88% 82% 49% 50% $104,169 $117,023 $63,470 $186,738 $145,964
CLASS C --------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 11.32 $ 10.17 $ 16.98 $ 15.77 $ 12.87 ------- ------- ------- ------- ------- 0.12 (b) 0.13 0.29 0.09 0.13 0.41 1.61 (5.69) 2.40 3.45 (c) 0.07 0.16 0.27 (0.16) (0.09) ------- ------- ------- ------- ------- 0.60 1.90 (5.13) 2.33 3.49 ------- ------- ------- ------- ------- (0.24) (0.75) -- -- -- -- -- (1.68) (1.12) (0.59) ------- ------- ------- ------- ------- (0.24) (0.75) (1.68) (1.12) (0.59) ------- ------- ------- ------- ------- 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------- ------- ------- ------- ------- $ 11.68 $ 11.32 $ 10.17 $ 16.98 $ 15.77 ======= ======= ======= ======= ======= 5.23% 20.32% (33.32%) 15.49% 28.15%(c)(f) 1.09%(b) 1.34% 2.12% 0.53% 0.91% 2.50% 2.46% 2.39% 2.33% 2.37% 2.50% 2.60% 2.41% 2.30% 2.42%(f) 54% 88% 82% 49% 50% $19,242 $19,079 $10,976 $25,677 $17,026
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 12.33 $ 11.05 $ 18.23 $ 16.79 $ 13.60 -------- -------- -------- -------- -------- Net investment income (a) 0.29 (b) 0.29 0.50 0.31 0.33 Net realized and unrealized gain (loss) on investments 0.43 1.75 (6.16) 2.56 3.66 (c) Net realized and unrealized gain on foreign currency transactions 0.08 0.18 0.30 (0.16) (0.10) -------- -------- -------- -------- -------- Total from investment operations 0.80 2.22 (5.36) 2.71 3.89 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.38) (0.94) (0.14) (0.15) (0.11) From net realized gain on investments -- -- (1.68) (1.12) (0.59) -------- -------- -------- -------- -------- Total dividends and distributions (0.38) (0.94) (1.82) (1.27) (0.70) -------- -------- -------- -------- -------- Redemption fee (a)(d) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- -------- -------- Net asset value at end of period $ 12.75 $ 12.33 $ 11.05 $ 18.23 $ 16.79 ======== ======== ======== ======== ======== Total investment return (e) 6.61% 22.01% (32.44%) 16.96% 29.94%(c)(f) Ratios (to average net assets)/Supplemental Data: Net investment income 2.40%(b) 2.70% 3.48% 1.80% 2.22% Net expenses 1.18% 1.08% 1.03% 1.03% 1.01% Expenses (before recoupment/waiver/reimburse- ment) 1.18% 1.17% 1.05% 1.02% 1.08%(f) Portfolio turnover rate 54% 88% 82% 49% 50% Net assets at end of period (in 000's) $373,332 $387,245 $371,975 $631,206 $520,233
CLASS R2 ---------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 12.27 $10.99 $ 18.14 $16.72 $13.55 ------- ------ ------- ------ ------ Net investment income (a) 0.25 (b) 0.16 0.46 0.24 0.31 Net realized and unrealized gain (loss) on investments 0.43 1.82 (6.14) 2.57 3.62 (c) Net realized and unrealized gain (loss) on foreign currency transactions 0.08 0.19 0.30 (0.16) (0.10) ------- ------ ------- ------ ------ Total from investment operations 0.76 2.17 (5.38) 2.65 3.83 ------- ------ ------- ------ ------ Less dividends and distributions: From net investment income (0.34) (0.89) (0.09) (0.11) (0.07) From net realized gain on investments -- -- (1.68) (1.12) (0.59) ------- ------ ------- ------ ------ Total dividends and distributions (0.34) (0.89) (1.77) (1.23) (0.66) ------- ------ ------- ------ ------ Redemption fee (a)(d) 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------- ------ ------- ------ ------ Net asset value at end of period $ 12.69 $12.27 $ 10.99 $18.14 $16.72 ======= ====== ======= ====== ====== Total investment return (e) 6.32% 21.53% (32.63%) 16.49% 29.53%(c)(f) Ratios (to average net assets)/Supplemental Data: Net investment income 2.09%(b) 1.39% 3.24% 1.38% 2.07% Net expenses 1.54% 1.50% 1.38% 1.38% 1.37% Expenses (before recoupment/waiver/reimburse- ment) 1.54% 1.54% 1.40% 1.37% 1.42%(f) Portfolio turnover rate 54% 88% 82% 49% 50% Net assets at end of period (in 000's) $10,942 $7,826 $ 274 $ 358 $ 289
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Included in net investment income per share and the ratio of net investment income to average net assets are $0.03 per share and 0.29%, respectively, resulting from a special one-time dividend from Ryanair Holdings PLC that paid $0.30 per share. (c) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was $0.02 per share on net realized gains on investments and the effect on total investment return was less than 0.01%, respectively. (d) The redemption fee was discontinued as of April 1, 2010. (e) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (f) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (g) Total investment return is not annualized.
22 MainStay International Equity Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS R1 ----------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $12.25 $10.98 $ 18.13 $16.71 $13.54 ------ ------ ------- ------ ------ 0.27(b) 0.28 0.49 0.29 0.32 0.44 1.74 (6.13) 2.55 3.64(c) 0.08 0.18 0.30 (0.16) (0.10) ------ ------ ------- ------ ------ 0.79 2.20 (5.34) 2.68 3.86 ------ ------ ------- ------ ------ (0.37) (0.93) (0.13) (0.14) (0.10) -- -- (1.68) (1.12) (0.59) ------ ------ ------- ------ ------ (0.37) (0.93) (1.81) (1.26) (0.69) ------ ------ ------- ------ ------ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------ ------ ------- ------ ------ $12.67 $12.25 $ 10.98 $18.13 $16.71 ====== ====== ======= ====== ====== 6.58% 21.89% (32.53%) 16.88% 29.76%(c)(f) 2.30%(b) 2.58% 3.40% 1.68% 2.19% 1.29% 1.19% 1.13% 1.13% 1.12% 1.29% 1.27% 1.15% 1.12% 1.17%(f) 54% 88% 82% 49% 50% $6,225 $5,348 $ 2,755 $4,158 $3,893
CLASS R3 ----------------------------------------------------------------------------- APRIL 28, 2006** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 2007 2006 $12.24 $10.95 $ 18.10 $16.70 $15.26 ------ ------ ------- ------ ------ 0.24 (b) 0.26 0.42 0.13 0.13 0.41 1.72 (6.13) 2.64 1.35(c) 0.07 0.17 0.30 (0.17) (0.04) ------ ------ ------- ------ ------ 0.72 2.15 (5.41) 2.60 1.44 ------ ------ ------- ------ ------ (0.32) (0.86) (0.06) (0.08) -- -- -- (1.68) (1.12) -- ------ ------ ------- ------ ------ (0.32) (0.86) (1.74) (1.20) -- ------ ------ ------- ------ ------ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------ ------ ------- ------ ------ $12.64 $12.24 $ 10.95 $18.10 $16.70 ====== ====== ======= ====== ====== 5.99% 21.31% (32.86%) 16.35% 9.44%(g) 2.00%(b) 2.45% 2.93% 0.76% 1.60%++ 1.79% 1.69% 1.63% 1.63% 1.59%++ 1.79% 1.77% 1.65% 1.62% 1.70%++(f) 54% 88% 82% 49% 50% $ 737 $ 322 $ 37 $ 57 $ 11
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay International Equity Fund (the "Fund"), a diversified fund. The Fund currently offers eight classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on September 13, 1994. Class C shares commenced operations on September 1, 1998. Class I shares, Class R1 shares and Class R2 shares commenced operations on January 2, 2004. Class R3 shares commenced operations on April 28, 2006. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I, Class R1, Class R2 and Class R3 shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The eight classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class, Class A, Class R2 and Class R3 shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to a distribution and/or service fee. Class R1, Class R2 and Class R3 shares are authorized to pay a shareholder service fee to the Manager, as defined in Note 3(A), its affiliates, or third-party service providers, as compensation for services rendered to shareholders of Class R1, Class R2 or Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. The Fund's investment objective is to provide long-term growth of capital commensurate with an acceptable level of risk by investing in a portfolio consisting primarily of non-U.S. equity securities. Current income is a secondary objective. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Futures contracts are valued at the last posted settlement price on the market where such futures are primarily 24 MainStay International Equity Fund traded. Options contracts are valued at the last posted settlement price on the market where such options are principally traded. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Foreign currency forward contracts are valued at their fair market values determined on the basis of the mean between the last current bid and ask prices based on dealer or exchange quotations and are generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. The roll forward activity of Level 3 fair value measurements is included at the end of the Fund's Portfolio of Investments. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Investment income received by the Fund from foreign sources may be subject to foreign income taxes. These foreign income taxes are generally withheld at the source. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) PURCHASED AND WRITTEN OPTIONS. The Fund may write covered call and put options on its portfolio securities or foreign currencies. These securities are subject to equity price risk in the normal course of investing in these transactions. Premiums received are recorded as assets, and the market value of the written options are recorded as liabilities. The liabilities are subsequently adjusted and unrealized appreciation or depreciation is recorded to reflect the current value of the options written. Premiums received from writing options that expire are treated as realized gains. Premiums received from writing options that are exercised or are cancelled in closing purchase transactions are added to the proceeds or netted against the amount paid on the transaction to determine the realized gain or loss. The Fund, in exchange for the premium, accepts the risk of a decline in the market value of the underlying security or foreign currency below the exercise price. A call option may be covered by the call writer's owning the underlying security throughout the option period. A call option may also be covered by the call writer's maintaining liquid assets valued at greater than the exercise price of the call written. When writing a covered call option, the Fund, in return for the premium on the option, gives up the opportunity to profit from a price increase in the underlying securities above the exercise price. However, as long as the obligation as the writer continues, the Fund has retained the risk of loss should the price of the underlying security decline. After writing a put option, the Fund may incur risk exposure equal to the difference between the exercise price of the option and the sum of the market value of the underlying security plus the premium received from the sale of the option. The Fund writes covered call options to try to realize greater return on the sale of a stock. The Fund writes put options to help protect against unanticipated adverse developments. The Fund may purchase call and put options on its portfolio securities or foreign currencies. The Fund may purchase call options to protect against an increase in the price of the security or foreign currency it anticipates purchasing. The Fund may purchase put options on its securities or foreign currencies to protect against a decline in the value of the security or foreign currency or to close out covered written put positions. The Fund may also purchase options to seek to enhance returns. Risks may arise from an imperfect correlation between the change in market value of the securities or foreign currencies held by the Fund and the prices of options relating to the securities or foreign currencies purchased or sold by the Fund and from the possible lack of a liquid secondary market for an option. The maximum risk exposure for any purchased option is limited to the premium initially paid for the option. (See Note 5.) As of October 31, 2010, the Fund did not hold purchased or written options. (I) FUTURES CONTRACTS. A futures contract is an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate, security, or securities index). The Fund is subject to equity rate risk in the normal course of investing in these transactions. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. The Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin." When the futures contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation 26 MainStay International Equity Fund margin reflect the extent of the Fund's involvement in open futures positions. Risks arise from the possible imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts. However, the Fund's activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. The Fund invests in futures contracts to help manage the duration and yield curve of the portfolio while minimizing the exposure to wider bid/ask spreads in traditional bonds. The Fund's investment in futures contracts and other derivatives may increase the volatility of the Fund's NAV and may result in a loss to the Fund. The Fund may also enter into futures contracts traded on foreign futures exchanges such as those located in Frankfurt, Tokyo, London or Paris as long as trading on foreign futures exchanges does not subject a Fund to risks that are materially greater than the risks associated with trading on U.S. exchanges. (J) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign currency forward contracts, which are agreements to buy or sell currencies of different countries on a specified future date at a specified rate. The Fund is subject to foreign currency exchange rate risk in the normal course of investing in these transactions. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. Cash movement occurs on settlement date. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into foreign currency forward contracts to reduce currency risk versus the benchmark or for trade settlement. The use of foreign currency forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. While a Fund may enter into forward contracts to reduce currency exchange risks, changes in currency exchange rates may result in poorer overall performance for the Fund than if it had not engaged in such transactions. Exchange rate movements can be large, depending on the currency, and can last for extended periods of time, affecting the value of the Fund's assets. Moreover, there may be an imperfect correlation between the Fund's holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to the risk of currency exchange loss. The unrealized appreciation (depreciation) on forward contracts reflects the Fund's exposure at valuation date to credit loss in the event of a counterparty's failure to perform its obligations. (See Note 5.) (K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (L) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (M) REDEMPTION FEE. Prior to April 1, 2010, the Fund imposed a 2.00% redemption fee on redemptions (including exchanges) of Fund shares made within 60 days of their date of purchase for any class. The redemption fee was designed to offset brokerage commissions and other costs associated with short-term trading and was not assessed on shares acquired through the reinvestment of dividends or mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) distributions paid by the Fund. The redemption fees are included in the Statement of Changes in Net Assets' shares redeemed amount and retained by the Fund. (N) CONCENTRATION OF RISK. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of securities held by the Fund to meet their obligations may be affected by economic and political developments in a specific country, industry or region. (O) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (P) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE EQUITY LIABILITIES CONTRACTS CONTRACTS LOCATION RISK RISK TOTAL Warrants Investments in securities, at value $ -- $24,039,732 $24,039,732 Futures Contracts Net Assets--Unrealized appreciation (depreciation) on investments and futures contracts (a) -- 878,429 878,429 Forward Contracts Unrealized appreciation on foreign currency forward contracts 863,278 -- 863,278 --------------------------------------- Total Fair Value $863,278 $24,918,161 $25,781,439 =======================================
LIABILITY DERIVATIVES
STATEMENT OF FOREIGN ASSETS AND EXCHANGE EQUITY LIABILITIES CONTRACTS CONTRACTS LOCATION RISK RISK TOTAL Futures Contracts Net Assets--Unrealized appreciation (depreciation) on investments and futures contracts (a) $ -- $(137,567) $(137,567) Forward Contracts Unrealized depreciation on foreign currency forward contracts (34,344) -- (34,344) ----------------------------------- Total Fair Value $(34,344) $(137,567) $(171,911) ===================================
(a) Includes cumulative depreciation of futures contracts as reported in Portfolio of Investments. Only current day's variation margin is reported within the Statement of Assets and Liabilities. 28 MainStay International Equity Fund The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows: REALIZED GAIN (LOSS)
FOREIGN STATEMENT OF EXCHANGE EQUITY OPERATIONS CONTRACTS CONTRACTS LOCATION RISK RISK TOTAL Purchased Options Net realized gain (loss) on security transactions $ -- $(641,216) $ (641,216) Futures Contracts Net realized gain (loss) on futures contracts -- 776,696 776,696 Warrants Net realized gain (loss) on security transactions -- 286,508 286,508 Written Options Net realized gain (loss) on written option transactions -- 86,507 86,507 Forward Contracts Net realized gain (loss) on foreign currency transactions: 3,116,788 -- 3,116,788 ------------------------------------- Total Realized Gain (Loss) $3,116,788 $ 508,495 $3,625,283 =====================================
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
FOREIGN STATEMENT OF EXCHANGE EQUITY OPERATIONS CONTRACTS CONTRACTS LOCATION RISK RISK TOTAL Warrants Net change in unrealized appreciation (depreciation) on security transactions $ -- $5,334,950 $5,334,950 Futures contracts Net change in unrealized appreciation (depreciation) on futures contracts -- 2,709,781 2,709,781 Written Options Net change in unrealized appreciation (depreciation) on written option contracts -- (1,955) (1,955) Forward Contracts Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities in foreign currencies and foreign currency forward contracts (140,308) -- (140,308) ------------------------------------- Total Change in Unrealized Appreciation (Depreciation) $(140,308) $8,042,776 $7,902,468 =====================================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
FOREIGN EXCHANGE EQUITY CONTRACTS CONTRACTS RISK RISK TOTAL Purchased Options (2) -- 1,085 1,085 Rights (2) -- 10,125,844 10,125,844 Warrants (2) -- 4,131,270 4,131,270 Futures Contracts (2) -- 1,063 1,063 Forward Contracts Long (3) $ 39,906,589 -- $ 39,906,589 Forward Contracts Short (3) $(39,906,589) -- $(39,906,589) ======================================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount(s) represent(s) number of contracts or number of shares/units. (3) Amount(s) represent(s) notional amount. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC (the "Subadvisor"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.90% up to $500 million and 0.85% in excess of $500 million, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.90% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. mainstayinvestments.com 29 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Effective August 1, 2009, New York Life Investments agreed to voluntarily waive or reimburse the expenses of the appropriate class of the Fund so that the total ordinary operating expenses of a class do not exceed the following percentages of average daily net assets: Investor Class, 1.85%; Class B, 2.60%; and Class C, 2.60%. These voluntary waivers or reimbursements may be discontinued at any time. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $5,471,612. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor receives a monthly distribution fee from the Investor Class, Class A and Class R2 shares, at an annual rate of 0.25% of the average daily net assets of the Investor Class, Class A and Class R2 shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Pursuant to the Class R3 Plan, the Distributor receives a monthly distribution and service fee from the Class R3 shares at an annual rate of 0.50% of the average daily net assets of the Class R3 shares. Class I and Class R1 shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. In accordance with the Shareholder Services Plans for the Class R1, Class R2 and Class R3 shares, the Manager has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R1, Class R2 and Class R3 shares. For its services, the Manager is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R1, Class R2 and Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. Shareholder Service Fees incurred by the Fund for the year ended October 31, 2010, were as follows: Class R1 $ 5,790 - ---------------------------------------------- Class R2 10,124 - ---------------------------------------------- Class R3 501 - ----------------------------------------------
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $15,167 and $20,652, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $12, $253, $38,784, and $13,588, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $183,863 - ----------------------------------------------- Class A 168,667 - ----------------------------------------------- Class B 156,288 - ----------------------------------------------- Class C 92,011 - ----------------------------------------------- Class I 601,278 - ----------------------------------------------- Class R1 9,024 - ----------------------------------------------- Class R2 15,826 - ----------------------------------------------- Class R3 796 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. 30 MainStay International Equity Fund (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 243 0.0%++ - ---------------------------------------------------- Class C 153 0.0++ - ---------------------------------------------------- Class I 54,640,860 14.6 - ---------------------------------------------------- Class R1 1,589 0.0++ - ---------------------------------------------------- Class R2 1,568 0.0++ - ---------------------------------------------------- Class R3 10,992 1.5 - ----------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $21,801. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $15,659,342 $(83,550,841) $-- $18,566,316 $(49,325,183) - ----------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized appreciation (depreciation) is primarily due to wash sale deferrals, mark to market on foreign currency forward contracts and futures contracts. The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized loss on investments arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) PAID-IN INCOME (LOSS) ON INVESTMENTS CAPITAL $3,932,046 $(3,932,046) $-- - ------------------------------------ ----------
The reclassification for the Fund is primarily due to foreign currency gains and losses. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $83,550,841 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2016 $29,857 2017 53,694 - ---------------------------------- ----- Total $83,551 - ---------------------------------- -----
The Fund utilized $13,700,376 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distribution paid from: Ordinary Income $18,017,346 $43,018,148 - ------------------------------------------------------
mainstayinvestments.com 31 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5-FOREIGN CURRENCY FORWARD CONTRACTS, FOREIGN CURRENCY TRANSACTIONS AND WRITTEN OPTIONS As of October 31, 2010, the Fund held the following foreign currency forward contracts:
CONTRACT CONTRACT UNREALIZED AMOUNT AMOUNT APPRECIATION/ COUNTERPARTY SOLD PURCHASED (DEPRECIATION) Foreign Currency Sale Contracts: - ----------------------------------------------------------------------------------------------------------------- Japanese Yen vs. Australian Dollar, expiring 1/11/11 HSBC BankUSA JPY121,093,950 AUD 1,515,000 USD(34,344) - ----------------------------------------------------------------------------------------------------------------- Japanese Yen vs. Norwegian Krone, expiring 12/14/10 HSBC BankUSA JPY 138,036,600 NOK 10,200,000 21,836 - ----------------------------------------------------------------------------------------------------------------- Swiss Franc vs. Japanese Yen, expiring 11/12/10 HSBC BankUSA CHF 22,800,000 JPY 1,886,700,000 276,392 - ----------------------------------------------------------------------------------------------------------------- Swiss Franc vs. Pound Sterling, expiring 11/26/10 JPMorgan Chase Bank CHF 3,950,000 GBP 2,532,295 42,109 - ----------------------------------------------------------------------------------------------------------------- Swiss Franc vs. Pound Sterling, expiring 1/13/11 HSBC BankUSA CHF 7,440,000 GBP 4,890,490 266,817 - ----------------------------------------------------------------------------------------------------------------- Swiss Franc vs. Swedish Krona, expiring 12/3/10 HSBC BankUSA CHF 15,850,000 SEK 109,428,400 256,124 - ----------------------------------------------------------------------------------------------------------------- Net unrealized appreciation on foreign currency forward contracts USD 828,934 - -----------------------------------------------------------------------------------------------------------------
As of October 31, 2010, the Fund held the following foreign currencies:
CURRENCY COST VALUE Australian Dollar AUD 2,643,783 USD 2,416,507 USD 2,589,718 - ---------------------------------------------------------------------------------------------------- Canadian Dollar CAD 49,400 48,355 48,436 - ---------------------------------------------------------------------------------------------------- Czech Koruna CZK 18,702,507 1,058,238 1,056,848 - ---------------------------------------------------------------------------------------------------- Danish Krone DKK 31,774 5,932 5,930 - ---------------------------------------------------------------------------------------------------- Euro EUR 3,250,355 4,528,430(a) 4,523,844(a) - ---------------------------------------------------------------------------------------------------- Japanese Yen JPY 220,801,432 2,693,429(a) 2,743,897(a) - ---------------------------------------------------------------------------------------------------- Norwegian Krone NOK 589,868 94,273 100,719 - ---------------------------------------------------------------------------------------------------- Pound Sterling GBP 2,602,954 4,075,005(a) 4,170,845(a) - ---------------------------------------------------------------------------------------------------- Singapore Dollar SGD 3,379,393 2,584,500 2,610,981 - ---------------------------------------------------------------------------------------------------- Swedish Krona SEK 2,627,930 357,022 393,423 - ---------------------------------------------------------------------------------------------------- Swiss Franc CHF 239,428 250,225 243,309 - ---------------------------------------------------------------------------------------------------- Total USD 18,111,916 USD 18,487,950 - ----------------------------------------------------------------------------------------------------
(a) A portion of this amount is segregated as collateral for futures contracts. During the year ended October 31, 2010, the Fund had the following transactions in written options:
NUMBER OF CONTRACTS PREMIUM Options Outstanding at October 31, 2009 1,500 $ 86,507 - --------------------------------------------------- Options--Written -- -- - --------------------------------------------------- Options--Expired (1,500) (86,507) - --------------------------------------------------- Options--Canceled in closing transactions -- -- - --------------------------------------------------- Options Outstanding at October 31, 2010 -- $ -- - ---------------------------------------------------
NOTE 6-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 7-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional 32 MainStay International Equity Fund maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $305,058 and $341,291, respectively. NOTE 9-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 262,880 $ 3,176,295 Shares issued to shareholders in reinvestment of dividends 84,216 1,031,647 Shares redeemed (605,885) (7,225,258) -------------------------- Net increase (decrease) in shares outstanding before conversion (258,789) (3,017,316) Shares converted into Investor Class (See Note 1) 225,549 2,702,090 Shares converted from Investor Class (See Note 1) (83,487) (1,015,195) -------------------------- Net increase (decrease) (116,727) $ (1,330,421) ========================== Year ended October 31, 2009: Shares sold 295,274 $ 3,133,222 Shares issued to shareholders in reinvestment of dividends 274,197 2,763,906 Shares redeemed (677,337) (7,030,762) -------------------------- Net increase (decrease) in shares outstanding before conversion (107,866) (1,133,634) Shares converted into Investor Class (See Note 1) 395,555 3,930,155 Shares converted from Investor Class (See Note 1) (254,427) (3,007,535) -------------------------- Net increase (decrease) 33,262 $ (211,014) ========================== CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 2,517,126 $ 30,522,416 Shares issued to shareholders in reinvestment of dividends 234,250 2,862,540 Shares redeemed (3,771,494) (44,406,529) -------------------------- Net increase (decrease) in shares outstanding before conversion (1,020,118) (11,021,573) Shares converted into Class A (See Note 1) 199,980 2,405,187 Shares converted from Class A (See Note 1) (52,650) (644,178) Shares converted from Class A (a) (458,901) (5,387,502) -------------------------- Net increase (decrease) (1,331,689) $ (14,648,066) ========================== Year ended October 31, 2009: Shares sold 5,778,794 $ 61,127,837 Shares issued to shareholders in reinvestment of dividends 472,195 4,745,571 Shares redeemed (2,669,609) (27,735,286) -------------------------- Net increase (decrease) in shares outstanding before conversion 3,581,380 38,138,122 Shares converted into Class A (See Note 1) 384,373 4,403,119 Shares converted from Class A (See Note 1) (192,063) (1,824,267) -------------------------- Net increase (decrease) 3,773,690 $ 40,716,974 ========================== CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 302,160 $ 3,373,463 Shares issued to shareholders in reinvestment of dividends 61,310 697,097 Shares redeemed (582,168) (6,400,715) -------------------------- Net increase (decrease) in shares outstanding before conversion (218,698) (2,330,155) Shares converted from Class B (See Note 1) (312,717) (3,447,904) -------------------------- Net increase (decrease) (531,415) $ (5,778,059) ========================== Year ended October 31, 2009: Shares sold 464,319 $ 4,633,379 Shares issued to shareholders in reinvestment of dividends 265,133 2,489,639 Shares redeemed (803,787) (7,681,906) -------------------------- Net increase (decrease) in shares outstanding before conversion (74,335) (558,888) Shares converted from Class B (See Note 1) (359,682) (3,501,472) -------------------------- Net increase (decrease) (434,017) $ (4,060,360) ========================== CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 496,946 $ 5,608,311 Shares issued to shareholders in reinvestment of dividends 28,179 320,677 Shares redeemed (562,111) (6,195,553) -------------------------- Net increase (decrease) (36,986) $ (266,565) ========================== Year ended October 31, 2009: Shares sold 1,013,936 $ 10,052,536 Shares issued to shareholders in reinvestment of dividends 72,908 683,874 Shares redeemed (481,736) (4,586,684) -------------------------- Net increase (decrease) 605,108 $ 6,149,726 ==========================
mainstayinvestments.com 33 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 8,029,733 $ 97,871,809 Shares issued to shareholders in reinvestment of dividends 772,194 9,482,538 Shares redeemed (11,397,225) (138,274,309) -------------------------- Net increase (decrease) in shares outstanding before conversion (2,595,298) (30,919,962) Shares converted into Class I (a) 456,568 5,387,502 -------------------------- Net increase (decrease) (2,138,730) $ (25,532,460) ========================== Year ended October 31, 2009: Shares sold 11,205,468 $ 122,915,797 Shares issued to shareholders in reinvestment of dividends 1,958,800 19,764,293 Shares redeemed (15,405,836) (159,726,727) -------------------------- Net increase (decrease) (2,241,568) $ (17,046,637) ========================== CLASS R1 SHARES AMOUNT Year ended October 31, 2010: Shares sold 115,722 $ 1,420,742 Shares issued to shareholders in reinvestment of dividends 13,721 167,532 Shares redeemed (74,563) (905,475) -------------------------- Net increase (decrease) 54,880 $ 682,799 ========================== Year ended October 31, 2009: Shares sold 198,843 $ 2,160,188 Shares issued to shareholders in reinvestment of dividends 22,981 230,732 Shares redeemed (36,009) (388,500) -------------------------- Net increase (decrease) 185,815 $ 2,002,420 ========================== CLASS R2 SHARES AMOUNT Year ended October 31, 2010: Shares sold 484,331 $ 5,892,843 Shares issued to shareholders in reinvestment of dividends 16,104 197,279 Shares redeemed (275,687) (3,373,623) -------------------------- Net increase (decrease) 224,748 $ 2,716,499 ========================== Year ended October 31, 2009: Shares sold 672,602 $ 7,620,471 Shares issued to shareholders in reinvestment of dividends 2,218 22,362 Shares redeemed (61,929) (677,769) -------------------------- Net increase (decrease) 612,891 $ 6,965,064 ========================== CLASS R3 SHARES AMOUNT Year ended October 31, 2010: Shares sold 50,108 $ 597,307 Shares issued to shareholders in reinvestment of dividends 724 8,861 Shares redeemed (18,860) (224,094) -------------------------- Net increase (decrease) 31,972 $ 382,074 ========================== Year ended October 31, 2009: Shares sold 38,045 $ 392,028 Shares issued to shareholders in reinvestment of dividends 293 2,952 Shares redeemed (15,357) (171,934) -------------------------- Net increase (decrease) 22,981 $ 223,046 ==========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified. 34 MainStay International Equity Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay International Equity Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay International Equity Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 35 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay International Equity Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' 36 MainStay International Equity Fund willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. In addition, the Board considered efforts by New York Life Investments and MacKay Shields in recent years to reduce the volatility in the Fund's investment performance relative to peer funds and to the Fund's benchmark index. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to MacKay Shields from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to MacKay Shields in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. mainstayinvestments.com 37 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships with the Fund supported the Board's determination to approve the Agreements. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. 38 MainStay International Equity Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $20,369,146 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 0.6% to arrive at the amount eligible for the corporate dividends received deduction. In accordance with federal tax law, the Fund elects to provide each shareholder with their portion of the Fund's foreign taxes paid and the income sourced from foreign countries. Accordingly, the Fund made the following designations regarding its fiscal year ended October 31, 2010: - -- the total amount of taxes paid to foreign countries was $2,040,939 - -- the total amount of income sourced from foreign countries was $23,532,296 In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). mainstayinvestments.com 39 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 40 MainStay International Equity Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 41
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
42 MainStay International Equity Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 43 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 44 MainStay International Equity Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21139 MS333-10 MSIE11-12/10 10 (MAINSTAY INVESTMENTS LOGO) MAINSTAY LARGE CAP GROWTH FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 14 - --------------------------------------------- Notes to Financial Statements 22 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 30 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 31 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 35 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 35 - --------------------------------------------- Board Members and Officers 36 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS A SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY LARGE CAP GROWTH FUND CLASS RUSSELL 1000(R) S&P 500(R) A SHARES GROWTH INDEX INDEX -------------- --------------- ---------- 10/31/00 23625 25000 25000 10/31/01 16077 15014 18774 10/31/02 13271 12068 15938 10/31/03 16418 14701 19253 10/31/04 17631 15198 21067 10/31/05 20134 16537 22904 10/31/06 22155 18330 26647 10/31/07 27959 21854 30526 10/31/08 17792 13778 19507 10/31/09 21017 16190 21420 10/31/10 24962 19372 24958
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 11.93% 3.12% Excluding sales charges 18.44 4.30 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares(4) Maximum 5.5% Initial Sales Charge With sales charges 12.24 3.22 Excluding sales charges 18.77 4.39 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares(5) Maximum 5% CDSC With sales charges 12.79 3.18 if Redeemed Within the First Six Years of Purchase Excluding sales charges 17.79 3.53 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares(5) Maximum 1% CDSC With sales charges 16.60 3.50 if Redeemed Within One Year of Purchase Excluding sales charges 17.60 3.50 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(5) No Sales Charge 19.22 4.88 - ----------------------------------------------------------------------------------------------------------------------------------- Class R1 Shares(5) No Sales Charge 19.01 4.77 - ----------------------------------------------------------------------------------------------------------------------------------- Class R2 Shares(5) No Sales Charge 18.67 4.53 - ----------------------------------------------------------------------------------------------------------------------------------- Class R3 Shares(6) No Sales Charge 18.30 4.20 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) -0.06% 1.46% 0.51 1.46 - ------------------------------------------------- Class A Shares(4) -0.02 1.25 0.55 1.25 - ------------------------------------------------- Class B Shares(5) -0.23 2.22 -0.23 2.22 - ------------------------------------------------- Class C Shares(5) -0.25 2.21 -0.25 2.21 - ------------------------------------------------- Class I Shares(5) 0.94 1.00 - ------------------------------------------------- Class R1 Shares(5) 0.80 1.10 - ------------------------------------------------- Class R2 Shares(5) 0.55 1.36 - ------------------------------------------------- Class R3 Shares(6) 0.28 1.60 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, include the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class A shares include the historical performance of the FMI Winslow Growth Fund (a predecessor to the Fund) through March 31, 2005, adjusted to reflect the current maximum sales charge applicable to Class A shares. Unadjusted, the performance shown for Class A shares might have been lower. 5. Performance figures for Class B, Class C, Class I, Class R1 and Class R2 shares, each of which was first offered on April 1, 2005, include the historical performance of Class A shares through March 31, 2005, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class B, C, I, R1 and R2 shares might have been lower. 6. Performance figures for Class R3 shares, first offered on April 28, 2006, include the historical performance of Class A shares through April 27, 2006, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class R3 shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Russell 1000(R) Growth Index(7) 19.65% 3.21% -2.52% - -------------------------------------------------------------------- S&P 500(R) Index(8) 16.52 1.73 -0.02 - -------------------------------------------------------------------- Average Lipper Large-Cap Growth Fund(9) 17.70 2.12 -2.00 - --------------------------------------------------------------------
7. The Russell 1000(R) Growth Index measures the performance of those Russell 1000(R) companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000(R) Index measures the performance of the 1,000 largest companies in the Russell 3000(R) Index, which represents approximately 92% of the total market capitalization of the Russell 3000(R) Index. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. The Russell 1000(R) Growth Index is the Fund's broad-based securities market index for comparison purposes. Total returns assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. 8. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R) Index is widely regarded as the standard for measuring large-cap U.S. stock- market performance. Results assume reinvestment of all income and capital gains. An investment cannot be made directly in an index. 9. The average Lipper large-cap growth fund is representative of funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalization (on a three-year weighted basis) above Lipper's U.S. Diversified Equity large-cap floor. Large-cap growth funds typically have an above-average price-to-earning ratio, price-to-book ratio, and three- year sales-per-share growth value, compared to the S&P 500(R) Index. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Large Cap Growth Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY LARGE CAP GROWTH FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,038.00 $ 6.52 $1,018.80 $ 6.46 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,039.50 $ 6.22 $1,019.10 $ 6.16 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,036.20 $10.37 $1,015.00 $10.26 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,036.30 $10.37 $1,015.00 $10.26 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,041.60 $ 4.37 $1,020.90 $ 4.33 - ------------------------------------------------------------------------------------------------------------- CLASS R1 SHARES $1,000.00 $1,042.00 $ 4.89 $1,020.40 $ 4.84 - ------------------------------------------------------------------------------------------------------------- CLASS R2 SHARES $1,000.00 $1,039.30 $ 6.73 $1,018.60 $ 6.67 - ------------------------------------------------------------------------------------------------------------- CLASS R3 SHARES $1,000.00 $1,038.20 $ 8.01 $1,017.30 $ 7.93 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.27% for Investor Class, 1.21% for Class A, 2.02% for Class B and Class C, 0.85% for Class I, 0.95% for Class R1, 1.31% for Class R2 and 1.56% for Class R3) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 INDUSTRY COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
Computers & Peripherals 8.1% IT Services 6.9 Software 6.8 Internet & Catalog Retail 6.2 Machinery 5.8 Communications Equipment 5.5 Capital Markets 5.1 Internet Software & Services 4.7 Energy Equipment & Services 4.1 Diversified Financial Services 3.4 Road & Rail 2.9 Aerospace & Defense 2.8 Pharmaceuticals 2.8 Health Care Providers & Services 2.7 Metals & Mining 2.7 Hotels, Restaurants & Leisure 2.2 Specialty Retail 2.2 Electronic Equipment & Instruments 1.9 Oil, Gas & Consumable Fuels 1.9 Wireless Telecommunication Services 1.7 Multiline Retail 1.5 Construction & Engineering 1.4 Air Freight & Logistics 1.1 Semiconductors & Semiconductor Equipment 1.1 Beverages 1.0 Biotechnology 1.0 Health Care Technology 1.0 Personal Products 1.0 Chemicals 0.9 Food & Staples Retailing 0.9 Food Products 0.9 Textiles, Apparel & Luxury Goods 0.9 Health Care Equipment & Supplies 0.8 Auto Components 0.6 Media 0.5 Short-Term Investment 4.0 Other Assets, Less Liabilities 1.0 ----- 100.0% =====
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. Apple, Inc. 2. Cognizant Technology Solutions Corp. Class A 3. Priceline.com, Inc. 4. Oracle Corp. 5. Union Pacific Corp. 6. Google, Inc. Class A 7. QUALCOMM, Inc. 8. Visa, Inc. Class A 9. Goldman Sachs Group, Inc. (The) 10. Express Scripts, Inc.
8 MainStay Large Cap Growth Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers Clark J. Winslow, Justin H. Kelly, CFA, and R. Bart Wear, CFA, of Winslow Capital Management, Inc., the Fund's Subadvisor. HOW DID MAINSTAY LARGE CAP GROWTH FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Large Cap Growth Fund returned 18.44% for Investor Class shares, 18.77% for Class A shares, 17.79% for Class B shares and 17.60% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund returned 19.22% for Class I shares, 19.01% for Class R1 shares, 18.67% for Class R2 shares and 18.30% for Class R3 shares. Investor Class, Class A, Class B, Class I, Class R1, Class R2 and Class R3 shares outperformed--and Class C shares underperformed--the 17.70% return of the average Lipper(1) large-cap growth fund. All share classes underperformed the 19.65% return of the Russell 1000(R) Growth Index(2) for the 12 months ended October 31, 2010. The Russell 1000(R) Growth Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund underperformed the Russell 1000(R) Growth Index primarily because of underperformance in the health care and financials sectors. In health care, detractors included biotechnology company Gilead Sciences and health care provider Medco Health Solutions. In financials, diversified financial services company JPMorgan Chase and capital markets firm Goldman Sachs both detracted from performance. Since we believed that the potential of these financial leaders was underestimated by investors, we used the price declines to add to the Fund's positions in both companies. Capital markets firm BlackRock also had a modestly negative impact on the Fund's performance, but we sold the Fund's position in the stock well above its price at the end of the reporting period. On the positive side, the Fund maintained a consistently overweight position in information technology, which was a strong performer for both the Fund and the Russell 1000(R) Growth Index during the reporting period. Stock selection in this sector was also effective, led by long-held IT services firm Cognizant Technology Solutions, Internet search and advertising service firm Baidu and computers & peripherals company Apple. Stock selection in the modestly underweight consumer discretionary sector also helped the Fund's returns, with solid performance from online travel company Priceline.com and online retailer Amazon.com. The industrials sector was a strong contributor to the Fund's relative performance, helped by selections such as road & rail company Union Pacific and machinery companies Deere and Danaher, each among the Fund's top-10 best performers during the reporting period. A consistently underweight position in the consumer staples sector, prompted by poor absolute performance, helped the Fund's results as well. DURING THE REPORTING PERIOD, WHICH SECTORS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S RELATIVE PERFORMANCE AND WHICH SECTORS WERE PARTICULARLY WEAK? Taking weightings and total returns into account, the sectors that made the strongest positive contributions to the Fund's performance relative to the Russell 1000(R) Growth Index were information technology, consumer discretionary and industrials. Financials, health care and energy were the weakest contributors to the Fund's relative performance. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST POSITIVE CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED THE MOST? Taking weightings and total returns into account, the stocks that made the strongest positive contributions to the Fund's absolute performance were online travel company Priceline.com, information technology outsourcing services firm Cognizant Technology Solutions and computers & peripherals giant Apple. Major detractors included pharmacy benefits management company CVS Caremark, computers & peripherals company Hewlett-Packard and home improvement retailer Lowes. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? During the reporting period, we repurchased Baidu, the dominant Chinese-language Internet search company. We felt that rival Google's possible exit from the Chinese market lowered Baidu's valuation risk and should help accelerate Baidu's growth. We also purchased a position in Express Scripts, one of the largest pharmacy benefits managers in the United States, as we became increasingly optimistic about the potential synergies that might result from the company's deal with Wellpoint's pharmacy benefits management business. We sold the Fund's position in Microsoft, the largest provider of software products for computing devices worldwide, to reposition the Fund and deploy assets into companies that we felt had better prospects for growth potential. We also eliminated the Fund's position in Hewlett-Packard, which provides a range of products, technologies, software and services worldwide. Our sale was based on concerns over rival Apple's market share gains with its iPad, the abrupt departure of Hewlett-Packard's chief executive officer and a rash of recent acquisition activity. WERE THERE ANY CHANGES IN THE FUND'S WEIGHTINGS DURING THE REPORTING PERIOD? During the reporting period, we slightly increased the Fund's weightings in consumer discretionary and industrials, reflecting our view of a modest upturn in the economy and an improved outlook for consumers. We reduced the Fund's weighting in 1. See footnote on page 6 for more information on Lipper Inc. 2. See footnote on page 6 for more information on the Russell 1000(R) Growth Index. mainstayinvestments.com 9 energy, based on our outlook regarding oversupply in natural gas. The Fund's weighting in information technology also declined slightly, primarily because of profit-taking in some stocks that had performed well. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund was overweight relative to the Russell 1000(R) Growth Index in the information technology and financials sectors. On the same date, the Fund was underweight relative to the benchmark in consumer staples. Within these sectors, the Fund is significantly different from the benchmark at the individual stock level. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Large Cap Growth Fund PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
SHARES VALUE COMMON STOCKS 95.0%+ - ------------------------------------------------------------------------------------- AEROSPACE & DEFENSE 2.8% Goodrich Corp. 667,800 $ 54,806,346 United Technologies Corp. 1,449,900 108,409,023 -------------- 163,215,369 -------------- AIR FREIGHT & LOGISTICS 1.1% C.H. Robinson Worldwide, Inc. 922,800 65,038,944 -------------- AUTO COMPONENTS 0.6% BorgWarner, Inc. (a) 564,600 31,679,706 -------------- BEVERAGES 1.0% PepsiCo., Inc. 852,300 55,655,190 -------------- BIOTECHNOLOGY 1.0% Celgene Corp. (a) 944,600 58,631,322 -------------- CAPITAL MARKETS 5.1% Franklin Resources, Inc. 733,700 84,155,390 X Goldman Sachs Group, Inc. (The) 986,500 158,777,175 TD Ameritrade Holding Corp. (a) 3,041,500 51,979,235 -------------- 294,911,800 -------------- CHEMICALS 0.9% Ecolab, Inc. 1,028,900 50,745,348 -------------- COMMUNICATIONS EQUIPMENT 5.5% Cisco Systems, Inc. (a) 5,197,900 118,668,057 Juniper Networks, Inc. (a) 1,190,200 38,550,578 X QUALCOMM, Inc. 3,587,400 161,899,362 -------------- 319,117,997 -------------- COMPUTERS & PERIPHERALS 8.1% X Apple, Inc. (a) 892,200 268,436,214 EMC Corp. (a) 6,173,400 129,703,134 NetApp, Inc. (a) 1,278,600 68,085,450 -------------- 466,224,798 -------------- CONSTRUCTION & ENGINEERING 1.4% Fluor Corp. 1,608,100 77,494,339 -------------- DIVERSIFIED FINANCIAL SERVICES 3.4% CME Group, Inc. 210,800 61,058,220 IntercontinentalExchange, Inc. (a) 450,700 51,771,909 JPMorgan Chase & Co. 2,191,300 82,458,619 -------------- 195,288,748 -------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 1.9% Agilent Technologies, Inc. (a) 1,471,900 51,222,120 Amphenol Corp. Class A 1,151,200 57,709,656 -------------- 108,931,776 -------------- ENERGY EQUIPMENT & SERVICES 4.1% FMC Technologies, Inc. (a) 1,429,900 103,095,790 Schlumberger, Ltd. 1,871,900 130,827,091 -------------- 233,922,881 -------------- FOOD & STAPLES RETAILING 0.9% Costco Wholesale Corp. 852,300 53,498,871 -------------- FOOD PRODUCTS 0.9% Green Mountain Coffee Roasters, Inc. (a) 1,516,500 50,029,335 -------------- HEALTH CARE EQUIPMENT & SUPPLIES 0.8% Varian Medical Systems, Inc. (a) 708,900 44,816,658 -------------- HEALTH CARE PROVIDERS & SERVICES 2.7% X Express Scripts, Inc. (a) 3,172,400 153,924,848 -------------- HEALTH CARE TECHNOLOGY 1.0% Cerner Corp. (a) 667,800 58,652,874 -------------- HOTELS, RESTAURANTS & LEISURE 2.2% Ctrip.com International, Ltd., Sponsored ADR (a)(b) 1,151,200 59,942,984 Yum! Brands, Inc. 1,322,400 65,538,144 -------------- 125,481,128 -------------- INTERNET & CATALOG RETAIL 6.2% Amazon.com, Inc. (a) 817,200 134,952,408 Netflix, Inc. (a) 188,800 32,756,800 X Priceline.com, Inc. (a) 505,200 190,364,412 -------------- 358,073,620 -------------- INTERNET SOFTWARE & SERVICES 4.7% Baidu, Inc., Sponsored ADR(a)(b) 944,600 103,915,446 X Google, Inc. Class A (a) 273,500 167,652,765 -------------- 271,568,211 -------------- IT SERVICES 6.9% X Cognizant Technology Solutions Corp. Class A (a) 3,585,400 233,732,226 X Visa, Inc. Class A 2,069,500 161,772,815 -------------- 395,505,041 --------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investment. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) MACHINERY 5.8% Danaher Corp. 3,295,400 $ 142,888,544 Deere & Co. 1,282,900 98,526,720 Illinois Tool Works, Inc. 1,972,900 90,161,530 -------------- 331,576,794 -------------- MEDIA 0.5% Scripps Networks Interactive Class A 540,600 27,511,134 -------------- METALS & MINING 2.7% Cliffs Natural Resources, Inc. 1,471,600 95,948,320 Walter Energy, Inc. 672,700 59,170,692 -------------- 155,119,012 -------------- MULTILINE RETAIL 1.5% Kohl's Corp. (a) 1,660,900 85,038,080 -------------- OIL, GAS & CONSUMABLE FUELS 1.9% Peabody Energy Corp. 1,072,100 56,714,090 Petroleo Brasileiro S.A., Sponsored ADR (b) 1,766,300 55,090,897 -------------- 111,804,987 -------------- PERSONAL PRODUCTS 1.0% Estee Lauder Cos., Inc. (The) Class A 839,300 59,732,981 -------------- PHARMACEUTICALS 2.8% Shire PLC, Sponsored ADR (b) 1,199,500 84,084,950 Teva Pharmaceutical Industries, Ltd., Sponsored ADR (b) 1,489,500 77,305,050 -------------- 161,390,000 -------------- ROAD & RAIL 2.9% X Union Pacific Corp. 1,915,800 167,977,344 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.1% Texas Instruments, Inc. 2,169,600 64,155,072 -------------- SOFTWARE 6.8% Autodesk, Inc. (a) 2,236,500 80,916,570 Citrix Systems, Inc. (a) 1,524,600 97,681,122 Intuit, Inc. (a) 769,600 36,940,800 X Oracle Corp. 6,006,400 176,588,160 -------------- 392,126,652 -------------- SPECIALTY RETAIL 2.2% Dick's Sporting Goods, Inc. (a) 1,024,400 29,523,208 O'Reilly Automotive, Inc. (a) 1,256,700 73,516,950 Urban Outfitters, Inc. (a) 749,400 23,059,038 -------------- 126,099,196 -------------- TEXTILES, APPAREL & LUXURY GOODS 0.9% NIKE, Inc. Class B 654,600 53,310,624 -------------- WIRELESS TELECOMMUNICATION SERVICES 1.7% American Tower Corp. Class A (a) 1,889,400 97,511,934 -------------- Total Common Stocks (Cost $4,469,675,555) 5,465,762,614 -------------- PRINCIPAL AMOUNT SHORT-TERM INVESTMENT 4.0% - ------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 4.0% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $230,718,406 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $214,645,000 and a Market Value of $235,336,778) $230,718,214 230,718,214 -------------- Total Short-Term Investment (Cost $230,718,214) 230,718,214 -------------- Total Investments (Cost $4,700,393,769) (c) 99.0% 5,696,480,828 Other Assets, Less Liabilities 1.0 57,118,723 ------------ -------------- Net Assets 100.0% $5,753,599,551 ============ ==============
(a) Non-income producing security. (b) ADR--American Depositary Receipt. (c) At October 31, 2010, cost is $4,719,015,432 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $1,023,137,497 Gross unrealized depreciation (45,672,101) -------------- Net unrealized appreciation $ 977,465,396 ==============
12 MainStay Large Cap Growth Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Common Stocks $5,465,762,614 $ -- $ -- $5,465,762,614 Short-Term Investment Repurchase Agreement -- 230,718,214 -- 230,718,214 -------------- ------------ -------- -------------- Total Investments in Securities $5,465,762,614 $230,718,214 $ -- $5,696,480,828 ============== ============ ======== ==============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - --------------------------------------------------- Investment in securities, at value (identified cost $4,700,393,769) $5,696,480,828 Receivables: Investment securities sold 99,912,438 Fund shares sold 28,851,810 Dividends and interest 1,699,865 Other assets 167,171 -------------- Total assets 5,827,112,112 -------------- LIABILITIES - --------------------------------------------------- Payables: Investment securities purchased 59,217,310 Fund shares redeemed 8,440,402 Manager (See Note 3) 2,952,450 Transfer agent (See Note 3) 1,851,629 NYLIFE Distributors (See Note 3) 609,004 Shareholder communication 271,633 Professional fees 142,877 Trustees 8,102 Custodian 7,960 Accrued expenses 11,194 -------------- Total liabilities 73,512,561 -------------- Net assets $5,753,599,551 ============== COMPOSITION OF NET ASSETS - --------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 8,621,364 Additional paid-in capital 4,922,281,579 -------------- 4,930,902,943 Accumulated net realized loss on investments and foreign currency transactions (173,390,451) Net unrealized appreciation on investments 996,087,059 -------------- Net assets $5,753,599,551 ============== INVESTOR CLASS Net assets applicable to outstanding shares $ 93,733,097 ============== Shares of beneficial interest outstanding 14,304,120 ============== Net asset value per share outstanding $ 6.55 Maximum sales charge (5.50% of offering price) 0.38 -------------- Maximum offering price per share outstanding $ 6.93 ============== CLASS A Net assets applicable to outstanding shares $1,131,967,913 ============== Shares of beneficial interest outstanding 172,125,618 ============== Net asset value per share outstanding $ 6.58 Maximum sales charge (5.50% of offering price) 0.38 -------------- Maximum offering price per share outstanding $ 6.96 ============== CLASS B Net assets applicable to outstanding shares $ 82,589,960 ============== Shares of beneficial interest outstanding 13,143,988 ============== Net asset value and offering price per share outstanding $ 6.28 ============== CLASS C Net assets applicable to outstanding shares $ 262,798,914 ============== Shares of beneficial interest outstanding 41,854,685 ============== Net asset value and offering price per share outstanding $ 6.28 ============== CLASS I Net assets applicable to outstanding shares $3,497,858,767 ============== Shares of beneficial interest outstanding 517,819,468 ============== Net asset value and offering price per share outstanding $ 6.75 ============== CLASS R1 Net assets applicable to outstanding shares $ 418,253,477 ============== Shares of beneficial interest outstanding 62,468,782 ============== Net asset value and offering price per share outstanding $ 6.70 ============== CLASS R2 Net assets applicable to outstanding shares $ 217,002,060 ============== Shares of beneficial interest outstanding 32,853,365 ============== Net asset value and offering price per share outstanding $ 6.61 ============== CLASS R3 Net assets applicable to outstanding shares $ 49,395,363 ============== Shares of beneficial interest outstanding 7,566,376 ============== Net asset value and offering price per share outstanding $ 6.53 ==============
14 MainStay Large Cap Growth Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME (LOSS) - -------------------------------------------------- INCOME Dividends (a) $ 30,135,395 Interest 13,489 ------------ Total income 30,148,884 ------------ EXPENSES Manager (See Note 3) 32,177,080 Transfer agent (See Note 3) 10,448,060 Distribution/Service--Investor Class (See Note 3) 210,536 Distribution/Service--Class A (See Note 3) 3,506,720 Distribution/Service--Class B (See Note 3) 849,839 Distribution/Service--Class C (See Note 3) 2,317,204 Distribution/Service--Class R2 (See Note 3) 415,308 Distribution/Service--Class R3 (See Note 3) 147,336 Shareholder communication 945,168 Professional fees 721,372 Shareholder service (See Note 3) 466,724 Registration 433,564 Trustees 164,555 Custodian 103,139 Miscellaneous 143,322 ------------ Total expenses before waiver/reimbursement 53,049,927 Expense waiver/reimbursement from Manager (See Note 3) (2,524,026) ------------ Net expenses 50,525,901 ------------ Net investment loss (20,377,017) ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - -------------------------------------------------- Net realized gain on: Security transactions 233,512,456 Foreign currency transactions 327 ------------ Net realized gain on investments and foreign currency transactions 233,512,783 ------------ Net change in unrealized appreciation (depreciation) on investments 598,938,004 ------------ Net realized and unrealized gain on investments and foreign currency transactions 832,450,787 ------------ Net increase in net assets resulting from operations $812,073,770 ============
(a) Dividends recorded net of foreign withholding taxes in the amount of $259,681. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - ----------------------------------------------------------- Operations: Net investment loss $ (20,377,017) $ (7,329,702) Net realized gain (loss) on investments and foreign currency transactions 233,512,783 (221,418,993) Net change in unrealized appreciation (depreciation) on investments 598,938,004 719,911,021 ------------------------------- Net increase in net assets resulting from operations 812,073,770 491,162,326 ------------------------------- Capital share transactions: Net proceeds from sale of shares 3,419,712,225 2,328,749,338 Net asset value of shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 159,791,755 -- Cost of shares redeemed (2,229,116,588) (793,865,436) ------------------------------- Increase in net assets derived from capital share transactions 1,350,387,392 1,534,883,902 ------------------------------- Net increase in net assets 2,162,461,162 2,026,046,228 NET ASSETS - ----------------------------------------------------------- Beginning of year 3,591,138,389 1,565,092,161 ------------------------------- End of year $ 5,753,599,551 $3,591,138,389 ===============================
16 MainStay Large Cap Growth Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 5.53 $ 4.70 $ 6.63 ------- ------- ------- Net investment loss (a) (0.04) (0.03) (0.03) Net realized and unrealized gain (loss) on investments 1.06 0.86 (1.90) ------- ------- ------- Total from investment operations 1.02 0.83 (1.93) ------- ------- ------- Net asset value at end of period $ 6.55 $ 5.53 $ 4.70 ======= ======= ======= Total investment return (b) 18.44% 17.66% (29.11%)(c) Ratios (to average net assets)/Supplemental Data: Net investment loss (0.64%) (0.62%) (0.73%)++ Net expenses 1.27% 1.45% 1.38% ++ Expenses (before waiver/reimbursement) 1.28% 1.45% 1.39% ++ Portfolio turnover rate 91% 62% 115% Net assets at end of period (in 000's) $93,733 $59,499 $46,762
CLASS B --------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 5.34 $ 4.57 $ 7.24 $ 5.77 $ 5.29 ------- ------- ------- -------- -------- Net investment loss (a) (0.08) (0.06) (0.09) (0.08) (0.07) Net realized and unrealized gain (loss) on investments 1.02 0.83 (2.58) 1.55 0.55 ------- ------- ------- -------- -------- Total from investment operations 0.94 0.77 (2.67) 1.47 0.48 ------- ------- ------- -------- -------- Less distributions: From net realized gain on investments -- -- -- -- (0.00)++ ------- ------- ------- -------- -------- Net asset value at end of period $ 6.28 $ 5.34 $ 4.57 $ 7.24 $ 5.77 ======= ======= ======= ======== ======== Total investment return (b) 17.60%(d) 16.85% (36.88%) 25.48% 9.13% Ratios (to average net assets)/Supplemental Data: Net investment loss (1.38%) (1.35%) (1.34%) (1.34%) (1.29%) Net expenses 2.02% 2.20% 2.10% 2.11% 2.15% Expenses (before waiver/reimbursement) 2.03% 2.21% 2.12% 2.18% 2.38% Portfolio turnover rate 91% 62% 115% 74% 92% Net assets at end of period (in 000's) $82,590 $63,327 $65,996 $132,402 $133,330
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (c) Total investment return is not annualized. (d) Total investment returns may reflect adjustments to conform to generally accepted accounting principles.
18 MainStay Large Cap Growth Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A ------------------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.54 $ 4.70 $ 7.37 $ 5.84 $ 5.31 ---------- ---------- -------- -------- -------- (0.03) (0.02) (0.03) (0.04) (0.03) 1.07 0.86 (2.64) 1.57 0.56 ---------- ---------- -------- -------- -------- 1.04 0.84 (2.67) 1.53 0.53 ---------- ---------- -------- -------- -------- $ 6.58 $ 5.54 $ 4.70 $ 7.37 $ 5.84 ========== ========== ======== ======== ======== 18.77% 17.87%(d) (36.36%) 26.20% 10.04% (0.52%) (0.43%) (0.52%) (0.61%) (0.53%) 1.17% 1.21% 1.23% 1.36% 1.40% 1.18% 1.24% 1.26% 1.43% 1.63% 91% 62% 115% 74% 92% $1,131,968 $1,662,622 $495,184 $374,978 $200,500
CLASS C ----------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.33 $ 4.57 $ 7.23 $ 5.77 $ 5.29 -------- -------- ------- ------- ------- (0.08) (0.07) (0.09) (0.09) (0.07) 1.03 0.83 (2.57) 1.55 0.55 -------- -------- ------- ------- ------- 0.95 0.76 (2.66) 1.46 0.48 -------- -------- ------- ------- ------- -- -- -- -- (0.00)++ -------- -------- ------- ------- ------- $ 6.28 $ 5.33 $ 4.57 $ 7.23 $ 5.77 ======== ======== ======= ======= ======= 17.82%(d) 16.63%(d) (36.79%) 25.30% 9.13% (1.39%) (1.38%) (1.41%) (1.37%) (1.29%) 2.02% 2.19% 2.11% 2.11% 2.15% 2.03% 2.20% 2.12% 2.18% 2.38% 91% 62% 115% 74% 92% $262,799 $174,955 $93,249 $58,119 $18,171
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ---------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 5.67 $ 4.79 $ 7.49 $ 5.89 $ 5.33 ---------- ---------- -------- -------- -------- Net investment loss (a) (0.01) 0.00++ (0.01) (0.00)++ 0.01 Net realized and unrealized gain (loss) on investments 1.09 0.88 (2.69) 1.60 0.55 ---------- ---------- -------- -------- -------- Total from investment operations 1.08 0.88 (2.70) 1.60 0.56 ---------- ---------- -------- -------- -------- Less distributions: From net realized gain on investments -- -- -- -- (0.00)++ ---------- ---------- -------- -------- -------- Net asset value at end of period $ 6.75 $ 5.67 $ 4.79 $ 7.49 $ 5.89 ========== ========== ======== ======== ======== Total investment return (b) 19.05%(d) 18.37% (36.05%) 27.16% 10.56% Ratios (to average net assets)/Supplemental Data: Net investment loss (0.23%) 0.00%(e) (0.08%) (0.01%) 0.11% Net expenses 0.85% 0.82% 0.79% 0.76% 0.75% Expenses (before waiver/reimbursement) 0.94% 0.99% 0.94% 0.91% 0.98% Portfolio turnover rate 91% 62% 115% 74% 92% Net assets at end of period (in 000's) $3,497,859 $1,341,715 $761,458 $524,485 $259,588
CLASS R2 ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 5.57 $ 4.72 $ 7.40 $ 5.84 $ 5.30 -------- -------- ------- ------ ------ Net investment loss (a) (0.04) (0.02) (0.03) (0.02) (0.01) Net realized and unrealized gain (loss) on investments 1.08 0.87 (2.65) 1.58 0.55 -------- -------- ------- ------ ------ Total from investment operations 1.04 0.85 (2.68) 1.56 0.54 -------- -------- ------- ------ ------ Less distributions: From net realized gain on investments -- -- -- -- (0.00)++ -------- -------- ------- ------ ------ Net asset value at end of period $ 6.61 $ 5.57 $ 4.72 $ 7.40 $ 5.84 ======== ======== ======= ====== ====== Total investment return (b) 18.67% 18.01% (36.22%) 26.71% 10.25% Ratios (to average net assets)/Supplemental Data: Net investment loss (0.66%) (0.45%) (0.46%) (0.37%) (0.24%) Net expenses 1.28% 1.24% 1.14% 1.11% 1.10% Expenses (before waiver/reimbursement) 1.29% 1.35% 1.29% 1.27% 1.33% Portfolio turnover rate 91% 62% 115% 74% 92% Net assets at end of period (in 000's) $217,002 $113,942 $35,410 $4,154 $ 9
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (c) Total investment return is not annualized. (d) Total investment returns may reflect adjustments to conform to generally accepted accounting principles. (e) Less than one-hundredth of a percent.
20 MainStay Large Cap Growth Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS R1 ---------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.63 $ 4.76 $ 7.45 $ 5.87 $ 5.31 -------- -------- ------- ------- ------ (0.02) (0.01) (0.01) (0.01) 0.00++ 1.09 0.88 (2.68) 1.59 0.56 -------- -------- ------- ------- ------ 1.07 0.87 (2.69) 1.58 0.56 -------- -------- ------- ------- ------ -- -- -- -- (0.00)++ -------- -------- ------- ------- ------ $ 6.70 $ 5.63 $ 4.76 $ 7.45 $ 5.87 ======== ======== ======= ======= ====== 19.01% 18.28% (36.11%) 26.92% 10.60% (0.35%) (0.19%) (0.16%) (0.19%) 0.03% 0.97% 0.98% 0.88% 0.85% 0.85% 1.04% 1.09% 1.03% 1.01% 1.08% 91% 62% 115% 74% 92% $418,253 $161,642 $62,344 $57,460 $3,163
CLASS R3 ------------------------------------------------------------------------------------ APRIL 28, 2006** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 2007 2006 $ 5.52 $ 4.69 $ 7.37 $ 5.83 $ 5.74 ------- ------- ------- ------ ------ (0.06) (0.03) (0.05) (0.04) (0.01) 1.07 0.86 (2.63) 1.58 0.10 ------- ------- ------- ------ ------ 1.01 0.83 (2.68) 1.54 0.09 ------- ------- ------- ------ ------ -- -- -- -- -- ------- ------- ------- ------ ------ $ 6.53 $ 5.52 $ 4.69 $ 7.37 $ 5.83 ======= ======= ======= ====== ====== 18.30% 17.70% (36.36%) 26.42% 1.57%(c) (0.92%) (0.70%) (0.77%) (0.66%) (0.47%)++ 1.53% 1.49% 1.40% 1.35% 1.37% ++ 1.54% 1.59% 1.56% 1.51% 1.63% ++ 91% 62% 115% 74% 92% $49,395 $13,436 $ 4,689 $ 117 $ 10
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Large Cap Growth Fund (the "Fund"), a diversified fund. The Fund currently offers eight classes of shares. Class A shares, Class B shares, Class C shares, Class I shares, Class R1 shares and Class R2 shares commenced operations on March 31, 2005. Class R3 shares commenced operations on April 28, 2006. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I, Class R1, Class R2 and Class R3 shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The eight classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class, Class A, Class R2 and Class R3 shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to a distribution and/or service fee. Class R1, Class R2 and Class R3 shares are authorized to pay a shareholder service fee to the Manager, as defined in Note 3(A), its affiliates, or third-party service providers, as compensation for services rendered to shareholders of Class R1, Class R2 or Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. The Fund's investment objective is to seek long-term growth of capital. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. These securities are generally categorized as Level 1 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days 22 MainStay Large Cap Growth Fund or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (H) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (I) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. Winslow Capital Management, Inc. ("Winslow" or "Subadvisor"), a registered investment adviser, is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The management fee is an annual percentage of the Fund's average daily net assets plus a fee for fund accounting services previously furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million, and 0.01% in excess of $100 million. Effective August 1, 2010, New York Life Investments has contractually agreed to waive a portion of its management fee based on the Fund's average daily net assets, so that the management fee does not exceed 0.750% up to $500 million; 0.725% from $500 million to $750 million; 0.700% from $750 million to $2 billion; 0.650% from $2 billion to $3 billion; 0.600% from $3 billion to $7 billion; and 0.575% in excess of $7 billion. Without this fee waiver, the actual fee would be 0.800% up to $250 million; 0.750% from $250 million to $500 million; 0.725% from $500 million to $750 million; 0.700% from $750 million to $2 billion; 0.650% from $2 billion to $3 billion; 0.600% from $3 billion to $7 billion; and 0.575% in excess of $7 billion. Prior to August 1, 2010, the Manager had contractually agreed to waive a portion of its management fee based on the Fund's average daily net assets, so that the management fee did not exceed 0.750% up to $500 million; 0.725% from $500 million to $750 million; 0.700% from $750 million to $2 billion; 0.650% from $2 billion to $3 billion; and 0.600% in excess of $3 billion. Without this fee waiver, the actual fee would have been 0.800% up to $250 million; 0.750% from $250 million to $500 million; 0.725% from $500 million to $750 million; 0.700% from $750 million to $2 billion; 0.650% from $2 billion to $3 billion; and 0.600% in excess of $3 billion. Effective February 26, 2010, New York Life Investments entered into a written expense limitation agreement under which it has agreed to waive a portion of the management fee or reimburse expenses of the Class I shares so that the total ordinary operating expenses of the Class I shares do not exceed 0.85% of its average daily net assets. This agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify or terminate the agreement. At the December 15, 2010, Board of Trustees meeting, the Board approved a revision to the current written expense limitation agreement on Class I shares increasing the expense limitation from 0.85% to 0.88% of its average daily net assets effective March 1, 2011. This revised expense limitation agreement expires on February 28, 2012. Effective August 1, 2010, the Manager voluntarily agreed to waive a portion of its management fee based on the Fund's average daily net assets, so that it does not exceed 0.72% up to $500 million, 0.70% from $500 million to $2 billion, 0.65% from $2 billion to $3 billion, 0.60% from $3 billion to $7 billion, and 0.575% in excess of $7 billion. This voluntary waiver may be discontinued at any time. For the period from July 1, 2010 through July 31, 2010, the Manager voluntarily agreed to waive a portion of its management fee based on the Fund's average daily net assets, so that it did not exceed 0.72% 24 MainStay Large Cap Growth Fund up to $500 million, 0.70% from $500 million to $2 billion, 0.65% from $2 billion to $3 billion, and 0.60% in excess of $3 billion. Additionally, effective April 1, 2010, New York Life Investments agreed to further voluntarily waive or reimburse the expenses of Class R1 shares of the Fund so that the total ordinary operating expenses of Class R1 shares do not exceed 0.95% of its average daily net assets. This additional voluntary waiver or reimbursement may be discontinued at any time. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. For the period August 1, 2009 through February 25, 2010, New York Life Investments had agreed to voluntarily waive or reimburse the expenses of the Class I shares of the Fund so that the total ordinary operating expenses of Class I shares did not exceed 0.85% of its average daily net assets. Effective November 13, 2009, the Manager agreed to voluntarily waive or reimburse the expenses of the appropriate class of the Fund so that the total ordinary operating expenses of a class do not exceed the following percentages of average daily net assets: Investor Class, 1.47%; Class A, 1.24%; Class B, 2.22%; Class C, 2.22%; Class R1, 1.09%; Class R2, 1.34%; Class R3, 1.59%. This voluntary waiver or reimbursement expired on November 12, 2010. The effective management fee rate (exclusive of any applicable waiver/reimbursement) was 0.67% for the year ended October 31, 2010, inclusive of the effective fund accounting services fee rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $32,177,080 and waived/reimbursed its fees in the amount of $2,524,026. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor receives a monthly distribution fee from the Investor Class, Class A and Class R2 shares, at an annual rate of 0.25% of the average daily net assets of the Investor Class, Class A and Class R2 shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Pursuant to the Class R3 Plan, the Distributor receives a monthly distribution and service fee from the Class R3 shares at an annual rate of 0.50% of the average daily net assets of the Class R3 shares. Class I and Class R1 shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. In accordance with the Shareholder Services Plans for the Class R1, Class R2 and Class R3 shares, the Manager has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R1, Class R2 and Class R3 shares. For its services, the Manager is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R1, Class R2 and Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. Shareholder Service Fees incurred by the Fund for the year ended October 31, 2010, were as follows: Class R1 $271,134 - ----------------------------------------------- Class R2 166,123 - ----------------------------------------------- Class R3 29,467 - -----------------------------------------------
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $30,381 and $103,798, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $250, $7,104, $131,928 and $48,192, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Investor Class $ 254,512 - ------------------------------------------------ Class A 2,835,447 - ------------------------------------------------ Class B 257,216 - ------------------------------------------------ Class C 699,391 - ------------------------------------------------ Class I 5,410,236 - ------------------------------------------------ Class R1 577,357 - ------------------------------------------------ Class R2 350,645 - ------------------------------------------------ Class R3 63,256 - ------------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 485 0.0%++ - ------------------------------------------------ Class B 2,606 0.0++ - ------------------------------------------------ Class C 2,842 0.0++ - ------------------------------------------------ Class I 5,127 0.0++ - ------------------------------------------------ Class R1 2,776 0.0++ - ------------------------------------------------ Class R2 24,043 0.0++ - ------------------------------------------------ Class R3 20,265 0.0++ - ------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $165,123. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $-- $(154,768,788) $-- $977,465,396 $822,696,608 - --------------------------------------------------------- -----------------
The difference between book-basis and tax basis unrealized depreciation is primarily due to wash sale deferrals and class action payment basis adjustments. The following table discloses the current year reclassifications between accumulated undistributed net investment loss, accumulated net realized loss on investments and additional paid-in capital arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED NET UNDISTRIBUTED NET REALIZED INVESTMENT GAIN (LOSS) ON ADDITIONAL INCOME (LOSS) INVESTMENTS PAID-IN CAPITAL $20,377,017 $(327) $(20,376,690) - ------------------------------------------- -------------
The reclassifications for the Fund are primarily due to net operating loss adjustment. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $154,768,788 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. The fund acquired $30,146,396 of capital losses in its reorganization with MainStay Mid Cap Growth Fund (see Note 9). Use of these losses may be limited due to the provisions of IRC section 382. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2016 29,684 2018 125,085 - ---------------------------------- ----- Total $154,769 - ---------------------------------- -----
The Fund utilized $205,646,227 of capital loss carryforwards during the year ended October 31, 2010. NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 26 MainStay Large Cap Growth Fund 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $5,199,859 and $4,167,983, respectively. NOTE 8-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,932,367 $ 11,572,868 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund 3,386,751 19,791,497 Shares redeemed (2,483,675) (14,964,700) ----------------------------- Net increase (decrease) in shares outstanding before conversion 2,835,443 16,399,665 Shares converted into Investor Class (See Note 1) 1,492,520 9,001,568 Shares converted from Investor Class (See Note 1) (791,645) (4,854,135) ----------------------------- Net increase (decrease) 3,536,318 $ 20,547,098 ============================= Year ended October 31, 2009: Shares sold 1,185,220 $ 5,644,897 Shares redeemed (1,705,493) (7,937,171) ----------------------------- Net increase (decrease) in shares outstanding before conversion (520,273) (2,292,274) Shares converted into Investor Class (See Note 1) 1,857,003 8,371,723 Shares converted from Investor Class (See Note 1) (527,203) (2,871,796) ----------------------------- Net increase (decrease) 809,527 $ 3,207,653 ============================= CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 128,527,725 $ 779,814,687 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 8,038,446 47,121,371 Shares redeemed (138,173,317) (829,703,361) ----------------------------- Net increase (decrease) in shares outstanding before conversion (1,607,146) (2,767,303) Shares converted into Class A (See Note 1) 1,496,793 9,168,843 Shares converted from Class A (See Note 1) (135,024) (858,202) Shares converted from Class A (a) (127,598,219) (763,037,350) ----------------------------- Net increase (decrease) (127,843,596) $ (757,494,012) ============================= Year ended October 31, 2009: Shares sold 275,635,598 $ 1,335,246,033 Shares redeemed (81,829,122) (394,226,769) ----------------------------- Net increase (decrease) in shares outstanding before conversion 193,806,476 941,019,264 Shares converted into Class A (See Note 1) 1,232,481 6,168,378 Shares converted from Class A (See Note 1) (511,877) (2,276,447) ----------------------------- Net increase (decrease) 194,527,080 $ 944,911,195 ============================= CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,444,554 $ 8,380,865 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 4,574,534 25,819,585 Shares redeemed (2,589,950) (14,962,818) ----------------------------- Net increase (decrease) in shares outstanding before conversion 3,429,138 19,237,632 Shares converted from Class B (See Note 1) (2,148,217) (12,458,074) ----------------------------- Net increase (decrease) 1,280,921 $ 6,779,558 ============================= Year ended October 31, 2009: Shares sold 2,203,717 $ 10,281,855 Shares redeemed (2,666,211) (11,904,756) ----------------------------- Net increase (decrease) in shares outstanding before conversion (462,494) (1,622,901) Shares converted from Class B (See Note 1) (2,114,416) (9,391,858) ----------------------------- Net increase (decrease) (2,576,910) $ (11,014,759) =============================
mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 13,481,864 $ 78,628,907 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 3,234,360 18,242,438 Shares redeemed (7,658,734) (44,126,088) ----------------------------- Net increase (decrease) 9,057,490 $ 52,745,257 ============================= Year ended October 31, 2009: Shares sold 18,526,032 $ 87,677,031 Shares redeemed (6,146,430) (27,887,032) ----------------------------- Net increase (decrease) 12,379,602 $ 59,789,999 ============================= CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 337,077,971 $ 2,090,206,271 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 7,929,625 47,583,301 Shares redeemed (188,366,547) (1,191,234,384) ----------------------------- Net increase in shares outstanding before conversion 156,641,049 946,555,188 Shares converted into Class I (a) 124,679,262 763,037,350 ----------------------------- Net increase (decrease) 281,320,311 $ 1,709,592,538 ============================= Year ended October 31, 2009: Shares sold 139,522,030 $ 689,831,159 Shares redeemed (62,000,780) (302,994,049) ----------------------------- Net increase (decrease) 77,521,250 $ 386,837,110 ============================= CLASS R1 SHARES AMOUNT Year ended October 31, 2010: Shares sold 42,545,314 $ 266,876,856 Shares redeemed (8,788,622) (54,406,256) ----------------------------- Net increase (decrease) 33,756,692 $ 212,470,600 ============================= Year ended October 31, 2009: Shares sold 20,960,751 $ 102,212,398 Shares redeemed (5,343,626) (25,555,494) ----------------------------- Net increase (decrease) 15,617,125 $ 76,656,904 ============================= CLASS R2 SHARES AMOUNT Year ended October 31, 2010: Shares sold 23,530,284 $ 142,391,393 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 16,271 95,806 Shares redeemed (11,158,233) (67,466,373) ----------------------------- Net increase (decrease) 12,388,322 $ 75,020,826 ============================= Year ended October 31, 2009: Shares sold 16,720,843 $ 86,609,987 Shares redeemed (3,758,852) (19,248,645) ----------------------------- Net increase (decrease) 12,961,991 $ 67,361,342 ============================= CLASS R3 SHARES AMOUNT Year ended October 31, 2010: Shares sold 6,977,919 $ 41,840,378 Shares issued in connection with the acquisition of MainStay Mid Cap Growth Fund (See Note 9) 194,952 1,137,757 Shares redeemed (2,041,081) (12,252,608) ----------------------------- Net increase (decrease) 5,131,790 $ 30,725,527 ============================= Year ended October 31, 2009: Shares sold 2,248,906 $ 11,245,978 Shares redeemed (814,674) (4,111,520) ----------------------------- Net increase (decrease) 1,434,232 $ 7,134,458 =============================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 9-FUND ACQUISITION At a meeting held on June 23, 2009, the Board approved a plan of reorganization whereby the Fund would acquire the assets, including the investments, and assume the liabilities of MainStay Mid Cap Growth Fund, a series of The MainStay Funds. Shareholders of the MainStay Mid Cap Growth Fund approved this reorganization on November 5, 2009, which was then completed on November 12, 2009. The aggregate net assets of the Fund immediately before the acquisition were $3,824,302,830 and the combined net assets after the acquisition were $3,984,094,585. 28 MainStay Large Cap Growth Fund The acquisition was accomplished by a tax-free exchange of the following:
MAINSTAY MID CAP GROWTH FUND SHARES VALUE Investor Class 2,057,499 $19,791,497 - ----------------------------------------------------- Class A 4,876,777 47,121,371 - ----------------------------------------------------- Class B 2,883,066 25,819,585 - ----------------------------------------------------- Class C 2,037,533 18,242,438 - ----------------------------------------------------- Class I 4,841,458 47,583,301 - ----------------------------------------------------- Class R2 9,945 95,806 - ----------------------------------------------------- Class R3 118,906 1,137,757 - -----------------------------------------------------
In exchange for the MainStay Mid Cap Growth Fund shares and net assets, the Fund issued 3,386,751 Investor Class Shares; 8,038,446 Class A shares; 4,574,534 Class B shares; 3,234,360 Class C shares; 7,929,625 Class I shares; 16,271 Class R2 shares; and 194,952 Class R3 shares. MainStay Mid Cap Growth Fund's net assets at the acquisition date were as follows, which include the following amounts of capital stock, unrealized appreciation, and accumulated net realized loss and undistributed net investment loss:
ACCUMULATED UNDISTRIBUTED TOTAL NET NET NET CAPITAL UNREALIZED REALIZED INVESTMENT ASSETS STOCK APPRECIATION LOSS LOSS MainStay Mid Cap Growth Fund $159,791,755 $184,410,583 $5,535,410 $(30,146,396) $(7,842) - ---------------------------------------------------------------------------------------------------------------
Assuming the acquisition had been completed on November 1, 2009, the beginning of the annual reporting period of the Fund, the Fund's pro forma results of operations for the year ended October 31, 2010, would be as follows: Net investment loss $(19,862,898) Net gain on investments $840,976,042 Net increase in net assets resulting from operations $821,113,144
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the MainStay Mid Cap Growth Fund that have been included in the Fund's Statement of Operations since November 12, 2009. For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from MainStay Mid Cap Growth Fund was carried forward to align ongoing reporting of the Fund's realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified other than the extension of the expense limitation agreement as disclosed in Note 3(A) to these financial statements. mainstayinvestments.com 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Large Cap Growth Fund (the "Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Large Cap Growth Fund of The MainStay Funds as of October 31, 2010, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 30 MainStay Large Cap Growth Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Large Cap Growth Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and Winslow Capital Management Inc. ("Winslow") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and Winslow on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates and Winslow as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and Winslow; (ii) the investment performance of the Fund, New York Life Investments and Winslow; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates and by Winslow as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND WINSLOW In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing Winslow's compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that Winslow provides to the Fund. The Board evaluated Winslow's experience in serving as subadviser to the Fund and managing other portfolios. It examined Winslow's track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at Winslow, and Winslow's overall legal and compliance environment. The Board also reviewed Winslow's willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the mainstayinvestments.com 31 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and Winslow's experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and Winslow to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND WINSLOW The Board considered the costs of the services provided by New York Life Investments and Winslow under the Agreements, and the profits realized by New York Life Investments, its affiliates and Winslow due to their relationships with the Fund. In evaluating any costs and profits of New York Life Investments and its affiliates and Winslow due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and Winslow must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, although the Board did not receive specific profitability information from Winslow, the Board considered representations from Winslow and New York Life Investments that the subadvisory fee paid by New York Life Investments to Winslow for services provided to the Fund was the result of arm's-length negotiations. Because Winslow is not affiliated with New York Life Investments, and Winslow's fees are paid directly by New York Life Investments, the Board focused primarily on the profitability of the relationship between New York Life Investments and its affiliates and the Fund. The Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board recognized, for example, the benefits to Winslow from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to Winslow in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board also requested and received information from Winslow and New York Life Investments concerning other business relationships between Winslow and its affiliates and New York Life Investments and its affiliates. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. 32 MainStay Large Cap Growth Fund After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates and Winslow due to their relationships with the Fund supported the Board's determination to approve the Agreements. With respect to Winslow, the Board concluded that any profits realized by Winslow due to its relationship with the Fund are the result of arm's-length negotiations between New York Life Investments and Winslow, and are based on subadvisory fees paid to Winslow by New York Life Investments, not the Fund. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to Winslow are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. The Board took note of New York Life Investments' agreement to institute a new contractual management fee breakpoint for the Fund, and its commitment to voluntarily reimburse expenses of the Fund so that the Fund will benefit from a recent reduction in subadvisory fees paid by New York Life Investments to Winslow. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and Winslow on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and Winslow about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. mainstayinvestments.com 33 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. 34 MainStay Large Cap Growth Fund PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). mainstayinvestments.com 35 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 36 MainStay Large Cap Growth Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 37
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
38 MainStay Large Cap Growth Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 39 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 40 MainStay Large Cap Growth Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-A021107 MS333-10 MSLG11-12/10 31 (MAINSTAY INVESTMENTS LOGO) MAINSTAY MAP FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 12 - --------------------------------------------- Financial Statements 17 - --------------------------------------------- Notes to Financial Statements 24 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 32 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 33 - --------------------------------------------- Federal Income Tax Information 36 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 36 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 36 - --------------------------------------------- Board Members and Officers 37 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS I SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (LINE GRAPH)
MAINSTAY MAP FUND CLASS RUSSELL 3000(R) S&P 500(R) I SHARES INDEX INDEX ------------ --------------- ---------- 10/31/00 10000 10000 10000 9794 7483 7510 8545 6409 6375 11105 7927 7701 12752 8681 8427 14531 9602 9508 17032 11173 10659 19926 12797 12211 12635 8113 7803 14451 8992 8568 10/31/10 16800 10641 9983
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 5.5% Initial Sales Charge With sales charges 9.39% 1.39% Excluding sales charges 15.75 2.55 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 5.5% Initial Sales Charge With sales charges 9.62 1.49 Excluding sales charges 16.00 2.65 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 9.93 1.46 if Redeemed Within the First Six Years of Purchase Excluding sales charges 14.93 1.77 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 13.89 1.77 if Redeemed Within One Year of Purchase Excluding sales charges 14.89 1.77 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares No Sales Charge 16.26 2.94 - ----------------------------------------------------------------------------------------------------------------------------------- Class R1 Shares(4) No Sales Charge 16.12 2.82 - ----------------------------------------------------------------------------------------------------------------------------------- Class R2 Shares(4) No Sales Charge 15.88 2.60 - ----------------------------------------------------------------------------------------------------------------------------------- Class R3 Shares(5) No Sales Charge 15.60 2.32 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 4.37% 1.50% 4.97 1.50 - ------------------------------------------------- Class A Shares 4.42 1.29 5.02 1.29 - ------------------------------------------------- Class B Shares 4.17 2.26 4.17 2.26 - ------------------------------------------------- Class C Shares 4.17 2.25 4.17 2.25 - ------------------------------------------------- Class I Shares 5.33 1.04 - ------------------------------------------------- Class R1 Shares(4) 5.20 1.14 - ------------------------------------------------- Class R2 Shares(4) 4.96 1.38 - ------------------------------------------------- Class R3 Shares(5) 4.67 1.63 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense rations disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A shares through February 27, 2008, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class R1 and R2 shares, each of which was first offered on January 2, 2004, includes the historical performance of Class A shares through January 1, 2004, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class R1 and R2 shares might have been lower. 5. Performance figures for Class R3 shares, which were first offered on April 28, 2006, includes the historical performance of Class A shares through April 27, 2006, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Class R3 shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Russell 3000(R) Index(6) 18.34% 2.08% 0.62% - ------------------------------------------------------------------ S&P 500(R) Index(7) 16.52 1.73 -0.02 - ------------------------------------------------------------------ Average Lipper Large-Cap Core Fund(8) 14.47 1.48 0.26 - ------------------------------------------------------------------
6. The Russell 3000(R) Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. Total returns assume reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. The Russell 3000(R) Index is the Fund's broad- based securities market index for comparison purposes. An investment cannot be made directly in an index. 7. "S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500(R) Index is widely regarded as the standard for measuring large-cap U.S. stock market performance. The S&P 500(R) Index is the Fund's secondary benchmark. Results assume reinvestment of all income and capital gains. An investment cannot be made directly in an index. 8. The average Lipper large-cap core fund is representative of funds that, by portfolio practice, invest at least 75% of their equity assets in companies with market capitalization (on a three-year weighted basis) above Lipper's U.S. Diversified Equity large-cap floor. Large-cap core funds have more latitude in the companies in which they invest. These funds typically have an average price-to-earning ratio, price-to-book ratio, and three-year sales-per-share growth value, compared to the S&P 500(R) Index. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay MAP Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MAP FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) - ------------------------------------------------------------------------------------------------------------- INVESTOR CLASS SHARES $1,000.00 $1,011.90 $ 7.15 $1,018.10 $ 7.17 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,012.90 $ 6.09 $1,019.20 $ 6.11 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,008.40 $10.93 $1,014.30 $10.97 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,008.00 $10.93 $1,014.30 $10.97 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,014.40 $ 4.82 $1,020.40 $ 4.84 - ------------------------------------------------------------------------------------------------------------- CLASS R1 SHARES $1,000.00 $1,013.90 $ 5.33 $1,019.90 $ 5.35 - ------------------------------------------------------------------------------------------------------------- CLASS R2 SHARES $1,000.00 $1,012.60 $ 6.59 $1,018.70 $ 6.61 - ------------------------------------------------------------------------------------------------------------- CLASS R3 SHARES $1,000.00 $1,011.20 $ 7.86 $1,017.40 $ 7.88 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (1.41% for Investor Class, 1.20% for Class A, 2.16% for Class B and Class C, 0.95% for Class I, 1.05% for Class R1, 1.30% for Class R2 and 1.55% for Class R3) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 INDUSTRY COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
Oil, Gas & Consumable Fuels 11.7% Pharmaceuticals 8.2 Beverages 5.5 Insurance 5.2 Commercial Banks 5.1 Capital Markets 4.8 Media 3.9 Aerospace & Defense 3.0 Internet Software & Services 2.9 Software 2.8 Communications Equipment 2.7 Health Care Equipment & Supplies 2.6 Industrial Conglomerates 2.6 Specialty Retail 2.3 Chemicals 2.2 Computers & Peripherals 2.1 Metals & Mining 1.8 Auto Components 1.7 Diversified Financial Services 1.7 Electric Utilities 1.7 Hotels, Restaurants & Leisure 1.7 Wireless Telecommunication Services 1.7 Consumer Finance 1.5 Semiconductors & Semiconductor Equipment 1.4 IT Services 1.3 Food & Staples Retailing 1.2 Diversified Telecommunication Services 1.1 Electronic Equipment & Instruments 1.0 Biotechnology 0.9 Health Care Providers & Services 0.9 Diversified Consumer Services 0.7 Machinery 0.7 Real Estate Investment Trusts 0.7 Electrical Equipment 0.6 Energy Equipment & Services 0.6 Air Freight & Logistics 0.5 Household Products 0.5 Internet & Catalog Retail 0.5 Multi-Utilities 0.5 Real Estate Management & Development 0.5 Road & Rail 0.5 Trading Companies & Distributors 0.5 Commercial Services & Supplies 0.4 Construction & Engineering 0.4 Food Products 0.4 Gas Utilities 0.4 Airlines 0.3 Automobiles 0.3 Construction Materials 0.3 Independent Power Producers & Energy Traders 0.3 Multiline Retail 0.3 Marine 0.1 Paper & Forest Products 0.1 Thrifts & Mortgage Finance 0.1 Office Electronics 0.0++ Short-Term Investment 2.5 Other Assets, Less Liabilities 0.1 ----- 100.0% =====
See Portfolio of Investments beginning on page 12 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN HOLDINGS AS OF OCTOBER 31, 2010 (excluding short-term investment) 1. PepsiCo., Inc. 2. ConocoPhillips 3. Microsoft Corp. 4. Coca-Cola Co. (The) 5. Pfizer, Inc. 6. Wells Fargo & Co. 7. Merck & Co., Inc. 8. Marathon Oil Corp. 9. Occidental Petroleum Corp. 10. Vodafone Group PLC, Sponsored ADR
8 MainStay MAP Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers Michael J. Mullarkey, Roger Lob and Christopher Mullarkey of the Fund's Co-Subadvisor Markston International LLC and by portfolio managers Thomas R. Wenzel, CFA, and Jerrold K. Senser, CFA, of the Fund's Co-Subadvisor Institutional Capital LLC (ICAP). HOW DID MAINSTAY MAP FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay MAP Fund returned 15.75% for Investor Class shares, 16.00% for Class A shares, 14.93% for Class B shares and 14.89% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 16.26%, Class R1 shares returned 16.12%, Class R2 shares returned 15.88% and Class R3 shares returned 15.60%. All share classes outperformed the 14.47% return of the average Lipper(1) large-cap core fund for the same time period. All share classes underperformed the 18.34% return of the Russell 3000(R) Index(2) and the 16.52% return of the S&P 500(R) Index for the 12 months ended October 31, 2010. The Russell 3000(R) Index is the Fund's broad-based securities-market index. The S&P 500(R) Index(3) is a secondary benchmark of the Fund. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING THE REPORTING PERIOD? Markston International During the reporting period, the performance of our portion of the Fund relative to the Russell 3000(R) Index resulted primarily from individual stock selection. In addition, we estimate that underweight positions relative to the Russell 3000(R) Index in telecommunication services and health care in our portion of the Fund, combined with slightly overweight positions relative to the Index in energy and materials, helped relative performance in our portion of the Fund. ICAP In our portion of the Fund that invests in U.S. equities, stock selection in several sectors was the key driver of performance relative to the S&P 500(R) Index. Positive stock selection in the industrials, energy and materials sectors contributed positively to relative performance. Stock selection in the health care, consumer staples and information technology sectors detracted from performance relative to the S&P 500(R) Index. In the portion of the Fund that invests in global stocks, the strongest- performing sectors on an absolute basis were industrials, consumer durables and materials. The weakest-performing sectors were utilities, energy and consumer staples. WHICH SECTORS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFORMANCE, AND WHICH SECTORS WERE PARTIC-ULARLY WEAK? Markston International In our portion of the Fund, the strongest-contributing sectors relative to the Russell 3000(R) Index were consumer discre-tionary, information technology and industrials. Since our portion of the Fund was slightly underweight in these sectors, the positive contribution came from favorable stock selection. The weakest-contributing sectors on a relative basis were telecommunication services, consumer staples and utilities. ICAP In our portion of the Fund that invests in domestic equities, industrials was the strongest-contributing sector relative to the S&P 500(R) Index, followed by energy and materials. Stock selection was the primary driver in each case, as our holdings outperformed those of the Index. Despite positive absolute returns, health care, consumer staples and information technology were the weakest- contributing sectors to performance relative to the S&P 500(R) Index in this portion of the Fund. Stock selection was the primary driver in these cases as well. In our portion of the Fund that invests in global equities, industrials, consumer durables and materials were the strongest-contributing sectors on an absolute basis. The weakest-contributing sectors on an absolute basis were utilities, energy and consumer staples. DURING THE REPORTING PERIOD, WHICH INDIVIDUAL STOCKS MADE THE STRONGEST CONTRIBUTIONS TO THE FUND'S ABSOLUTE PERFORMANCE AND WHICH STOCKS DETRACTED THE MOST? Markston International Strong contributors in our portion of the Fund included media company Liberty Media, computers & peripherals company Apple and chemical company E.I. du Pont de Nemours. Liberty Media has a 40% ownership stake in Sirius XM Radio, which experienced increased subscriber growth during the reporting period. Apple performed well on continued growth in its iPhone and applications business, while rolling out the iPad to eager early adopters. E.I du Pont de Nemours benefited from stronger-than-expected earnings, as a result of low raw-material costs in its chemical business and market share gains in the company's seed business. The company also offered an above average dividend yield. Stocks that detracted from performance included financial holding company Bank of America, regional brokerage firm Jefferies Group and pharmacy and benefits manager CVS Caremark. Bank of America generated negative returns during the reporting period, largely because investors feared that the company might have to buy back underperforming mortgages at 100 cents on the dollar. Jefferies Group, a firm that did not require assistance from the Troubled Asset Relief Program (TARP), produced a slightly negative return during the reporting period, despite having almost no exposure to bad mortgages. Over the 12-month reporting period, the company increased its head count rapidly in anticipation of a return to a more robust 1. See footnote on page 6 for more information about Lipper Inc. 2. See footnote on page 6 for more information on the Russell 3000(R) Index. 3. See footnote on page 6 for more information on the S&P 500(R) Index. mainstayinvestments.com 9 economic environment. We attributed CVS Caremark's falling stock price to high unemployment, which led to reduced foot traffic in the company's retail pharmacies. ICAP During the reporting period, the strongest contributors to absolute performance in our domestic equity portion of the Fund included gold miner and producer Newmont Mining, engine and power-systems manufacturer Cummins and automotive systems and building control systems manufacturer Johnson Controls. Newmont Mining performed well as the continued high price of gold contributed to higher revenues and margins for the company. Cummins benefited as the recovering economy unleashed pent-up demand for its diesel engines, both domestically and in emerging markets. Johnson Controls benefited from improved demand for automobiles and increasing interest in building efficiency. Newmont Mining and Johnson Controls remained in our domestic equity portion of the Fund at the end of the period, while Cummins was sold when it reached our price target. In our domestic equity portion of the Fund, stocks that detracted from performance included pharmacy retailer and benefits manager CVS Caremark, networking equipment provider Cisco Systems and technology hardware and services company Hewlett-Packard. We attributed CVS Caremark's underperformance to disappointing sales and slow-to-materialize integration gains from the merger of CVS and Caremark. We sold the stock from our domestic equity portion of the Fund during the reporting period. Hewlett-Packard was also sold from our domestic equity portion of the Fund, as the departure of the company's Chief Executive Officer called into question Hewlett-Packard's ability to continue to improve margins and growth through cost-cutting and restructuring. Cisco Systems remained in our domestic equity portion of the Fund at the end of the period, as we still believe the stock is attractive. In our portion of the Fund that invests in global equities, the stocks that made the greatest contributions to absolute performance included cable network owner Viacom, global wireless carrier Vodafone and global fertilizer company Yara International. Viacom was helped by several factors, including better ratings in a number of its cable networks, higher affiliate fees and a stronger advertising market. Vodafone benefited from European market improvements and from the increasing potential for restructuring action that could enhance shareholder value. Yara International performed well, as high grain prices prompted farmers to use more fertilizer in order to maximize yields. This led to improved results for the company, as pricing remained strong. All three of these stocks remained in the global equity portion of the Fund at the end of the reporting period. In our portion of the Fund that invests in global equities, the largest individual detractors from absolute performance included integrated oil & gas company BP, water and waste management company Suez Environnement and French retail and investment bank Societe Generale. BP's stock price fell as liability from the Gulf of Mexico oil spill weighed on the company. Suez Environnement showed weak performance as the economic downturn impaired the company's ability to grow revenue in its waste management business. Asset write-downs also continued to hurt Societe Generale's results. All three of these stocks were sold from our global equity portion of the Fund during the reporting period. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? Markston International During the reporting period, we initiated positions in seed technology company Monsanto and data storage device maker STEC. We purchased Monsanto when we thought its shares were attractively priced and poised to benefit from positive data on its new SmartStax technology in corn. We added STEC to our portion of the Fund in anticipation of large orders from original equipment manufacturers. In addition, after a period of slow order growth in 2009, we saw evidence that the company's orders were once again increasing. We quickly sold our position in oil, gas & consumable fuels company BP after the company announced that it was having difficulty fixing the Gulf of Mexico oil spill. We eliminated our position in Sun Microsystems when the company was purchased by Oracle. ICAP During a period characterized by an ongoing, if somewhat restrained, economic recovery, the stock market was volatile but continued to rebound overall. In this environment, we continued to look for stocks that have both attractive valuations and specific catalysts that could trigger appreciation over a 12- to 18-month time frame. In our domestic and global portions of the Fund, we added integrated oil firm ConocoPhillips. We believed that the stock was attractively valued and that management was focused on improving returns by divesting underperforming assets, cutting costs and capital expenditures and using free cash to reduce debt and repurchase shares. We also added insurance carrier Aflac to our domestic and global portions of the Fund. We believed that the firm's investment portfolio performance and its sales in Japan would exceed expectations. In our global equity portion of the Fund, we added Bridgestone, the world's largest tire supplier, on our belief that pent-up demand would be unleashed in both the replacement and original equipment markets and could result in improved sales growth and margins for the company. In our domestic and global portions of the Fund, we also bought Microsoft, the world's largest software company. We felt that the rapid adoption of the company's new operating system, Windows 7, and other applications during a potentially large spending cycle to refresh enterprise technology could enhance Microsoft's earnings power. In our domestic and global portions of the Fund, we elimi- nated financial services provider Capital One Financial and 10 MainStay MAP Fund semiconductor manufacturer Intel. Both were sold when we found other stocks that we felt had greater potential upside and were more attractive on a relative- valuation basis. In our global equity portion of the Fund, we sold Saipem, an Italian firm that specializes in construction and drilling for the oil and gas industry worldwide. The stock was sold when it achieved our price target. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? Markston International In our portion of the Fund, we reduced our cash position and added to our exposure in the consumer discretionary and technology sectors. During the reporting period, we slightly reduced our overweight position relative to the Russell 3000(R) Index in the financials sector. ICAP In our portion of the Fund that invests in domestic equities, we increased sector weightings relative to the S&P 500(R) Index in energy and information technology. In energy, the increase moved our domestic equity portion of the Fund from an under- weight position relative to the S&P 500(R) Index to an over- weight position. Even after the increase, our domestic equity portion of the Fund remained underweight relative to the S&P 500(R) Index in information technology. Over the same period, our domestic equity portion of the Fund substantially decreased its exposure to the industrials sector, moving from an overweight to an underweight position relative to the S&P 500(R) Index. Our domestic equity portion of the Fund also pared the size of its overweight position relative to the S&P 500(R) Index in the financials sector. In the global equity portion of the Fund, we increased sector exposure in energy and telecommunication services. Over the same period, we decreased the Fund's global equity exposure to industrials and utilities. HOW WAS THE FUND POSITIONED AT THE END OF OCTOBER 2010? Markston International As of October 31, 2010, our portion of the Fund was slightly overweight the financials and energy sectors relative to the Russell 3000(R) Index and slightly underweight relative to the Russell 3000(R) Index in the consumer staples and information technology sectors. ICAP As of October 31, 2010, the most significantly overweight sectors relative to the S&P 500(R) Index in our domestic equity portion of the Fund were health care and energy. The most significantly underweight sectors were industrials and information technology. As of the same date, the largest sector allocations in the global equity portion of the Fund were financials and industrials. The smallest sector allocations were in utilities and telecommunication services. This positioning reflects our view on the prospects for the economy and the relative attractiveness of individual holdings in these sectors. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
SHARES VALUE COMMON STOCKS 96.9%+ - -------------------------------------------------------- AEROSPACE & DEFENSE 3.0% Boeing Co. (The) 172,800 $ 12,206,592 GenCorp, Inc. (a) 150,800 734,396 Honeywell International, Inc. 486,352 22,912,043 Northrop Grumman Corp. 83,328 5,267,163 Orbital Sciences Corp. (a) 155,000 2,517,200 Raytheon Co. 65,500 3,018,240 -------------- 46,655,634 -------------- AIR FREIGHT & LOGISTICS 0.5% TNT N.V. 285,508 7,589,768 -------------- AIRLINES 0.3% Southwest Airlines Co. 372,800 5,129,728 -------------- AUTO COMPONENTS 1.7% Bridgestone Corp. 424,650 7,614,887 Goodyear Tire & Rubber Co. (The) (a) 103,250 1,055,215 Johnson Controls, Inc. 516,150 18,127,188 -------------- 26,797,290 -------------- AUTOMOBILES 0.3% Nissan Motor Co., Ltd. 602,800 5,318,603 -------------- BEVERAGES 5.5% X Coca-Cola Co. (The) 523,895 32,125,242 Molson Coors Brewing Co. Class B 148,600 7,018,378 X PepsiCo., Inc. 696,291 45,467,802 -------------- 84,611,422 -------------- BIOTECHNOLOGY 0.9% Alkermes, Inc. (a) 82,380 953,137 Celgene Corp. (a) 78,700 4,884,909 Genzyme Corp. (a) 95,871 6,915,175 Gilead Sciences, Inc. (a) 21,000 833,070 -------------- 13,586,291 -------------- CAPITAL MARKETS 4.8% Ameriprise Financial, Inc. 143,050 7,394,254 Bank of New York Mellon Corp. (The) 54,075 1,355,119 BlackRock, Inc. 59,450 10,165,355 Credit Suisse Group A.G., Sponsored ADR (b) 163,150 6,770,725 Goldman Sachs Group, Inc. (The) 161,769 26,036,721 Jefferies Group, Inc. 319,451 7,644,462 Knight Capital Group, Inc. Class A (a) 25,753 335,562 Legg Mason, Inc. 24,010 745,030 State Street Corp. 189,584 7,917,028 UBS A.G. (a) 370,500 6,272,578 Virtus Investment Partners, Inc. (a) 7,726 283,931 -------------- 74,920,765 -------------- CHEMICALS 2.2% CF Industries Holdings, Inc. 2,100 257,313 E.I. du Pont de Nemours & Co. 358,600 16,954,608 Monsanto Co. 182,014 10,815,272 Mosaic Co. (The) 28,240 2,066,038 Yara International A.S.A. 70,000 3,681,317 -------------- 33,774,548 -------------- COMMERCIAL BANKS 5.1% BB&T Corp. 277,450 6,495,105 China Construction Bank Corp. Class H 3,181,000 3,032,748 Erste Group Bank A.G. 65,000 2,933,845 Intesa Sanpaolo S.p.A. 1,977,500 6,956,399 Popular, Inc. (a) 467,671 1,276,742 Standard Chartered PLC 82,450 2,385,315 U.S. Bancorp 1,025,400 24,794,172 X Wells Fargo & Co. 1,202,824 31,369,650 -------------- 79,243,976 -------------- COMMERCIAL SERVICES & SUPPLIES 0.4% Covanta Holding Corp. 241,253 3,806,972 Waste Management, Inc. 51,400 1,836,008 -------------- 5,642,980 -------------- COMMUNICATIONS EQUIPMENT 2.7% Cisco Systems, Inc. (a) 1,037,900 23,695,257 Finisar Corp. (a) 7,734 131,555 Infinera Corp. (a) 124,751 1,021,711 Motorola, Inc. (a) 10,100 82,315 QUALCOMM, Inc. 361,450 16,312,239 -------------- 41,243,077 -------------- COMPUTERS & PERIPHERALS 2.1% Apple, Inc. (a) 68,985 20,755,517 Dell, Inc. (a) 266,900 3,838,022 SanDisk Corp. (a) 109,591 4,118,430 STEC, Inc. (a) 226,750 3,537,300 -------------- 32,249,269 -------------- CONSTRUCTION & ENGINEERING 0.4% China Communications Construction Co., Ltd. Class H 3,030,500 2,893,172 Jacobs Engineering Group, Inc. (a) 94,486 3,648,105 -------------- 6,541,277 -------------- CONSTRUCTION MATERIALS 0.3% Holcim, Ltd. 64,950 4,049,268 --------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest holdings, as of October 31, 2010, excluding short- term investment. May be subject to change daily. 12 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) CONSUMER FINANCE 1.4% American Express Co. 386,800 $ 16,036,728 Discover Financial Services 327,830 5,786,199 -------------- 21,822,927 -------------- DIVERSIFIED CONSUMER SERVICES 0.6% Coinstar, Inc. (a) 151,470 8,721,643 -------------- DIVERSIFIED FINANCIAL SERVICES 1.7% Bank of America Corp. 305,904 3,499,542 Citigroup, Inc. (a) 278,900 1,163,013 CME Group, Inc. 33,800 9,790,170 Hong Kong Exchanges and Clearing, Ltd. 73,100 1,608,884 ING Groep N.V. (a) 351,200 3,749,097 JPMorgan Chase & Co. 134,682 5,068,084 Leucadia National Corp. (a) 82,360 2,093,591 -------------- 26,972,381 -------------- DIVERSIFIED TELECOMMUNICATION SERVICES 1.1% AT&T, Inc. 333,600 9,507,600 Frontier Communications Corp. 6,049 53,110 Koninklijke KPN N.V. 336,900 5,626,770 Verizon Communications, Inc. 48,200 1,565,054 -------------- 16,752,534 -------------- ELECTRIC UTILITIES 1.7% American Electric Power Co., Inc. 52,765 1,975,522 Duke Energy Corp. 1,041,400 18,963,894 Energias de Portugal S.A. 1,200,400 4,592,800 -------------- 25,532,216 -------------- ELECTRICAL EQUIPMENT 0.6% ABB, Ltd. (a) 261,300 5,411,609 Rockwell Automation, Inc. 64,424 4,018,125 -------------- 9,429,734 -------------- ELECTRONIC EQUIPMENT & INSTRUMENTS 1.0% Corning, Inc. 124,000 2,266,720 HOYA Corp. 234,600 5,486,731 Tyco Electronics, Ltd. 226,971 7,190,441 -------------- 14,943,892 -------------- ENERGY EQUIPMENT & SERVICES 0.6% Baker Hughes, Inc. 47,122 2,183,162 Exterran Holdings, Inc. (a) 35,400 891,018 Key Energy Services, Inc. (a) 226,105 2,227,134 Parker Drilling Co. (a) 75,200 318,096 Schlumberger, Ltd. 48,000 3,354,720 Weatherford International, Ltd. (a) 50,650 851,427 -------------- 9,825,557 -------------- FOOD & STAPLES RETAILING 1.2% CVS Caremark Corp. 118,451 3,567,744 Wal-Mart Stores, Inc. 185,920 10,071,286 Walgreen Co. 164,411 5,570,245 -------------- 19,209,275 -------------- FOOD PRODUCTS 0.4% Archer-Daniels-Midland Co. 53,463 1,781,387 Bunge, Ltd. 50,790 3,050,955 Kraft Foods, Inc. Class A 36,000 1,161,720 -------------- 5,994,062 -------------- GAS UTILITIES 0.4% National Fuel Gas Co. 69,611 3,841,135 Nicor, Inc. 34,250 1,631,327 -------------- 5,472,462 -------------- HEALTH CARE EQUIPMENT & SUPPLIES 2.6% Baxter International, Inc. 105,442 5,366,998 Boston Scientific Corp. (a) 21,700 138,446 CareFusion Corp. (a) 44,612 1,076,934 Covidien PLC 419,619 16,730,210 Gen-Probe, Inc. (a) 28,468 1,378,705 Hospira, Inc. (a) 98,423 5,854,200 Medtronic, Inc. 285,768 10,061,891 -------------- 40,607,384 -------------- HEALTH CARE PROVIDERS & SERVICES 0.9% Aetna, Inc. 371,270 11,086,122 Cardinal Health, Inc. 61,370 2,128,925 SunLink Health Systems, Inc. (a) 46,368 84,854 Universal Health Services, Inc. Class B 5,800 239,366 -------------- 13,539,267 -------------- HOTELS, RESTAURANTS & LEISURE 1.7% Genting Berhad 1,025,700 3,441,526 Marriott International, Inc. Class A 28,660 1,061,853 McDonald's Corp. 121,180 9,424,169 Sands China, Ltd. (a) 2,272,300 4,936,692 Starwood Hotels & Resorts Worldwide, Inc. 50,625 2,740,837 TUI Travel PLC 1,212,800 4,102,372 -------------- 25,707,449 -------------- HOUSEHOLD PRODUCTS 0.5% Colgate-Palmolive Co. 28,612 2,206,557 Procter & Gamble Co. (The) 97,800 6,217,146 -------------- 8,423,703 -------------- INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 0.3% AES Corp. (The) (a) 429,000 5,122,260 -------------- INDUSTRIAL CONGLOMERATES 2.6% 3M Co. 66,390 5,591,366 General Electric Co. 598,250 9,583,965 Hutchison Whampoa, Ltd. 514,700 5,079,768
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
SHARES VALUE COMMON STOCKS (CONTINUED) INDUSTRIAL CONGLOMERATES (CONTINUED) Siemens A.G. 40,150 $ 4,586,694 Sime Darby Berhad 1,477,600 4,193,221 Textron, Inc. 252,700 5,261,214 Tyco International, Ltd. 174,189 6,667,955 -------------- 40,964,183 -------------- INSURANCE 5.2% Aflac, Inc. 341,198 19,069,556 AIA Group, Ltd. (a) 208,600 621,662 Allstate Corp. (The) 196,800 6,000,432 Aon Corp. 415,990 16,535,603 Chubb Corp. (The) 50,600 2,935,812 HCC Insurance Holdings, Inc. 65,800 1,742,384 Marsh & McLennan Cos., Inc. 108,755 2,716,700 MetLife, Inc. 186,961 7,540,137 Phoenix Cos., Inc. (The) (a) 119,600 251,160 Reinsurance Group of America, Inc. 35,592 1,782,091 Tokio Marine Holdings, Inc. 178,200 5,022,463 Travelers Cos., Inc. (The) 162,005 8,942,676 W.R. Berkley Corp. 284,097 7,818,350 -------------- 80,979,026 -------------- INTERNET & CATALOG RETAIL 0.5% Liberty Media Corp. Interactive Class A (a) 550,690 8,128,184 -------------- INTERNET SOFTWARE & SERVICES 2.9% AOL, Inc. (a) 5,151 137,428 eBay, Inc. (a) 439,675 13,106,712 Google, Inc. Class A (a) 19,816 12,147,010 Internet Capital Group, Inc. (a) 33,273 415,580 Valueclick, Inc. (a) 181,274 2,494,330 VeriSign, Inc. (a) 494,348 17,178,593 -------------- 45,479,653 -------------- IT SERVICES 1.3% Accenture PLC Class A 195,800 8,754,218 Computer Sciences Corp. 86,500 4,242,825 International Business Machines Corp. 51,799 7,438,336 -------------- 20,435,379 -------------- MACHINERY 0.7% Caterpillar, Inc. 79,050 6,213,330 KOMATSU, Ltd. 176,250 4,319,187 -------------- 10,532,517 -------------- MARINE 0.1% American Commercial Lines, Inc. (a) 38,336 1,270,838 -------------- MEDIA 3.9% Ascent Media Corp. Class A (a) 1,729 47,098 British Sky Broadcasting Group PLC 369,750 4,185,795 Cablevision Systems Corp. Class A 158,973 4,250,938 Comcast Corp. Class A 122,000 2,510,760 DIRECTV Class A (a) 20,700 899,622 Liberty Media Corp. Capital Class A (a) 264,814 15,237,398 Liberty Media-Starz, Series A (a) 56,287 3,687,924 Madison Square Garden, Inc. Class A (a) 107,269 2,230,123 Time Warner Cable, Inc. 15,445 893,802 Time Warner, Inc. 56,666 1,842,212 Viacom, Inc. Class B 626,250 24,166,987 Walt Disney Co. (The) 29,843 1,077,631 -------------- 61,030,290 -------------- METALS & MINING 1.8% Anglo American PLC 67,400 3,140,595 Barrick Gold Corp. 147,650 7,100,489 Newmont Mining Corp. 239,100 14,554,017 United States Steel Corp. 64,000 2,738,560 -------------- 27,533,661 -------------- MULTI-UTILITIES 0.5% Dominion Resources, Inc. 28,800 1,251,648 GDF Suez S.A. 155,296 6,198,923 -------------- 7,450,571 -------------- MULTILINE RETAIL 0.3% Kohl's Corp. (a) 71,500 3,660,800 Target Corp. 26,700 1,386,798 -------------- 5,047,598 -------------- OFFICE ELECTRONICS 0.0%++ Xerox Corp. 65,600 767,520 -------------- OIL, GAS & CONSUMABLE FUELS 11.6% Anadarko Petroleum Corp. 131,600 8,102,612 Apache Corp. 109,649 11,076,742 BG Group PLC 365,200 7,112,846 Chesapeake Energy Corp. 107,557 2,333,987 Chevron Corp. 66,674 5,507,939 X ConocoPhillips 588,626 34,964,384 Devon Energy Corp. 180,171 11,714,719 EOG Resources, Inc. 81,700 7,820,324 ExxonMobil Corp. 60,600 4,028,082 Hess Corp. 57,575 3,628,952 InterOil Corp. (a) 5,900 419,962 X Marathon Oil Corp. 803,749 28,589,352 X Occidental Petroleum Corp. 350,270 27,541,730 Petroleo Brasileiro S.A., ADR (b) 112,150 3,826,558 Repsol YPF, S.A. 151,500 4,201,340 Spectra Energy Corp. 530,400 12,607,608 Total S.A. 51,800 2,814,959 Williams Cos., Inc. 126,295 2,717,868 -------------- 179,009,964 --------------
14 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
SHARES VALUE COMMON STOCKS (CONTINUED) PAPER & FOREST PRODUCTS 0.1% MeadWestvaco Corp. 80,405 $ 2,068,821 -------------- PHARMACEUTICALS 8.2% Abbott Laboratories 159,177 8,168,964 Bayer A.G. 72,500 5,410,553 GlaxoSmithKline PLC 314,100 6,145,274 Johnson & Johnson 40,850 2,600,920 X Merck & Co., Inc. 838,105 30,406,449 Mylan, Inc. (a) 29,000 589,280 Novartis A.G. 57,450 3,330,646 X Pfizer, Inc. 1,808,550 31,468,770 Sanofi-Aventis 182,900 12,773,832 Sanofi-Aventis, Sponsored ADR (b) 534,450 18,764,540 Teva Pharmaceutical Industries, Ltd., Sponsored ADR (b) 125,998 6,539,296 -------------- 126,198,524 -------------- REAL ESTATE INVESTMENT TRUSTS 0.7% HCP, Inc. 97,977 3,528,152 UDR, Inc. 249,127 5,600,375 Weyerhaeuser Co. 61,705 1,000,855 -------------- 10,129,382 -------------- REAL ESTATE MANAGEMENT & DEVELOPMENT 0.5% Cheung Kong Holdings, Ltd. 162,000 2,472,453 Mitsubishi Estate Co., Ltd. 202,700 3,551,721 St. Joe Co. (The) (a) 101,100 2,041,209 -------------- 8,065,383 -------------- ROAD & RAIL 0.5% Celadon Group, Inc. (a) 116,274 1,508,074 CSX Corp. 49,142 3,019,776 Union Pacific Corp. 38,500 3,375,680 -------------- 7,903,530 -------------- SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 1.4% Intel Corp. 229,420 4,604,459 Texas Instruments, Inc. 572,600 16,931,782 -------------- 21,536,241 -------------- SOFTWARE 2.8% Adobe Systems, Inc. (a) 34,950 983,842 Blackboard, Inc. (a) 45,339 1,892,450 Compuware Corp. (a) 25,172 251,972 Electronic Arts, Inc. (a) 31,733 502,968 JDA Software Group, Inc. (a) 31,679 801,479 LiveWire Mobile, Inc. 15,722 47,166 X Microsoft Corp. 1,279,183 34,077,435 Oracle Corp. 45,668 1,342,639 S1 Corp. (a) 61,970 360,665 SAP A.G. 61,650 3,215,094 -------------- 43,475,710 -------------- SPECIALTY RETAIL 2.1% Home Depot, Inc. (The) 240,953 7,440,629 Lowe's Cos., Inc. 1,026,200 21,888,846 PEP Boys-Manny, Moe & Jack 234,255 2,738,441 -------------- 32,067,916 -------------- THRIFTS & MORTGAGE FINANCE 0.1% New York Community Bancorp, Inc. 47,700 807,561 -------------- TRADING COMPANIES & DISTRIBUTORS 0.5% Mitsubishi Corp. 298,800 7,185,013 -------------- WIRELESS TELECOMMUNICATION SERVICES 1.7% X Vodafone Group PLC, Sponsored ADR (b) 949,100 26,109,741 -------------- Total Common Stocks (Cost $1,368,540,381) 1,499,607,848 -------------- NUMBER OF RIGHTS RIGHTS 0.0%++ - -------------------------------------------------------- COMMERCIAL BANKS 0.0%++ Banco Santander S.A. Expires 11/5/10 (a) 131,125 21,718 Standard Chartered PLC Expires 11/5/10 (a) 10,306 86,780 -------------- Total Rights (Cost $21,960) 108,498 -------------- PRINCIPAL AMOUNT LONG-TERM BONDS 0.5% CONVERTIBLE BONDS 0.3% - -------------------------------------------------------- COMMERCIAL SERVICES & SUPPLIES 0.0%++ Covanta Holding Corp. 1.00%, due 2/1/27 $ 150,000 146,625 -------------- CONSUMER FINANCE 0.1% Americredit Corp. 0.75%, due 9/15/11 1,250,000 1,257,112 --------------
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE CONVERTIBLE BONDS (CONTINUED) DIVERSIFIED CONSUMER SERVICES 0.1% Coinstar, Inc. 4.00%, due 9/1/14 $ 900,000 $ 1,460,250 -------------- OIL, GAS & CONSUMABLE FUELS 0.1% Bill Barrett Corp. 5.00%, due 3/15/28 989,300 1,014,033 -------------- Total Convertible Bonds (Cost $2,860,988) 3,878,020 -------------- CORPORATE BOND 0.2% - -------------------------------------------------------- SPECIALTY RETAIL 0.2% PEP Boys-Manny Moe & Jack 7.50%, due 12/15/14 2,800,000 2,814,000 -------------- Total Corporate Bond (Cost $2,115,664) 2,814,000 -------------- Total Long-Term Bonds (Cost $4,976,652) 6,692,020 -------------- SHORT-TERM INVESTMENT 2.5% - -------------------------------------------------------- REPURCHASE AGREEMENT 2.5% State Street Bank and Trust Co. 0.01%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $39,262,996 (Collateralized by a United States Treasury Note with a rate of 3.125% and a maturity date of 4/30/17, with a Principal Amount of $36,535,000 and a Market Value of $40,056,974) 39,262,963 39,262,963 -------------- Total Short-Term Investment (Cost $39,262,963) 39,262,963 -------------- Total Investments (Cost $1,412,801,956) (c) 99.9% 1,545,671,329 Other Assets, Less Liabilities 0.1 1,951,049 ----------- -------------- Net Assets 100.0% $1,547,622,378 =========== ==============
++ Less than one-tenth of a percent. (a) Non-income producing security. (b) ADR--American Depositary Receipt. (c) At October 31, 2010, cost is $1,430,975,932 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $210,464,338 Gross unrealized depreciation (95,768,941) ------------ Net unrealized appreciation $114,695,397 ============
The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Common Stocks $1,499,607,848 $ -- $ -- $1,499,607,848 Rights 108,498 -- -- 108,498 Long-Term Bonds Convertible Bonds -- 3,878,020 -- 3,878,020 Corporate Bond -- 2,814,000 -- 2,814,000 -------------- ----------- -------- -------------- Total Long-Term Bonds -- 6,692,020 -- 6,692,020 -------------- ----------- -------- -------------- Short-Term Investment Repurchase Agreement -- 39,262,963 -- 39,262,963 -------------- ----------- -------- -------------- Total Investments in Securities $1,499,716,346 $45,954,983 $-- $1,545,671,329 ============== =========== ======== ==============
(a) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) 16 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - --------------------------------------------------- Investment in securities, at value (identified cost $1,412,801,956) $1,545,671,329 Cash denominated in foreign currencies (identified cost $30) 30 Receivables: Investment securities sold 4,050,358 Dividends and interest 2,055,122 Fund shares sold 804,041 Other assets 69,666 -------------- Total assets 1,552,650,546 -------------- LIABILITIES - --------------------------------------------------- Payables: Fund shares redeemed 1,853,095 Investment securities purchased 1,183,793 Manager (See Note 3) 982,770 Transfer agent (See Note 3) 495,639 NYLIFE Distributors (See Note 3) 356,993 Shareholder communication 97,795 Professional fees 40,366 Custodian 12,729 Trustees 3,291 Accrued expenses 1,697 -------------- Total liabilities 5,028,168 -------------- Net assets $1,547,622,378 ============== COMPOSITION OF NET ASSETS - --------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 522,372 Additional paid-in capital 1,617,896,527 -------------- 1,618,418,899 Undistributed net investment income 10,512,556 Accumulated net realized loss on investments and foreign currency transactions (214,198,882) Net unrealized appreciation on investments 132,869,373 Net unrealized appreciation on translation of other assets and liabilities in foreign currencies 20,432 -------------- Net assets $1,547,622,378 ============== INVESTOR CLASS Net assets applicable to outstanding shares $ 113,556,736 ============== Shares of beneficial interest outstanding 3,815,703 ============== Net asset value per share outstanding $ 29.76 Maximum sales charge (5.50% of offering price) 1.73 -------------- Maximum offering price per share outstanding $ 31.49 ============== CLASS A Net assets applicable to outstanding shares $ 345,066,871 ============== Shares of beneficial interest outstanding 11,582,448 ============== Net asset value per share outstanding $ 29.79 Maximum sales charge (5.50% of offering price) 1.73 -------------- Maximum offering price per share outstanding $ 31.52 ============== CLASS B Net assets applicable to outstanding shares $ 140,673,854 ============== Shares of beneficial interest outstanding 5,092,242 ============== Net asset value and offering price per share outstanding $ 27.63 ============== CLASS C Net assets applicable to outstanding shares $ 160,097,644 ============== Shares of beneficial interest outstanding 5,794,093 ============== Net asset value and offering price per share outstanding $ 27.63 ============== CLASS I Net assets applicable to outstanding shares $ 759,317,361 ============== Shares of beneficial interest outstanding 24,983,844 ============== Net asset value and offering price per share outstanding $ 30.39 ============== CLASS R1 Net assets applicable to outstanding shares $ 325,067 ============== Shares of beneficial interest outstanding 10,860 ============== Net asset value and offering price per share outstanding $ 29.93 ============== CLASS R2 Net assets applicable to outstanding shares $ 26,734,962 ============== Shares of beneficial interest outstanding 895,772 ============== Net asset value and offering price per share outstanding $ 29.85 ============== CLASS R3 Net assets applicable to outstanding shares $ 1,849,883 ============== Shares of beneficial interest outstanding 62,270 ============== Net asset value and offering price per share outstanding $ 29.71 ==============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Dividends (a) $ 29,528,309 Interest 563,269 ------------ Total income 30,091,578 ------------ EXPENSES Manager (See Note 3) 10,734,105 Distribution/Service--Investor Class (See Note 3) 264,804 Distribution/Service--Class A (See Note 3) 842,724 Distribution/Service--Class B (See Note 3) 1,556,490 Distribution/Service--Class C (See Note 3) 1,645,696 Distribution/Service--Class R2 (See Note 3) 57,842 Distribution/Service--Class R3 (See Note 3) 8,506 Transfer agent (See Note 3) 2,944,681 Professional fees 244,013 Shareholder communication 242,903 Registration 183,577 Custodian 148,693 Trustees 48,943 Shareholder service (See Note 3) 25,156 Miscellaneous 58,208 ------------ Total expenses 19,006,341 ------------ Net investment income 11,085,237 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS - -------------------------------------------------- Net realized gain (loss) on: Security transactions 78,854,682 Foreign currency transactions (40,696) ------------ Net realized gain on investments and foreign currency transactions 78,813,986 ------------ Net change in unrealized appreciation (depreciation) on: Investments 131,737,174 Translation of other assets and liabilities in foreign currencies 21,303 ------------ Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions 131,758,477 ------------ Net realized and unrealized gain on investments and foreign currency transactions 210,572,463 ------------ Net increase in net assets resulting from operations $221,657,700 ============
(a) Dividends recorded net of foreign withholding taxes in the amount of $610,083. 18 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - ----------------------------------------------------------- Operations: Net investment income $ 11,085,237 $ 11,503,862 Net realized gain (loss) on investments and foreign currency transactions 78,813,986 (150,493,564) Net change in unrealized appreciation (depreciation) on investments and foreign currency transactions 131,758,477 284,312,182 ------------------------------ Net increase in net assets resulting from operations 221,657,700 145,322,480 ------------------------------ Dividends to shareholders: From net investment income: Investor Class -- (1,466,474) Class A -- (6,536,408) Class B -- (621,662) Class C -- (598,336) Class I (238,519) (12,231,419) Class R1 (1,435) (21,358) Class R2 -- (182,158) Class R3 -- (11,256) ------------------------------ Total dividends to shareholders (239,954) (21,669,071) ------------------------------ Capital share transactions: Net proceeds from sale of shares 401,048,658 251,418,088 Net asset value of shares issued in connection with the acquisition of MainStay Mid Cap Core Fund -- 87,462,037 Net asset value of shares issued to shareholders in reinvestment of dividends 231,400 19,947,441 Cost of shares redeemed (420,255,102) (301,744,976) ------------------------------ Increase (decrease) in net assets derived from capital share transactions (18,975,044) 57,082,590 ------------------------------ Net increase in net assets 202,442,702 180,735,999 NET ASSETS - ----------------------------------------------------------- Beginning of year 1,345,179,676 1,164,443,677 ------------------------------ End of year $1,547,622,378 $1,345,179,676 ============================== Undistributed net investment income at end of year $ 10,512,556 $ -- ==============================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------- FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 25.71 $ 23.04 $ 32.90 -------- ------- ------- Net investment income (a) 0.19 0.22 0.17 Net realized and unrealized gain (loss) on investments 3.86 2.90 (10.02) Net realized and unrealized gain (loss) on foreign currency transactions (0.00)++ 0.00++ (0.01) -------- ------- ------- Total from investment operations 4.05 3.12 (9.86) -------- ------- ------- Less dividends and distributions: From net investment income -- (0.45) -- From net realized gain on investments -- -- -- -------- ------- ------- Total dividends and distributions -- (0.45) -- -------- ------- ------- Net asset value at end of period $ 29.76 $ 25.71 $ 23.04 ======== ======= ======= Total investment return (b) 15.75% 13.83% (29.97%)(c) Ratios (to average net assets)/Supplemental Data: Net investment income 0.69% 0.98% 0.81%++ Net expenses 1.41% 1.44% 1.35%++ Expenses (before waiver/reimbursement) 1.41% 1.50% 1.35%++ Portfolio turnover rate 49% 60% 96% Net assets at end of period (in 000's) $113,557 $99,663 $72,709
CLASS B ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 24.04 $ 21.36 $ 38.79 $ 36.49 $ 33.50 -------- -------- -------- -------- -------- Net investment income (loss) (a) (0.01) 0.06 0.04 0.02 (0.15) Net realized and unrealized gain (loss) on investments 3.60 2.70 (12.91) 5.34 5.27 Net realized and unrealized gain (loss) on foreign currency transactions (0.00)++ 0.00++ (0.01) -- -- -------- -------- -------- -------- -------- Total from investment operations 3.59 2.76 (12.88) 5.36 5.12 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income -- (0.08) -- -- -- From net realized gain on investments -- -- (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- Total dividends and distributions -- (0.08) (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- Net asset value at end of period $ 27.63 $ 24.04 $ 21.36 $ 38.79 $ 36.49 ======== ======== ======== ======== ======== Total investment return (b) 14.93% 12.97% (37.33%) 15.73% 15.94% Ratios (to average net assets)/Supplemental Data: Net investment income (loss) (0.04%) 0.31% 0.13% 0.06% (0.45%) Net expenses 2.16% 2.19% 2.07% 2.02% 2.10% Expenses (before waiver/reimbursement) 2.16% 2.26% 2.07% 2.02% 2.08% Portfolio turnover rate 49% 60% 96% 76% 100% Net assets at end of period (in 000's) $140,674 $169,606 $189,015 $378,342 $354,543
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (c) Total investment return is not annualized.
20 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 25.68 $ 23.04 $ 41.39 $ 38.55 $ 35.03 -------- -------- -------- -------- -------- 0.25 0.28 0.31 0.31 0.11 3.86 2.90 (13.88) 5.68 5.54 (0.00)++ 0.00 ++ (0.01) -- -- -------- -------- -------- -------- -------- 4.11 3.18 (13.58) 5.99 5.65 -------- -------- -------- -------- -------- -- (0.54) (0.22) (0.09) -- -- -- (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- -- (0.54) (4.77) (3.15) (2.13) -------- -------- -------- -------- -------- $ 29.79 $ 25.68 $ 23.04 $ 41.39 $ 38.55 ======== ======== ======== ======== ======== 16.00% 14.12% (36.80%) 16.61% 16.80% 0.90% 1.25% 0.96% 0.79% 0.28% 1.21% 1.20% 1.23% 1.27% 1.35% 1.21% 1.29% 1.25% 1.27% 1.33% 49% 60% 96% 76% 100% $345,067 $324,421 $291,812 $647,374 $524,523
CLASS C -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 24.05 $ 21.37 $ 38.79 $ 36.49 $ 33.50 -------- -------- -------- -------- -------- (0.01) 0.06 0.04 0.01 (0.16) 3.59 2.70 (12.90) 5.35 5.28 (0.00)++ 0.00 ++ (0.01) -- -- -------- -------- -------- -------- -------- 3.58 2.76 (12.87) 5.36 5.12 -------- -------- -------- -------- -------- -- (0.08) -- -- -- -- -- (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- -- (0.08) (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- $ 27.63 $ 24.05 $ 21.37 $ 38.79 $ 36.49 ======== ======== ======== ======== ======== 14.89% 12.96% (37.30%) 15.73% 15.94% (0.05%) 0.29% 0.13% 0.04% (0.46%) 2.16% 2.19% 2.07% 2.02% 2.10% 2.16% 2.25% 2.07% 2.02% 2.08% 49% 60% 96% 76% 100% $160,098 $167,652 $178,672 $331,430 $245,458
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 26.15 $ 23.51 $ 42.13 $ 39.15 $ 35.50 -------- -------- -------- -------- -------- Net investment income (a) 0.32 0.33 0.39 0.45 0.23 Net realized and unrealized gain (loss) on investments 3.93 2.95 (14.12) 5.78 5.62 Net realized and unrealized gain (loss) on foreign currency transactions (0.00)++ 0.00 ++ (0.00)++ -- -- -------- -------- -------- -------- -------- Total from investment operations 4.25 3.28 (13.73) 6.23 5.85 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.01) (0.64) (0.34) (0.19) (0.07) From net realized gain on investments -- -- (4.55) (3.06) (2.13) -------- -------- -------- -------- -------- Total dividends and distributions (0.01) (0.64) (4.89) (3.25) (2.20) -------- -------- -------- -------- -------- Net asset value at end of period $ 30.39 $ 26.15 $ 23.51 $ 42.13 $ 39.15 ======== ======== ======== ======== ======== Total investment return (b) 16.26% 14.38% (36.59%) 16.99% 17.21% Ratios (to average net assets)/Supplemental Data: Net investment income 1.12% 1.45% 1.22% 1.15% 0.61% Net expenses 0.95% 0.98% 0.96% 0.92% 1.03% Expenses (before waiver/reimbursement) 0.95% 1.04% 0.96% 0.92% 1.01% Portfolio turnover rate 49% 60% 96% 76% 100% Net assets at end of period (in 000's) $759,317 $567,720 $425,266 $438,054 $358,423
CLASS R2 ----------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 25.76 $ 23.06 $ 41.40 $38.54 $35.03 ------- ------- ------- ------ ------ Net investment income (loss) (a) 0.22 0.23 0.28 0.32 0.07 Net realized and unrealized gain (loss) on investments 3.87 2.93 (13.86) 5.68 5.57 Net realized and unrealized gain (loss) on foreign currency transactions (0.00)++ 0.00 ++ (0.00)++ -- -- ------- ------- ------- ------ ------ Total from investment operations 4.09 3.16 (13.58) 6.00 5.64 ------- ------- ------- ------ ------ Less dividends and distributions: From net investment income -- (0.46) (0.21) (0.08) -- From net realized gain on investments -- -- (4.55) (3.06) (2.13) ------- ------- ------- ------ ------ Total dividends and distributions -- (0.46) (4.76) (3.14) (2.13) ------- ------- ------- ------ ------ Net asset value at end of period $ 29.85 $ 25.76 $ 23.06 $41.40 $38.54 ======= ======= ======= ====== ====== Total investment return (b) 15.88% 13.96% (36.78%) 16.61% 16.80% Ratios (to average net assets)/Supplemental Data: Net investment income (loss) 0.80% 1.01% 0.89% 0.81% 0.17% Net expenses 1.31% 1.33% 1.30% 1.27% 1.38% Expenses (before waiver/reimbursement) 1.31% 1.38% 1.30% 1.27% 1.36% Portfolio turnover rate 49% 60% 96% 76% 100% Net assets at end of period (in 000's) $26,735 $14,006 $ 6,427 $8,560 $5,806
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I, Class R1, Class R2 and Class R3 shares are not subject to sales charges. (c) Total investment return is not annualized.
22 MainStay MAP Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS R1 ------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $25.84 $23.23 $ 41.69 $ 38.78 $ 35.19 ------ ------ ------- ------- ------- 0.30 0.27 0.42 0.42 0.19 3.87 2.94 (14.03) 5.71 5.57 (0.00)++ 0.00 ++ (0.00)++ -- -- ------ ------ ------- ------- ------- 4.17 3.21 (13.61) 6.13 5.76 ------ ------ ------- ------- ------- (0.08) (0.60) (0.30) (0.16) (0.04) -- -- (4.55) (3.06) (2.13) ------ ------ ------- ------- ------- (0.08) (0.60) (4.85) (3.22) (2.17) ------ ------ ------- ------- ------- $29.93 $25.84 $ 23.23 $ 41.69 $ 38.78 ====== ====== ======= ======= ======= 16.12% 14.20% (36.67%) 16.89% 17.08% 1.07% 1.21% 1.24% 1.08% 0.51% 1.06% 1.08% 1.01% 1.02% 1.13% 1.06% 1.14% 1.01% 1.02% 1.11% 49% 60% 96% 76% 100% $ 325 $ 626 $ 232 $12,424 $15,583
CLASS R3 ---------------------------------------------------------------------------------- APRIL 28, 2006** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 2007 2006 $25.70 $22.97 $ 41.31 $38.49 $37.46 ------ ------ ------- ------ ------ 0.15 0.16 0.19 0.17 (0.02) 3.86 2.93 (13.82) 5.73 1.05 (0.00)++ 0.00 ++ (0.00)++ -- -- ------ ------ ------- ------ ------ 4.01 3.09 (13.63) 5.90 1.03 ------ ------ ------- ------ ------ -- (0.36) (0.16) (0.02) -- -- -- (4.55) (3.06) -- ------ ------ ------- ------ ------ -- (0.36) (4.71) (3.08) -- ------ ------ ------- ------ ------ $29.71 $25.70 $ 22.97 $41.31 $38.49 ====== ====== ======= ====== ====== 15.60% 13.65% (36.96%) 16.37% 2.75%(c) 0.54% 0.72% 0.61% 0.42% (0.10%)++ 1.56% 1.58% 1.56% 1.52% 1.72%++ 1.56% 1.63% 1.56% 1.52% 1.73%++ 49% 60% 96% 76% 100% $1,850 $1,484 $ 310 $ 256 $ 10
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay MAP Fund (the "Fund"), a diversified fund. The Fund currently offers eight classes of shares. Class A shares, Class B shares, Class C shares and Class I shares commenced operations on June 9, 1999. Class R1 shares and Class R2 shares commenced operations on January 2, 2004. Class R3 shares commenced operations on April 28, 2006. Investor Class shares commenced operations on February 28, 2008. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $1 million or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I, Class R1, Class R2 and Class R3 shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The eight classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class, Class A, Class R2 and Class R3 shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I and Class R1 shares are not subject to a distribution and/or service fee. Class R1, Class R2 and Class R3 shares are authorized to pay a shareholder service fee to the Manager, as defined in Note 3(A), its affiliates, or third-party service providers, as compensation for services rendered to shareholders of Class R1, Class R2 or Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. The Fund's investment objective is to seek long-term appreciation of capital. The Fund also seeks to earn income, but this is a secondary objective. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Equity securities and Exchange Traded Funds are valued at the latest quoted sales prices as of the close of regular trading on the Exchange on each valuation date. Securities that are not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices normally are taken from the principal market in which each security trades. Investments in other mutual funds are valued at their NAVs as of the close of the Exchange on the valuation date. These securities are generally categorized as Level 1 in the hierarchy. 24 MainStay MAP Fund Debt securities are valued at the evaluated bid prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Foreign currency forward contracts are valued at their fair market values determined on the basis of the mean between the last current bid and ask prices based on dealer or exchange quotations and are generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. Certain events may occur between the time that foreign markets close, on which securities held by the Fund principally trade, and the time at which the Fund's NAV is calculated. These events may include, but are not limited to, situations relating to a single issuer in a market sector, significant fluctuations in U.S. or foreign markets, natural disasters, armed conflicts, governmental actions or other developments not tied directly to the securities markets. Should the Manager or Subadvisor conclude that such events may have affected the accuracy of the last price reported on the local foreign market, the Manager or Subadvisor may, pursuant to procedures adopted by the Fund's Board, adjust the value of the local price to reflect the impact on the price of such securities as a result of such events. In this instance, securities are generally categorized as Level 3 in the hierarchy. Additionally, foreign equity securities are also fair valued whenever the movement of a particular index exceeds certain thresholds. In such cases, the securities are fair valued by applying factors provided by a third party vendor in accordance with the Fund's policies and procedures and are generally categorized as Level 2 in the hierarchy. At October 31, 2010, foreign equity securities held by the Fund were not fair valued. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Investment income received by the Fund from foreign sources may be subject to foreign income taxes. These foreign income taxes are generally withheld at the source. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than short-term investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager or Subadvisor (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (H) SECURITIES LENDING. In order to realize additional income, the Fund may engage in securities lending, subject to the limitations set forth in the 1940 Act, and relevant guidance by the staff of the Securities and Exchange Commission. In the event the Fund does engage in securities lending, the Fund will lend through its custodian, State Street Bank and Trust Company ("State Street"). State Street will manage the Fund's cash collateral in accordance with the Lending Agreement between the Fund and State Street, and indemnify the Fund's portfolio against counterparty risk. The loans will be collateralized by cash or securities at least equal at all times to the market value of the securities loaned. Collateral will consist of U.S. Government securities, cash equivalents or irrevocable letters of credit. The Fund may bear the risk of delay in recovery of, or loss of rights in, the securities loaned should the borrower of the securities experience financial difficulty. The Fund may also record realized gain or loss on securities deemed sold due to a borrower's inability to return securities on loan. The Fund will receive compensation for lending its securities in the form of fees or retain a portion of interest on the investment of any cash received as collateral. The Fund also will continue to receive interest and dividends on the securities loaned and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Fund. Although the Fund and New York Life Investments (as defined in Note 3(A)) have temporarily suspended securities lending, the Fund and New York Life Investments reserve the right to reinstitute lending when deemed appropriate. The Fund had no portfolio securities on loan as of October 31, 2010. (I) CONCENTRATION OF RISK. The Fund invests in foreign securities, which carry certain risks that are in addition to the usual risks inherent in domestic instruments. These risks include those resulting from currency fluctuations, future adverse political and economic developments and possible imposition of currency exchange blockages or other foreign governmental laws or restrictions. These risks are likely to be greater in emerging markets than in developed markets. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (J) FOREIGN CURRENCY FORWARD CONTRACTS. The Fund may enter into foreign currency forward contracts, which are agreements to buy or sell currencies of different countries on a specified future date at a specified rate. The Fund is subject to foreign currency exchange rate risk in the normal course of investing in these transactions. During the period the forward contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. Cash movement occurs on settlement date. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into foreign currency forward contracts to reduce currency risk versus the benchmark or for trade settlement. The use of foreign currency forward contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract amount reflects the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. While a Fund may enter into forward contracts to reduce currency exchange risks, changes in currency 26 MainStay MAP Fund exchange rates may result in poorer overall performance for the Fund than if it had not engaged in such transactions. Exchange rate movements can be large, depending on the currency, and can last for extended periods of time, affecting the value of the Fund's assets. Moreover, there may be an imperfect correlation between the Fund's holdings of securities denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving the intended hedge or expose the Fund to the risk of currency exchange loss. The unrealized appreciation (depreciation) on forward contracts reflects the Fund's exposure at valuation date to credit loss in the event of a counterparty's failure to perform its obligations. (See Note 5.) (K) FOREIGN CURRENCY TRANSACTIONS. The books and records of the Fund are kept in U.S. dollars. Prices of securities denominated in foreign currency amounts are translated into U.S. dollars at the mean between the buying and selling exchange rates last quoted by any major U.S. bank at the following dates: (i) market value of investment securities, other assets and liabilities--at the valuation date, and (ii) purchases and sales of investment securities, income and expenses--at the date of such transactions. The assets and liabilities that are denominated in foreign currency amounts are presented at the exchange rates and market values at the close of the period. The realized and unrealized changes in net assets arising from fluctuations in exchange rates and market prices of securities are not separately presented. Net realized gain (loss) on foreign currency transactions represents net gains and losses on foreign currency forward contracts, net currency gains or losses realized as a result of differences between the amounts of securities sale proceeds or purchase cost, dividends, interest and withholding taxes as recorded on the Fund's books, and the U.S. dollar equivalent amount actually received or paid. Net currency gains or losses from valuing such foreign currency denominated assets and liabilities, other than investments at valuation date exchange rates, are reflected in unrealized foreign exchange gains or losses. (L) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. (M) QUANTITATIVE DISCLOSURE OF DERIVATIVE HOLDINGS. The following tables show additional disclosures about the Fund's derivative and hedging activities, including how such activities are accounted for and their effect on the Fund's financial positions, performance and cash flows. These derivatives are not accounted for as hedging instruments. Fair value of derivatives as of October 31, 2010: ASSET DERIVATIVES
STATEMENT OF ASSETS AND EQUITY LIABILITIES CONTRACTS LOCATION RISK TOTAL Investment in Rights securities, at value $108,498 $108,498 ------------------- Total Fair Value $108,498 $108,498 ===================
The effect of derivative instruments on the Statement of Operations for the year ended October 31, 2010 is as follows:
STATEMENT OF EQUITY OPERATIONS CONTRACTS LOCATION RISK TOTAL Net change in unrealized appreciation (depreciation) Rights on security transactions $86,538 $ 86,538 ------------------- Total Change in Unrealized Appreciation (Depreciation) $86,538 $86,538 ===================
NUMBER OF CONTRACTS, NOTIONAL AMOUNTS OR SHARES/UNITS (1)
EQUITY CONTRACTS RISK TOTAL Rights (2) 100,091 100,091 ==================
(1) Amount disclosed represents the weighted average held during the year ended October 31, 2010. (2) Amount represents number of contracts or number of shares/units. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. Markston International LLC and Institutional Capital LLC (the "Subadvisors"), each registered investment advisers, serve as Subadvisors to the Fund and manage a portion of the Fund's assets, as designated by New York Life Investments from time to time, subject to the oversight of New York Life Investments. Each Subadvisor is responsible for the day-to-day portfolio management of the Fund with respect to its allocated portion of the Fund's assets. Pursuant to the mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) terms of Amended and Restated Subadvisory Agreements ("Subadvisory Agreements") between New York Life Investments and the Subadvisors, New York Life Investments pays for the services of the Subadvisors. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.75% up to $1 billion and 0.70% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate was 0.75% for the year ended October 31, 2010, inclusive of the effective fund accounting services fee rate of 0.01% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares did not exceed 1.28% of its average daily net assets. New York Life Investments applied an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This expense limitation agreement expired on July 31, 2010. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. Additionally, effective August 1, 2009, New York Life Investments agreed to voluntarily waive or reimburse the expenses of the appropriate class of the Fund so that the total ordinary operating expenses of a class do not exceed the following percentages: Class A, 1.27%; Class I, 1.02%; Class R1, 1.12%; Class R2, 1.37% and Class R3, 1.62%. This voluntary waiver will be discontinued effective February 28, 2011. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $10,734,105. State Street, 1 Lincoln Street, Boston, Massachusetts 02111, provides sub- administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION, SERVICE AND SHAREHOLDER SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Investor Class, Class A and Class R2 Plans, the Distributor receives a monthly distribution fee from the Investor Class, Class A and Class R2 shares, at an annual rate of 0.25% of the average daily net assets of the Investor Class, Class A and Class R2 shares for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, Class B and Class C shares of the Fund pay the Distributor a monthly distribution fee at an annual rate of 0.75% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at an annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 1.00%. Pursuant to the Class R3 Plan, the Distributor receives a monthly distribution and service fee from the Class R3 shares at an annual rate of 0.50% of the average daily net assets of the Class R3 shares. Class I and Class R1 shares are not subject to a distribution or service fee. The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. In accordance with the Shareholder Services Plans for the Class R1, Class R2 and Class R3 shares, the Manager has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R1, Class R2 and Class R3 shares. For its services, the Manager is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R1, Class R2 and Class R3 shares. This is in addition to any fees paid under a distribution plan, where applicable. Shareholder Service Fees incurred by the Fund for the year ended October 31, 2010, were as follows: Class R1 $ 318 - ---------------------------------------------- Class R2 23,137 - ---------------------------------------------- Class R3 1,701 - ----------------------------------------------
(C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $48,603 and $38,134, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Investor Class, Class A, Class B and Class C shares of $7, $1,799, $187,674, and $7,576, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent 28 MainStay MAP Fund expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $371,837 - ----------------------------------------------- Class A 483,861 - ----------------------------------------------- Class B 547,036 - ----------------------------------------------- Class C 578,121 - ----------------------------------------------- Class I 927,748 - ----------------------------------------------- Class R1 456 - ----------------------------------------------- Class R2 33,181 - ----------------------------------------------- Class R3 2,441 - -----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $ 1,590 0.0%++ - --------------------------------------------------- Class B 1,203 0.0++ - --------------------------------------------------- Class C 1,812 0.0++ - --------------------------------------------------- Class I 87,470,854 11.5 - --------------------------------------------------- Class R1 1,384 0.4 - --------------------------------------------------- Class R2 1,363 0.0++ - --------------------------------------------------- Class R3 18,993 1.0 - ---------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $51,441. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $10,512,556 $(196,024,906) $-- $114,715,829 $(70,796,521) - -----------------------------------------------------------------------------
The difference between book-basis and tax basis unrealized depreciation is primarily due to wash sale deferrals and class action payments basis adjustments. The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized loss on investments arising from permanent differences; net assets at October 31, 2010 were not affected.
UNDISTRIBUTED NET ACCUMULATED INVESTMENT NET REALIZED ADDITIONAL INCOME GAIN (LOSS) ON PAID-IN (LOSS) INVESTMENTS CAPITAL $(332,727) $332,727 $-- - -------------------------------------- -----------
The reclassifications for the Fund are primarily due to foreign currency gain (loss), reclassifications of distributions and capital gain distribution from real estate investment trusts ("REITs"). At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $196,024,906 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2015 $ 14,278 2016 34,567 2017 147,180 - ---------------------------------- ----- Total $196,025 - ---------------------------------- -----
The Fund utilized $74,118,686 of capital loss carryforwards during the year ended October 31, 2010. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $239,954 $21,669,071 - -----------------------------------------------------
NOTE 5-FOREIGN CURRENCY TRANSACTIONS As of October 31, 2010, the Fund held the following foreign currencies:
CURRENCY COST VALUE Danish Krone DKK 1 USD -- (a)USD -- (a) Euro EUR 21 30 30 Japanese Yen JPY 13 -- (a) -- (a) - ------------------------------------------- ------------ Total USD 30 USD 30 - ------------------------------------------- ------------
(a) Less than $1 dollar NOTE 6-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. mainstayinvestments.com 29 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up-front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 8-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $672,314 and $662,400, respectively. NOTE 9-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 334,273 $ 9,342,716 Shares redeemed (611,144) (16,977,903) ------------------------- Net increase (decrease) in shares outstanding before conversion (276,871) (7,635,187) Shares converted into Investor Class (See Note 1) 478,912 13,245,592 Shares converted from Investor Class (See Note 1) (262,644) (7,349,186) ------------------------- Net increase (decrease) (60,603) $ (1,738,781) ========================= Year ended October 31, 2009: Shares sold 383,366 $ 8,240,976 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 471,960 12,672,446 Shares issued to shareholders in reinvestment of dividends 64,654 1,458,575 Shares redeemed (599,693) (12,860,843) ------------------------- Net increase (decrease) in shares outstanding before conversion 320,287 9,511,154 Shares converted into Investor Class (See Note 1) 643,791 13,254,045 Shares converted from Investor Class (See Note 1) (244,045) (6,093,420) ------------------------- Net increase (decrease) 720,033 $ 16,671,779 ========================= CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 1,324,661 $ 36,823,346 Shares redeemed (2,930,686) (81,173,843) ------------------------- Net increase (decrease) in shares outstanding before conversion (1,606,025) (44,350,497) Shares converted into Class A (See Note 1) 932,834 26,034,065 Shares converted from Class A (See Note 1) (34,316) (987,295) Shares converted from Class A (a) (341,373) (9,353,625) ------------------------- Net increase (decrease) (1,048,880) $ (28,657,352) ========================= Year ended October 31, 2009: Shares sold 2,244,808 $ 52,654,656 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 596,707 16,004,168 Shares issued to shareholders in reinvestment of dividends 249,055 5,611,889 Shares redeemed (3,641,400) (77,667,930) ------------------------- Net increase (decrease) in shares outstanding before conversion (550,830) (3,397,217) Shares converted into Class A (See Note 1) 813,072 19,144,146 Shares converted from Class A (See Note 1) (294,018) (5,757,338) ------------------------- Net increase (decrease) (31,776) $ 9,989,591 ========================= CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 393,873 $ 10,223,095 Shares redeemed (1,159,562) (30,020,659) ------------------------- Net increase (decrease) in shares outstanding before conversion (765,689) (19,797,564) Shares converted from Class B (See Note 1) (1,195,830) (30,943,176) ------------------------- Net increase (decrease) (1,961,519) $ (50,740,740) ========================= Year ended October 31, 2009: Shares sold 582,834 $ 11,699,920 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 403,233 10,127,002 Shares issued to shareholders in reinvestment of dividends 26,940 562,784 Shares redeemed (1,821,389) (35,852,163) ------------------------- Net increase (decrease) in shares outstanding before conversion (808,382) (13,462,457) Shares converted from Class B (See Note 1) (985,900) (20,547,433) ------------------------- Net increase (decrease) (1,794,282) $ (34,009,890) =========================
30 MainStay MAP Fund
CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 427,492 $ 11,078,115 Shares redeemed (1,604,342) (41,521,971) ------------------------- Net increase (decrease) (1,176,850) $ (30,443,856) ========================= Year ended October 31, 2009: Shares sold 551,592 $ 11,194,866 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 369,562 9,283,474 Shares issued to shareholders in reinvestment of dividends 20,620 432,575 Shares redeemed (2,333,234) (46,017,006) ------------------------- Net increase (decrease) (1,391,460) $ (25,106,091) ========================= CLASS I SHARES AMOUNT Year ended October 31, 2010: Shares sold 11,410,879 $ 318,747,033 Shares issued to shareholders in reinvestment of dividends 8,251 229,965 Shares redeemed (8,484,606) (245,068,050) ------------------------- Net increase in shares outstanding before conversion 2,934,524 73,908,948 Shares converted into Class I (a) 335,135 9,353,625 ------------------------- Net increase (decrease) 3,269,659 $ 83,262,573 ========================= Year ended October 31, 2009: Shares sold 6,941,766 $ 151,458,215 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 1,439,148 39,290,316 Shares issued to shareholders in reinvestment of dividends 505,597 11,671,808 Shares redeemed (5,262,830) (119,056,348) ------------------------- Net increase (decrease) 3,623,681 $ 83,363,991 ========================= CLASS R1 SHARES AMOUNT Year ended October 31, 2010: Shares sold 52 $ 257,735 Shares issued to shareholders in reinvestment of dividends 9,145 1,435 Shares redeemed (22,572) (628,072) ------------------------- Net increase (decrease) (13,375) $ (368,902) ========================= Year ended October 31, 2009: Shares sold 197,166 $ 4,212,936 Shares issued to shareholders in reinvestment of dividends 831 21,358 ------------------------- Shares redeemed (183,762) (4,807,602) Net increase (decrease) 14,235 $ (573,308) ========================= CLASS R2 SHARES AMOUNT Year ended October 31, 2010: Shares sold 492,272 $ 13,488,789 Shares redeemed (140,281) (3,897,645) ------------------------- Net increase (decrease) 351,991 $ 9,591,144 ========================= Year ended October 31, 2009: Shares sold 485,479 $ 10,783,583 Shares issued to shareholders in reinvestment of dividends 7,440 177,196 Shares redeemed (227,893) (5,151,546) ------------------------- Net increase (decrease) 265,026 $ 5,809,233 ========================= CLASS R3 SHARES AMOUNT Year ended October 31, 2010: Shares sold 39,237 $ 1,087,829 Shares redeemed (34,723) (966,959) ------------------------- Net increase (decrease) 4,514 $ 120,870 ========================= Year ended October 31, 2009: Shares sold 56,355 $ 1,172,936 Shares issued in connection with the acquisition of MainStay Mid Cap Core Fund 3,153 84,631 Shares issued to shareholders in reinvestment of dividends 452 11,256 Shares redeemed (15,699) (331,538) ------------------------- Net increase (decrease) 44,261 $ 937,285 =========================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. NOTE 10-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified. mainstayinvestments.com 31 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay MAP Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay MAP Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 32 MainStay MAP Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENTS (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay MAP Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreements between New York Life Investments and Institutional Capital LLC ("ICAP") and Markston International LLC ("Markston") (each a "Subadivser" and, collectively, the "Subadvisers") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and the Subadvisers on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including ICAP, and Markston, as Subadvisers, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and the Subadvisers; (ii) the investment performance of the Fund, New York Life Investments and the Subadvisers; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including ICAP, and by Markston, as Subadvisers, from their relationships with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND EACH SUBADVISER In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing each Subadviser's compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that each Subadviser provides to the Fund. The Board evaluated each Subadviser's experience in serving as subadviser to the Fund and managing other portfolios. It examined each Subadviser's track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at each Subadviser, and each Subadviser's overall legal and compliance environment. The Board also reviewed each Subadviser's mainstayinvestments.com 33 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENTS (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and each Subadviser's experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and the Subadvisers to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND EACH SUBADVISER The Board considered the costs of the services provided by New York Life Investments and the Subadvisers under the Agreements, and the profits realized by New York Life Investments, its affiliates and Markston due to their relationships with the Fund. Because ICAP is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and ICAP in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including ICAP, and Markston, as Subadvisers, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and the Subadvisers must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board considered representations from Markston and New York Life Investments that the subadvisory fee paid by New York Life Investments to Markston for services provided to the Fund was the result of arm's-length negotiations. Because Markston is not affiliated with New York Life Investments, and Markston's fees are paid directly by New York Life Investments, the Board focused primarily on the profitability of the relationship between New York Life Investments, its affiliates and the Fund. The Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments, its affiliates and Markston due to their relationships with the Fund. The Board recognized, for example, the benefits to the Subadvisers from legally permitted "soft-dollar" arrangements by which brokers provide research and other services to the Subadvisers in exchange for commissions paid by the Fund with respect to trades on the Fund's portfolio securities. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, 34 MainStay MAP Fund the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including ICAP) and Markston due to their relationships with the Fund supported the Board's determination to approve the Agreements. With respect to Markston, the Board concluded that any profits realized by Markston due to its relationship with the Fund are the result of arm's-length negotiations between New York Life Investments and Markston, and are based on subadvisory fees paid to Markston by New York Life Investments, not the Fund. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to the Subadvisers are paid by New York Life Investments, not the Fund. The Board also noted that New York Life Investments had not proposed to renew the Fund's expense limitation agreement. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and the Subadvisers on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and the Subadvisers about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 35 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For the fiscal year ended October 31, 2010, the Fund designated approximately $29,168,935 under the Internal Revenue Code as qualified dividend income eligible for reduced tax rates. The dividends paid by the Fund during the fiscal year ended October 31, 2010, should be multiplied by 86.5% to arrive at the amount eligible for qualified interest income and 100.0% for the corporate dividends received deduction. In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 36 MainStay MAP Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 37
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
38 MainStay MAP Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 39
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
40 MainStay MAP Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 41 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. (C) 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21356 MS333-10 MSMP11-12/10 30 (MAINSTAY INVESTMENTS LOGO) MAINSTAY MONEY MARKET FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 10 - --------------------------------------------- Financial Statements 15 - --------------------------------------------- Notes to Financial Statements 20 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 25 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 26 - --------------------------------------------- Federal Income Tax Information 29 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 29 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 29 - --------------------------------------------- Board Members and Officers 30 - ---------------------------------------------
- -------------------------------------------------------------------------------- AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624- 6782) OR VISIT MAINSTAYINVESTMENTS.COM. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. (LINE GRAPH)
MAINSTAY MONEY MARKET FUND LIPPER MONEY CLASS B MARKET FUNDS SHARES AVERAGE -------------- ------------ 10/31/00 10000 10000 10/31/01 10442 10418 10/31/02 10587 10542 10/31/03 10650 10598 10/31/04 10707 10651 10/31/05 10943 10870 10/31/06 11401 11310 10/31/07 11936 11830 10/31/08 12243 12138 10/31/09 12257 12184 10/31/10 12260 12188
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
GROSS EXPENSE CLASS SALES CHARGE ONE YEAR FIVE YEARS TEN YEARS RATIO(2) - ------------------------------------------------------------------------------------------------ Investor Class Shares(3,4) No Sales Charge 0.02% 2.29% 2.06% 0.91% - ------------------------------------------------------------------------------------------------ Class A Shares(2) No Sales Charge 0.02 2.32 2.07 0.69 - ------------------------------------------------------------------------------------------------ Class B Shares(2) No Sales Charge 0.02 2.30 2.06 0.91 - ------------------------------------------------------------------------------------------------ Class C Shares(2) No Sales Charge 0.02 2.30 2.06 0.91 - ------------------------------------------------------------------------------------------------
7-DAY CURRENT YIELD: 0.01% 1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. As of October 31, 2010, MainStay Money Market Fund had an effective 7-day yield of 0.01%, 0.01%, 0.01% and 0.01% for Investor Class, Class A, B and C shares, respectively. The 7-day current yield was 0.01%, 0.01%, 0.01% and 0.01% for Investor Class, Class A, B and C shares, respectively. These yields reflect certain expense limitations. Had these expense limitations not been in effect, the effective 7-day yield would have been -0.53%, -0.50%, -0.53% and -0.53% for Investor Class, Class A, B and C shares, respectively, and the 7-day current yield would have been -0.53%, -0.50%, -0.53%, -0.53% for Investor Class, Class A, B and C shares, respectively. The current yield reflects the Fund's earnings better than does the Fund's total return. For information on current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 4. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class A Shares through February 27, 2008, adjusted for differences in certain expenses and fees. Unadjusted, the performance shown for Investor Class shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Lipper Money Market Funds Average(5) 0.03% 2.30% 2.00% - ---------------------------------------------------------------
5. The Lipper money market funds average is an equally weighted performance average adjusted for capital gains distributions and income dividends of all of the money market funds in the Lipper Universe. Lipper Inc., a wholly- owned subsidiary of Reuters Group PLC, is an independent monitor of mutual fund performance. Results do not reflect any deduction of sales charges. Lipper averages are not class specific. Lipper returns are unaudited. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Money Market Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY MONEY MARKET FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,000.00 $1.26 $1,023.90 $1.28 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,000.00 $1.21 $1,024.00 $1.22 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,000.00 $1.26 $1,023.90 $1.28 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,000.00 $1.26 $1,023.90 $1.28 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (0.25% for Investor Class, 0.24% for Class A and 0.25% for Class B and Class C) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Other Commercial Paper 45.7 Financial Company Commercial Paper 14.5 Repurchase Agreements 11.2 Government Agency Debt 10.1 Other Notes 9.5 Treasury Debt 6 Asset-Backed Commercial Paper 3.4 Other Assets, Less Liabili- ties (0.4)
See Portfolio of Investments beginning on page 10 for specific holdings within these categories. 8 MainStay Money Market Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers David E. Clement, CFA, and Thomas J. Girard of New York Life Investments,(1) the Fund's Manager. HOW DID MAINSTAY MONEY MARKET FUND PERFORM RELATIVE TO ITS PEERS DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? As of October 31, 2010, MainStay Money Market Fund provided a 7-day current yield of 0.01% for Investor Class, Class A, Class B and Class C shares. As of the same date, the Fund provided a 7-day effective yield of 0.01% for all share classes. For the 12 months ended October 31, 2010, MainStay Money Market Fund returned 0.02% for all share classes. All share classes underperformed the 0.03% return of the Lipper(2) money market funds average for the 12 months ended October 31, 2010. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund's increased exposure to Treasury bills and repurchase agreements detracted from relative performance during the reporting period, while a longer duration(3) contributed positively to relative performance. Our investment in floating-rate securities backed by the Federal Deposit Insurance Corporation (FDIC) continued to have a positive impact on performance, as did our investments in asset-backed securities. WHAT WAS THE FUND'S DURATION--OR DAYS-TO-MATURITY--STRATEGY DURING THE REPORTING PERIOD? We maintained a longer-than-normal duration during the 12 months ended October 31, 2010. Doing so made a positive contribution to the Fund's performance because the yield curve(4) remained upward-sloping throughout the reporting period. During the second half of the reporting period, however, duration was shortened to prepare the Fund for new SEC regulations. In light of these new regulations, effective May 26, 2010, the Fund maintains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life to maturity of 120 days or less. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? The decision of the Federal Open Market Committee (FOMC) to maintain the targeted federal funds rate in a very low range gave us the confidence to move out further on the upward-sloping yield curve. Against this backdrop, we increased the Fund's exposure to longer-dated Treasury coupon securities, callable agency coupon securities and asset-backed securities. (Asset-backed securities must be recorded as though they will mature on their legal maturity date even though their average lives are generally much shorter.) We were comfortable "using duration" in this environment, that is, having a longer average life, because the FOMC stated that conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. We hedged this positioning by participating in the floating-rate securities market. The use of floating-rate securities allowed us to accomplish two things. First, if interest rates rose, we would participate in the upward movement; and second, we felt that floating-rate securities offered compelling yields compared to other available investments. Our negative view on foreign banks continued during the reporting period and was reinforced during the European sovereign debt crisis. For the most part, we avoided this sector, except for certain shorter-dated commercial paper investments in some of the stronger issuers. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFOR- MANCE AND WHICH MARKET SEGMENTS WERE PARTIC- ULARLY WEAK? The major positive contributors to the Fund's performance included floating-rate securities, corporate floating-rate securities, FDIC-backed floating-rate securities, asset-backed securities and callable agency securities. The Fund's return was hampered by investments in Treasury bills and repurchase agreements. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? Significant purchases during the reporting period included a Pepsi corporate floating-rate issue (due July 2011), a Federal Home Loan Bank callable security (due November 2011) and a General Electric Equipment asset-backed security (due September 2011). There were no significant sales during the reporting period. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we increased the Fund's weightings in asset-backed securities, repurchase agreements, floating-rate securities and commercial paper. The Fund decreased its weightings in government and agency securities and corporate bonds. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? The Fund had no significant overweight or underweight positions at the end of the period. 1. "New York Life Investments" is a service mark used by New York Life Investment Management LLC. 2. See footnote on page 6 for more information on Lipper Inc. 3. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 4. The yield curve is a line that plots the yields of various securities of similar quality--typically U.S. Treasury issues--across a range of maturities. The U.S. Treasury yield curve serves as a benchmark for other debt and is used in economic forecasting. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. mainstayinvestments.com 9 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS 100.4%+ - ------------------------------------------------------- ASSET-BACKED COMMERCIAL PAPER 3.4% Straight-A Funding LLC 0.23%, due 12/2/10 (a)(b) $ 5,005,000 $ 5,004,009 0.24%, due 11/8/10 (a)(b) 3,750,000 3,749,825 0.25%, due 12/7/10 (a)(b) 2,400,000 2,399,400 0.25%, due 1/10/11 (a)(b) 6,250,000 6,246,962 ------------ 17,400,196 ------------ FINANCIAL COMPANY COMMERCIAL PAPER 14.5% American Honda Finance Corp. 0.20%, due 11/4/10 (a) 6,250,000 6,249,896 0.22%, due 11/22/10 (a) 4,760,000 4,759,389 BNP Paribas Finance, Inc. 0.19%, due 11/1/10 (a) 6,250,000 6,250,000 0.19%, due 11/3/10 (a) 6,500,000 6,499,931 Caterpillar Financial Services Corp. 0.24%, due 12/16/10 (a) 6,250,000 6,248,125 John Deere Credit, Inc. 0.21%, due 11/15/10 (a)(b) 5,000,000 4,999,592 JPMorgan Chase & Co. 0.22%, due 11/22/10 (a) 5,600,000 5,599,281 National Rural Utilities Cooperative Finance Corp. 0.23%, due 11/19/10 (a) 6,000,000 5,999,310 0.24%, due 11/9/10 (a) 7,000,000 6,999,627 PACCAR Financial Corp. 0.20%, due 11/8/10 (a) 2,513,000 2,512,902 Private Export Funding Corp. 0.35%, due 12/20/10 (a)(b) 6,250,000 6,247,023 Societe Generale North America, Inc. 0.25%, due 11/5/10 (a) 6,250,000 6,249,827 0.25%, due 11/18/10 (a) 5,750,000 5,749,321 ------------ 74,364,224 ------------ GOVERNMENT AGENCY DEBT 10.1% Federal Farm Credit Bank 0.242%, due 9/16/11 (c) 3,750,000 3,749,836 0.25%, due 11/4/11 (c) 4,995,000 4,995,000 3.75%, due 12/6/10 2,700,000 2,708,843 Federal Home Loan Bank 0.282%, due 7/29/11 (c) 6,250,000 6,250,000 0.34%, due 11/15/11 6,240,000 6,240,000 Federal Home Loan Mortgage Corporation (Discount Notes) 0.17%, due 11/1/10 (a) 6,250,000 6,250,000 0.22%, due 12/8/10 (a) 1,715,000 1,714,612 0.25%, due 5/2/11 (a) 1,625,000 1,622,946 0.26%, due 12/21/10 (a) 2,400,000 2,399,133 Federal National Mortgage Association 0.216%, due 9/19/11 (c) 6,250,000 6,250,294 Federal National Mortgage Association (Discount Notes) 0.23%, due 11/17/10 (a) 2,660,000 2,659,728 0.25%, due 4/11/11 (a) 3,250,000 3,246,318 0.33%, due 2/22/11 (a) 3,600,000 3,596,271 ------------ 51,682,981 ------------ OTHER COMMERCIAL PAPER 45.7% Abbott Laboratories 0.20%, due 11/23/10 (a)(b) 3,750,000 3,749,542 American Water Capital Corp. 0.35%, due 11/1/10 (a)(b) 2,100,000 2,100,000 Archer-Daniels-Midland Co. 0.20%, due 11/16/10 (a)(b) 6,250,000 6,249,479 0.20%, due 11/18/10 (a)(b) 6,250,000 6,249,410 Basin Electric Power Cooperative, Inc. 0.22%, due 11/29/10 (a)(b) 2,500,000 2,499,572 0.25%, due 11/29/10 (a)(b) 5,280,000 5,278,974 Becton Dickinson & Co. 0.20%, due 11/9/10 (a) 5,500,000 5,499,756 Brown-Forman Corp. 0.24%, due 11/23/10 (a)(b) 6,255,000 6,254,083 Campbell Soup Co. 0.17%, due 11/4/10 (a)(b) 6,250,000 6,249,911 Clorox Co. (The) 0.30%, due 11/5/10 (a)(b) 2,000,000 1,999,933 Coca-Cola Co. (The) 0.20%, due 12/16/10 (a)(b) 6,250,000 6,248,438 0.23%, due 1/11/11 (a)(b) 6,000,000 5,997,278 Colgate-Palmolive Co. 0.16%, due 11/3/10 (a)(b) 6,255,000 6,254,944 Diageo Capital PLC 0.30%, due 11/15/10 (a)(b) 2,100,000 2,099,755 Duke Energy Corp. 0.33%, due 11/24/10 (a)(b) 2,100,000 2,099,557 Emerson Electric Co. 0.18%, due 11/4/10 (a)(b) 6,750,000 6,749,899 Florida Power & Light Co. 0.22%, due 11/1/10 (a) 3,900,000 3,900,000 General Electric Co. 0.20%, due 11/17/10 (a) 6,250,000 6,249,444 General Mills, Inc. 0.27%, due 11/30/10 (a)(b) 2,000,000 1,999,565 Google, Inc. 0.18%, due 11/29/10 (a)(b) 4,050,000 4,049,433 0.20%, due 11/17/10 (a)(b) 6,000,000 5,999,467 Hewlett-Packard Co. 0.19%, due 11/18/10 (a)(b) 6,250,000 6,249,439 0.20%, due 12/2/10 (a)(b) 6,750,000 6,748,838
+ Percentages indicated are based on Fund net assets. 10 MainStay Money Market Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS (CONTINUED) OTHER COMMERCIAL PAPER (CONTINUED) Honeywell International, Inc. 0.22%, due 12/23/10 (a)(b) $ 2,500,000 $ 2,499,206 Illinois Tool Works, Inc. 0.20%, due 11/5/10 (a)(b) 6,250,000 6,249,861 0.20%, due 11/15/10 (a)(b) 6,250,000 6,249,514 International Business Machines Corp. 0.17%, due 11/3/10 (a)(b) 6,250,000 6,249,941 Kimberly-Clark Worldwide, Inc. 0.17%, due 11/2/10 (a)(b) 5,900,000 5,899,972 0.17%, due 11/16/10 (a)(b) 3,800,000 3,799,731 0.18%, due 11/5/10 (a)(b) 2,500,000 2,499,950 McDonald's Corp. 0.20%, due 11/4/10 (a)(b) 2,700,000 2,699,955 Merck & Co., Inc. 0.20%, due 11/19/10 (a)(b) 6,500,000 6,499,350 0.20%, due 12/13/10 (a)(b) 6,250,000 6,248,542 Nestle Capital Corp. 0.24%, due 4/1/11 (a)(b) 6,250,000 6,243,708 Nestle Finance International, Ltd. 0.18%, due 11/1/10 (a) 5,500,000 5,500,000 Novartis Finance Corp. 0.20%, due 11/2/10 (a)(b) 6,250,000 6,249,965 0.26%, due 12/10/10 (a)(b) 6,250,000 6,248,240 NSTAR Electric Co. 0.22%, due 11/2/10 (a) 1,756,000 1,755,989 Procter & Gamble International Funding SCA 0.20%, due 11/8/10 (a)(b) 4,630,000 4,629,820 Roche Holdings, Inc. 0.18%, due 11/2/10 (a)(b) 6,500,000 6,499,967 0.23%, due 12/3/10 (a)(b) 6,000,000 5,998,773 Schlumberger Technology Corp. 0.20%, due 11/29/10 (a)(b) 2,500,000 2,499,611 United Technologies Corp. 0.19%, due 11/23/10 (a)(b) 6,750,000 6,749,216 0.20%, due 11/22/10 (a)(b) 6,500,000 6,499,242 Wal-Mart Stores, Inc. 0.17%, due 11/8/10 (a)(b) 3,750,000 3,749,876 0.20%, due 11/8/10 (a)(b) 3,400,000 3,399,868 Walt Disney Co. (The) 0.18%, due 11/16/10 (a)(b) 6,250,000 6,249,531 WW Grainger, Inc. 0.20%, due 11/22/10 (a) 2,137,000 2,136,751 ------------ 234,083,296 ------------ OTHER NOTES 9.5% Ally Auto Receivables Trust Series 2010-1, Class A1 0.323%, due 4/15/11 83,359 83,359 Series 2010-2, Class A1 0.586%, due 7/15/11 1,131,473 1,131,473 Bank of America Corp. 0.796%, due 12/2/10 (c)(d) 1,000,000 1,000,509 Berkshire Hathaway Finance Corp. 0.391%, due 2/10/11 (c) 8,100,000 8,100,245 BMW Vehicle Lease Trust Series 2010-1, Class A1 0.298%, due 10/17/11 1,919,038 1,919,038 Citigroup, Inc. 0.842%, due 12/9/10 (c)(d) 4,000,000 4,002,587 CNH Equipment Trust Series 2010-A, Class A1 0.354%, due 4/15/11 943,359 943,358 Ford Credit Auto Owner Trust Series 2010-A, Class A1 0.384%, due 5/15/11 (b) 387,269 387,269 Series 2010-B, Class A1 0.506%, due 8/15/11 (b) 1,186,659 1,186,659 GE Equipment Midticket LLC Series 2010-1, Class A1 0.351%, due 9/14/11 (b) 1,260,000 1,260,000 General Electric Capital Corp. 0.373%, due 3/11/11 (c)(d) 3,250,000 3,250,000 0.922%, due 12/9/10 (c)(d) 2,000,000 2,001,549 Honda Auto Receivables Owner Trust Series 2010-1, Class A1 0.269%, due 2/22/11 110,715 110,715 Hyundai Auto Receivables Trust Series 2010-B, Class A1 0.371%, due 9/15/11 1,096,005 1,096,005 John Deere Owner Trust Series 2010-A, Class A1 0.344%, due 5/16/11 942,417 942,417 KeyCorp 0.942%, due 12/15/10 (c)(d) 5,000,000 5,004,433 Mercedes-Benz Auto Receivables Trust Series 2010-1, Class A1 0.309%, due 5/13/11 683,301 683,301 Navistar Financial Corp. Owner Trust Series 2010-B, Class A1 0.345%, due 10/18/11 (b) 1,900,000 1,900,000 Series 2010-A, Class A1 0.608%, due 6/20/11 (b) 1,443,850 1,443,850 Nissan Auto Receivables Owner Trust Series 2010-A, Class A1 0.356%, due 10/17/11 2,191,956 2,191,956 PepsiCo, Inc. 0.319%, due 7/15/11 (c) 3,600,000 3,601,301 SunTrust Bank 0.942%, due 12/16/10 (c)(d) 1,750,000 1,751,647
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS (CONTINUED) OTHER NOTES (CONTINUED) Volkswagen Auto Lease Trust Series 2010-A, Class A1 0.299%, due 11/21/11 $ 3,000,000 $ 3,000,000 Volvo Financial Equipment LLC Series 2010-1A, Class A1 0.51%, due 5/16/11 (b) 1,493,059 1,493,059 ------------ 48,484,730 ------------ TREASURY DEBT 6.0% United States Treasury Notes 0.875%, due 1/31/11 9,000,000 9,010,565 0.875%, due 3/31/11 8,995,000 9,016,820 1.00%, due 8/31/11 6,250,000 6,286,535 1.00%, due 9/30/11 6,200,000 6,240,647 ------------ 30,554,567 ------------ TREASURY REPURCHASE AGREEMENTS 11.2% Deutsche Bank Securities, Inc. 0.21%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $19,100,334 (Collateralized by a United States Treasury Note, with a rate of 1.875% and a maturity date of 6/30/15, with a Principal Amount of $18,739,900 and a Market Value of $19,482,058) 19,100,000 19,100,000 Morgan Stanley Co. 0.20%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $19,086,318 (Collateralized by a United States Treasury Note, with a rate of 2.50% and a maturity date of 7/15/16, with a Principal Amount of $15,565,200 and a Market Value of $19,467,802) 19,086,000 19,086,000 SG Americas Securities LLC 0.21%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $19,100,334 (Collateralized by a United States Treasury Note, with a rate of 1.00% and a maturity date of 4/30/12, with a Principal Amount of $19,190,100 and a Market Value of $19,482,090) 19,100,000 19,100,000 ------------ 57,286,000 ------------ Total Short-Term Investments (Amortized Cost $513,855,994) (e) 100.4% 513,855,994 Other Assets, Less Liabilities (0.4) (1,864,082) ----------- ------------ Net Assets 100.0% $511,991,912 =========== ============
(a) Interest rate presented is yield to maturity. (b) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (c) Floating rate--Rate shown is the rate in effect at October 31, 2010. (d) The debt is guaranteed under the Federal Deposit Insurance Corporation (FDIC) Temporary Liquidity Guarantee Program and is backed by the full faith and credit of the United States. The expiration date of the FDIC's guarantee is the earlier of the maturity date of the debt or June 30, 2012. (e) The amortized cost also represents the aggregate cost for federal income tax purposes.
12 MainStay Money Market Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities Short-Term Investments Asset-Backed Commercial Paper $ -- $ 17,400,196 $ -- $ 17,400,196 Financial Company Commercial Paper -- 74,364,224 -- 74,364,224 Government Agency Debt -- 51,682,981 -- 51,682,981 Other Commercial Paper -- 234,083,296 -- 234,083,296 Other Notes -- 48,484,730 -- 48,484,730 Treasury Debt -- 30,554,567 -- 30,554,567 Treasury Repurchase Agreements -- 57,286,000 -- 57,286,000 -------- ------------ -------- ------------ Total Investments in Securities $-- $513,855,994 $-- $513,855,994 ======== ============ ======== ============
For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED) The table below sets forth the diversification of the MainStay Money Market Fund investments by industry. INDUSTRY DIVERSIFICATION (UNAUDITED)
AMORTIZED COST PERCENT + Aerospace & Defense $ 13,248,458 2.6% Agriculture 12,498,889 2.4 Automobile ABS 15,133,625 2.9 Banks 29,357,605 5.8 Beverages 24,200,855 4.8 Computers 19,248,218 3.7 Cosmetics & Personal Care 23,084,417 4.6 Distribution & Wholesale 2,136,751 0.4 Diversified Financial Services 86,916,153 17.0 Electric 15,534,092 3.0 Electrical Components & Equipment 6,749,899 1.3 Food 19,993,184 3.9 Health Care--Products 5,499,756 1.1 Health Care--Services 12,498,740 2.4 Household Products & Wares 1,999,933 0.4 Insurance 8,100,245 1.6 Internet 10,048,900 2.0 Machinery--Diversified 4,999,592 1.0 Media 6,249,531 1.2 Miscellaneous--Manufacturing 21,248,025 4.1 Oil & Gas 2,499,611 0.5 Other ABS 4,638,834 0.9 Pharmaceuticals 16,497,434 3.2 Repurchase Agreements 57,286,000 11.2 Retail 9,849,699 1.9 U.S. Government & Agencies 82,237,548 16.1 Water 2,100,000 0.4 ------------ ----- 513,855,994 100.4 Other Assets, Less Liabilities (1,864,082) (0.4) ------------ ----- Net Assets $511,991,912 100.0% ============ =====
+ Percentages indicated are based on Fund net assets.
14 MainStay Money Market Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (amortized cost $456,569,994) $456,569,994 Repurchase agreement, at value (identified cost $57,286,000) 57,286,000 Cash 6,200,233 Receivables: Fund shares sold 1,294,979 Interest 167,902 Manager (See Note 3) 45,396 Other assets 56,230 ------------ Total assets 521,620,734 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 7,995,000 Fund shares redeemed 1,297,738 Transfer agent (See Note 3) 254,927 Shareholder communication 50,291 Professional fees 19,202 Custodian 2,495 Trustees 1,546 Accrued expenses 7,623 ------------ Total liabilities 9,628,822 ------------ Net assets $511,991,912 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 5,120,408 Additional paid-in capital 506,871,504 ------------ 511,991,912 Net assets $511,991,912 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 64,360,184 ============ Shares of beneficial interest outstanding 64,367,404 ============ Net asset value and offering price per share outstanding $ 1.00 ============ CLASS A Net assets applicable to outstanding shares $301,795,356 ============ Shares of beneficial interest outstanding 301,830,082 ============ Net asset value and offering price per share outstanding $ 1.00 ============ CLASS B Net assets applicable to outstanding shares $118,529,409 ============ Shares of beneficial interest outstanding 118,534,928 ============ Net asset value and offering price per share outstanding $ 1.00 ============ CLASS C Net assets applicable to outstanding shares $ 27,306,963 ============ Shares of beneficial interest outstanding 27,308,362 ============ Net asset value and offering price per share outstanding $ 1.00 ============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Interest $ 1,346,373 ----------- EXPENSES Manager (See Note 3) 2,444,161 Transfer agent (See Note 3) 1,412,694 Professional fees 145,328 Registration 129,576 Shareholder communication 97,950 Custodian 27,464 Trustees 17,802 Miscellaneous 30,903 ----------- Total expenses before waiver/reimbursement 4,305,878 Expense waiver/reimbursement from Manager (See Note 3) (3,009,712) ----------- Net expenses 1,296,166 ----------- Net investment income 50,207 ----------- REALIZED GAIN ON INVESTMENTS - -------------------------------------------------- Net realized gain on investments 1,079 ----------- Net increase in net assets resulting from operations $ 51,286 ===========
16 MainStay Money Market Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 DECREASE IN NET ASSETS - ---------------------------------------------------------- Operations: Net investment income $ 50,207 $ 951,141 Net realized gain on investments 1,079 4,423 ---------------------------- Net increase in net assets resulting from operations 51,286 955,564 ---------------------------- Dividends to shareholders: From net investment income: Investor Class (14,067) (88,466) Class A (68,137) (568,332) Class B (29,495) (218,829) Class C (6,590) (63,098) ---------------------------- Total dividends to shareholders (118,289) (938,725) ---------------------------- Capital share transactions: Net proceeds from sale of shares 481,351,855 405,818,659 Net asset value of shares issued to shareholders in reinvestment of dividends 113,620 882,086 Cost of shares redeemed (494,050,599) (571,445,207) ---------------------------- Decrease in net assets derived from capital share transactions (12,585,124) (164,744,462) ---------------------------- Net decrease in net assets (12,652,127) (164,727,623) NET ASSETS - ---------------------------------------------------------- Beginning of year 524,644,039 689,371,662 ---------------------------- End of year $ 511,991,912 $ 524,644,039 ============================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- Net investment income 0.00 ++ 0.00 ++ 0.01 Net realized and unrealized gain on investments 0.00 ++ 0.00 ++ 0.00 ++ ------- ------- ------- Total from investment operations 0.00 ++ 0.00 ++ 0.01 ------- ------- ------- Less dividends and distributions: From net investment income (0.00)++ (0.00)++ (0.01) Return of capital (0.00)++ -- -- ------- ------- ------- Total dividends and distributions (0.00)++ (0.00)++ (0.01) ------- ------- ------- Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= Total investment return 0.02% 0.12% 1.24%(a) Ratios (to average net assets)/Supplemental Data: Net investment income 0.01% 0.13% 1.67%++ Net expenses 0.25% 0.50% 0.80%++ Expenses (before waiver/reimbursement) 0.94% 0.95% 0.88%++ Net assets at end of period (in 000's) $64,360 $67,220 $72,721
CLASS B ------------------------------------------------------------------------------ YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- Net investment income 0.00 ++ 0.00 ++ 0.03 0.05 0.04 Net realized and unrealized gain on investments 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- -------- -------- Total from investment operations 0.00 ++ 0.00 ++ 0.03 0.05 0.04 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.00)++ (0.00)++ (0.03) (0.05) (0.04) Return of capital (0.00)++ -- -- -- -- -------- -------- -------- -------- -------- Total dividends and distributions (0.00)++ (0.00)++ (0.03) (0.05) (0.04) -------- -------- -------- -------- -------- Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total investment return 0.02% 0.12% 2.57% 4.69% 4.18% Ratios (to average net assets)/Supplemental Data: Net investment income 0.01% 0.14% 2.54% 4.59% 4.14% Net expenses 0.25% 0.51% 0.76% 0.70% 0.70% Expenses (before waiver/reimbursement) 0.94% 0.95% 0.84% 0.83% 0.93% Net assets at end of period (in 000's) $118,529 $144,464 $187,237 $176,753 $189,216
** Commencement of operations. ++ Annualized. ++ Less than one cent per share. (a) Total investment return is not annualized.
18 MainStay Money Market Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- 0.00 ++ 0.00 ++ 0.03 0.05 0.04 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ -------- -------- -------- -------- -------- 0.00 ++ 0.00 ++ 0.03 0.05 0.04 -------- -------- -------- -------- -------- (0.00)++ (0.00)++ (0.03) (0.05) (0.04) (0.00)++ -- -- -- -- -------- -------- -------- -------- -------- (0.00)++ (0.00)++ (0.03) (0.05) (0.04) -------- -------- -------- -------- -------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== 0.02% 0.16% 2.65% 4.69% 4.18% 0.01% 0.18% 2.65% 4.59% 4.14% 0.25% 0.47% 0.68% 0.70% 0.70% 0.72% 0.73% 0.71% 0.83% 0.93% $301,795 $279,766 $372,956 $346,960 $260,642
CLASS C --------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- 0.00 ++ 0.00 ++ 0.03 0.05 0.04 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ 0.00 ++ ------- ------- ------- ------- ------- 0.00 ++ 0.00 ++ 0.03 0.05 0.04 ------- ------- ------- ------- ------- (0.00)++ (0.00)++ (0.03) (0.05) (0.04) (0.00)++ -- -- -- -- ------- ------- ------- ------- ------- (0.00)++ (0.00)++ (0.03) (0.05) (0.04) ------- ------- ------- ------- ------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======= 0.02% 0.12% 2.57% 4.69% 4.18% 0.01% 0.15% 2.51% 4.59% 4.14% 0.25% 0.52% 0.76% 0.70% 0.70% 0.94% 0.95% 0.83% 0.83% 0.93% $27,307 $33,194 $56,458 $36,270 $23,306
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Money Market Fund (the "Fund"), a diversified fund. The Fund currently offers four classes of shares at net asset value ("NAV") without the imposition of a front-end sales charge or a contingent deferred sales charge ("CDSC"). Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on May 1, 1986. Class C shares commenced operations on September 1, 1998. Investor Class shares commenced operations on February 28, 2008. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The four classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and bear the same conditions. The Fund's investment objective is to seek a high level of current income while preserving capital and maintaining liquidity. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) VALUATION OF FUND SHARES. The Fund seeks to maintain a NAV of $1.00 per share, although there is no assurance that it will be able to do so on a continuous basis, and it has adopted certain investment, portfolio and dividend and distribution policies designed to enable it to do as such. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. (B) SECURITIES VALUATION. "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Securities are valued at their amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between such cost and the value on maturity date. These securities are generally categorized as Level 2 in the hierarchy. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. 20 Mainstay Money Market Fund Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund declares dividends of net investment income daily and the Fund pays them monthly and declares and pays distribution of net realized capital gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued daily and discounts and premiums on securities purchased for the Fund are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (G) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (I) CONCENTRATION OF RISK. The Fund's investments may include securities such as variable rate master demand notes, "floating-rate notes" and mortgage-related and asset-backed securities. If expectations about changes in interest rates, or assessments of an issuer's credit worthiness or market conditions are incorrect, the use of these types of investments could result in a loss. The Fund may also invest in securities of foreign issuers, which carry certain risks in addition to the usual risks inherent in domestic instruments. These risks include those resulting from future adverse political or economic developments and possible imposition of currency exchange blockages or other foreign governmental laws and restrictions. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER. New York Life Investment Management LLC ("New York Life Investments" or "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement, ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the mainstayinvestments.com 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Fund. The Fund is advised by New York Life Investments directly, without a subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.45% up to $500 million, 0.40% from $500 million to $1 billion and 0.35% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% on from $20 million to $100 million and 0.01% on in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursement) was 0.47% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it has agreed to waive a portion of the Fund's management fee or reimburse the expenses of the appropriate class of the Fund so that the total ordinary operating expenses of a class do not exceed the following percentages of average daily net assets: Investor Class, 0.80%; Class A, 0.70%; Class B, 0.80%; and Class C, 0.80%. This agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. At the December 15, 2010, Board of Trustees meeting, the Board approved an extension of the current written expense limitation agreement through February 28, 2012. From time to time, the Manager may limit expenses of the Fund to the extent it deems appropriate to enhance the yield of the Fund, or a particular class of the Fund, during periods when expenses have a significant impact on the yield of the Fund, or a particular class of the Fund, as applicable, because of low interest rates. This expense limitation policy is voluntary and in addition to any contractual arrangements that may be in place with respect to the Fund and described in the Fund's prospectus. It may be revised or terminated by the Manager at any time without notice. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $2,444,161 and waived/reimbursed its fees in the amount of $3,009,712. State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) CONTINGENT DEFERRED SALES CHARGE. Although the Fund does not assess a CDSC upon redemption of Class B or Class C shares of the Fund, the applicable CDSC will be assessed when shares were redeemed from the Fund if the shareholder previously exchanged his or her investment into the Fund from another Fund in the Trust. The Fund was advised that NYLIFE Distributors LLC (the "Distributor"), an indirect wholly owned subsidiary of New York Life, received from shareholders the proceeds from contingent deferred sales charges of Investor Class, Class A, Class B and Class C of $300, $3,014, $212,630 and $13,276, respectively for the year ended October 31, 2010. (C) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $252,906 - ----------------------------------------------- Class A 536,181 - ----------------------------------------------- Class B 508,965 - ----------------------------------------------- Class C 114,642 - -----------------------------------------------
(D) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (E) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $610 0.0%++ - ---------------------------------------------- Class C 117 0.0++ - ----------------------------------------------
++ Less than one-tenth of a percent. (F) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $18,890. 22 Mainstay Money Market Fund NOTE 4-FEDERAL INCOME TAX The following table discloses the current year reclassifications between undistributed net investment income, accumulated net realized gain on investments and additional paid-in capital arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED ADDITIONAL NET INVESTMENT GAIN (LOSS) PAID-IN INCOME (LOSS) ON INVESTMENTS CAPITAL $52,876 $(1,079) $(51,797) - ------------------------------------ ----------
The reclassifications for the Fund are primarily due to the redesignation of distributions and taxable overdistribution. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statements of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $118,289 $938,725 - ---------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS (AT $1 PER SHARE) SHARES Year ended October 31, 2010: Shares sold 53,744,737 Shares issued to shareholders in reinvestment of dividends 13,680 Shares redeemed (53,422,575) ------------ Net increase (decrease) in shares outstanding before conversion 335,842 Shares converted into Investor Class (See Note 1) 13,297,505 Shares converted from Investor Class (See Note 1) (16,485,615) ------------ Net increase (decrease) (2,852,268) ============ Year ended October 31, 2009: Shares sold 65,903,696 Shares issued to shareholders in reinvestment of dividends 84,957 Shares redeemed (62,623,592) ------------ Net increase (decrease) in shares outstanding before conversion 3,365,061 Shares converted into Investor Class (See Note 1) 5,050,264 Shares converted from Investor Class (See Note 1) (13,919,066) ------------ Net increase (decrease) (5,503,741) ============ CLASS A (AT $1 PER SHARE) SHARES Year ended October 31, 2010: Shares sold 352,517,198 Shares issued to shareholders in reinvestment of dividends 65,335 Shares redeemed (334,508,432) ------------ Net increase (decrease) in shares outstanding before conversion 18,074,101 Shares converted into Class A (See Note 1) 16,856,364 Shares converted from Class A (See Note 1) (12,862,782) ------------ Net increase (decrease) 22,067,683 ============ Year ended October 31, 2009: Shares sold 257,260,638 Shares issued to shareholders in reinvestment of dividends 533,055 Shares redeemed (360,583,179) ------------ Net increase (decrease) in shares outstanding before conversion (102,789,486) Shares converted into Class A (See Note 1) 14,106,124 Shares converted from Class A (See Note 1) (4,510,377) ------------ Net increase (decrease) (93,193,739) ============
mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
CLASS B (AT $1 PER SHARE) SHARES Year ended October 31, 2010: Shares sold 38,638,162 Shares issued to shareholders in reinvestment of dividends 28,319 Shares redeemed (63,778,006) ------------ Net increase (decrease) in shares outstanding before conversion (25,111,525) Shares converted from Class B (See Note 1) (805,472) ------------ Net increase (decrease) (25,916,997) ============ Year ended October 31, 2009: Shares sold 51,857,844 Shares issued to shareholders in reinvestment of dividends 205,583 Shares redeemed (94,117,333) ------------ Net increase (decrease) in shares outstanding before conversion (42,053,906) Shares converted from Class B (See Note 1) (726,945) ------------ Net increase (decrease) (42,780,851) ============ CLASS C (AT $1 PER SHARE) SHARES Year ended October 31, 2010: Shares sold 36,451,758 Shares issued to shareholders in reinvestment of dividends 6,311 Shares redeemed (42,341,583) ------------ Net increase (decrease) (5,883,514) ============ Year ended October 31, 2009: Shares sold 30,796,481 Shares issued to shareholders in reinvestment of dividends 58,491 Shares redeemed (54,121,103) ------------ Net increase (decrease) (23,266,131) ============
NOTE 7-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified other than the extension of the written expense limitation agreement as disclosed in Note 3(A) to these financial statements. 24 Mainstay Money Market Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Money Market Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Money Market Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 25 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreement. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Money Market Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"). In reaching its decision to approve this agreement (the "Agreement"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third-party service provider engaged by the Board to report objectively on the Fund's investment performance, management fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreement, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments; (ii) the investment performance of the Fund and New York Life Investments; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decision to approve the Agreement was based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year with respect to New York Life Investments and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreement also were based, in part, on the Board's consideration of the Agreement in prior years. In addition to considering the above-referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decision to approve the Agreement is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS In considering the approval of the Agreement, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds and serves a variety of other investment advisory clients, including other pooled investment vehicles, generally, and other money market funds specifically. The Board considered the experience of senior personnel at New York Life Investments providing investment advisory, management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and New York Life Investments' method for compensating portfolio managers. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreement, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports, include, among 26 Mainstay Money Market Fund other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreement, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments to enhance investment returns, supported a determination to approve the Agreement. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS The Board considered the costs of the services provided by New York Life Investments under the Agreement, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. In evaluating any costs and profits of New York Life Investments and its affiliates due to their relationships with the Fund, the Board considered, among other things, New York Life Investments' investments in personnel, systems, equipment and other resources necessary to manage the Fund. The Board acknowledged that New York Life Investments must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high- quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreement, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreement, that any profits realized by New York Life Investments and its affiliates due to their relationships with the Fund supported the Board's determination to approve the Agreement. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreement, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. mainstayinvestments.com 27 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED) (CONTINUED) MANAGEMENT FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreement and the Fund's expected total ordinary operating expenses. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreement, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreement. 28 Mainstay Money Market Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q and every month on Form N-MFP. In addition, the Fund will make available its complete schedule of portfolio holdings on its website at www.mainstayinvestments.com, five days after month-end. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624- 6782). Form N-MFP will be made available to the public by the SEC 60 days after the month to which the information pertains, and a link to each of the most recent 12 months of filings on Form N-MFP will be provided on the Fund's website. You can also obtain and review copies of Forms N-Q and N-MFP by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC- 0330). mainstayinvestments.com 29 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 30 Mainstay Money Market Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 31
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
32 Mainstay Money Market Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 33 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 34 Mainstay Money Market Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21215 MS333-10 MSMM11-12/10 12 (MAINSTAY INVESTMENTS LOGO) MAINSTAY PRINCIPAL PRESERVATION FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 10 - --------------------------------------------- Financial Statements 15 - --------------------------------------------- Notes to Financial Statements 19 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 23 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 24 - --------------------------------------------- Federal Income Tax Information 27 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 27 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 27 - --------------------------------------------- Board Members and Officers 28 - ---------------------------------------------
- -------------------------------------------------------------------------------- AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (UNAUDITED) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. (LINE GRAPH)
MAINSTAY PRINCIPAL PRESERVATION FUND LIPPER MONEY LIPPER INSTITUTIONAL CLASS I MARKET FUNDS MONEY MARKET SHARES AVERAGE FUNDS AVERAGE ------------------ ------------ -------------------- 10/31/00 10000 10000 10000 10493 10418 10470 10673 10542 10645 10787 10598 10745 10893 10651 10840 11179 10870 11118 11700 11310 11625 12305 11830 12218 12667 12138 12596 12784 12184 12672 10/31/10 12791 12188 12681
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
GROSS EXPENSE CLASS SALES CHARGE ONE YEAR FIVE YEARS TEN YEARS RATIO(2) - ---------------------------------------------------------------------------------------------- Class I Shares(3) No Sales Charge 0.05% 2.73% 2.49% 0.45% - ----------------------------------------------------------------------------------------------
7-DAY CURRENT YIELD: 0.01% 1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. On November 17, 2007, McMorgan Principal Preservation Fund was reorganized into MainStay Principal Preservation Fund Class I shares. Prior to November 11, 2007, performance for MainStay Principal Preservation Fund Class I shares includes the historical performance of the McMorgan Class shares of the McMorgan Principal Preservation Fund. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. As of October 31, 2010, MainStay Principal Preservation Fund had an effective 7-day yield of 0.01% for Class I shares. The 7-day current yield was 0.01% for Class I shares. These yields reflect certain fee waivers and/or expense limitations. Had these expense limitations not been in effect, the effective 7-day yield would have been -0.29% for Class I shares and the 7-day current yield would have been -0.29% for Class I shares. The current yield reflects the Fund's earnings better than the Fund's total return. For information on current fee waivers and/or expense limitations, please refer to the notes to the financial statements. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Lipper Institutional Money Market Funds Average(4) 0.08% 2.63% 2.40% - ----------------------------------------------------------------------------- Lipper Money Market Funds Average(5) 0.03 2.30 2.00 - -----------------------------------------------------------------------------
4. The Lipper institutional money market funds average is representative of funds that invest in high-quality financial instruments rated in the top two grades with dollar-weighted average maturities of less than 90 days. These funds are commonly limited to 401K and pension participants and often require high minimum investments and have lower total expense ratios relative to other money market funds. They intend to keep constant net asset value. This benchmark is a product of Lipper Inc. 5. The Lipper money market funds average is an equally weighted performance average adjusted for capital gains distributions and income dividends of all of the money market funds in the Lipper Universe. Lipper Inc., a wholly- owned subsidiary of Reuters Group PLC, is an independent monitor of mutual fund performance. Results do not reflect any deduction of sales charges. Lipper averages are not class specific. Lipper returns are unaudited. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Principal Preservation Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY PRINCIPAL PRESERVATION FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) CLASS I SHARES $1,000.00 $1,000.00 $1.26 $1,023.90 $1.28 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's Class I annualized expense ratio (0.25%) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 PORTFOLIO COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited) (PIE CHART) Other Commercial Paper 46.0 Financial Company Commercial Paper 13.2 Other Notes 11.3 Treasury Repurchase Agreements 11.3 Government Agency Debt 10.2 Treasury Debt 4.6 Asset Backed Commercial Paper 2.9 Other Assets, Less Liabilities 0.5
See Portfolio of Investments beginning on page 10 for specific holdings within these categories. 8 MainStay Principal Preservation Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers David E. Clement, CFA, and Thomas J. Girard of New York Life Investments,(1) the Fund's Manager. HOW DID MAINSTAY PRINCIPAL PRESERVATION FUND PERFORM RELATIVE TO ITS PEERS DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? As of October 31, 2010, MainStay Principal Preservation Fund Class I shares provided a 7-day current yield of 0.01% and a 7-day effective yield of 0.01%. For the 12 months ended October 31, 2010, MainStay Principal Preservation Fund Class I shares returned 0.05%. The Fund underperformed the 0.08% return of the Lipper(2) institutional money market funds average and outperformed the 0.03% return of the Lipper money market funds average for the 12 months ended October 31, 2010. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund's increased exposure to Treasury bills and repurchase agreements detracted from relative performance during the reporting period, while a longer duration(3) contributed positively to relative performance. Our investment in floating-rate securities backed by the Federal Deposit Insurance Corporation (FDIC) continued to have a positive impact on performance, as did our investment in asset-backed securities. WHAT WAS THE FUND'S DURATION--OR DAYS-TO-MATURITY--STRATEGY DURING THE REPORTING PERIOD? We maintained a longer-than-normal duration during the 12 months ended October 31, 2010. Doing so made a positive contribution to the Fund's performance because the yield curve(4) remained upward-sloping throughout the reporting period. During the second half of the reporting period, however, duration was shortened to prepare the Fund for new SEC regulations. In light of these new regulations, effective May 26, 2010, the Fund main- tains a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life to maturity of 120 days or less. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? The decision of the Federal Open Market Committee (FOMC) to maintain the targeted federal funds rate in a very low range gave us confidence to move out further on the upward-sloping yield curve. Against this backdrop, we increased the Fund's exposure to longer-dated Treasury coupon securities, callable agency coupon securities and asset-backed securities. (Asset-backed securities must be recorded as though they will mature on their legal maturity date even though their average lives are generally much shorter.) We were comfortable "using duration" in this environ- ment, that is, having a longer average life, because FOMC stated that conditions were likely to warrant exceptionally low levels of the federal funds rate for an extended period. We hedged this positioning by participating in the floating-rate securities market. The use of floating-rate securities allowed us to accomplish two things. First, if interest rates rose, we would participate in the upward movement; and second, we felt that floating-rate securities offered compelling yields compared to other available investments. Our negative view on foreign banks continued during the reporting period and was reinforced during the European sovereign debt crisis. For the most part, we avoided this sector, except for certain shorter-dated commercial paper investments in some of the stronger issuers. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST CONTRIBUTORS TO THE FUND'S PERFOR-MANCE AND WHICH MARKET SEGMENTS WERE PARTIC- ULARLY WEAK? The major positive contributors to the Fund's performance included its floating- rate securities, corporate floating-rate securities, FDIC-backed floating-rate securities, asset-backed securities and callable agency securities. The Fund's return was hampered by investments in Treasury bills and repurchase agreements. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? Significant purchases during the reporting period included a Pepsi corporate floating-rate issue (due July 2011), a Federal Home Loan Bank callable security (due November 2011) and a General Electric Equipment asset-backed security (due September 2011). There were no significant sales during the reporting period. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we increased the Fund's weightings in asset-backed securities, repurchase agreements, floating-rate securities and commercial paper. The Fund decreased its weight- ings in government and agency securities and corporate bonds. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? The Fund had no significant overweights or underweights at the end of the period. 1. "New York Life Investments" is a service mark used by New York Life Investment Management LLC. 2. See footnote on page 6 for more information on Lipper Inc. 3. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 4. The yield curve is a line that plots the yields of various securities of similar quality--typically U.S. Treasury issues--across a range of maturities. The U.S. Treasury yield curve serves as a benchmark for other debt and is used in economic forecasting. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. mainstayinvestments.com 9 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS 99.5%+ - ------------------------------------------------------- ASSET-BACKED COMMERCIAL PAPER 2.9% Straight-A Funding LLC 0.23%, due 12/2/10 (a)(b) $1,175,000 $ 1,174,767 0.24%, due 11/8/10 (a)(b) 750,000 749,965 0.25%, due 12/7/10 (a)(b) 400,000 399,900 0.25%, due 1/10/11 (a)(b) 1,250,000 1,249,393 ------------ 3,574,025 ------------ FINANCIAL COMPANY COMMERCIAL PAPER 13.2% American Honda Finance Corp. 0.20%, due 11/4/10 (a) 1,250,000 1,249,979 0.22%, due 11/22/10 (a) 680,000 679,913 BNP Paribas Finance, Inc. 0.19%, due 11/1/10 (a) 1,250,000 1,250,000 0.19%, due 11/3/10 (a) 1,500,000 1,499,984 Caterpillar Financial Services Corp. 0.24%, due 12/16/10 (a) 1,500,000 1,499,550 John Deere Credit, Inc. 0.21%, due 11/15/10 (a)(b) 1,200,000 1,199,902 JPMorgan Chase & Co. 0.22%, due 11/22/10 (a) 1,000,000 999,872 National Rural Utilities Cooperative Finance Corp. 0.23%, due 11/19/10 (a) 1,200,000 1,199,862 0.24%, due 11/9/10 (a) 2,000,000 1,999,893 PACCAR Financial Corp. 0.20%, due 11/8/10 (a) 603,000 602,977 Private Export Funding Corp. 0.35%, due 12/20/10 (a)(b) 1,500,000 1,499,285 Societe Generale North America, Inc. 0.25%, due 11/5/10 (a) 1,250,000 1,249,965 0.25%, due 11/18/10 (a) 1,500,000 1,499,823 ------------ 16,431,005 ------------ GOVERNMENT AGENCY DEBT 10.2% Federal Farm Credit Bank 0.242%, due 9/16/11 (c) 750,000 749,967 1.00%, due 11/4/11 (c) 1,205,000 1,205,000 3.75%, due 12/6/10 500,000 501,637 Federal Home Loan Bank 0.287%, due 7/29/11 (c) 1,500,000 1,500,000 0.34%, due 11/15/11 1,465,000 1,465,000 Federal Home Loan Mortgage Corporation (Discount Notes) 0.17%, due 11/1/10 (a) 1,250,000 1,250,000 0.22%, due 12/8/10 (a) 1,700,000 1,699,616 0.25%, due 5/2/11 (a) 400,000 399,494 0.26%, due 12/21/10 (a) 400,000 399,856 Federal National Mortgage Association 0.216%, due 9/19/11 (c) 1,500,000 1,500,071 Federal National Mortgage Association (Discount Notes) 0.23%, due 11/17/10 (a) 640,000 639,935 0.25%, due 4/11/11 (a) 780,000 779,116 0.33%, due 2/22/11 (a) 600,000 599,378 ------------ 12,689,070 ------------ OTHER COMMERCIAL PAPER 46.0% Abbott Laboratories 0.20%, due 11/23/10 (a)(b) 750,000 749,908 American Water Capital Corp. 0.35%, due 11/1/10 (a)(b) 500,000 500,000 Archer-Daniels-Midland Co. 0.20%, due 11/16/10 (a)(b) 1,500,000 1,499,875 0.20%, due 11/18/10 (a)(b) 1,250,000 1,249,882 Basin Electric Power Cooperative, Inc. 0.22%, due 11/29/10 (a)(b) 700,000 699,880 0.25%, due 11/29/10 (a)(b) 1,200,000 1,199,767 Becton Dickinson & Co. 0.20%, due 11/9/10 (a) 1,875,000 1,874,917 Brown-Forman Corp. 0.24%, due 11/23/10 (a)(b) 1,470,000 1,469,784 Campbell Soup Co. 0.17%, due 11/4/10 (a)(b) 1,500,000 1,499,979 Clorox Co. (The) 0.30%, due 11/5/10 (a)(b) 500,000 499,983 Coca-Cola Co. (The) 0.20%, due 12/16/10 (a)(b) 1,250,000 1,249,688 0.23%, due 1/11/11 (a)(b) 1,500,000 1,499,320 Colgate-Palmolive Co. 0.16%, due 11/3/10 (a)(b) 1,470,000 1,469,987 Diageo Capital PLC 0.30%, due 11/15/10 (a)(b) 500,000 499,942 Duke Energy Corp. 0.33%, due 11/24/10 (a)(b) 500,000 499,895 Emerson Electric Co. 0.18%, due 11/4/10 (a)(b) 2,500,000 2,499,962 Florida Power & Light Co. 0.22%, due 11/1/10 (a) 900,000 900,000 General Electric Co. 0.20%, due 11/17/10 (a) 1,250,000 1,249,889 General Mills, Inc. 0.27%, due 11/30/10 (a)(b) 500,000 499,891 Google, Inc. 0.18%, due 11/29/10 (a)(b) 1,500,000 1,499,790 0.20%, due 11/17/10 (a)(b) 1,500,000 1,499,867 Hewlett-Packard Co. 0.19%, due 11/18/10 (a)(b) 1,250,000 1,249,888 0.20%, due 12/2/10 (a)(b) 2,500,000 2,499,569
+ Percentages indicated are based on Fund net assets. 10 MainStay Principal Preservation Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS (CONTINUED) OTHER COMMERCIAL PAPER (CONTINUED) Honeywell International, Inc. 0.22%, due 12/23/10 (a)(b) $ 500,000 $ 499,841 Illinois Tool Works, Inc. 0.20%, due 11/5/10 (a)(b) 1,250,000 1,249,972 0.20%, due 11/15/10 (a)(b) 1,750,000 1,749,864 International Business Machines Corp. 0.17%, due 11/3/10 (a)(b) 1,500,000 1,499,986 Kimberly-Clark Worldwide, Inc. 0.17%, due 11/2/10 (a)(b) 1,180,000 1,179,994 0.17%, due 11/16/10 (a)(b) 912,000 911,935 0.18%, due 11/5/10 (a)(b) 700,000 699,986 McDonald's Corp. 0.20%, due 11/4/10 (a)(b) 540,000 539,991 Merck & Co., Inc. 0.20%, due 11/19/10 (a)(b) 1,500,000 1,499,850 0.20%, due 12/13/10 (a)(b) 1,500,000 1,499,650 Nestle Capital Corp. 0.24%, due 4/1/11 (a)(b) 1,250,000 1,248,742 Nestle Finance International, Ltd. 0.18%, due 11/1/10 (a) 1,250,000 1,250,000 Novartis Finance Corp. 0.20%, due 11/2/10 (a)(b) 1,250,000 1,249,993 0.26%, due 12/10/10 (a)(b) 1,500,000 1,499,578 NSTAR Electric Co. 0.22%, due 11/2/10 (a) 351,000 350,998 Procter & Gamble International Funding SCA 0.20%, due 11/8/10 (a)(b) 1,200,000 1,199,953 Roche Holdings, Inc. 0.18%, due 11/2/10 (a)(b) 1,250,000 1,249,994 0.23%, due 12/3/10 (a)(b) 1,500,000 1,499,693 Schlumberger Technology Corp. 0.20%, due 11/29/10 (a)(b) 500,000 499,922 United Technologies Corp. 0.19%, due 11/23/10 (a)(b) 2,500,000 2,499,710 0.20%, due 11/22/10 (a)(b) 1,250,000 1,249,854 Wal-Mart Stores, Inc. 0.17%, due 11/8/10 (a)(b) 750,000 749,975 0.20%, due 11/8/10 (a)(b) 1,000,000 999,961 Walt Disney Co. (The) 0.18%, due 11/16/10 (a)(b) 1,250,000 1,249,906 WW Grainger, Inc. 0.20%, due 11/22/10 (a) 513,000 512,940 ------------ 57,003,951 ------------ OTHER NOTES 11.3% Ally Auto Receivables Trust Series 2010-1, Class A1 0.323%, due 4/15/11 22,924 22,924 Series 2010-2, Class A1 0.586%, due 7/15/11 247,510 247,510 Bank of America Corp. 0.796%, due 12/2/10 (c)(d) 1,100,000 1,100,560 Berkshire Hathaway Finance Corp. 0.391%, due 2/10/11 (c) 2,100,000 2,100,054 BMW Vehicle Lease Trust Series 2010-1, Class A1 0.298%, due 10/17/11 452,893 452,893 CNH Equipment Trust Series 2010-A, Class A1 0.354%, due 4/15/11 251,562 251,562 Ford Credit Auto Owner Trust Series 2010-A, Class A1 0.384%, due 5/15/11 (b) 109,381 109,381 Series 2010-B, Class A1 0.506%, due 8/15/11 (b) 271,943 271,943 GE Equipment Midticket LLC Series 2010-1, Class A1 0.351%, due 9/14/11 (b) 300,000 300,000 General Electric Capital Corp. 0.373%, due 3/11/11 (c)(d) 1,100,000 1,100,400 0.922%, due 12/9/10 (c)(d) 2,200,000 2,201,704 Honda Auto Receivables Owner Trust Series 2010-1, Class A1 0.269%, due 2/22/11 32,049 32,049 Hyundai Auto Receivables Trust Series 2010-B, Class A1 0.371%, due 9/15/11 260,954 260,954 John Deere Owner Trust Series 2010-A, Class A1 0.344%, due 5/16/11 214,186 214,186 Mercedes-Benz Auto Receivables Trust Series 2010-1, Class A1 0.309%, due 5/13/11 159,437 159,437 Navistar Financial Corp. Owner Trust Series 2010-B, Class A1 0.345%, due 10/18/11 (b) 450,000 450,000 Series 2010-A, Class A1 0.608%, due 6/20/11 (b) 341,964 341,964 Nissan Auto Receivables Owner Trust Series 2010-A, Class A1 0.356%, due 10/17/11 517,302 517,302 PepsiCo, Inc. 0.319%, due 7/15/11 (c) 900,000 900,325 SunTrust Bank 0.942%, due 12/16/10 (c)(d) 1,900,000 1,901,788 Volkswagen Auto Lease Trust Series 2010-A, Class A1 0.299%, due 11/21/11 700,000 700,000
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMORTIZED AMOUNT COST SHORT-TERM INVESTMENTS (CONTINUED) OTHER NOTES (CONTINUED) Volvo Financial Equipment LLC Series 2010-1A, Class A1 0.51%, due 5/16/11 (b) $ 363,177 $ 363,176 ------------ 14,000,112 ------------ TREASURY DEBT 4.6% United States Treasury Notes 0.875%, due 1/31/11 1,500,000 1,501,872 0.875%, due 3/31/11 1,455,000 1,458,962 1.00%, due 8/31/11 1,250,000 1,257,307 1.00%, due 9/30/11 1,450,000 1,459,507 ------------ 5,677,648 ------------ TREASURY REPURCHASE AGREEMENTS 11.3% Deutsche Bank Securities, Inc. 0.21%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $4,600,081 (Collateralized by a United States Treasury Note with a rate of 1.875% and a maturity date of 6/30/15, with a Principal Amount of $4,513,300 and a Market Value of $4,692,041) 4,600,000 4,600,000 Morgan Stanley Co. 0.20%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $4,831,081 (Collateralized by a United States Treasury Note with a rate of 2.50% and a maturity date of 7/15/16, with a Principal Amount of $3,939,900 and a Market Value of $4,927,736) 4,831,000 4,831,000 SG Americas Securities LLC 0.21%, dated 10/29/10 due 11/1/10 Proceeds at Maturity $4,600,081 (Collateralized by United States Treasury Note with a rate of 1.00% and a maturity date of 4/30/12, with a Principal Amount of $4,621,700 and a Market Value of $4,692,022) 4,600,000 4,600,000 ------------ 14,031,000 ------------ Total Short-Term Investments (Amortized Cost $123,406,811) (e) 99.5% 123,406,811 Other Assets, Less Liabilities 0.5 582,914 ---------- ------------ Net Assets 100.0% $123,989,725 ========== ============
(a) Interest rate presented is yield to maturity. (b) May be sold to institutional investors only under Rule 144A or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. (c) Floating rate--Rate shown is the rate in effect at October 31, 2010. (d) The debt is guaranteed under the Federal Deposit Insurance Corporation (FDIC) Temporary Liquidity Guarantee Program and is backed by the full faith and credit of the United States. The expiration date of the FDIC's guarantee is the earlier of the maturity date of the debt or June 30, 2012. (e) The amortized cost also represents the aggregate cost for federal income tax purposes.
12 MainStay Principal Preservation Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities Short-Term Investments Asset-Backed Commercial Paper $ -- $ 3,574,025 $ -- $ 3,574,025 Financial Company Commercial Paper -- 16,431,005 -- 16,431,005 Government Agency Debt -- 12,689,070 -- 12,689,070 Other Commercial Paper -- 57,003,951 -- 57,003,951 Other Notes -- 14,000,112 -- 14,000,112 Treasury Debt -- 5,677,648 -- 5,677,648 Treasury Repurchase Agreements -- 14,031,000 -- 14,031,000 -------- ------------ -------- ------------ Total Investments in Securities $-- $123,406,811 $-- $123,406,811 ======== ============ ======== ============
For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED) The table below sets forth the diversification of the Principal Preservation Fund investments by industry. INDUSTRY DIVERSIFICATION (UNAUDITED)
AMORTIZED COST PERCENT + Aerospace & Defense $ 3,749,564 3.0% Agriculture 2,749,757 2.2 Automobile ABS 3,566,357 2.9 Banks 6,752,008 5.5 Beverages 5,619,059 4.5 Computers 5,249,443 4.2 Cosmetics & Personal Care 5,461,855 4.4 Distribution & Wholesale 512,940 0.4 Diversified Financial Services 21,107,143 17.0 Electric 3,650,540 2.9 Electrical Components & Equipment 2,499,962 2.0 Food 4,498,612 3.6 Health Care--Products 1,874,917 1.5 Health Care--Services 2,749,687 2.2 Household Products & Wares 499,983 0.4 Insurance 2,100,054 1.7 Internet 2,999,657 2.4 Machinery--Diversified 1,199,902 1.0 Media 1,249,906 1.0 Miscellaneous--Manufacturing 4,749,566 3.8 Oil & Gas 499,922 0.4 Other ABS 1,128,924 0.9 Pharmaceuticals 3,749,408 3.0 Repurchase Agreements 14,031,000 11.4 Retail 2,289,927 1.9 U.S. Government & Agencies 18,366,718 14.9 Water 500,000 0.4 ------------ ----- 123,406,811 99.5 Other Assets, Less Liabilities 582,914 0.5 ------------ ----- Net Assets $123,989,725 100.0% ============ =====
+ Percentages indicated are based on Fund net assets.
14 MainStay Principal Preservation Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (amortized cost $109,375,811) $109,375,811 Repurchase agreements, at value (identified cost $14,031,000) 14,031,000 Cash 2,000,253 Receivables: Fund shares sold 538,495 Interest 42,287 Other assets 20,689 ------------ Total assets 126,008,535 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 1,905,000 Fund shares redeemed 83,052 Shareholder communication 12,068 Professional fees 10,902 Transfer agent (See Note 3) 4,291 Custodian 1,948 Trustees 379 Manager (See Note 3) 82 Accrued expenses 1,088 ------------ Total liabilities 2,018,810 ------------ Net assets $123,989,725 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 1,240,038 Additional paid-in capital 122,746,511 ------------ 123,986,549 Undistributed net investment income 3,176 ------------ Net assets $123,989,725 ============ CLASS I Net assets applicable to outstanding shares $123,989,725 ============ Shares of beneficial interest outstanding 124,003,795 ============ Net asset value and offering price per share outstanding $ 1.00 ============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - ------------------------------------------------- INCOME Interest $ 341,019 --------- EXPENSES Manager (See Note 3) 373,902 Professional fees 71,853 Registration 34,996 Shareholder communication 31,158 Transfer agent (See Note 3) 30,349 Custodian 24,092 Trustees 4,373 Miscellaneous 8,264 --------- Total expenses before waiver/reimbursement 578,987 Expense waiver/reimbursement from Manager (See Note 3) (252,466) --------- Net expenses 326,521 --------- Net investment income 14,498 --------- REALIZED GAIN ON INVESTMENTS - ------------------------------------------------- Net realized gain on investments 3,165 --------- Net increase in net assets resulting from operations $ 17,663 =========
16 MainStay Principal Preservation Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 DECREASE IN NET ASSETS - --------------------------------------------------------- Operations: Net investment income $ 14,498 $ 1,615,755 Net realized gain on investments 3,165 65,201 --------------------------- Net increase in net assets resulting from operations 17,663 1,680,956 --------------------------- Dividends and distributions to shareholders: From net investment income: Class I (14,459) (1,622,662) From net realized gain on investments: Class I (63,057) -- --------------------------- Total dividends and distributions to shareholders (77,516) (1,622,662) --------------------------- Capital share transactions: Net proceeds from sale of shares 55,452,389 104,424,689 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 77,180 1,590,770 Cost of shares redeemed (99,861,840) (136,976,130) --------------------------- Decrease in net assets derived from capital share transactions (44,332,271) (30,960,671) --------------------------- Net decrease in net assets (44,392,124) (30,902,377) NET ASSETS - --------------------------------------------------------- Beginning of year 168,381,849 199,284,226 --------------------------- End of year $123,989,725 $ 168,381,849 =========================== Undistributed net investment income at end of year $ 3,176 $ 63,029 ===========================
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS I ---------------------------------------------------------------------------------- JULY 1, 2007*** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, YEAR ENDED JUNE 30, 2010 2009 2008 (A) 2007 2007 2006 Net asset value at beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- -------- Net investment income 0.00 ++ 0.01 0.03 0.02 0.05 0.04 Net realized and unrealized gain (loss) on investments 0.00 ++ -- 0.00 ++ (0.00)++ 0.00 ++ (0.00)++ -------- -------- -------- -------- -------- -------- Total from investment operations 0.00 ++ 0.01 0.03 0.02 0.05 0.04 -------- -------- -------- -------- -------- -------- Less dividends: From net investment income (0.00)++ (0.01) (0.03) (0.02) (0.05) (0.04) From net realized capital gain on investment (0.00)++ -- -- -- -- -- Return of capital -- -- -- (0.00)++ -- -- -------- -------- -------- -------- -------- -------- Total dividends (0.00)++ (0.01) (0.03) (0.02) (0.05) (0.04) -------- -------- -------- -------- -------- -------- Net asset value at end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== ======== Total investment return 0.05% 0.93% 2.94% 1.69%(b) 5.20%(c) 4.01% Ratios (to average net assets)/Supplemental Data: Net investment income 0.01% 0.92% 2.91% 4.97%++ 5.08% 3.93% Net expenses 0.25% 0.34% 0.30% 0.30%++ 0.30% 0.30% Expenses (before waiver/reimbursement) 0.43% 0.49% 0.39% 0.49%++ 0.46% 0.50% Net assets at end of period (in 000's) $123,990 $168,382 $199,284 $198,672 $182,080 $146,766
++ Annualized. ++ Less than one cent per share. *** The McMorgan Principal Preservation Fund changed its fiscal year end from June 30 to October 31. (a) Effective November 27, 2007, shareholders of the McMorgan Principal Preservation Fund Class McMorgan shares became owners of Class I shares of the MainStay Principal Preservation Fund. Additionally, the accounting and performance history of the McMorgan Principal Preservation Fund was redesignated as that of Class I shares of MainStay Principal Preservation Fund. (b) Total investment return is not annualized. (c) The loss resulting from a compliance violation did not have an effect on total return.
18 MainStay Principal Preservation Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Principal Preservation Fund (the "Fund"), a diversified fund. The Fund currently offers one class of shares, Class I shares, which commenced operations on November 27, 2007. Class I shares are offered at net asset value ("NAV") without imposition of a front-end sales charge or a contingent deferred sales charge ("CDSC"). The Fund's investment objective is to seek to maximize current income consistent with maintaining liquidity and preserving capital. The financial statements of the Fund reflect the historical results of McMorgan Principal Preservation Fund, a series of McMorgan Funds (the "McMorgan Trust"), prior to its reorganization. Upon the completion of the reorganization, the Class I shares of the Fund assumed the performance, financial and other historical information of the McMorgan Principal Preservation Fund. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) VALUATION OF FUND SHARES. The Fund seeks to maintain a NAV of $1.00 per share, although there is no assurance that it will be able to do so on a continuous basis, and it has adopted certain investment, portfolio and dividend and distribution policies designed to enable it to do as such. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. (B) SECURITIES VALUATION. "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Securities are valued at their amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between such cost and the value on maturity date. These securities are generally categorized as Level 2 in the hierarchy. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (C) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing mainstayinvestments.com 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (D) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund declares dividends of net investment income daily and the Fund pays them monthly and declares and pays distribution of net realized capital gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (E) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued daily and discounts and premiums on securities purchased for the Fund are accreted and amortized, respectively, on the straight-line method. (F) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (G) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (H) REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements to earn income. The Fund may enter into repurchase agreements only with financial institutions that are deemed by the Manager (as defined in Note 3(A)) to be creditworthy, pursuant to guidelines established by the Fund's Board. Repurchase agreements are considered under the 1940 Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. When the Fund invests in repurchase agreements, the Fund's custodian takes possession of the collateral pledged for investments in such repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to determine that the value, including accrued interest, exceeds the repurchase price. In the event of the seller's default of the obligation to repurchase, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings and possible realized loss to the Fund. (I) CONCENTRATION OF RISK. The Fund's investments may include securities such as variable rate master demand notes, "floating-rate notes" and mortgage-related and asset-backed securities. If expectations about changes in interest rates, or assessments of an issuer's credit worthiness or market conditions are incorrect, the use of these types of investments could result in a loss. The Fund may also invest in securities of foreign issuers, which carry certain risks in addition to the usual risks inherent in domestic instruments. These risks include those resulting from future adverse political or economic developments and possible imposition of currency exchange blockages or other foreign governmental laws and restrictions. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (J) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER. New York Life Investment Management LLC ("New York Life Investments" or "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement, ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. The Fund is advised by New York Life Investments directly, without a subadvisor. The Fund is advised by New York Life Investments directly, without a subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of 0.25% of the Fund's average daily net assets, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million, 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.28% for the year ended October 31, 2010, inclusive of the effective fund accounting services fee rate of 0.03% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. 20 MainStay Principal Preservation Fund Effective August 1, 2009, New York Life Investments has entered into a written expense limitation agreement under which it has agreed to waive a portion of the Fund's management fee or reimburse the expenses of the Fund so that the Fund's total ordinary operating expenses do not exceed 0.30% of the Fund's average daily net assets. This agreement expires on February 28, 2011 and is reviewed annually by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. At the December 15, 2010, Board of Trustees meeting, the Board approved an extension of the current written expense limitation agreement through February 28, 2012. From time to time, the Manager may limit expenses of the Fund to the extent it deems appropriate to enhance the yield of the Fund, or a particular class of the Fund, during periods when expenses have a significant impact on the yield of the Fund, or a particular class of the Fund, as applicable, because of low interest rates. This expense limitation policy is voluntary and in addition to any contractual arrangements that may be in place with respect to the Fund and described in the Fund's prospectus. It may be revised or terminated by the Manager at any time without notice. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $373,902 and waived/reimbursed its fees in the amount of $252,466. State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAV of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's NAV, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Class I $30,349 - ----------------------------------------------
(C) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $4,892. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED CAPITAL OTHER UNREALIZED TOTAL ORDINARY AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $3,176 $-- $-- $-- $3,176 - ------------------------------------------------------- ----------------
The following table discloses the current year reclassifications between undistributed net investment income and accumulated net realized loss on investments arising from permanent differences; net assets at October 31, 2010 were not affected.
ACCUMULATED UNDISTRIBUTED NET REALIZED NET INVESTMENT GAIN (LOSS) ADDITIONAL INCOME (LOSS) ON INVESTMENTS PAID-IN CAPITAL $(59,892) $59,892 $-- - ---------------------------------------- -----------
The reclassifications for the Fund are primarily due to reclassification of distributions. The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009 shown in the Statement of Changes in Net Assets, was as follows:
2010 2009 Distributions paid from: Ordinary Income $77,516 $1,622,662 - ----------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-CAPITAL SHARE TRANSACTIONS
CLASS I (AT $1 PER SHARE) SHARES Year ended October 31, 2010: Shares sold 55,452,389 Shares issued to shareholders in reinvestment of dividends and distributions 77,180 Shares redeemed (99,861,840) ------------ Net increase (decrease) (44,332,271) ============ Year ended October 31, 2009: Shares sold 104,424,689 Shares issued to shareholders in reinvestment of dividends 1,590,770 Shares redeemed (136,976,130) ------------ Net increase (decrease) (30,960,671) ============
mainstayinvestments.com 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustments or disclosure have been identified other than the extension of the written expense limitation agreement as disclosed in Note 3(A) to these financial statements. 22 MainStay Principal Preservation Fund REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Principal Preservation Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and financial highlights for each of the years in the three-year period ended October 31, 2010. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the years or periods presented through October 31, 2007, were audited by other auditors, whose report dated December 17, 2007, expressed an unqualified opinion thereon. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Principal Preservation Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period ended October 31, 2010, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 mainstayinvestments.com 23 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreement. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Principal Preservation Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"). In reaching its decision to approve this agreement (the "Agreement"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third-party service provider engaged by the Board to report objectively on the Fund's investment performance, management fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreement, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments; (ii) the investment performance of the Fund and New York Life Investments; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decision to approve the Agreement was based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year with respect to New York Life Investments and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreement also were based, in part, on the Board's consideration of the Agreement in prior years. In addition to considering the above-referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decision to approve the Agreement is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS In considering the approval of the Agreement, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds and serves a variety of other investment advisory clients, including other pooled investment vehicles, generally, and other money market funds specifically. The Board considered the experience of senior personnel at New York Life Investments providing investment advisory, management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and New York Life Investments' method for compensating portfolio managers. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreement, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports, include, among 24 MainStay Principal Preservation Fund other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreement, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments to enhance investment returns, supported a determination to approve the Agreement. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS The Board considered the costs of the services provided by New York Life Investments under the Agreement, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. In evaluating any costs and profits of New York Life Investments and its affiliates due to their relationships with the Fund, the Board considered, among other things, New York Life Investments' investments in personnel, systems, equipment and other resources necessary to manage the Fund. The Board acknowledged that New York Life Investments must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high- quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreement, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreement, that any profits realized by New York Life Investments and its affiliates due to their relationships with the Fund supported the Board's determination to approve the Agreement. EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreement, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreement and the Fund's expected total ordinary operating expenses. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses. mainstayinvestments.com 25 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT (UNAUDITED) (CONTINUED) In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreement, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreement. 26 MainStay Principal Preservation Fund FEDERAL INCOME TAX INFORMATION (UNAUDITED) In February 2011, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q and every month on Form N-MFP. In addition, the Fund will make available its complete schedule of portfolio holdings on its website at www.mainstayinvestments.com, five days after month-end. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624- 6782). Form N-MFP will be made available to the public by the SEC 60 days after the month to which the information pertains, and a link to each of the most recent 12 months of filings on Form N-MFP will be provided on the Fund's website. You can also obtain and review copies of Forms N-Q and N-MFP by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC- 0330). mainstayinvestments.com 27 BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." 28 MainStay Principal Preservation Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 29
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
30 MainStay Principal Preservation Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 31 The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. 32 MainStay Principal Preservation Fund MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. (C) 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21216 MS333-10 MSPP11-12/10 D2 (MAINSTAY INVESTMENTS LOGO) MAINSTAY TAX FREE BOND FUND MESSAGE FROM THE PRESIDENT AND ANNUAL REPORT October 31, 2010 This page intentionally left blank MESSAGE FROM THE PRESIDENT AN ADVANCING STOCK MARKET Several leading indexes of stock market performance in the United States and around the globe provided double-digit returns for the 12 months ended October 31, 2010. According to Russell data for U.S. equity markets, small- and mid-cap stocks generally outperformed large-cap stocks, and growth stocks outperformed value stocks at all capitalization levels. Although the U.S. economy continued to advance, the level of growth varied from quarter to quarter, and the stock market's progress was far from uniform over the 12-month reporting period. From November 2009 through March 2010, many stocks with low or negative earnings were particularly strong, as investors looked for stocks likely to benefit from an eco-nomic recovery. From April through September, however, concerns about the quality of sovereign debt in Greece and other European nations drove stock prices lower. Fortunately, central banks and policymakers joined forces to help restore market confidence, and in September and October 2010, major stock indexes recouped much of the ground they had previously lost. A SHIFTING APPETITE FOR YIELD Throughout the reporting period, the Federal Open Market Committee maintained the targeted federal funds rate in a range from 0% to 0.25%, which kept short- term yields low. Investors seeking higher yields increased their appetite for risk, extending maturities and investing in corporate bonds and commercial mortgage-backed securities. The high-yield bond market saw significant inflows from individual and institutional investors. The leveraged loan market as a whole provided double-digit returns for the reporting period, and municipal debt overall provided strong single-digit returns. As every investor knows, past performance is no guarantee of future results. Economic conditions next year may be very different from those today. Individual companies may exper-ience gains or setbacks related to their products, their comp-etition or other industry, economic or market forces. In such an environment, how can investors know what to expect? HELPING INVESTORS REMAIN CONFIDENT At MainStay, we believe that mutual fund investing can help investors remain confident as they cope with changing markets. Each of our Funds pursues a specific investment objective using established investment strategies. Our portfolio managers bring a professional perspective to daily market events, seeking to balance what's happening now with what their investments seek to achieve over full market cycles. They aim to manage the risks of individual securities and the market as a whole within the guidelines outlined in the Prospectus. In doing so, they look to bring consistency of purpose and a sense of direction to investment markets that themselves may be erratic or unpredictable. We hope that you will carefully review the accompanying annual report. It provides greater insight into the market events, secur-ities and investment decisions that affected your MainStay Fund(s) during the 12 months ended October 31, 2010. The information in the annual report is an important part of your overall financial plan. We hope that you will use it wisely, as you maintain or gradually adjust your investments in line with your long-range investment goals. Sincerely, /s/ STEPHEN P. FISHER Stephen P. Fisher President Not part of the Annual Report TABLE OF CONTENTS Annual Report - --------------------------------------------- Investment and Performance Comparison 5 - --------------------------------------------- Portfolio Management Discussion and Analysis 9 - --------------------------------------------- Portfolio of Investments 11 - --------------------------------------------- Financial Statements 18 - --------------------------------------------- Notes to Financial Statements 24 - --------------------------------------------- Report of Independent Registered Public Accounting Firm 30 - --------------------------------------------- Board Consideration and Approval of Management Agreement and Subadvisory Agreement 31 - --------------------------------------------- Federal Income Tax Information 34 - --------------------------------------------- Proxy Voting Policies and Procedures and Proxy Voting Record 34 - --------------------------------------------- Shareholder Reports and Quarterly Portfolio Disclosure 34 - --------------------------------------------- Board Members and Officers 35 - ---------------------------------------------
- -------------------------------------------------------------------------------- INVESTORS SHOULD REFER TO THE FUND'S SUMMARY PROSPECTUS AND/OR PROSPECTUS AND CONSIDER THE FUND'S INVESTMENT OBJECTIVES, STRATEGIES, RISKS, CHARGES AND EXPENSES CAREFULLY BEFORE INVESTING. THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CONTAIN THIS AND OTHER INFORMATION ABOUT THE FUND. YOU MAY OBTAIN COPIES OF THE FUND'S SUMMARY PROSPECTUS, PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION FREE OF CHARGE, UPON REQUEST, BY CALLING TOLL-FREE 800-MAINSTAY (624-6782), BY WRITING TO NYLIFE DISTRIBUTORS LLC, ATTN: MAINSTAY MARKETING DEPARTMENT, 169 LACKAWANNA AVENUE, PARSIPPANY, NEW JERSEY 07054 OR BY SENDING AN E-MAIL TO MAINSTAYSHAREHOLDERSERVICES@NYLIM.COM. THESE DOCUMENTS ARE ALSO AVAILABLE VIA THE MAINSTAY FUNDS' WEBSITE AT MAINSTAYINVESTMENTS.COM/DOCUMENTS. PLEASE READ THE SUMMARY PROSPECTUS AND/OR PROSPECTUS CAREFULLY BEFORE INVESTING. INVESTMENT AND PERFORMANCE COMPARISON(1) (Unaudited) PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. BECAUSE OF MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND AS A RESULT, WHEN SHARES ARE REDEEMED, THEY MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE GRAPH BELOW DEPICTS THE HISTORICAL PERFORMANCE OF CLASS B SHARES OF THE FUND. PERFORMANCE WILL VARY FROM CLASS TO CLASS BASED ON DIFFERENCES IN CLASS-SPECIFIC EXPENSES AND SALES CHARGES. FOR PERFORMANCE INFORMATION CURRENT TO THE MOST RECENT MONTH-END, PLEASE CALL 800-MAINSTAY (624-6782) OR VISIT MAINSTAYINVESTMENTS.COM. (With sales charges) (LINE GRAPH)
MAINSTAY TAX BARCLAYS CAPITAL FREE BOND BARCLAYS CAPITAL 3-15 YEAR FUND CLASS MUNICIPAL BOND BLENDED MUNICIPAL B SHARES INDEX BOND INDEX ------------ ---------------- ----------------- 10/31/00 10000 10000 10000 10/31/01 11004 11051 10998 10/31/02 11425 11699 11664 10/31/03 11697 12297 12268 10/31/04 12229 13039 12913 10/31/05 12402 13370 13062 10/31/06 13042 14138 13724 10/31/07 13154 14550 14193 10/31/08 12173 14069 14268 10/31/09 13551 15982 15896 10/31/10 14751 17225 17064
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED OCTOBER 31, 2010 - --------------------------------------------------------------------------------
CLASS SALES CHARGE ONE YEAR FIVE YEARS - ----------------------------------------------------------------------------------------------------------------------------------- Investor Class Shares(3) Maximum 4.5% Initial Sales Charge With sales charges 4.17% 2.84% Excluding sales charges 9.08 3.80 - ----------------------------------------------------------------------------------------------------------------------------------- Class A Shares Maximum 4.5% Initial Sales Charge With sales charges 4.33 2.90 Excluding sales charges 9.25 3.85 - ----------------------------------------------------------------------------------------------------------------------------------- Class B Shares Maximum 5% CDSC With sales charges 3.85 3.19 if Redeemed Within the First Six Years of Purchase Excluding sales charges 8.85 3.53 - ----------------------------------------------------------------------------------------------------------------------------------- Class C Shares Maximum 1% CDSC With sales charges 7.85 3.53 if Redeemed Within One Year of Purchase Excluding sales charges 8.85 3.53 - ----------------------------------------------------------------------------------------------------------------------------------- Class I Shares(4) No Sales Charge 9.48 4.06 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS EXPENSE CLASS TEN YEARS RATIO(2) - ------------------------------------------------- Investor Class Shares(3) 3.75% 1.25% 4.23 1.25 - ------------------------------------------------- Class A Shares 3.78 1.08 4.25 1.08 - ------------------------------------------------- Class B Shares 3.96 1.50 3.96 1.50 - ------------------------------------------------- Class C Shares 3.96 1.51 3.96 1.51 - ------------------------------------------------- Class I Shares(4) 4.49 0.83 - -------------------------------------------------
1. The performance table and graph do not reflect the deduction of taxes that a shareholder would pay on distributions or Fund-share redemptions. Total returns reflect maximum applicable sales charges as indicated in the table above, change in share price, and reinvestment of dividend and capital gain distributions. The graph assumes the initial investment amount shown above and reflects the deduction of all sales charges that would have applied for the period of investment. Performance figures reflect certain fee waivers and/or expense limitations, without which total returns may have been lower. For more information on share classes and current fee waivers and/or expense limitations, please refer to the notes to the financial statements. 2. The gross expense ratios presented reflect the Fund's "Total Annual Fund Operating Expenses" from the most recent Prospectus and may differ from other expense ratios disclosed in this report. 3. Performance figures for Investor Class shares, first offered on February 28, 2008, includes the historical performance of Class B shares through February 27, 2008, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Investor Class shares might have been lower. 4. Performance figures for Class I shares, first offered on December 21, 2009, includes the historical performance of Class B shares through December 20, 2009, adjusted for differences in certain fees and expenses. Unadjusted, the performance shown for Class I shares might have been lower. THE FOOTNOTES ON THE NEXT PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. mainstayinvestments.com 5
BENCHMARK PERFORMANCE ONE FIVE TEN YEAR YEARS YEARS Barclays Capital Municipal Bond Index(5) 7.78% 5.20% 5.59% - ------------------------------------------------------------------------------------- Barclays Capital 3-15 Year Blended Municipal Bond Index(6) 7.35 5.49 5.49 - ------------------------------------------------------------------------------------- Average Lipper General Municipal Debt Fund(7) 7.65 3.87 4.53 - -------------------------------------------------------------------------------------
5. The Barclays Capital Municipal Bond Index includes approximately 15,000 municipal bonds, rated Baa or better by Moody's, with a maturity of at least two years. Bonds subject to the Alternative Minimum Tax or with floating or zero coupons are excluded. The Barclays Capital Municipal Bond Index is the Fund's broad-based securities market index for comparison purposes. Total returns assume the reinvestment of all dividends and capital gains. An investment cannot be made directly in an index. 6. The Barclays Capital 3-15 Year Blended Municipal Bond Index is an index of investment grade municipal bonds with maturities of 3-15 years. The index is calculated on a total return basis. Results assume reinvestment of all income and capital gains. An investment cannot be made directly in an index. 7. The average Lipper general municipal debt fund is representative of funds that invest primarily in municipal debt issues in the top four credit ratings. This benchmark is a product of Lipper Inc. Lipper Inc. is an independent monitor of fund performance. Results are based on average total returns of similar funds with all dividend and capital gain distributions reinvested. THE FOOTNOTES ON THE PRECEDING PAGE ARE AN INTEGRAL PART OF THE TABLE AND GRAPH AND SHOULD BE CAREFULLY READ IN CONJUNCTION WITH THEM. 6 MainStay Tax Free Bond Fund COST IN DOLLARS OF A $1,000 INVESTMENT IN MAINSTAY TAX FREE BOND FUND (UNAUDITED) - -------------------------------------------------------------------------------- The example below is intended to describe the fees and expenses borne by shareholders during the six-month period from May 1, 2010, to October 31, 2010, and the impact of those costs on your investment. EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including exchange fees and sales charges (loads) on purchases (as applicable), and (2) ongoing costs, including management fees, distribution and/or service (12b-1) fees, and other Fund expenses (as applicable). 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 made at the beginning of the six-month period and held for the entire period from May 1, 2010, to October 31, 2010. This example illustrates your Fund's ongoing costs in two ways: ACTUAL EXPENSES The second and third data columns in the table below provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid during the six months ended October 31, 2010. 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 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 fourth and fifth data columns in the table below provide 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 balances or expenses you paid for the six-month period shown. You may use this information to compare the ongoing costs of investing in the Fund with the ongoing costs of investing in other Funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of 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, such as exchange fees or sales charges (loads). Therefore, the fourth and fifth data columns of the table are 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.
ENDING ACCOUNT ENDING ACCOUNT VALUE (BASED VALUE (BASED ON HYPOTHETICAL BEGINNING ON ACTUAL EXPENSES 5% ANNUALIZED EXPENSES ACCOUNT RETURNS AND PAID RETURN AND PAID VALUE EXPENSES) DURING ACTUAL EXPENSES) DURING SHARE CLASS 5/1/10 10/31/10 PERIOD(1) 10/31/10 PERIOD(1) INVESTOR CLASS SHARES $1,000.00 $1,048.60 $4.75 $1,020.60 $4.69 - ------------------------------------------------------------------------------------------------------------- CLASS A SHARES $1,000.00 $1,049.40 $4.24 $1,021.10 $4.18 - ------------------------------------------------------------------------------------------------------------- CLASS B SHARES $1,000.00 $1,047.50 $6.04 $1,019.30 $5.95 - ------------------------------------------------------------------------------------------------------------- CLASS C SHARES $1,000.00 $1,047.50 $6.04 $1,019.30 $5.95 - ------------------------------------------------------------------------------------------------------------- CLASS I SHARES $1,000.00 $1,050.60 $2.95 $1,022.30 $2.91 - -------------------------------------------------------------------------------------------------------------
1. Expenses are equal to the Fund's annualized expense ratio of each class (0.92% for Investor Class, 0.82% for Class A, 1.17% for Class B and Class C and 0.57% for Class I) multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). The table above represents the actual expenses incurred during the one-half year period. mainstayinvestments.com 7 STATE COMPOSITION AS OF OCTOBER 31, 2010 (Unaudited)
California 13.2% Texas 11.2 Florida 9.9 New Jersey 7.5 Massachusetts 5.3 Puerto Rico 4.7 Illinois 3.9 New York 3.9 Pennsylvania 3.9 Georgia 3.6 Louisiana 3.1 Ohio 2.8 Michigan 2.7 South Carolina 2.4 Tennessee 2.3 Washington 2.1 Arizona 1.9 U.S. Virgin Islands 1.9 North Carolina 1.8 North Dakota 1.7 Virginia 1.4 Colorado 1.2 Nevada 1.1 Wisconsin 1.1 Hawaii 0.9 Kansas 0.9 New Mexico 0.8 Delaware 0.6 Wyoming 0.6 Alabama 0.4 Indiana 0.4 Missouri 0.4 Utah 0.3 District of Columbia 0.1 Other Assets, Less Liabilities 0.0++ ----- 100.0% =====
See Portfolio of Investments beginning on page 11 for specific holdings within these categories. ++ Less than one-tenth of a percent. TOP TEN ISSUERS HELD AS OF OCTOBER 31, 2010 1. California State, 5.625%-6.25%, due 4/1/26-11/1/35 2. Texas State Turnpike Authority Central Texas System Revenue, 5.50%, due 8/15/39 3. Massachusetts State Health & Educational Facilities Authority Revenue, Suffolk University, 6.25%, due 7/1/30 4. South Carolina State Ports Authority Revenue, 5.30%, due 7/1/26 5. FYI Properties Wash Lease Revenue, 5.50%, due 6/1/39 6. Chicago, Illinois Housing Authority Capital Program Revenue, 5.00%, due 7/1/23 7. Massachusetts Educational Financing Authority Revenue, 5.70%-6.00%, due 1/1/28-1/1/31 8. Atlanta, Georgia Water & Wastewater Revenue, 5.00%-6.25%, due 11/1/22-11/1/43 9. Texas Private Activity Bond Surface Transportation Corp. Revenue, 7.50%, due 6/30/33 10. Virgin Islands Public Finance Authority, 6.75%, due 10/1/37
8 MainStay Tax Free Bond Fund PORTFOLIO MANAGEMENT DISCUSSION AND ANALYSIS (UNAUDITED) Questions answered by portfolio managers John Loffredo, CFA, and Robert DiMella, CFA, of MacKay Shields LLC, the Fund's Subadvisor. HOW DID MAINSTAY TAX FREE BOND FUND PERFORM RELATIVE TO ITS PEERS AND ITS BENCHMARK DURING THE 12 MONTHS ENDED OCTOBER 31, 2010? Excluding all sales charges, MainStay Tax Free Bond Fund returned 9.08% for Investor Class shares, 9.25% for Class A shares, 8.85% for Class B shares and 8.85% for Class C shares for the 12 months ended October 31, 2010. Over the same period, the Fund's Class I shares returned 9.48%. All share classes outperformed the 7.65% return of the average Lipper(1) general municipal debt fund and the 7.78% return of the Barclays Capital Municipal Bond Index(2) for the 12 months ended October 31, 2010. The Barclays Capital Municipal Bond Index is the Fund's broad-based securities-market index. See page 5 for Fund returns with sales charges. WHAT FACTORS AFFECTED THE FUND'S RELATIVE PERFORMANCE DURING THE REPORTING PERIOD? The Fund outperformed the Barclays Capital Municipal Bond Index during the reporting period primarily because of an overweight position in lower-rated investment-grade credits and an emphasis on longer-dated bonds (those maturing in 20 years or more). WHAT WAS THE FUND'S DURATION(3) STRATEGY DURING THE REPORTING PERIOD? Overall, our strategy is to keep the Fund's duration close to that of the Barclays Capital Municipal Bond Index. At times, depending on conditions in the municipal market, seasonal technicals and our outlook for what lies ahead, we may adjust the Fund's duration modestly shorter or longer. During the reporting period, the Fund's duration was somewhat longer than that of the benchmark index because of the Fund's overweight position in longer-dated bonds. We felt that bonds with longer maturities would outperform shorter-dated bonds as the Build America Bond program reduced the supply of municipal bonds with maturities of 20 years or more. Our positioning decision proved beneficial for the Fund's performance. WHAT SPECIFIC FACTORS, RISKS OR MARKET FORCES PROMPTED SIGNIFICANT DECISIONS FOR THE FUND DURING THE REPORTING PERIOD? We anticipated that the Federal Reserve would maintain the targeted federal funds rate at a very low level for an indefinite period of time to help corporate and individual borrowers reduce interest costs and to help get the economy back on track. We also expected that as the economy showed signs of stabilizing, heavy demand for higher-quality securities would taper off and investors would gravitate toward riskier credits in search of higher yield. In addition, we anticipated that the growth of the Build America Bond Program would result in lower long-term issuance and, thus, contribute to the stronger performance of long-term bonds. As a result, our investment activity centered on adding bonds rated A and BBB to the Fund.(4) We also favored longer-term bonds over short-term bonds within the Fund. Both of these decisions had a positive impact on the Fund's performance during the reporting period. DURING THE REPORTING PERIOD, WHICH MARKET SEGMENTS WERE THE STRONGEST POSITIVE CONTRIBUTORS TO THE FUND'S PERFORMANCE AND WHICH MARKET SEGMENTS WERE PARTICULARLY WEAK? On an absolute basis, the most significant positive contributors to the Fund's performance were revenue bonds, bonds rated A and BBB, and investments with maturities of 20 years or more. The Fund's weakest contributing market segments were securities rated AAA and AA and bonds maturing in 10 years or less. DID THE FUND MAKE ANY SIGNIFICANT PURCHASES OR SALES DURING THE REPORTING PERIOD? We increased the Fund's allocation to bonds maturing in 15 to 30 years. We also reduced the Fund's exposure to intermediate-maturity bonds. We increased the Fund's exposure to bonds rated BBB, while reducing the Fund's exposure to bonds rated AAA and AA. HOW DID THE FUND'S SECTOR WEIGHTINGS CHANGE DURING THE REPORTING PERIOD? During the reporting period, we increased the Fund's exposure both to toll-road issuers and to state general obligation debt. 1. See page 6 for more information on Lipper Inc. 2. See page 6 for more information on the Barclays Capital Municipal Bond Index. 3. Duration is a measure of the price sensitivity of a fixed-income investment to changes in interest rates. Duration is expressed as a number of years and is considered a more accurate sensitivity gauge than average maturity. 4. Debt rated AAA has the highest rating assigned by Standard & Poor's, and in the opinion of Standard & Poor's, the obligor's capacity to meet its financial commitment on the obligation is extremely strong. Debt rated AA by Standard & Poor's is deemed by Standard & Poor's to differ from the highest- rated issues only in small degree. In the opinion of Standard & Poor's, the obligor's capacity to meet its financial commitment on the obligation is very strong. Debt rated A by Standard & Poor's is deemed by Standard & Poor's to be somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. In the opinion of Standard & Poor's, however, the obligor's capacity to meet its financial commitment on the obligation is still strong. Debt rated BBB by Standard & Poor's is deemed by Standard & Poor's to exhibit adequate protection parameters. It is the opinion of Standard & Poor's, however, that adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation than would be the case debt in higher-rated categories. When applied to Fund holdings, ratings are based solely on the creditworthiness of the bonds in the portfolio and are not meant to represent the security or safety of the Fund. mainstayinvestments.com 9 We reduced the Fund's exposure to prerefunded(5) bonds as well as to bonds secured by a dedicated tax stream. HOW WAS THE FUND POSITIONED AT THE END OF THE REPORTING PERIOD? As of October 31, 2010, the Fund was overweight relative to the Barclays Capital Municipal Bond Index in revenue bonds and underweight relative to the benchmark in general obligation bonds. On the same date, the Fund held underweight positions in bonds rated AAA and AA and overweight positions in bonds rated A and BBB. At the end of the reporting period, the Fund remained overweight relative to the benchmark in bonds with maturities of 20 years or more. Each of these positioning strategies helped the Fund's performance during the reporting period. 5. Prerefunding, or advance refunding, is a procedure in which a bond issuer floats a second bond at a lower interest rate, and the proceeds from the sale of the second bond are usually invested in Treasury securities, which in turn, are held in escrow, collateralizing the first bond. Since in most cases, the advance refunded bonds essentially become fully tax-exempt U.S. Treasury securities and no longer represent the credit risk profile of the original borrower, they often increase in value--sometimes significantly. The opinions expressed are those of the portfolio managers as of the date of this report and are subject to change. There is no guarantee that any forecast made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. 10 MainStay Tax Free Bond Fund PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS 100.0%+ - ----------------------------------------------------------- ALABAMA 0.4% Alabama Water Pollution Control Authority Refunding, Revolving Fund Loan Series B, Insured: AMBAC 4.125%, due 2/15/14 (a) $ 1,550,000 $ 1,385,514 ------------ ARIZONA 1.9% Pima County Industrial Development Authority Lease Revenue, Metro Police Facility Series A 6.00%, due 7/1/41 4,000,000 4,357,640 Pima County Industrial Development Authority Revenue, Tucson Electric Power Co. 5.75%, due 9/1/29 1,000,000 1,034,920 Scottsdale Arizona Industrial Development Authority Hospital Revenue, Scottsdale Healthcare 5.00%, due 9/1/17 1,370,000 1,507,959 ------------ 6,900,519 ------------ CALIFORNIA 13.2% California Health Facilities Financing Authority Revenue, Catholic Healthcare Series G 5.25%, due 7/1/23 575,000 596,206 Series A 6.00%, due 7/1/34 3,000,000 3,297,360 California Health Facilities Financing Authority Revenue, Providence Health Services Series B 5.50%, due 10/1/39 535,000 573,531 California Infrastructure & Economic Development Bank Revenue, California Independent System Operator Corp. Series A 5.50%, due 2/1/30 5,400,000 5,600,286 X California State 5.625%, due 4/1/26 2,500,000 2,718,075 6.00%, due 11/1/35 2,500,000 2,817,550 6.25%, due 11/1/34 5,000,000 5,768,100 California State Public Works Board, Lease Revenue Series C 5.25%, due 6/1/28 4,310,000 4,367,969 California State Public Works Revenue, Various Capital Project Series G1 5.75%, due 10/1/30 1,000,000 1,059,680 California Statewide Communities Development Authority Revenue 5.25%, due 11/1/30 1,475,000 1,548,779 California Statewide Communities Development Authority Revenue, Aspire Public School 6.375%, due 7/1/45 3,000,000 3,088,110 Golden State Tobacco Securitization Corp. Series A 4.50%, due 6/1/27 4,595,000 4,168,814 Hayward, California Unified School District, Capital Appreciation Election Series A, Insured: AGM (zero coupon), due 8/1/36 (b) 12,500,000 2,144,375 Los Rios, California Community College District Election Series D 5.375%, due 8/1/34 4,000,000 4,315,240 Morongo, California Unified School District Election Series B, Insured: AGM 5.25%, due 8/1/38 (b) 3,600,000 3,730,680 Sacramento, California Unified School District Election Series C, Insured: AMBAC 5.125%, due 7/1/31 (a) 1,945,000 2,023,170 ------------ 47,817,925 ------------ COLORADO 1.2% E-470 Public Highway Authority Colorado Revenue Series C 5.375%, due 9/1/26 1,000,000 1,011,730 Fronterra Village Metropolitan District, Colorado, Refunding Insured: CIFG 4.375%, due 12/1/36 (c) 1,580,000 1,132,607 North Range Village Metropolitan District, Colorado, Refunding & Improvement Insured: CIFG 4.25%, due 12/1/36 (c) 1,820,000 1,465,901 Sand Creek Metropolitan District Insured: RADIAN 4.625%, due 12/1/31 (d) 875,000 741,344 ------------ 4,351,582 ------------
+ Percentages indicated are based on Fund net assets. X Among the Fund's 10 largest issuers held, as of October 31, 2010. May be subject to change daily. The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 11 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS (CONTINUED) DELAWARE 0.6% Delaware State Economic Development Authority Revenue Pollution Control, Delmarva Power Series C, Insured: AMBAC 4.90%, due 5/1/26 (a) $ 2,250,000 $ 2,269,575 ------------ DISTRICT OF COLUMBIA 0.1% District of Columbia Water and Sewer Authority Revenue, Public Utilities Insured: AGM 5.50%, due 10/1/28 (b) 400,000 486,324 ------------ FLORIDA 9.9% Cape Coral, Florida, Water & Sewer Revenue Insured: AMBAC, AGM 5.00%, due 10/1/36 (a)(b) 6,000,000 6,088,800 Citizens Property Insurance Corp. Revenue Series A-1 5.25%, due 6/1/17 3,500,000 3,785,180 Series A-1 6.00%, due 6/1/16 2,220,000 2,494,636 Florida Hurricane Catastrophe Fund, Florida Finance Corp. Revenue Series A 5.00%, due 7/1/14 2,000,000 2,171,020 Gainesville, Florida, Utilities System Revenue Series A 0.33%, due 10/1/26 390,000 390,000 Highlands County Florida Health Facilities Authority Revenue Hospital, Adventist Health Systems Series D 5.375%, due 11/15/35 (e) 4,500,000 5,043,465 Miami-Dade County Florida Aviation International Airport Revenue Series A, Insured: AGM 5.50%, due 10/1/26 (b)(f) 2,000,000 2,101,360 Series A-1 5.50%, due 10/1/29 3,000,000 3,256,620 Miami-Dade County Florida Solid Waste System Revenue Insured: NATL-RE 5.00%, due 10/1/19 (g) 1,735,000 1,883,134 Miami-Dade County Florida Special Obligation, Subordinate Series B, Insured: NATL-RE (zero coupon), due 10/1/31 (g) 16,935,000 4,653,907 South Florida Water Management District Insured: AMBAC 5.00%, due 10/1/20 (a) 3,535,000 3,866,725 ------------ 35,734,847 ------------ GEORGIA 3.6% X Atlanta, Georgia Water & Wastewater Revenue Insured: AGM 5.00%, due 11/1/43 (b) 1,000,000 1,013,380 Series A 6.00%, due 11/1/22 2,000,000 2,332,080 Series A 6.25%, due 11/1/39 3,500,000 3,945,270 DeKalb County Hospital Authority Revenue, DeKalb Medical Center, Project 6.125%, due 9/1/40 3,500,000 3,631,880 Fulton County Georgia Development Authority Revenue, Piedmont Healthcare, Inc. Series A 5.00%, due 6/15/32 2,050,000 2,122,508 ------------ 13,045,118 ------------ HAWAII 0.9% Hawaii State Department of Budget and Finance Revenue, Hawaiian Electric Co. 6.50%, due 7/1/39 3,000,000 3,324,390 ------------ ILLINOIS 3.9% X Chicago, Illinois Housing Authority Capital Program Revenue Insured: AGM 5.00%, due 7/1/23 (b) 7,000,000 7,461,440 Chicago, Illinois Waterworks Revenue Insured: NATL-RE 6.50%, due 11/1/15 (g) 3,005,000 3,663,336 Cook County, Illinois Series A, Insured: NATL-RE 5.00%, due 11/15/28 (g) 125,000 125,264 Illinois Finance Authority Revenue, Refunding, OSF Healthcare System Series A 6.00%, due 5/15/39 2,560,000 2,710,502 ------------ 13,960,542 ------------ INDIANA 0.4% Indianapolis, Indiana Public Improvement Bond Bank Series A, Insured: AGM 5.50%, due 1/1/38 (b) 1,100,000 1,210,363
12 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS (CONTINUED) INDIANA (CONTINUED) Whiting, Indiana Environmental Facilities Revenue 2.80%, due 6/1/44 $ 200,000 $ 204,036 ------------ 1,414,399 ------------ KANSAS 0.9% Arkansas City Public Building Commission Revenue, South Central Regional Medical Center 7.00%, due 9/1/29 3,000,000 3,333,570 ------------ LOUISIANA 3.1% Louisiana Local Government Environmental Facilities & Community Development Authority Revenue Series A, Insured: AMBAC 5.625%, due 10/1/16 (a) 1,425,000 1,433,764 Louisiana Public Facilities Authority Hospital Revenue, Franciscan Mission Aries 6.75%, due 7/1/39 4,000,000 4,407,480 Louisiana Public Facilities Authority Revenue, Christus Health Series A 6.00%, due 7/1/29 1,600,000 1,725,360 Louisiana State Citizens Property Insurance Corp. Assessment Revenue Series B, Insured: AMBAC 5.00%, due 6/1/20 (a) 2,340,000 2,410,200 New Orleans, Louisiana Sewer Service Revenue Insured: AGM 6.00%, due 6/1/24 (b) 500,000 546,400 Insured: AGM 6.25%, due 6/1/29 (b) 750,000 812,865 ------------ 11,336,069 ------------ MASSACHUSETTS 5.3% X Massachusetts Educational Financing Authority Revenue Series B 5.70%, due 1/1/31 (f) 3,000,000 3,080,550 Series I 6.00%, due 1/1/28 4,000,000 4,295,640 Massachusetts State Health & Educational Facilities Authority Revenue Series C 5.375%, due 7/1/35 2,950,000 2,927,846 X Massachusetts State Health & Educational Facilities Authority Revenue, Suffolk University Series A 6.25%, due 7/1/30 7,550,000 8,358,076 Massachusetts State Water Resources Authority Series DCL-003 0.40%, due 8/1/37 395,000 395,000 ------------ 19,057,112 ------------ MICHIGAN 2.7% Detroit, Michigan Sewer Disposal Revenue Series B, Insured: AGM 7.50%, due 7/1/33 (b) 3,900,000 4,765,059 Detroit, Michigan Water Supply System Series A, Insured: AGM 5.00%, due 7/1/34 (b) 800,000 802,320 Michigan Finance Authority Series E 4.75%, due 8/22/11 4,035,000 4,122,963 Michigan Tobacco Settlement Finance Authority Series A 6.00%, due 6/1/34 250,000 210,957 ------------ 9,901,299 ------------ MISSOURI 0.4% Cape Girardeau County Industrial Development Authority Series A 5.75%, due 6/1/39 1,400,000 1,479,534 ------------ NEVADA 1.1% Clark County Nevada Passenger Facility Charge Revenue, Las Vegas-McCarran International Airport Series A-2, Insured: AMBAC 5.00%, due 7/1/26 (a) 3,750,000 3,942,825 ------------ NEW JERSEY 7.5% New Jersey Economic Development Authority Revenue, Cigarette Tax 5.50%, due 6/15/31 2,420,000 2,370,729 New Jersey Economic Development Authority Revenue, MSU Student Housing Project 5.875%, due 6/1/42 1,000,000 1,049,640 New Jersey Economic Development Authority Revenue, MSU Student Housing Project-Provident Group-Montclair LLC 5.375%, due 6/1/25 4,500,000 4,679,235
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 13 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS (CONTINUED) NEW JERSEY (CONTINUED) New Jersey Health Care Facilities Financing Authority Revenue, Cigarette Tax 5.625%, due 6/15/18 $ 2,550,000 $ 2,551,938 New Jersey Health Care Facilities Financing Authority Revenue, Hackensack University Medical Center Insured: GTY 5.25%, due 1/1/31 (h) 2,760,000 2,921,046 New Jersey Health Care Facilities Financing Authority, Hospital Asset Transformation Program Series A 5.75%, due 10/1/31 2,000,000 2,191,200 New Jersey State Higher Education Assistance Authority Revenue, Student Loan Series A, Insured: AGM 6.125%, due 6/1/30 (b)(f) 4,000,000 4,300,680 Newark, New Jersey Housing Authority Revenue, South Ward Police Facility Insured: AGM 6.75%, due 12/1/38 (b) 4,000,000 4,615,080 Tobacco Settlement Financing Corp. Series 1A 4.50%, due 6/1/23 2,800,000 2,630,320 ------------ 27,309,868 ------------ NEW MEXICO 0.8% New Mexico Finance Authority State Transportation Revenue Series A, Insured: MBIA 5.00%, due 6/15/22 (i) 2,750,000 3,037,238 ------------ NEW YORK 3.9% Albany Industrial Development Agency Civic Facility Revenue Series A, Insured: AGM 5.50%, due 5/1/32 (b) 1,215,000 1,316,149 City of New York 2.10%, due 8/1/23 250,000 250,000 Dutchess County, New York, Industrial Development Agency Civic Facility Revenue Series A 4.50%, due 8/1/36 3,975,000 3,645,552 New York Liberty Development Corp. Revenue Refunding, Second Priority Bank of America 5.625%, due 7/15/47 1,400,000 1,462,790 6.375%, due 7/15/49 1,950,000 2,095,139 New York State Dormitory Authority Revenue Series B 7.50%, due 5/15/11 (e) 1,250,000 1,296,525 New York State Environmental Facilities Corp. Pollution Control Revenue, State Water Revolving Fund Series A 7.50%, due 6/15/12 30,000 30,182 Port Authority of New York and New Jersey Insured: FGIC 5.00%, due 10/1/22 (f)(j) 3,725,000 3,921,717 ------------ 14,018,054 ------------ NORTH CAROLINA 1.8% North Carolina Eastern Municipal Power Agency Systems Revenue Series A 5.50%, due 1/1/12 2,000,000 2,097,840 North Carolina Turnpike Authority Series A, Insured: AGM 5.75%, due 1/1/39 (b) 4,000,000 4,339,880 ------------ 6,437,720 ------------ NORTH DAKOTA 1.7% Mclean County North Dakota Solid Waste Facilities Revenue Series A 4.875%, due 7/1/26 6,135,000 6,296,473 ------------ OHIO 2.8% Lucas County Ohio Hospital Revenue, Promedica Healthcare Obligated Group Insured: AMBAC 5.375%, due 11/15/29 (a) 2,830,000 2,845,622 Toledo-Lucas County Port Authority Development Revenue Series A 5.10%, due 5/15/12 320,000 319,907 Series B 6.25%, due 5/15/24 (f) 1,030,000 1,020,236 University of Cincinnati, Ohio, Receipts Series A, Insured: AMBAC 5.00%, due 6/1/31 (a) 5,615,000 5,757,340 ------------ 9,943,105 ------------ PENNSYLVANIA 3.9% Montgomery County Industrial Development Authority 5.25%, due 8/1/33 275,000 290,766 5.75%, due 8/1/30 1,000,000 1,062,570
14 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements.
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS (CONTINUED) PENNSYLVANIA (CONTINUED) Pennsylvania Economic Development Financing Authority Water Facility Revenue Series A 5.00%, due 12/1/33 (f) $ 3,790,000 $ 3,797,277 Series A 5.00%, due 12/1/34 (f) 1,000,000 999,260 Pennsylvania State Turnpike Commission Revenue Series B 5.75%, due 6/1/39 4,000,000 4,378,400 Philadelphia Pennsylvania Airport Revenue Series A, Insured: AGM 5.00%, due 6/15/40 (b) 3,470,000 3,555,084 ------------ 14,083,357 ------------ PUERTO RICO 4.7% Puerto Rico Commonwealth Infrastructure Financing Authority, Special Tax Revenue Series C, Insured: AMBAC 5.50%, due 7/1/23 (a) 5,000,000 5,539,850 Puerto Rico Commonwealth, Refunding, Public Improvement Series B 6.50%, due 7/1/37 5,000,000 5,726,550 Puerto Rico Electric Power Authority Revenue Series WW 5.25%, due 7/1/33 3,000,000 3,122,700 Puerto Rico Sales Tax Financing Corp. Revenue Series C 6.00%, due 8/1/39 2,250,000 2,540,497 ------------ 16,929,597 ------------ SOUTH CAROLINA 2.4% South Carolina Jobs-Economic Development Authority/Economic Development Revenue, Bon Secours-St. Francis Medical Center Series A 5.625%, due 11/15/30 935,000 1,030,024 X South Carolina State Ports Authority Revenue Insured: AGM 5.30%, due 7/1/26 (b)(f) 7,500,000 7,508,325 ------------ 8,538,349 ------------ TENNESSEE 2.3% Blount County Tennessee Public Building Authority Revenue Series A 0.83%, due 6/1/32 425,000 425,000 Series A 0.95%, due 6/1/34 4,450,000 4,450,000 Johnson City Tennessee Health And Educational Facilities Board Hospital Revenue Series A 6.50%, due 7/1/38 1,500,000 1,629,975 Memphis-Shelby County Tennessee Airport Authority Revenue, Refunding Series B 5.75%, due 7/1/24 (f) 1,380,000 1,490,924 Sevier County Tennessee Public Building Authority Revenue Series VI-K-1, Insured: Syncora Guarantee, Inc. 0.95%, due 6/1/34 225,000 225,000 ------------ 8,220,899 ------------ TEXAS 11.2% Dallas-Fort Worth, Texas International Airport Facilities Improvement Revenue Series A, Insured: NATL-RE 6.00%, due 11/1/28 (f)(g) 4,000,000 4,006,280 Gulf Coast Waste Disposal Authority, Texas Environmental Facilities Revenue 2.30%, due 1/1/42 3,000,000 3,037,110 Houston, Texas Airport System Revenue Series B, Insured: FGIC 5.00%, due 7/1/22 (j) 2,985,000 3,205,114 La Vernia Texas Higher Education Finance Corp. Revenue Series A 6.25%, due 8/15/39 1,835,000 1,945,522 Matagorda County, Texas, Navigation District No 1 Revenue Series A, Insured: NATL-RE 5.25%, due 6/1/26 (g) 1,365,000 1,365,560 North Texas Throughway Authority Revenue Series F 5.75%, due 1/1/38 3,000,000 3,167,280 Series A 6.25%, due 2/1/23 2,800,000 2,980,320 Texas Private Activity Bond Surface Transportation Corp Series Lien-LBG 7.50%, due 6/30/32 2,500,000 2,858,725
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 15 PORTFOLIO OF INVESTMENTS OCTOBER 31, 2010 (CONTINUED)
PRINCIPAL AMOUNT VALUE MUNICIPAL BONDS (CONTINUED) TEXAS (CONTINUED) X Texas Private Activity Bond Surface Transportation Corp. Revenue 7.50%, due 6/30/33 $ 6,000,000 $ 6,851,280 X Texas State Turnpike Authority Central Texas System Revenue Series A, Insured: AMBAC 5.50%, due 8/15/39 (a) 10,000,000 10,149,800 Texas State, Public Finance Authority, Charter School Finance Corp. Revenue Series A 6.20%, due 2/15/40 1,000,000 1,058,510 ------------ 40,625,501 ------------ U.S. VIRGIN ISLANDS 1.9% X Virgin Islands Public Finance Authority Series A 6.75%, due 10/1/37 6,000,000 6,765,540 ------------ UTAH 0.3% Herrriman Utah Special Assessment 5.00%, due 11/1/24 575,000 588,231 5.00%, due 11/1/29 425,000 427,877 ------------ 1,016,108 ------------ VIRGINIA 1.4% Capital Beltway Funding Corp. Revenue Series B 3.55%, due 12/31/47 (f) 5,000,000 5,000,000 ------------ WASHINGTON 2.1% Central Puget Sound Regional Transportation Authority Sales & Use Tax Revenue Series 2625Z 0.31%, due 11/1/15 175,000 175,000 X FYI Properties Wash Lease Revenue 5.50%, due 6/1/39 7,000,000 7,491,750 ------------ 7,666,750 ------------ WISCONSIN 1.1% Wisconsin State Health & Educational Facilities Authority Revenue 5.00%, due 7/1/20 1,785,000 1,807,866 5.00%, due 7/1/25 2,270,000 2,279,216 ------------ 4,087,082 ------------ WYOMING 0.6% Campbell County, Wyoming Solid Waste Facilities Revenue Series A 5.75%, due 7/15/39 2,000,000 2,211,000 ------------ Total Municipal Bonds (Cost $344,729,141) 361,927,785 ------------ Total Investments (Cost $344,729,141) (k) 100.0% 361,927,785 Other Assets, Less Liabilities 0.0++ 179,014 ----------- ------------ Net Assets 100.0% $362,106,799 =========== ============
++ Less than one-tenth of a percent. (a) AMBAC--Ambac Assurance Corp. (b) AGM--Assured Guaranty Municipal Corp. (c) CIFG--CIFG Group (d) RADIAN--Radian Asset Assurance, Inc. (e) Pre-refunding Security--issuer has or will issue new bonds and use the proceeds to purchase Treasury securities that mature at or near the same date as the original issue's call date. (f) Interest on these securities is subject to alternative minimum tax. (g) NATL-RE--National Public Finance Guarantee (h) GTY--Assured Guaranty Corp. (i) MBIA--MBIA Insurance Corp. (j) FGIC--Financial Guaranty Insurance Co. (k) At October 31, 2010, cost is $344,729,141 for federal income tax purposes and net unrealized appreciation is as follows:
Gross unrealized appreciation $17,408,359 Gross unrealized depreciation (209,715) ----------- Net unrealized appreciation $17,198,644 ===========
16 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. The following is a summary of the fair valuations according to the inputs used as of October 31, 2010, for valuing the Fund's assets. ASSET VALUATION INPUTS
QUOTED PRICES IN ACTIVE SIGNIFICANT MARKETS FOR OTHER SIGNIFICANT IDENTICAL OBSERVABLE UNOBSERVABLE ASSETS INPUTS INPUTS DESCRIPTION (LEVEL 1) (LEVEL 2) (LEVEL 3) TOTAL Investments in Securities (a) Municipal Bonds $ -- $361,927,785 $ -- $361,927,785 -------- ------------ -------- ------------ Total Investments in Securities $ -- $361,927,785 $ -- $361,927,785 ======== ============ ======== ============
(a) For a complete listing of investments and their industries, see the Portfolio of Investments. For the period ended October 31, 2010, the Fund did not have any transfers between Level 1 and Level 2 fair value measurements. (See Note 2) At October 31, 2010, the Fund did not hold any investments with significant unobservable inputs (Level 3). (See Note 2) The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 17 STATEMENT OF ASSETS AND LIABILITIES AS OF OCTOBER 31, 2010 ASSETS - -------------------------------------------------- Investment in securities, at value (identified cost $344,729,141) $361,927,785 Cash 19,816 Receivables: Interest 5,850,310 Fund shares sold 3,312,083 Investment securities sold 1,325,229 Other assets 62,585 ------------ Total assets 372,497,808 ------------ LIABILITIES - -------------------------------------------------- Payables: Investment securities purchased 9,372,274 Fund shares redeemed 191,788 Manager (See Note 3) 126,470 NYLIFE Distributors (See Note 3) 88,743 Transfer agent (See Note 3) 39,120 Shareholder communication 26,506 Professional fees 20,901 Custodian 2,363 Trustees 981 Accrued expenses 2,375 Dividend payable 519,488 ------------ Total liabilities 10,391,009 ------------ Net assets $362,106,799 ============ COMPOSITION OF NET ASSETS - -------------------------------------------------- Share of beneficial interest outstanding (par value of $.01 per share) unlimited number of shares authorized $ 383,479 Additional paid-in capital 362,404,912 ------------ 362,788,391 Distributions in excess of net investment income (286,856) Accumulated net realized loss on investments (17,593,380) Net unrealized appreciation on investments 17,198,644 ------------ Net assets $362,106,799 ============ INVESTOR CLASS Net assets applicable to outstanding shares $ 22,219,830 ============ Shares of beneficial interest outstanding 2,343,532 ============ Net asset value per share outstanding $ 9.48 Maximum sales charge (4.50% of offering price) 0.45 ------------ Maximum offering price per share outstanding $ 9.93 ============ CLASS A Net assets applicable to outstanding shares $242,890,694 ============ Shares of beneficial interest outstanding 25,730,966 ============ Net asset value per share outstanding $ 9.44 Maximum sales charge (4.50% of offering price) 0.44 ------------ Maximum offering price per share outstanding $ 9.88 ============ CLASS B Net assets applicable to outstanding shares $ 13,907,240 ============ Shares of beneficial interest outstanding 1,473,635 ============ Net asset value and offering price per share outstanding $ 9.44 ============ CLASS C Net assets applicable to outstanding shares $ 65,695,090 ============ Shares of beneficial interest outstanding 6,957,641 ============ Net asset value and offering price per share outstanding $ 9.44 ============ CLASS I Net assets applicable to outstanding shares $ 17,393,945 ============ Shares of beneficial interest outstanding 1,842,124 ============ Net asset value and offering price per share outstanding $ 9.44 ============
18 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2010 INVESTMENT INCOME - -------------------------------------------------- INCOME Interest $ 14,882,374 ------------ EXPENSES Manager (See Note 3) 1,493,488 Distribution/Service--Investor Class (See Note 3) 55,264 Distribution/Service--Class A (See Note 3) 498,374 Distribution/Service--Class B (See Note 3) 79,088 Distribution/Service--Class C (See Note 3) 213,876 Transfer agent (See Note 3) 217,360 Professional fees 108,158 Registration 92,684 Shareholder communication 45,189 Custodian 27,917 Trustees 10,357 Miscellaneous 14,290 ------------ Total expenses before waiver/reimbursement 2,856,045 Expense waiver/reimbursement from Manager (See Note 3) (287,611) ------------ Net expenses 2,568,434 ------------ Net investment income 12,313,940 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS - -------------------------------------------------- Net realized gain on investments 4,970,773 Net change in unrealized appreciation (depreciation) on investments 8,204,118 ------------ Net realized and unrealized gain on investments 13,174,891 ------------ Net increase in net assets resulting from operations $25,488,831 ============
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 19 STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED OCTOBER 31, 2010 AND OCTOBER 31, 2009
2010 2009 INCREASE IN NET ASSETS - --------------------------------------------------------- Operations: Net investment income $ 12,313,940 $ 7,719,759 Net realized gain (loss) on investments and swap transactions 4,970,773 (12,322,414) Net change in unrealized appreciation (depreciation) on investments and swap contracts 8,204,118 25,657,323 -------------------------- Net increase in net assets resulting from operations 25,488,831 21,054,668 -------------------------- Dividends to shareholders: From net investment income: Investor Class (966,893) (898,748) Class A (9,075,767) (6,125,325) Class B (653,552) (843,706) Class C (1,804,556) (433,702) Class I (376,448) -- -------------------------- Total dividends to shareholders (12,877,216) (8,301,481) -------------------------- Capital share transactions: Net proceeds from sale of shares 156,464,595 45,502,223 Net asset value of shares issued to shareholders in reinvestment of dividends 7,665,296 5,623,582 Cost of shares redeemed (40,000,749) (28,103,439) -------------------------- Increase in net assets derived from capital share transactions 124,129,142 23,022,366 -------------------------- Net increase in net assets 136,740,757 35,775,553 NET ASSETS - --------------------------------------------------------- Beginning of year 225,366,042 189,590,489 -------------------------- End of year $362,106,799 $225,366,042 ========================== Undistributed (distributions in excess of) net investment income at end of year $ (286,856) $ 276,420 ==========================
20 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. This page intentionally left blank The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 21 FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
INVESTOR CLASS ------------------------------------------ FEBRUARY 28, 2008** THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 Net asset value at beginning of period $ 9.08 $ 8.48 $ 9.07 ------- ------- ------- Net investment income 0.39 (a) 0.34 (a) 0.25 Net realized and unrealized gain (loss) on investments 0.41 0.63 (0.60) ------- ------- ------- Total from investment operations 0.80 0.97 (0.35) ------- ------- ------- Less dividends: From net investment income (0.40) (0.37) (0.24) ------- ------- ------- Net asset value at end of period $ 9.48 $ 9.08 $ 8.48 ======= ======= ======= Total investment return (b) 9.08% 11.67% (4.03%)(c) Ratios (to average net assets)/Supplemental Data: Net investment income 4.24% 3.93% 3.92%++ Net expenses 0.93% 1.02% 0.99%++ Expenses (before waiver/reimbursement) 1.03% 1.25% 1.21%++ Portfolio turnover rate 97% 94% 90% Net assets at end of period (in 000's) $22,220 $21,683 $21,450
CLASS B ------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 Net asset value at beginning of period $ 9.04 $ 8.44 $ 9.48 $ 9.75 $ 9.62 ------- ------- ------- ------- ------- Net investment income 0.37 (a) 0.32 (a) 0.33 0.34 0.36 (a) Net realized and unrealized gain (loss) on investments 0.41 0.63 (1.03) (0.26) 0.13 (e) ------- ------- ------- ------- ------- Total from investment operations 0.78 0.95 (0.70) 0.08 0.49 ------- ------- ------- ------- ------- Less dividends: From net investment income (0.38) (0.35) (0.34) (0.35) (0.36) ------- ------- ------- ------- ------- Net asset value at end of period $ 9.44 $ 9.04 $ 8.44 $ 9.48 $ 9.75 ======= ======= ======= ======= ======= Total investment return (b) 8.85% 11.32% (7.46%) 0.86% 5.16%(d)(e) Ratios (to average net assets)/Supplemental Data: Net investment income 3.99% 3.68% 3.63% 3.63% 3.68% Net expenses 1.18% 1.26% 1.20% 1.14% 1.14% Expenses (before waiver/reimbursement) 1.28% 1.50% 1.40% 1.31% 1.34%(d) Portfolio turnover rate 97% 94% 90% 59% 55% Net assets at end of period (in 000's) $13,907 $18,219 $23,935 $31,921 $45,529
** Commencement of operations. ++ Annualized. (a) Per share data based on average shares outstanding during the period. (b) Total investment return is calculated exclusive of sales charges and assumes the reinvestment of dividends and distributions. Class I shares are not subject to sales charges. (c) Total investment return is not annualized. (d) Includes nonrecurring reimbursements from the Manager for professional fees. The effect on total return was less than one-hundredth of a percent. (e) The impact of nonrecurring dilutive effects resulting from shareholder trading arrangements and the Manager's reimbursement of such losses was less than 0.01% per share on net realized gains on investments and the effect on total investment return was less than 0.01%.
22 MainStay Tax Free Bond Fund The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. FINANCIAL HIGHLIGHTS SELECTED PER SHARE DATA AND RATIOS
CLASS A -------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, 2010 2009 2008 2007 2006 $ 9.04 $ 8.45 $ 9.48 $ 9.75 $ 9.62 -------- -------- -------- -------- -------- 0.40 (a) 0.35 (a) 0.36 0.38 0.38 (a) 0.42 0.62 (1.02) (0.27) 0.13 (e) -------- -------- -------- -------- -------- 0.82 0.97 (0.66) 0.11 0.51 -------- -------- -------- -------- -------- (0.42) (0.38) (0.37) (0.38) (0.38) -------- -------- -------- -------- -------- $ 9.44 $ 9.04 $ 8.45 $ 9.48 $ 9.75 ======== ======== ======== ======== ======== 9.25% 11.72% (7.17%) 1.12% 5.43%(d)(e) 4.36% 4.04% 3.94% 3.88% 3.93% 0.82% 0.90% 0.88% 0.89% 0.89% 0.92% 1.08% 1.04% 1.06% 1.09%(d) 97% 94% 90% 59% 55% $242,891 $162,921 $136,781 $189,210 $200,593
CLASS I ------------ DECEMBER 21, CLASS C 2009** ---------------------------------------------------------------- THROUGH YEAR ENDED OCTOBER 31, OCTOBER 31, 2010 2009 2008 2007 2006 2010 $ 9.04 $ 8.45 $ 9.48 $ 9.75 $ 9.62 $ 9.07 ------- ------- ------ ------ ------ ------- 0.37 (a) 0.32 (a) 0.34 0.35 0.36 (a) 0.38 (a) 0.41 0.61 (1.03) (0.27) 0.13 (e) 0.35 ------- ------- ------ ------ ------ ------- 0.78 0.93 (0.69) 0.08 0.49 0.73 ------- ------- ------ ------ ------ ------- (0.38) (0.34) (0.34) (0.35) (0.36) (0.36) ------- ------- ------ ------ ------ ------- $ 9.44 $ 9.04 $ 8.45 $ 9.48 $ 9.75 $ 9.44 ======= ======= ====== ====== ====== ======= 8.85% 11.31% (7.46%) 0.86% 5.16%(d)(e) 8.25%(c) 3.99% 3.68% 3.64% 3.63% 3.68% 4.64%++ 1.18% 1.28% 1.20% 1.14% 1.14% 0.57%++ 1.28% 1.51% 1.40% 1.31% 1.34%(d) 0.67%++ 97% 94% 90% 59% 55% 97% $65,695 $22,544 $7,425 $6,752 $5,949 $17,394
The notes to the financial statements are an integral part of, and should be read in conjunction with, the financial statements. mainstayinvestments.com 23 NOTES TO FINANCIAL STATEMENTS NOTE 1-ORGANIZATION AND BUSINESS The MainStay Funds (the "Trust") was organized on January 9, 1986, as a Massachusetts business trust. The Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and is comprised of fourteen funds (collectively referred to as the "Funds"). These financial statements and notes relate only to the MainStay Tax Free Bond Fund (the "Fund"), a diversified fund. The Fund currently offers five classes of shares. Class A shares commenced operations on January 3, 1995. Class B shares commenced operations on May 1, 1986. Class C shares commenced operations on September 1, 1998. Investor Class shares commenced operations on February 28, 2008. Class I shares were first offered and commenced operations on December 21, 2009. Investor Class and Class A shares are offered at net asset value ("NAV") per share plus an initial sales charge. No sales charge applies on investments of $500,000 or more (and certain other qualified purchases) in Investor Class and Class A shares, but a contingent deferred sales charge ("CDSC") is imposed on certain redemptions of such shares within one year of the date of purchase. Prior to July 15, 2010, no sales charge applied on investments of $1 million or more in Investor and Class A shares. Class B shares and Class C shares are offered at NAV without an initial sales charge, although a declining CDSC may be imposed on redemptions made within six years of purchase of Class B shares and a 1.00% CDSC may be imposed on redemptions made within one year of purchase of Class C shares. Class I shares are offered at NAV and are not subject to a sales charge. Depending upon eligibility, Class B shares convert to either Investor Class or Class A shares at the end of the calendar quarter eight years after the date they were purchased. Additionally, depending upon eligibility, Investor Class shares may convert to Class A shares and Class A shares may convert to Investor Class shares. The five classes of shares have the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights, and the same terms and conditions, except that Class B and Class C shares are subject to higher distribution and/or service fee rates than Investor Class and Class A shares under a distribution plan pursuant to Rule 12b-1 under the 1940 Act. Class I shares are not subject to a distribution and/or service fee. The Fund's investment objective is to provide a high level of current income free from regular federal income tax, consistent with the preservation of capital. NOTE 2-SIGNIFICANT ACCOUNTING POLICIES The Fund prepares its financial statements in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follows the significant accounting policies described below. (A) SECURITIES VALUATION. Investments are valued as of the close of regular trading on the New York Stock Exchange ("Exchange") (generally 4:00 p.m. Eastern time) on each day the Fund is open for business ("valuation date"). "Fair value" is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market of the investment. Fair value measurements are determined within a framework that has established a three-tier hierarchy which maximizes the use of observable market data and minimizes the use of unobservable inputs to establish classification of fair value measurements for disclosure purposes. "Inputs" refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the information available in the circumstances. The inputs or methodology used for valuing securities may not be an indication of the risks associated with investing in those securities. The three-tier hierarchy of inputs is summarized in the three broad Levels listed below. - - Level 1--quoted prices in active markets for identical investments - - Level 2--other significant observable inputs (including quoted prices for similar investments in active markets, interest rates and yield curves, prepayment speeds, credit risks, etc.) - - Level 3--significant unobservable inputs (including the Fund's own assumptions about the assumptions that market participants would use in determining the fair value of investments) The valuation techniques used by the Fund to measure fair value during the year ended October 31, 2010 maximized the use of observable inputs and minimized the use of unobservable inputs. The Fund may have utilized some of the following fair value techniques: multi-dimensional relational pricing models, option adjusted spread pricing and estimating the price that would have prevailed in a liquid market for an international equity security given information available at the time of evaluation, when there are significant events after the close of local foreign markets. For the year ended October 31, 2010, there have been no changes to the fair value methodologies. The aggregate value by input level, as of October 31, 2010, for the Fund's investments is included at the end of the Fund's Portfolio of Investments. Debt securities are valued at the evaluated mean prices supplied by a pricing agent or brokers selected by the Fund's Manager (as defined in Note 3(A)) in consultation with the Fund's Subadvisor (as defined in Note 3(A)) whose prices reflect broker/dealer supplied valuations and electronic data processing techniques, if such prices are deemed by the Fund's Manager, in consultation with the Fund's Subadvisor, to be representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities, including corporate bonds, U.S. government & federal agency bonds, municipal bonds, foreign bonds, Yankee bonds, convertible bonds, asset-backed securities, and mortgage-backed securities, are generally categorized as Level 2 in the hierarchy. Temporary cash investments acquired over 60 days prior to maturity are valued using the latest bid prices or using valuations based on a 24 MainStay Tax Free Bond Fund matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments which mature in 60 days or less ("Short-Term Investments") are valued at amortized cost. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. These securities are all generally categorized as Level 2 in the hierarchy. Securities for which market quotations are not readily available are valued by methods deemed in good faith by the Fund's Board to represent fair value. Equity and non-equity securities which may be valued in this manner include, but are not limited to: (i) a security the trading for which has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation; (iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been de-listed from a national exchange; (v) a security the market price of which is not available from an independent pricing source or, if so provided, does not, in the opinion of the Fund's Manager or Subadvisor reflect the security's market value; and (vi) a security where the trading on that security's principal market is temporarily closed at a time when, under normal conditions, it would be open. These securities are generally categorized as Level 3 in the hierarchy. At October 31, 2010, the Fund did not hold securities that were valued in such a manner. The Fund adopted Financial Accounting Standards Board Accounting Standards Update No. 2010-06 "Fair Value Measurements and Disclosures" (the "Update"), effective April 30, 2010. The Update requires the Fund to make new disclosures about the amounts of and reasons for significant transfers in and out of Level 1 and Level 2 measurements in the fair value hierarchy and input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The Update also requires that the Fund separately report information on purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. The Fund recognizes transfers between levels as of the beginning of the period. Disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy are summarized under the Level 2 or Level 3 categories listed above. (B) FEDERAL INCOME TAXES. The Fund's policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") applicable to regulated investment companies and to distribute all of the taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no federal income tax provision is required. Management evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. Management has analyzed the Fund's tax positions taken on federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Fund's financial statements. The Fund's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue. (C) DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Unless the shareholder elects otherwise, all dividends and distributions are reinvested in the same class of shares of the Fund, at NAV. Dividends and distributions to shareholders are determined in accordance with federal income tax regulations and may differ from GAAP. (D) SECURITY TRANSACTIONS AND INVESTMENT INCOME. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is accrued as earned using the effective interest rate method. Discounts and premiums on securities purchased, other than Short-Term Investments, for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities or, in the case of a callable security, over the period to the first date of call. Discounts and premiums on Short-Term Investments are accreted and amortized, respectively, on the straight-line method. Investment income and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares pro rata based upon their relative net assets on the date the income is earned or realized and unrealized gains and losses are incurred. (E) EXPENSES. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred, except where direct allocations of expenses can be made. Expenses (other than transfer agent expenses and fees incurred under the shareholder services plans and the distribution plans further discussed in Note 3(B)) are allocated to separate classes of shares pro rata based upon their relative net assets on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. (F) USE OF ESTIMATES. In preparing financial statements in conformity with GAAP, management makes estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. (G) CONCENTRATION OF RISK. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific country, industry or region. (H) INDEMNIFICATIONS. Under the Trust's organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations mainstayinvestments.com 25 NOTES TO FINANCIAL STATEMENTS (CONTINUED) and warranties and which provide general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund. NOTE 3-FEES AND RELATED PARTY TRANSACTIONS (A) MANAGER AND SUBADVISOR. New York Life Investment Management LLC ("New York Life Investments" or the "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life Insurance Company ("New York Life"), serves as the Fund's Manager, pursuant to an Amended and Restated Management Agreement ("Management Agreement"). The Manager provides offices, conducts clerical, recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager also pays the salaries and expenses of all personnel affiliated with the Fund and the operational expenses of the Fund. MacKay Shields LLC ("MacKay Shields" or the "Subadvisor"), a registered investment advisor and an indirect, wholly owned subsidiary of New York Life, serves as Subadvisor and is responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of an Amended and Restated Subadvisory Agreement ("Subadvisory Agreement") between New York Life Investments and the Subadvisor, New York Life Investments pays for the services of the Subadvisor. The Fund pays the Manager a monthly fee for services performed and facilities furnished at an annual rate of the Fund's average daily net assets as follows: 0.50% up to $500 million; 0.475% from $500 million to $1 billion and 0.45% in excess of $1 billion, plus a fee for fund accounting services furnished at an annual rate of the Fund's average daily net assets as follows: 0.05% up to $20 million; 0.0333% from $20 million to $100 million and 0.01% in excess of $100 million. The effective management fee rate (exclusive of any applicable waivers/reimbursements) was 0.52% for the year ended October 31, 2010, inclusive of the effective fund accounting services rate of 0.02% of the Fund's average daily net assets which was previously provided by New York Life Investments under a separate fund accounting agreement. New York Life Investments contractually agreed to waive a portion of its management fee so that the management fee does not exceed 0.40% on assets up to $500 million, 0.375% on assets from $500 million to $1 billion, and 0.35% on assets in excess of $1 billion. At the December 15, 2010, Board of Trustees meeting, the Board approved a revision to the current contractual management fee waiver decreasing the management fee waiver from 0.10% to 0.05% of the Fund's average daily net assets effective March 1, 2011. In this regard, effective March 1, 2011, New York Life Investments will waive a portion of its management fee so that the management fee does not exceed 0.45% on assets up to $500 million, 0.425% on assets from $500 million to $1 billion, and 0.40% on assets in excess of $1 billion. This revised management fee waiver expires February 28, 2012. Effective August 1, 2009, New York Life Investments entered into a written expense limitation agreement under which it agreed to waive a portion of the management fee or reimburse expenses to the extent necessary to ensure that the total ordinary operating expenses for the Fund's Class A shares do not exceed 0.94% of its average daily net assets. New York Life Investments will apply an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This agreement expires on February 28, 2011, and is reviewed by the Board in connection with its review of the Fund's investment advisory agreements. Based on its review, the Board may agree to maintain, modify, or terminate the agreement. Total ordinary operating expenses excludes taxes, interest, litigation, extraordinary expenses, brokerage, other transaction expenses relating to the purchase or sale of portfolio investments, and the fees and expenses of any other funds in which the Fund invests. At the December 15, 2010, Board of Trustees meeting, the Board approved a revision to the current written expense limitation agreement on Class A shares decreasing the expense limitation from 0.94% to 0.82% of its average daily net assets effective March 1, 2011. New York Life Investments will continue to apply an equivalent waiver or reimbursement, in an equal number of basis points, to the other share classes of the Fund. This revised expense limitation agreement expires on February 28, 2012. For the year ended October 31, 2010, New York Life Investments earned fees from the Fund in the amount of $1,493,488 and waived/reimbursed its fees in the amount of $287,611. State Street Bank and Trust Company ("State Street"), 1 Lincoln Street, Boston, Massachusetts 02111, provides sub-administration and sub-accounting services to the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAVs of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the Fund's respective NAVs, and assisting New York Life Investments in conducting various aspects of the Fund's administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments. (B) DISTRIBUTION AND SERVICE FEES. The Trust, on behalf of the Fund, has entered into a Distribution Agreement with NYLIFE Distributors LLC (the "Distributor"), an indirect, wholly-owned subsidiary of New York Life. The Fund has adopted distribution plans, (the "Plans") in accordance with the provisions of Rule 12b- 1 under the 1940 Act. Pursuant to the Investor Class and Class A Plans, the Distributor receives a monthly distribution fee from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Investor Class and Class A shares, which is an expense of the Investor Class and Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B and Class C Plans, the Fund pays the Distributor a monthly distribution fee, which is an expense of the Class B and Class C shares of the Fund, at the annual rate of 0.25% of the average daily net assets of the Fund's Class B and Class C shares, along with a service fee at the annual rate of 0.25% of the average daily net assets of the Class B and Class C shares of the Fund for a total 12b-1 fee of 0.50%. Class I shares are not subject to a distribution or service fee. 26 MainStay Tax Free Bond Fund The Plans provide that the distribution and service fees are payable to the Distributor regardless of the amounts actually expended by the Distributor for distribution of the Fund's shares and service activities. (C) SALES CHARGES. The Fund was advised by the Distributor that the amount of sales charges retained on sales of Investor Class and Class A shares were $8,158 and $148,882, respectively, for the year ended October 31, 2010. The Fund was also advised that the Distributor retained CDSCs on redemptions of Class A, Class B and Class C shares of $5,904, $9,544 and $12,421, respectively, for the year ended October 31, 2010. (D) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT. NYLIM Service Company LLC, an affiliate of New York Life Investments, is the Fund's transfer, dividend disbursing and shareholder servicing agent pursuant to an agreement between NYLIM Service Company LLC and the Trust. NYLIM Service Company LLC has entered into an agreement with Boston Financial Data Services, Inc. ("BFDS") pursuant to which BFDS performs certain transfer agent services on behalf of NYLIM Service Company LLC. Transfer agent expenses incurred by the Fund for the year ended October 31, 2010, were as follows: Investor Class $35,210 - ---------------------------------------------- Class A 86,036 - ---------------------------------------------- Class B 25,289 - ---------------------------------------------- Class C 67,527 - ---------------------------------------------- Class I 3,298 - ----------------------------------------------
(E) SMALL ACCOUNT FEE. Shareholders with small accounts adversely impact the cost of providing transfer agency services. In an effort to reduce total transfer agency expenses, the Fund has implemented a small account fee on certain types of accounts. Certain shareholders with an account balance of less than $1,000 are charged an annual per account fee of $20 (assessed semi- annually). These fees are included in transfer agent fees shown on the Statement of Operations. (F) CAPITAL. At October 31, 2010, New York Life and its affiliates beneficially held shares of the Fund with the following values and percentages of net assets as follows: Class A $59,864 0.0%++ - ------------------------------------------------ Class C 120 0.0++ - ------------------------------------------------ Class I 26,962 0.2 - ------------------------------------------------
++ Less than one-tenth of a percent. (G) OTHER. Pursuant to the Management Agreement, a portion of the cost of legal services provided to the Fund by the Office of the General Counsel of New York Life Investments is payable directly by the Fund. For the year ended October 31, 2010, these fees, which are included in professional fees shown on the Statement of Operations, were $10,114. NOTE 4-FEDERAL INCOME TAX As of October 31, 2010, the components of accumulated gain (loss) on a tax basis were as follows:
ACCUMULATED UNDISTRIBUTED CAPITAL OTHER UNREALIZED TOTAL ORDINARY TAX EXEMPT AND OTHER TEMPORARY APPRECIATION ACCUMULATED INCOME INCOME GAIN (LOSS) DIFFERENCES (DEPRECIATION) GAIN (LOSS) $150,840 $81,792 $(17,593,380) $(519,488) $17,198,644 $(681,592) - --------------------------------------------------------------------- --------------------
The other temporary differences are primarily due to distributions payable. At October 31, 2010, for federal income tax purposes, capital loss carryforwards of $17,593,380 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years indicated. To the extent that these loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any capital loss carryforwards have been fully utilized or expired.
CAPITAL LOSS CAPITAL LOSS AVAILABLE THROUGH AMOUNTS (000'S) 2011 $ 3,146 2012 478 2016 1,647 2017 12,322 - ---------------------------------- ----- Total $17,593 - ---------------------------------- -----
The Fund utilized $4,970,774 of capital loss carryforwards during the year ended October 31, 2010. mainstayinvestments.com 27 NOTES TO FINANCIAL STATEMENTS (CONTINUED) The tax character of distributions paid during the years ended October 31, 2010 and October 31, 2009, shown in the Statement of Changes in Net Assets, was as follows:
2010 2009 Distribution paid from: Ordinary Income $ 50,732 $ 370,756 Exempt Interest Dividends 12,826,484 7,930,725 - ------------------------------------------------------ Total $12,877,216 $8,301,481 - ------------------------------------------------------
NOTE 5-CUSTODIAN State Street is the custodian of the cash and the securities of the Fund. Custodial fees are charged to the Fund based on the market value of securities in the Fund and the number of certain cash transactions incurred by the Fund. NOTE 6-LINE OF CREDIT The Fund and certain affiliated funds maintain a line of credit with a syndicate of banks in order to secure a source of funds for temporary purposes to meet unanticipated or excessive redemption requests. Effective September 1, 2010, under an amended credit agreement, the aggregate commitment amount is $125,000,000 with an optional maximum amount of $175,000,000. The commitment rate is an annual rate of 0.10% of the average commitment amount, plus an annual 0.02% up-front payment payable, regardless of usage, to The Bank of New York Mellon, which serves as the agent to the syndicate. The commitment fee and up- front payment are allocated among certain MainStay Funds based upon net assets and other factors. Interest on any revolving credit loan is charged based upon the Federal Funds Advances rate or the one month LIBOR rate, whichever is higher. Prior to September 1, 2010, the aggregate commitment amount was $125,000,000 with an annualized commitment fee rate of 0.10% of the average commitment amount, plus an up-front payment of 0.04% paid to The Bank of New York Mellon. The line of credit expires on August 31, 2011. There were no borrowings made or outstanding with respect to the Fund on the Credit Agreement during the year ended October 31, 2010. NOTE 7-PURCHASES AND SALES OF SECURITIES (IN 000'S) During the year ended October 31, 2010, purchases and sales of securities, other than short-term securities, were $396,265 and $277,837, respectively. NOTE 8-CAPITAL SHARE TRANSACTIONS
INVESTOR CLASS SHARES AMOUNT Year ended October 31, 2010: Shares sold 220,062 $ 2,042,969 Shares issued to shareholders in reinvestment of dividends 88,874 822,591 Shares redeemed (282,871) (2,622,286) --------------------- Net increase (decrease) in shares outstanding before conversion 26,065 243,274 Shares converted into Investor Class (See Note 1) 170,508 1,585,079 Shares converted from Investor Class (See Note 1) (241,144) (2,255,419) --------------------- Net increase (decrease) (44,571) $ (427,066) ===================== Year ended October 31, 2009: Shares sold 91,282 $ 808,244 Shares issued to shareholders in reinvestment of dividends 86,590 753,775 Shares redeemed (302,466) (2,644,594) --------------------- Net increase (decrease) in shares outstanding before conversion (124,594) (1,082,575) Shares converted into Investor Class (See Note 1) 117,038 1,032,575 Shares converted from Investor Class (See Note 1) (133,943) (1,212,371) --------------------- Net increase (decrease) (141,499) $(1,262,371) =====================
CLASS A SHARES AMOUNT Year ended October 31, 2010: Shares sold 10,196,940 $ 94,144,661 Shares issued to shareholders in reinvestment of dividends 598,616 5,525,110 Shares redeemed (3,026,006) (27,960,275) ------------------------ Net increase (decrease) in shares outstanding before conversion 7,769,550 71,709,496 Shares converted into Class A (See Note 1) 759,834 7,030,745 Shares converted from Class A (See Note 1) (78,133) (726,760) Shares converted from Class A (a) (739,946) (6,763,103) ------------------------ Net increase (decrease) 7,711,305 $ 71,250,378 ======================== Year ended October 31, 2009: Shares sold 3,026,444 $ 27,215,955 Shares issued to shareholders in reinvestment of dividends 465,198 4,038,840 Shares redeemed (2,208,318) (19,125,509) ------------------------ Net increase (decrease) in shares outstanding before conversion 1,283,324 12,129,286 Shares converted into Class A (See Note 1) 575,013 5,062,692 Shares converted from Class A (See Note 1) (34,659) (311,996) ------------------------ Net increase (decrease) 1,823,678 $ 16,879,982 ========================
28 MainStay Tax Free Bond Fund
CLASS B SHARES AMOUNT Year ended October 31, 2010: Shares sold 295,839 $ 2,740,723 Shares issued to shareholders in reinvestment of dividends 51,171 470,784 Shares redeemed (277,988) (2,554,239) --------------------- Net increase (decrease) in shares outstanding before conversion 69,022 657,268 Shares converted from Class B (See Note 1) (610,842) (5,633,645) --------------------- Net increase (decrease) (541,820) $(4,976,377) ===================== Year ended October 31, 2009: Shares sold 164,271 $ 1,433,748 Shares issued to shareholders in reinvestment of dividends 69,749 602,494 Shares redeemed (529,475) (4,617,021) --------------------- Net increase (decrease) in shares outstanding before conversion (295,455) (2,580,779) Shares converted from Class B (See Note 1) (523,358) (4,570,900) --------------------- Net increase (decrease) (818,813) $(7,151,679) =====================
CLASS C SHARES AMOUNT Year ended October 31, 2010: Shares sold 4,778,747 $44,173,733 Shares issued to shareholders in reinvestment of dividends 88,900 822,965 Shares redeemed (402,689) (3,753,300) ---------------------- Net increase (decrease) 4,464,958 $41,243,398 ====================== Year ended October 31, 2009: Shares sold 1,788,795 $16,044,276 Shares issued to shareholders in reinvestment of dividends 26,029 228,473 Shares redeemed (201,133) (1,716,315) ---------------------- Net increase (decrease) 1,613,691 $14,556,434 ======================
CLASS I SHARES AMOUNT Period ended October 31, 2010 (b): Shares sold 1,434,882 $13,362,509 Shares issued to shareholders in reinvestment of dividends 2,548 23,846 Shares redeemed (335,252) (3,110,649) ---------------------- Net increase (decrease) in shares outstanding before conversion 1,102,178 10,275,706 Shares converted into Class I (a) 739,946 6,763,103 ---------------------- Net increase (decrease) 1,842,124 $17,038,809 ======================
(a) In addition to any automatic conversion features described above in Note 1 with respect to Investor Class, Class A and B shares, an investor generally may also elect to convert their shares on a voluntary basis into another share class of the same fund for which an investor is eligible. However, the following limitations apply: - Investor Class and Class A shares that remain subject to a CDSC are ineligible for a voluntary conversion; and - All Class B and C shares are ineligible for a voluntary conversion. These limitations do not impact any automatic conversion features described in Note 1 with respect to Investor Class, Class A and B shares. An investor or an investor's financial intermediary may contact the Fund to request a voluntary conversion between shares classes of the same Fund. An investor may be required to provide sufficient information to establish eligibility to convert to the new share class. All permissible conversions will be made on the basis of the relevant NAVs of the two classes without the imposition of any sales load, fee or other charge. If an investor fails to remain eligible for the new share class, an investor may automatically be converted back to their original share class, or into another share class, if appropriate. (b) Class I shares were first offered on December 21, 2009. NOTE 9-SUBSEQUENT EVENTS In connection with the preparation of the financial statements of the Fund as of and for the fiscal year ended October 31, 2010, events and transactions subsequent to October 31, 2010 through the date the financial statements were issued have been evaluated by the Fund's management for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified other than the revision and extension of the written expense limitation agreement and decrease in the contractual management fee waiver, as disclosed in Note 3(A) to these financial statements. mainstayinvestments.com 29 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Trustees and Shareholders of The MainStay Funds: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the MainStay Tax Free Bond Fund ("the Fund"), one of the funds constituting The MainStay Funds, as of October 31, 2010, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the MainStay Tax Free Bond Fund of The MainStay Funds as of October 31, 2010, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles. /s/ KPMG LLP Philadelphia, Pennsylvania December 23, 2010 30 MainStay Tax Free Bond Fund BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) Section 15(c) of the Investment Company Act of 1940, as amended (the "1940 Act") requires that each mutual fund's board of directors/trustees, including a majority of the independent directors/trustees, annually review and approve the fund's investment advisory agreements. At its June 29-30, 2010 meeting, the Board of Directors/Trustees of the MainStay Group of Funds ("Board") unanimously approved the Management Agreement between the MainStay Tax Free Bond Fund ("Fund") and New York Life Investment Management LLC ("New York Life Investments"), and the Subadvisory Agreement between New York Life Investments and MacKay Shields LLC ("MacKay Shields") on behalf of the Fund. In reaching its decisions to approve these agreements (the "Agreements"), the Board considered information prepared specifically in connection with the contract review process that took place at various meetings between December 2009 and June 2010, as well as information furnished to it throughout the year at regular and special Board meetings. Information requested by and provided to the Board specifically in connection with the contract review process included, among other things, reports on the Fund prepared by Strategic Insight Mutual Fund Research and Consulting LLC ("Strategic Insight"), an independent third- party service provider engaged by the Board to report objectively on the Fund's investment performance, management and subadvisory fees and ordinary operating expenses. The Board also requested and received information from New York Life Investments and MacKay Shields on the fees charged to other investment advisory clients (including institutional separate accounts) that follow investment strategies similar to the Fund, and the rationale for any differences in the Fund's management and/or subadvisory fee and the fees charged to such institutional products. In addition, the Board requested and received information on the profitability of the Fund to New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, and responses to several comprehensive lists of questions encompassing a variety of topics prepared on behalf of the Board by independent legal counsel to the Board and its independent directors/trustees (the "Independent Trustees"). Information provided to the Board at its meetings throughout the year included, among other things, detailed investment performance reports on the Fund prepared by the Investment Consulting Group at New York Life Investments. The structure and format for this regular reporting was developed in consultation with the Board. The Board also received throughout the year, among other things, periodic reports on legal and compliance matters, portfolio turnover, and sales and marketing activity. In determining to approve the Agreements, the members of the Board reviewed and evaluated all of the information and factors they believed to be relevant and appropriate in light of legal advice furnished to them by independent legal counsel and through the exercise of their own business judgment. The broad factors considered by the Board are discussed in greater detail below, and included, among other things: (i) the nature, extent, and quality of the services provided to the Fund by New York Life Investments and MacKay Shields; (ii) the investment performance of the Fund, New York Life Investments and MacKay Shields; (iii) the costs of the services provided, and profits realized, by New York Life Investments and its affiliates, including MacKay Shields as subadviser to the Fund, from their relationship with the Fund; (iv) the extent to which economies of scale may be realized as the Fund grows, and the extent to which economies of scale may benefit Fund investors; and (v) the reasonableness of the Fund's management and subadvisory fee levels and overall total ordinary operating expenses, particularly as compared to similar funds and accounts managed by New York Life Investments and third-party "peer funds" identified by Strategic Insight. While individual members of the Board may have weighed certain factors differently, the Board's decisions to approve the Agreements were based on a comprehensive consideration of all the information provided to the Board, including information provided to the Board throughout the year and specifically in connection with the contract review process. The Board's conclusions with respect to the Agreements also were based, in part, on the Board's consideration of the Agreements in prior years. In addition to considering the above- referenced factors, the Board observed that in the marketplace there are a range of investment options available to shareholders of the Fund, and that the Fund's shareholders, having had the opportunity to consider alternative investment products and services, have chosen to invest in the Fund. A more detailed discussion of the factors that figured prominently in the Board's decisions to approve the Agreements is provided below. NATURE, EXTENT AND QUALITY OF SERVICES TO BE PROVIDED BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS In considering the approval of the Agreements, the Board examined the nature, extent and quality of the services that New York Life Investments provides to the Fund. The Board evaluated New York Life Investments' experience in serving as manager of the Fund, noting that New York Life Investments manages other mutual funds, serves a variety of other investment advisory clients, including other pooled investment vehicles, and has experience with overseeing affiliated and non-affiliated subadvisers. The Board considered the experience of senior personnel at New York Life Investments providing management and administrative services to the Fund, as well as New York Life Investments' reputation and financial condition. The Board considered New York Life Investments' performance in fulfilling its responsibilities for overseeing the Fund's legal and compliance environment, for overseeing MacKay Shields' compliance with the Fund's policies and investment objectives, and for implementing Board directives as they relate to the Fund. The Board considered New York Life Investments' willingness to invest in personnel that benefit the Fund, and noted that New York Life Investments also is responsible for paying all of the salaries and expenses for the Fund's officers. The Board also considered the benefits to shareholders of being part of the MainStay Group of Funds, including the privilege of exchanging investments between the same class of shares without the imposition of a sales charge, as described more fully in the Fund's prospectus. The Board also examined the nature, extent and quality of the services that MacKay Shields provides to the Fund. The Board evaluated MacKay Shields' experience in serving as subadviser to the Fund and managing other portfolios. It examined MacKay Shields' track record and experience in providing investment advisory services, the experience of investment advisory, senior management and administrative personnel at MacKay Shields, and MacKay Shields' overall legal and compliance environment. The Board also reviewed MacKay Shields' mainstayinvestments.com 31 BOARD CONSIDERATION AND APPROVAL OF MANAGEMENT AGREEMENT AND SUBADVISORY AGREEMENT (UNAUDITED) (CONTINUED) willingness to invest in personnel designed to benefit the Fund. In this regard, the Board considered the experience of the Fund's portfolio managers, the number of accounts managed by the portfolio managers and the method for compensating portfolio managers. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund likely would continue to benefit from the nature, extent and quality of these services as a result of New York Life Investments' and MacKay Shields' experience, personnel, operations and resources. INVESTMENT PERFORMANCE In evaluating the Fund's investment performance, the Board considered investment performance results in light of the Fund's investment objective, strategies and risks, as disclosed in the Fund's prospectus. The Board particularly considered the detailed investment performance reports provided by New York Life Investments' Investment Consulting Group on the Fund throughout the year. These reports include, among other things, information on the Fund's gross and net returns, the Fund's investment performance relative to relevant investment categories and Fund benchmarks, the Fund's risk-adjusted investment performance, and the Fund's investment performance as compared to similar competitor funds, as appropriate. The Board also considered information provided by Strategic Insight showing the investment performance of the Fund as compared to peer funds. In considering the Fund's investment performance, the Board focused principally on the Fund's long-term performance track record. The Board also gave weight to its ongoing discussions with senior management at New York Life Investments concerning the Fund's investment performance, as well as discussions between the Fund's portfolio managers and the Board that occurred at meetings from time to time throughout the year and in previous years. The Board also considered any specific actions that New York Life Investments had taken, or had agreed with the Board to take, to enhance Fund investment performance, and the results of those actions. Based on these considerations, the Board concluded, within the context of its overall determinations regarding the Agreements, that the long-term investment performance of the Fund, along with ongoing efforts by New York Life Investments and MacKay Shields to enhance investment returns, supported a determination to approve the Agreements. The Fund discloses more information about investment performance in the Portfolio Management Discussion and Analysis, Investment and Performance Comparison and Financial Highlights sections of this Annual Report and in the Fund's prospectus. COSTS OF THE SERVICES PROVIDED, AND PROFITS TO BE REALIZED, BY NEW YORK LIFE INVESTMENTS AND MACKAY SHIELDS The Board considered the costs of the services provided by New York Life Investments and MacKay Shields under the Agreements, and the profits realized by New York Life Investments and its affiliates due to their relationships with the Fund. Because MacKay Shields is an affiliate of New York Life Investments whose subadvisory fees are paid directly by New York Life Investments, the Board considered cost and profitability information for New York Life Investments and MacKay Shields in the aggregate. In evaluating any costs and profits of New York Life Investments and its affiliates, including MacKay Shields, due to their relationships with the Fund, the Board considered, among other things, each party's investments in personnel, systems, equipment and other resources necessary to manage the Fund, and the fact that New York Life Investments is responsible for paying the subadvisory fees for the Fund. The Board acknowledged that New York Life Investments and MacKay Shields must be in a position to pay and retain experienced professional personnel to provide services to the Fund, and that New York Life Investments' ability to maintain a strong financial position is important in order for New York Life Investments to continue to provide high-quality services to the Fund. The Board noted, for example, costs borne by New York Life Investments and its affiliates due to new and ongoing regulatory and compliance requirements. The Board also noted that the Fund benefits from the allocation of certain fixed costs across the MainStay Group of Funds. In addition, the Board noted the difficulty in obtaining reliable comparative data about mutual fund managers' profitability, since such information generally is not publicly available and may be impacted by numerous factors, including the structure of a fund manager's organization, the types of funds it manages, and the manager's capital structure and costs of capital. While recognizing the difficulty in evaluating a manager's profitability with respect to the Fund, and noting that other profitability methodologies may also be reasonable, the Board concluded that the profitability methodology presented by New York Life Investments to the Board, which was developed by New York Life Investments in consultation with an independent consultant, was reasonable in all material respects. In considering the costs and profitability of the Fund, the Board also considered certain fall-out benefits that may be realized by New York Life Investments and its affiliates due to their relationships with the Fund. The Board further considered that, in addition to fees earned by New York Life Investments for managing the Fund, New York Life Investments' affiliates also earn revenues from serving the Fund in various other capacities, including as the Fund's transfer agent and distributor. The information provided to the Board indicated that the profitability to New York Life Investments and its affiliates arising directly from these other arrangements was not significant. The Board noted that, although it assessed the overall profitability of the Fund to New York Life Investments and its affiliates as part of the annual contract review process, when considering the reasonableness of the fees to be paid to New York Life Investments and its affiliates under the Agreements, the Board considered the profitability of New York Life Investments' relationship with the Fund on a pre-tax basis, and without regard to distribution expenses. After evaluating the information presented to the Board, the Board concluded, within the context of its overall determinations regarding the Agreements, that any profits realized by New York Life Investments and its affiliates (including MacKay Shields) due to their relationships with the Fund supported the Board's determination to approve the Agreements. 32 MainStay Tax Free Bond Fund EXTENT TO WHICH ECONOMIES OF SCALE MAY BE REALIZED AS THE FUND GROWS The Board also considered whether the Fund's expense structure permitted economies of scale to be shared with Fund investors. The Board reviewed information from New York Life Investments showing how the Fund's management fee schedule compared to fee schedules of other funds and accounts managed by New York Life Investments. The Board also reviewed information from Strategic Insight showing how the Fund's management fee schedule hypothetically would compare with fees paid for similar services by peer funds at varying asset levels. The Board noted the extent to which the Fund benefits from any breakpoints or expense limitations. While recognizing the difficulty of determining economies of scale with precision, the Board acknowledged that economies of scale may be shared with the Fund in a number of ways, including, for example, through the imposition of management fee breakpoints and by initially setting relatively lower management fees. Based on this information, the Board concluded, within the context of its overall determinations regarding the Agreements, that the Fund's expense structure appropriately reflects economies of scale for the benefit of Fund investors. The Board noted, however, that it would continue to evaluate the reasonableness of the Fund's expense structure as the Fund grows over time. MANAGEMENT AND SUBADVISORY FEES AND TOTAL ORDINARY OPERATING EXPENSES The Board evaluated the reasonableness of the fees to be paid under the Agreements and the Fund's expected total ordinary operating expenses. The Board primarily considered the reasonableness of the overall management fees paid by the Fund to New York Life Investments, since the fees to be paid to MacKay Shields are paid by New York Life Investments, not the Fund. The Board also considered the impact of the Fund's expense limitation arrangements pursuant to which New York Life Investments has agreed to limit the Fund's total ordinary operating expenses In assessing the reasonableness of the Fund's fees and expenses, the Board primarily considered comparative data provided by Strategic Insight on the fees and expenses charged by similar mutual funds managed by other investment advisers. In addition, the Board considered information provided by New York Life Investments and MacKay Shields on fees charged to other investment advisory clients, including institutional separate accounts and other funds with similar investment objectives as the Fund. In this regard, the Board took into account explanations from New York Life Investments and MacKay Shields about the different scope of services provided to retail mutual funds as compared with other investment advisory clients. The Board noted that, outside of the Fund's management fee and the fees charged under a share class's Rule 12b-1 and/or shareholder services plans, a share class's most significant "other expenses" are transfer agent fees. Transfer agent fees are charged to the Fund based on the number of shareholder accounts (a "per-account" fee) as compared with certain other fees (e.g., management fees), which are charged based on the Fund's average net assets. The Board took into account information from New York Life Investments showing that the Fund's transfer agent fee schedule is reasonable, including industry data showing that the per-account fees that NYLIM Service Company LLC, the Fund's transfer agent, charges the Fund are within the range of per-account fees charged by transfer agents to other mutual funds. In addition, the Board considered representations from New York Life Investments that NYLIM Service Company LLC historically has realized only modest profitability from providing transfer agent services to the Funds. The Board observed that, because the Fund's transfer agent fees are billed on a per-account basis, the impact of transfer agent fees on a share class's expense ratio may be more significant in cases where the share class has a high number of accounts with limited assets (i.e., small accounts). The Board noted that transfer agent fees are a significant portion of total expenses of many funds in the MainStay Group of Funds. The impact of transfer agent fees on the expense ratios of these MainStay Funds tends to be greater than for other open-end retail funds because the MainStay Group of Funds generally has a significant number of small accounts relative to competitor funds. The Board noted the role that the MainStay Group of Funds historically has played in serving the investment needs of New York Life Insurance Company ("New York Life") policyholders, who often maintain smaller account balances than other fund investors. The Board discussed measures that it and New York Life Investments have taken in recent years to mitigate the effect of small accounts on the expense ratios of Fund share classes, including: (i) encouraging New York Life agents to consolidate multiple small accounts held by the same investor into one MainStay Asset Allocation Fund account; (ii) increasing investment minimums from $500 to $1,000 in 2003; (iii) closing small accounts with balances below $500; (iv) since 2007, charging an annual $20.00 small account fee on certain accounts with balances below $1,000; (v) modifying the approach for billing transfer agent expenses to reduce the degree of subsidization by large accounts of smaller accounts; and (vi) introducing Investor Class shares for certain MainStay Funds in early 2008 to consolidate smaller account investors. After considering all of the factors outlined above, the Board concluded that the Fund's management and subadvisory fees and total ordinary operating expenses were within a range that is competitive and, within the context of the Board's overall conclusions regarding the Agreements, support a conclusion that these fees and expenses are reasonable. CONCLUSION On the basis of the information provided to it and its evaluation thereof, the Board, including the Independent Trustees, unanimously voted to approve the Agreements. mainstayinvestments.com 33 FEDERAL INCOME TAX INFORMATION (UNAUDITED) For individual federal income tax purposes, the Fund designated 99.6% of the ordinary income dividends paid during the fiscal year ended October 31, 2010 as attributable to interest income from tax exempt municipal bonds. Such dividends are currently exempt from federal income taxes under Section 103 (a) of the Internal Revenue Code. In February 2011, shareholders will receive an IRS. Form 1099-DIV or substitute Form 1099 which will show the federal tax status of the distributions received by shareholders in calendar year 2010. The amounts that will be reported on such 1099-DIV or substitute Form 1099 will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Fund's fiscal year ended October 31, 2010. PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD A description of the policies and procedures that New York Life Investments uses to vote proxies related to the Fund's securities is available without charge, upon request, (i) by visiting the Fund's website at mainstayinvestments.com; or (ii) on the SEC's website at www.sec.gov. The Fund is required to file with the SEC its proxy voting record for the 12- month period ending June 30 on Form N-PX. The Fund's most recent Form N-PX is available free of charge upon request (i) by calling 800-MAINSTAY (624-6782); (ii) by visiting the Fund's website at mainstayinvestments.com; or (iii) on the SEC's website at www.sec.gov. SHAREHOLDER REPORTS AND QUARTERLY PORTFOLIO DISCLOSURE The Fund is required to file its complete schedule of portfolio holdings with the SEC for its first and third fiscal quarters on Form N-Q. The Fund's Form N-Q is available without charge on the SEC's website at www.sec.gov or by calling MainStay Investments at 800-MAINSTAY (624-6782). You also can obtain and review copies of Form N-Q by visiting the SEC's Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330). 34 MainStay Tax Free Bond Fund BOARD MEMBERS AND OFFICERS (UNAUDITED) The Board Members oversee the MainStay Group of Funds (which is comprised of Funds that are series of The MainStay Funds, Eclipse Funds, Eclipse Funds Inc., MainStay Funds Trust, and MainStay VP Series Fund, Inc.) (collectively, the "Fund Complex"), the Manager and, when applicable, the Subadvisor(s). Each Board Member serves until his or her successor is elected and qualified or until his or her resignation, death or removal. The Retirement Policy provides that a Board Member shall tender his or her resignation upon reaching age 72. A Board Member reaching the age of 72 may continue for additional one-year periods with the approval of the Board's Nominating and Governance Committee. Officers serve a term of one year and are elected annually by the Board Members. The business address of each Board Member and officer listed below is 51 Madison Avenue, New York, New York 10010. The Statement of Additional Information applicable to the Fund includes additional information about the Board Members and is available without charge, upon request, by calling 800-MAINSTAY (624-6782) or by going online to mainstayinvestments.com.
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- INTERESTED BOARD MEMBER* JOHN Y. KIM Indefinite; Member of the Board of 66 None 9/24/60 ECLIPSE FUNDS: Trustee since Managers, President and Chief 2008 (2 funds); Executive Officer (since 2008) ECLIPSE FUNDS INC.: Director of New York Life Investment since 2008 (1 fund); Management LLC and New York THE MAINSTAY FUNDS: Trustee Life Investment Management since 2008 (14 funds); Holdings LLC; Executive Vice MAINSTAY FUNDS TRUST: Trustee President, New York Life since 2009 (29 funds); and Insurance Company (since MAINSTAY VP SERIES FUND, INC.: 2008); Member of the Board, Director since 2008 (20 MacKay Shields LLC (since portfolios). 2008); Chairman of the Board, Institutional Capital LLC, Madison Capital Funding LLC, Madison Square Investors LLC and McMorgan & Company LLC, Chairman of the Board and Chief Executive Officer, NYLIFE Distributors LLC (since 2008); Chairman of the Board, NYLCAP Manager, LLC (since 2008); Executive Vice President, NYLIFE Insurance Company of Arizona and New York Life Insurance and Annuity Corporation (since 2008); President, Prudential Retirement, a business unit of Prudential Financial, Inc. (2002 to 2007) - -----------------------------------------------------------------------------------------------------------------------------
* This Board Member is considered to be an "interested person" of the MainStay Group of Funds within the meaning of the 1940 Act because of his affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column entitled "Principal Occupation(s) During the Past Five Years." mainstayinvestments.com 35
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS SUSAN B. KERLEY Indefinite; President, Strategic 66 Trustee, Legg Mason 8/12/51 ECLIPSE FUNDS: Chairman since Management Advisors LLC (since Partners Funds, Inc., since 2005, and Trustee since 2000 1990) 1991 (60 portfolios) (2 funds); ECLIPSE FUNDS INC.: Chairman since 2005 and Director since 1990 (1 fund); THE MAINSTAY FUNDS: Chairman and Board Member since 2007 (14 funds); MAINSTAY FUNDS TRUST: Chairman and Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Chairman and Director since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ALAN R. LATSHAW Indefinite; Retired; Partner, Ernst & 66 Trustee, State Farm 3/27/51 ECLIPSE FUNDS: Trustee and Young LLP (2002 to 2003); Associates Funds Trusts Audit Committee Financial Partner, Arthur Andersen LLP since 2005 (4 portfolios); Expert since 2007 (2 funds); (1989 to 2002); Consultant to Trustee, State Farm Mutual ECLIPSE FUNDS INC.: Director the MainStay Funds Audit and Fund Trust since 2005 (15 and Audit Committee Financial Compliance Committee (2004 to portfolios); Trustee, State Expert since 2007 (1 fund); 2006) Farm Variable Product Trust THE MAINSTAY FUNDS: Trustee since 2005 (9 portfolios) and Audit Committee Financial Expert since 2006 (14 funds); MAINSTAY FUNDS TRUST: Trustee and Audit Committee Financial Expert since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director and Audit Committee Financial Expert since 2007 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- PETER MEENAN Indefinite; Independent Consultant; 66 None 12/5/41 ECLIPSE FUNDS: Trustee since President and Chief Executive 2002 (2 funds); Officer, Babson--United, Inc. ECLIPSE FUNDS INC.: Director (financial services firm) since 2002 (1 fund); (2000 to 2004); Independent THE MAINSTAY FUNDS: Trustee Consultant (1999 to 2000); since 2007 (14 funds); Head of Global Funds, Citicorp MAINSTAY FUNDS TRUST: Trustee (1995 to 1999) since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2007 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
36 MainStay Tax Free Bond Fund
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS RICHARD H. Indefinite; Managing Director, ICC Capital 66 None NOLAN, JR. ECLIPSE FUNDS: Trustee since Management; 11/16/46 2007 (2 funds); President--Shields/Alliance, ECLIPSE FUNDS INC.: Director Alliance Capital Management since 2007 (1 fund); (1994 to 2004) THE MAINSTAY FUNDS: Trustee since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 2006 (20 portfolios). - ----------------------------------------------------------------------------------------------------------------------------- RICHARD S. Indefinite; Chairman and Chief Executive 66 None TRUTANIC ECLIPSE FUNDS: Trustee since Officer Somerset & Company 2/13/52 2007 (2 funds); (financial advisory firm) ECLIPSE FUNDS INC.: Director (since 2004); Managing since 2007 (1 fund); Director The Carlyle Group THE MAINSTAY FUNDS: Trustee (private investment firm) since 1994 (14 funds); (2002 to 2004); Senior MAINSTAY FUNDS TRUST: Trustee Managing Director, Partner and since 2009 (29 funds); and Board Member, Groupe Arnault MAINSTAY VP SERIES FUND, INC.: S.A. (private investment firm) Director since 2007 (20 (1999 to 2002) portfolios). - ----------------------------------------------------------------------------------------------------------------------------- ROMAN L. WEIL Indefinite; V. Duane Rath Professor 66 None 5/22/40 ECLIPSE FUNDS: Emeritus of Accounting, Trustee and Audit Committee Chicago Booth School of Financial Expert since 2007 (2 Business, University of funds); Chicago; President, Roman L. ECLIPSE FUNDS INC.: Director Weil Associates, Inc. and Audit Committee Financial (consulting firm) Expert since 2007 (1 fund); THE MAINSTAY FUNDS: Trustee and Audit Committee Financial Expert since 2007 (14 funds); MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1994 and Audit Committee Financial Expert since 2003 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
mainstayinvestments.com 37
TERM OF OFFICE, NUMBER OF POSITION(S) HELD FUNDS IN FUND OTHER WITH THE FUND COMPLEX DIRECTORSHIPS NAME AND COMPLEX AND PRINCIPAL OCCUPATION(S) OVERSEEN BY HELD BY DATE OF BIRTH LENGTH OF SERVICE DURING PAST FIVE YEARS BOARD MEMBER BOARD MEMBER - ----------------------------------------------------------------------------------------------------------------------------- NON-INTERESTED BOARD MEMBERS JOHN A. WEISSER Indefinite; Retired. Managing Director of 66 Trustee, Direxion Funds (32 10/22/41 ECLIPSE FUNDS: Salomon Brothers, Inc. (1971 portfolios) and Direxion Trustee since 2007 (2 funds); to 1995) Insurance Trust (1 ECLIPSE FUNDS INC.: Director portfolio) since 2007; since 2007 (1 fund); Trustee, Direxion Shares THE MAINSTAY FUNDS: Trustee ETF Trust, since 2008 (36 since 2007 (14 funds); portfolios) MAINSTAY FUNDS TRUST: Trustee since 2009 (29 funds); and MAINSTAY VP SERIES FUND, INC.: Director since 1997 (20 portfolios). - -----------------------------------------------------------------------------------------------------------------------------
38 MainStay Tax Free Bond Fund The following individuals have been appointed by the Board Members to serve as Officers of the MainStay Group of Funds.
POSITIONS(S) HELD NAME AND WITH THE FUNDS PRINCIPAL OCCUPATION(S) DATE OF BIRTH AND LENGTH OF SERVICE DURING PAST FIVE YEARS - -------------------------------------------------------------------------------- OFFICERS JACK R. Treasurer and Principal Assistant Treasurer, New York BENINTENDE Financial and Accounting Life Investment Management 5/12/64 Officer, Eclipse Funds, Holdings LLC (since 2008); Eclipse Funds, Inc. and The Managing Director, New York MainStay Funds (since 2007), Life Investment Management LLC MainStay Funds Trust (since (since 2007); Treasurer and 2009) Principal Financial and Accounting Officer, MainStay VP Series Fund, Inc.; Vice President, Prudential Investments (2000 to 2007); Assistant Treasurer, JennisonDryden Family of Funds, Target Portfolio Trust, The Prudential Series Fund and American Skandia Trust (2006 to 2007); Treasurer and Principal Financial Officer, The Greater China Fund (2007) - -------------------------------------------------------------------------------- JEFFREY A. Vice President and Chief Managing Director, Compliance ENGELSMAN Compliance Officer, Eclipse (since 2009), Director and 9/28/67 Funds, Eclipse Funds, Inc., Associate General Counsel, New The MainStay Funds and York Life Investment MainStay Funds Trust (since Management LLC (2005 to 2008); 2009) Assistant Secretary, NYLIFE Distributors LLC (2006 to 2008); Assistant Secretary NYLIFE Distributors LLC (2006 to 2008); Vice President and Chief Compliance Officer, MainStay VP Series Fund, Inc. (since 2009); Assistant Secretary, The MainStay Funds and ICAP Funds, Inc. (2006 to 2008); Assistant Secretary, Eclipse Funds, Eclipse Funds, Inc. and MainStay VP Series Fund, Inc. (2005 to 2008); Director and Senior Counsel, Deutsche Bank Asset Management (1999 to 2005) - -------------------------------------------------------------------------------- STEPHEN P. President, Eclipse Funds, Manager, President and Chief FISHER Eclipse Funds, Inc. and The Operating Officer, NYLIFE 2/22/59 MainStay Funds (since 2007), Distributors LLC (since 2008); MainStay Funds Trust (since Chairman of the Board, NYLIM 2009) Service Company LLC (since 2008); Senior Managing Director and Chief Marketing Officer, New York Life Investment Management LLC (since 2005); Managing Director--Retail Marketing, New York Life Investment Management LLC (2003 to 2005); President, MainStay VP Series Fund, Inc. (since 2007) - -------------------------------------------------------------------------------- J. KEVIN GAO Secretary and Chief Legal Managing Director and 10/13/67 Officer, Eclipse Funds, Associate General Counsel, New Eclipse Funds, Inc., The York Life Investment MainStay Funds and MainStay Management LLC (since 2010); Funds Trust (since 2010) Secretary and Chief Legal Officer, MainStay VP Series Fund, Inc. (since 2010); Director and Counsel of Credit Suisse, Chief Legal Officer and Secretary of Credit Suisse Asset Management, LLC and Credit Suisse Funds (2003 to 2010) - -------------------------------------------------------------------------------- SCOTT T. Vice Director, New York Life HARRINGTON President -- Administration, Investment Management LLC 2/8/59 Eclipse Funds, Eclipse Funds, (including predecessor Inc. and The MainStay Funds advisory organizations) (since (since 2005), MainStay Funds 2000); Executive Vice Trust (since 2009) President, New York Life Trust Company and New York Life Trust Company, FSB (since 2006); Vice President--Administration, MainStay VP Series Fund, Inc. (since 2005) - --------------------------------------------------------------------------------
* The Officers listed above are considered to be "interested persons" of the MainStay Group of Funds within the meaning of the 1940 Act because of their affiliation with New York Life Insurance Company, New York Life Investment Management LLC, Madison Square Investors LLC, MacKay Shields LLC, Institutional Capital LLC, Epoch Investment Partners, Inc., Markston International, LLC, Winslow Capital Management, Inc., NYLIFE Securities LLC and/or NYLIFE Distributors LLC, as described in detail above in the column captioned "Principal Occupation(s) During Past Five Years." Officers are elected annually by the Board to serve a one-year term. mainstayinvestments.com 39 MAINSTAY FUNDS MainStay offers a wide range of Funds for virtually any investment need. The full array of MainStay offerings is listed here, with information about the manager, subadvisors, legal counsel, and independent registered public accounting firm. EQUITY FUNDS MainStay 130/30 Core Fund MainStay 130/30 Growth Fund MainStay Common Stock Fund MainStay Epoch U.S. All Cap Fund MainStay Epoch U.S. Equity Fund MainStay Equity Index Fund(1) MainStay Growth Equity Fund MainStay ICAP Equity Fund MainStay ICAP Select Equity Fund MainStay Large Cap Growth Fund MainStay MAP Fund MainStay S&P 500 Index Fund MainStay U.S. Small Cap Fund INCOME FUNDS MainStay Cash Reserves Fund MainStay Diversified Income Fund MainStay Floating Rate Fund MainStay Government Fund MainStay High Yield Corporate Bond Fund MainStay High Yield Municipal Bond Fund MainStay High Yield Opportunities Fund MainStay Indexed Bond Fund MainStay Intermediate Term Bond Fund MainStay Money Market Fund MainStay Principal Preservation Fund MainStay Short Term Bond Fund MainStay Tax Free Bond Fund BLENDED FUNDS MainStay Balanced Fund MainStay Convertible Fund MainStay Income Builder Fund INTERNATIONAL FUNDS MainStay 130/30 International Fund MainStay Epoch Global Choice Fund MainStay Epoch Global Equity Yield Fund MainStay Epoch International Small Cap Fund MainStay Global High Income Fund MainStay ICAP Global Fund MainStay ICAP International Fund MainStay International Equity Fund ASSET ALLOCATION FUNDS MainStay Conservative Allocation Fund MainStay Growth Allocation Fund MainStay Moderate Allocation Fund MainStay Moderate Growth Allocation Fund RETIREMENT FUNDS MainStay Retirement 2010 Fund MainStay Retirement 2020 Fund MainStay Retirement 2030 Fund MainStay Retirement 2040 Fund MainStay Retirement 2050 Fund - -------------------------------------------------------------------------------- MANAGER NEW YORK LIFE INVESTMENT MANAGEMENT LLC New York, New York SUBADVISORS EPOCH INVESTMENT PARTNERS, INC. New York, New York INSTITUTIONAL CAPITAL LLC(2) Chicago, Illinois MACKAY SHIELDS LLC(2) New York, New York MADISON SQUARE INVESTORS LLC(2) New York, New York MARKSTON INTERNATIONAL LLC White Plains, New York WINSLOW CAPITAL MANAGEMENT, INC. Minneapolis, Minnesota LEGAL COUNSEL DECHERT LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 1. Closed to new investors and new purchases as of January 1, 2002. 2. An affiliate of New York Life Investment Management LLC. Not part of the Annual Report MAINSTAYINVESTMENTS.COM MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey, 07054. This report may be distributed only when preceded or accompanied by a current Fund prospectus. 2010 by NYLIFE Distributors LLC. All rights reserved.
- ----------------------------------------------------------------- Not Not a May Lose No Bank Not Insured by Any FDIC/NCUA Deposit Value Guarantee Government Agency Insured - -----------------------------------------------------------------
NYLIM-AO21090 MS333-10 MST11-12/10 13 ITEM 2. CODE OF ETHICS. As of the end of the period covered by this report, the Registrant has adopted a code of ethics (the "Code") that applies to the Registrant's principal executive officer ("PEO") and principal financial officer ("PFO"). A copy of the Code is filed herewith. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the PEO or PFO during the period covered by this report. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Board of Trustees has determined that the Registrant has two audit committee financial experts serving on its Audit Committee. The Audit Committee financial experts are Alan R. Latshaw and Roman L. Weil. Messrs. Latshaw and Weil are "independent" within the meaning of that term under the Investment Company Act of 1940. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees billed for the fiscal year ended October 31, 2010 for professional services rendered by KPMG LLP ("KPMG") for the audit of the Registrant's annual financial statements or services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements for that fiscal year were $578,705. The aggregate fees billed for the fiscal year ended October 31, 2009 for professional services rendered by KPMG for the audit of the Registrant's annual financial statements or services that are normally provided by KPMG in connection with statutory and regulatory filings or engagements for that fiscal year were $708,705. (b) Audit-Related Fees The aggregate fees billed for assurance and related services by KPMG that are reasonably related to the performance of the audit of the Registrant's financial statements and are not reported under paragraph (a) of this Item were: (i) $11,500 for the fiscal year ended October 31, 2010, and (ii) $40,000 for the fiscal year ended October 31, 2009. These audit-related services include review of financial highlights for Registrant's registration statements and issuance of consents to use the auditor's reports. (c) Tax Fees The aggregate fees billed for professional services rendered by KPMG for tax compliance, tax advice, and tax planning were: (i) $90,800 during the fiscal year ended October 31, 2010, and (ii) $88,100 during the fiscal year ended October 31, 2009. These services primarily included preparation of federal, state and local income tax returns and excise tax returns, as well as services relating to excise tax distribution requirements. (d) All Other Fees The aggregate fees billed for products and services provided by KPMG, other than the services reported in paragraphs (a) through (c) of this Item were: (i) $0 during the fiscal year ended October 31, 2010, and (ii) $0 during the fiscal year ended October 31, 2009. (e) Pre-Approval Policies and Procedures (1) The Registrant's Audit and Compliance Committee has adopted pre-approval policies and procedures (the "Procedures") to govern the Committee's pre-approval of (i) all audit services and permissible non-audit services to be provided to the Registrant by its independent accountant, and (ii) all permissible non-audit services to be provided by such independent accountant to the Registrant's investment adviser and to any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Registrant (collectively, the "Service Affiliates") if the services directly relate to the Registrant's operations and financial reporting. In accordance with the Procedures, the Audit and Compliance Committee is responsible for the engagement of the independent accountant to certify the Registrant's financial statements for each fiscal year. With respect to the pre-approval of non-audit services provided to the Registrant and its Service Affiliates, the Procedures provide that the Audit and Compliance Committee may annually pre-approve a list of the types of services that may be provided to the Registrant or its Service Affiliates, or the Audit and Compliance Committee may pre-approve such services on a project-by-project basis as they arise. Unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit and Compliance Committee if it is to be provided by the independent accountant. The Procedures also permit the Audit and Compliance Committee to delegate authority to one or more of its members to pre-approve any proposed non-audit services that have not been previously pre-approved by the Audit and Compliance Committee, subject to the ratification by the full Audit and Compliance Committee no later than its next scheduled meeting. To date, the Audit and Compliance Committee has not delegated such authority. (2) With respect to the services described in paragraphs (b) through (d) of this Item 4, no amount was approved by the Audit and Compliance Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) There were no hours expended on KPMG's engagement to audit the Registrant's financial statements for the most recent fiscal year attributable to work performed by persons other than KPMG's full-time, permanent employees. (g) All non-audit fees billed by KPMG for services rendered to the Registrant for the fiscal years ended October 31, 2010 and October 31, 2009 are disclosed in 4(b)-(d) above. The aggregate non-audit fees billed by KPMG for services rendered to the Registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the Registrant were approximately: (i) $0 for the fiscal year ended October 31, 2010, and (ii) $0 for the fiscal year ended October 31, 2009. (h) The Registrant's Audit and Compliance Committee has determined that the non-audit services rendered by KPMG for the fiscal year ended October 31, 2010 to the Registrant's investment adviser and any entity controlling, controlled by, or under common control with the Registrant's investment adviser that provides ongoing services to the Registrant that were not required to be pre-approved by the Audit and Compliance Committee because they did not relate directly to the operations and financial reporting of the registrant were compatible with maintaining the respective independence of KPMG during the relevant time period. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS The Schedule of Investments is included as part of Item 1 of this report. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not Applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Since the Registrant's last response to this Item, there have been no material changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees. ITEM 11. CONTROLS AND PROCEDURES. (a) Based on an evaluation of the Registrant's Disclosure Controls and Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) (the "Disclosure Controls"), as of a date within 90 days prior to the filing date (the "Filing Date") of this Form N-CSR (the "Report"), the Registrant's principal executive officer and principal financial officer have concluded that the Disclosure Controls are reasonably designed to ensure that information required to be disclosed by the Registrant in the Report is recorded, processed, summarized and reported by the Filing Date, including ensuring that information required to be disclosed in the Report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d)) under the Investment Company Act of 1940 that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940. (b) Certifications of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. THE MAINSTAY FUNDS By: /s/ Stephen P. Fisher --------------------------------- Stephen P. Fisher President and Principal Executive Officer Date: January 7, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Stephen P. Fisher --------------------------------- Stephen P. Fisher President and Principal Executive Officer Date: January 7, 2011 By: /s/ Jack R. Benintende --------------------------------- Jack R. Benintende Treasurer and Principal Financial and Accounting Officer Date: January 7, 2011 EXHIBIT INDEX (a)(1) Code of Ethics (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940. (b) Certification of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002. EX-99.CODE ETH 2 y88798exv99wcodeeth.txt EX-99.CODE ETH Exhibit (a)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICERS MAINSTAY GROUP OF FUNDS (THE "FUNDS") ECLIPSE FUNDS ECLIPSE FUNDS INC. MAINSTAY FUNDS TRUST THE MAINSTAY FUNDS MAINSTAY VP SERIES FUND, INC. APPROVED BY THE BOARD OF THE DIRECTORS/TRUSTEES OF MAINSTAY GROUP OF FUNDS (THE "BOARD") ON SEPTEMBER 30, 2009 PURSUANT TO THE SARBANES-OXLEY ACT OF 2002 I. INTRODUCTION AND APPLICATION The Funds recognize the importance of high ethical standards in the conduct of their business and requires this Code of Ethics ("Code") be observed by their principal executive officers (each, a "Covered Officer") (defined below). In accordance with the Sarbanes-Oxley Act of 2002 (the "Act") and the rules promulgated thereunder by the U.S. Securities and Exchange Commission ("SEC") the Funds are required to file reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended ("1934 Act"), and must disclose whether each has adopted a code of ethics applicable to the principal executive officers. The Board, including a majority of its Independent Directors/Trustees (defined below), has approved this Code as compliant with the requirements of the Act and related SEC rules. All recipients of the Code are directed to read it carefully, retain it for future reference, and abide by the rules and policies set forth herein. Any questions concerning the applicability or interpretation of such rules and policies, and compliance therewith, should be directed to the relevant Compliance Officer (defined below). II. PURPOSE This Code has been adopted by the Board in accordance with the Act and the rules promulgated by the SEC in order to deter wrongdoing and promote: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - full, fair, accurate, timely and understandable disclosure in reports and documents filed by the Funds with the SEC or made in other public communications by the Funds; - compliance with applicable governmental laws, rules and regulations; - prompt internal reporting to an appropriate person or persons of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. III. DEFINITIONS (A) "Covered Officer" means the principal executive officer and senior financial officers, including the principal financial officer, controller or principal accounting officer, or persons performing similar functions. The Covered Officers of the Funds shall be identified in Schedule I, as amended from time to time. (B) "Compliance Officer" means the person appointed by the Funds' Board to administer the Code. The Compliance Officer of the Funds shall be identified in Schedule II as amended from time to time. (C) "Director" or "Trustee" means a director or trustee of the Funds, as applicable. (D) "Executive Officer" shall have the same meaning as set forth in Rule 3b-7 of the 1934 Act. Subject to any changes in the Rule, an Executive Officer means the president, any vice president, any officer who performs a policy making function, or any other person who performs similar policy making functions for the Funds. (E) "Independent Director/Trustee" means a director/trustee of the Board who is not an "interested person" of the Funds within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended ("Investment Company Act"). (F) "Implicit Waiver" means the Compliance Officer failed to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an Executive Officer. (G) "Restricted List" means that listing of securities maintained by the Compliance Officer in which trading by certain individuals subject to the Funds' 17j-1 code of ethics is generally prohibited. (H) "Waiver" means the approval by the Compliance Officer of a material departure from a provision of the Code. IV. HONEST AND ETHICAL CONDUCT (A) Overview. A "conflict of interest" occurs when a Covered Officer's personal interest interferes with the interests of, or his or her service to, the Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the Funds and already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act of 1940, as amended (the "Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Funds because of their status as "affiliated persons" of the Funds. The Funds' and certain of its service providers' compliance policies, programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, restate or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise or result from the contractual relationship between the Funds and New York Life Investment Management LLC (the "Adviser"). The Covered Officers may be officers or employees of the Adviser. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Funds or the Adviser), be involved in establishing policies and implementing decisions that will have different effects on the Adviser and the Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationships between the Funds and the Adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Advisers Act, such activities normally will be deemed to have been handled ethically. In addition, it is recognized by the Board that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. (B) General Policy. Each Covered Officer shall adhere to high standards of honest and ethical conduct. Each Covered Officer has a duty to exercise his or her authority and responsibility for the benefit of the Funds and its shareholders, to place the interests of the shareholders first, and to refrain from having outside interests that conflict with the interests of the Funds and its shareholders. Each such person must avoid any circumstances that might adversely affect, or appear to affect, his or her duty of loyalty to the Funds and its shareholders in discharging his or her responsibilities, including the protection of confidential information and corporate integrity. (C) Conflicts of Interest. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions of the Investment Company Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Funds. (1) Prohibited Conflicts of Interest. Each Covered Officer must: - not use his or her personal influence or personal relationships improperly to influence decisions or financial reporting by the Funds whereby the Covered Officer would benefit personally to the detriment of the Funds; - not cause the Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than benefit the Funds; - not use material non-public knowledge of portfolio transactions made or contemplated for the Funds to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; or - report at least annually the information elicited in the Funds' Director/Trustee's and Officer's Questionnaire relating to potential conflicts of interest. (2) Duty to Disclose Conflicts. Each Covered Officer has the duty to disclose to the Compliance Officer any interest that he or she may have in any firm, corporation or business entity that is not affiliated or participating in any joint venture or partnership with the Funds or its affiliates and that does business with the Funds or that otherwise presents a possible conflict of interest. Disclosure must be timely so that the Funds may take action concerning any possible conflict as it deems appropriate. It is recognized, however, that the Funds or its affiliates may have business relationships with many organizations and that a relatively small interest in publicly traded securities of an organization does not necessarily give rise to a prohibited conflict of interest. Therefore, the following procedures have been adopted. (3) Conflicts of Interest that may be Waived. There are some conflict of interest situations for which a Covered Officer may seek a Waiver from a provision(s) of the Code. Waivers must be sought in accordance with Section VII of the Code. Examples of these include: - Board Memberships. Except as described below, it is considered generally incompatible with the duties of a Covered Officer to assume the position of director of a corporation not affiliated with the Funds. A report should be made by a Covered Officer to the Compliance Officer of any invitation to serve as a director of a corporation that is not an affiliate and the person must receive the approval of the Compliance Officer prior to accepting any such directorship. In the event that approval is given, the Compliance Officer shall immediately determine whether the corporation in question is to be placed on the Funds' Restricted List. - "Other" Business Interests. Except as described below, it is considered generally incompatible with the duties of a Covered Officer to act as an officer, general partner, consultant, agent, representative or employee of any business other than an affiliate. A report should be made of any invitation to serve as an officer, general partner, consultant, agent, representative or employee of any business that is not an affiliate for the approval of the Compliance Officer prior to accepting any such position. In the event that approval is given, the Compliance Officer shall immediately determine whether the business in question is to be placed on the Funds' Restricted List. - Gifts, Entertainment, Favors or Loans. Covered Officers are subject to the New York Life Investment Management Gift and Entertainment Policy and should refer to that Policy for guidance with respect to the limits on giving and receiving gifts/entertainment to and from third parties that do business with the Funds. - Permissible Outside Activities. Covered Officers who, in the regular course of their duties relating to the Funds' private equity/venture capital advisory and investment activities, are asked to serve as the director, officer, general partner, consultant, agent, representative or employee of a privately-held business may do so with the prior written approval of the Compliance Officer. - Doing Business with the Funds. Except as approved by the Compliance Officer, Covered Officers may not have a monetary interest, as principal, co-principal, agent or beneficiary, directly or indirectly, or through any substantial interest in any other corporation or business unit, in any transaction involving the Funds, subject to such exceptions as are specifically permitted under law. V. FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE AND COMPLIANCE Covered Officers shall: - be familiar with the disclosure requirements generally applicable to the Funds; - not knowingly misrepresent, or cause others to misrepresent, facts about the Funds to others, whether within or outside the Funds, including the Funds' Directors/Trustees and auditors, governmental regulators and self-regulatory organizations; - to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Funds, the Adviser and other Funds service providers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds files with, or submits to, the SEC and in other public communications made by the Funds; and - promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. VI. INTERNAL REPORTING BY COVERED PERSONS (A) Certifications and Accountability. Each Covered Officer shall: (1) upon adoption of the Code (or thereafter as applicable upon becoming a Covered Officer), affirm in writing on Schedule A hereto that the Covered Officer has received, read, and understands the Code; (2) annually thereafter affirm on Schedule A hereto that the Covered Officer has complied with the requirements of the Code; and (3) not retaliate against any other Covered Officer or employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith. (B) Reporting. A Covered Officer shall promptly report any knowledge of a material violation of this Code to the Compliance Officer. Failure to do so is itself a violation of the Code. VII. WAIVERS OF PROVISIONS OF THE CODE (A) Application of the Code. The Compliance Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. The Compliance Officer is authorized to consult, as appropriate, with counsel to the Funds/counsel to the Independent Directors/Trustees. However, any approvals or Waivers sought by and/or granted to a Covered Officer will be reported to the Board in accordance with Section VIII, below. (B) Waivers. The Compliance Officer may grant Waivers to the Code in circumstances that present special hardship. Waivers shall be structured to be as narrow as is reasonably practicable with appropriate safeguards designed to prevent abuse of the Waiver. To request a Waiver from the Code, the Covered Officer shall submit to the Compliance Officer a written request describing the transaction, activity or relationship for which a Waiver is sought. The request shall briefly explain the reason for engaging in the transaction, activity or relationship. Notwithstanding the foregoing, no exception will be granted where such exception would result in a violation of SEC rules or other applicable laws. (C) Documentation. The Compliance Officer shall document all Waivers (including Implicit Waivers). If a Waiver is granted, the Compliance Officer shall prepare a brief description of the nature of the Waiver, the name of the Covered Officer and the date of the Waiver so that this information may be disclosed in the next Form N-CSR to be filed on behalf of the Funds or posted on the Funds' internet website within five business days following the date of the Waiver. All Waivers must be reported to the Board at each quarterly meeting as set forth in Section VIII below. VIII. BOARD REPORTING The Compliance Officer shall report any violations of the Code to the Board for its consideration on a quarterly basis. At a minimum, the report shall: describe the violation under the Code and any sanctions imposed; identify and describe any Waivers sought or granted under the Code; and identify any recommended changes to the Code. IX. AMENDMENTS The Covered Officers and the Compliance Officer may recommend amendments to the Code for the consideration and approval of the Board. In connection with any amendment to the Code, the Compliance Officer shall prepare a brief description of the amendment so that the necessary disclosure may be made with the next Form N-CSR to be filed on behalf of the Funds, or posted on the Funds' internet website within five business days following the date of the amendment. X. SANCTIONS Compliance by Covered Officers with the provisions of the Code is required. Covered Officers should be aware that in response to any violation, the Funds will take whatever action is deemed necessary under the circumstances, including, but not limited to, the imposition of appropriate sanctions. These sanctions may include, among others, the reversal of trades, reallocation of trades to client accounts, fines, disgorgement of profits, suspension or termination. XI. RECORD-KEEPING The Compliance Officer shall maintain all records, including any internal memoranda, relating to compliance with the Code or Waivers of a provision(s) of the Code, for a period of 7 years from the end of the fiscal year in which such document was created, 2 years in an accessible place. XII. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Adviser, and NYLIFE Distributors LLC (the "Underwriter"), or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' the Adviser's and the Underwriter's codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code. XIII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Board, the Adviser and the Compliance Officer, and their respective counsels. XIV. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of the Funds, as to any fact, circumstance, or legal conclusion. SCHEDULE I COVERED OFFICERS Stephen P. Fisher, President and Principal Executive Officer Jack R. Benintende, Treasurer and Principal Financial and Accounting Officer SCHEDULE II COMPLIANCE OFFICER Jeffrey A. Engelsman EXHIBIT A MAINSTAY GROUP OF FUNDS ECLIPSE FUNDS ECLIPSE FUNDS INC. MAINSTAY FUNDS TRUST THE MAINSTAY FUNDS MAINSTAY VP SERIES FUND, INC. CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICERS INITIAL AND ANNUAL CERTIFICATION OF COMPLIANCE WITH THE MAINSTAY GROUP OF FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICERS [X] I hereby certify that I have received the MainStay Group of Funds Code of Ethics for Principal Executive Officers adopted pursuant to the Sarbanes-Oxley Act of 2002 (the "Code") and that I have read and understood the Code. I further certify that I am subject to the Code and will comply with each of the Code's provisions to which I am subject. [X] I hereby certify that I have received the MainStay Group of Funds Code of Ethics for Principal Financial Officers adopted pursuant to the Sarbanes-Oxley Act of 2002 (the "Code") and that I have read and understood the Code. I further certify that I have complied with and will continue to comply with each of the provisions of the Code to which I am subject. /s/ Stephen P. Fisher ---------------------------------------- Name: Stephen P. Fisher Title: President and Principal Executive Officer Date: January 7, 2011 /s/ Jack R. Benintende ---------------------------------------- Name: Jack R. Benintende Title: Treasurer and Principal Financial and Accounting Officer Date: January 7, 2011 EX-99.CERT 3 y88798exv99wcert.txt EX-99.CERT Exhibit (a)(2) SECTION 302 CERTIFICATIONS I, Stephen P. Fisher, President and Principal Executive Officer of The MainStay Funds, certify that: 1. I have reviewed this report on Form N-CSR of The MainStay Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Stephen P. Fisher ------------------------------------ Stephen P. Fisher President and Principal Executive Officer, The MainStay Funds Date: January 7, 2011 SECTION 302 CERTIFICATIONS I, Jack R. Benintende, Treasurer and Principal Financial and Accounting Officer of The MainStay Funds, certify that: 1. I have reviewed this report on Form N-CSR of The MainStay Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Jack R. Benintende ------------------------------------ Jack R. Benintende Treasurer and Principal Financial and Accounting Officer, The MainStay Funds Date: January 7, 2011 EX-99.906CERT 4 y88798exv99w906cert.txt EX-99.906CERT Exhibit (b) SECTION 906 CERTIFICATIONS In connection with this report on Form N-CSR for the Registrant as furnished to the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Stephen P. Fisher ------------------------------------ Stephen P. Fisher President and Principal Executive Officer, The MainStay Funds Date: January 7, 2011 SECTION 906 CERTIFICATIONS In connection with this report on Form N-CSR for the Registrant as furnished to the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Jack R. Benintende ------------------------------------ Jack R. Benintende Treasurer and Principal Financial and Accounting Officer, The MainStay Funds Date: January 7, 2011 -----END PRIVACY-ENHANCED MESSAGE-----