-----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, DoHarBO7STphgP/8OVi7ALNs9mkfYkzJb4hdC/i+bpMRLLQlAlIDdLIZapUjZs5k XIK75TcvteB5t8CtlZ/tVg== 0001145443-06-000714.txt : 20060310 0001145443-06-000714.hdr.sgml : 20060310 20060310092352 ACCESSION NUMBER: 0001145443-06-000714 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060310 DATE AS OF CHANGE: 20060310 EFFECTIVENESS DATE: 20060310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST CENTRAL INDEX KEY: 0000799295 IRS NUMBER: 043106135 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-04813 FILM NUMBER: 06677640 BUSINESS ADDRESS: STREET 1: ONE BOSTON PLACE CITY: BOSTON STATE: MA ZIP: 02108-4408 BUSINESS PHONE: 1-800-221-4795 MAIL ADDRESS: STREET 1: ONE BOSTON PLACE CITY: BOSTON STATE: MA ZIP: 02108-4408 FORMER COMPANY: FORMER CONFORMED NAME: STANDISH AYER & WOOD INVESTMENT TRUST DATE OF NAME CHANGE: 19920703 0000799295 S000011501 Standish Mellon Fixed Income Fund C000031762 Standish Mellon Fixed Income Fund 0000799295 S000011502 Standish Mellon Global Fixed Income Fund C000031763 Standish Mellon Global Fixed Income Fund 0000799295 S000011503 Standish Mellon High Yield Bond Fund C000031764 Standish Mellon High Yield Bond Fund 0000799295 S000011504 Standish Mellon International Fixed Income Fund C000031765 Standish Mellon International Fixed Income Fund 0000799295 S000011505 Standish Mellon International Fixed Income Fund II C000031766 Standish Mellon International Fixed Income Fund II 0000799295 S000011506 Standish Mellon Investment Grade Bond Fund C000031767 Standish Mellon Investment Grade Bond Fund 0000799295 S000011507 Standish Mellon Emerging Markets Debt Fund C000031768 Standish Mellon Emerging Markets Debt Fund 0000799295 S000011508 Standish Mellon Opportunistic High Yield Fund C000031769 Standish Mellon Opportunistic High Yield Fund 0000799295 S000011510 Standish Mellon Enhanced Yield Fund C000031771 Standish Mellon Enhanced Yield Fund N-CSR 1 d18722_ncsr.txt 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: 811-4813 -------------------------------------------- MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST ------------------------------------------------------------- (Exact name of registrant as specified in charter) Mellon Financial Center, One Boston Place, Boston, Massachusetts 02108 --------------------------------------------------------------- (Address of principal executive offices) (Zip code) Barbara A. McCann Vice President and Secretary One Boston Place, Boston, MA 02108 --------------------------------------------------------------- (Name and address of agent for service) with a copy to: Christopher P. Harvey, Esq. Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, Massachusetts 02109 Registrant's telephone number, including area code: (617) 248-6000 ----------------------------------------------------------- Date of fiscal year end: December 31 ------------------------------------------ Date of reporting period: December 31, 2005 -------------------------------------- Item 1. Reports to Stockholders. [LOGO]Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Investment Grade Bond Fund - ------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO]Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- The economy grew steadily in 2005 despite continuous rate hikes by the U.S. Federal Reserve, sharply higher energy prices and major disruptions from Hurricanes Katrina and Rita. Job gains remained surprisingly strong with a 12-month moving average of 168,000 jobs, and the unemployment rate fell to 5%. Inflation news was generally positive as CPI, excluding food and energy, hovered in the area of 2% and the latest release of the Fed's preferred measure of inflation, core personal consumption expenditures, posted a moderate 1.8% rise year over year. Against this backdrop, short term interest rates rose significantly more than long term rates, leaving the slope between 2- and 10-year Treasuries virtually flat by year-end. In an environment where the Fed's inflation-fighting credibility and policy transparency has been quite good, interest rate volatility has fallen. Similarly, risk premiums have remained low during 2005. However, there has been a notable pickup in event risk in the corporate market over the course of the year which started with downgrades in the auto sector and spread more broadly with increasing merger activity and leveraged buy out rumors. As we close the year, slowing growth prospects, moderate inflation and a likely decline in the housing market lead us to expect that the Fed is nearly done raising rates. For the latest year, the Standish Mellon Investment Grade Bond Fund outperformed the Lehman Brothers U.S. Aggregate Index. Over the 12-month period ended December 31, 2005, the Fund returned 2.63% net of fees compared to 2.43% for the index. The Fund's yield curve strategy contributed strongly to excess returns as we implemented a barbell position (overweight cash and long bonds versus underweight intermediate maturities) which capitalized on the yield curve flattening. Similarly, a shorter-than-benchmark duration was advantageous given significantly higher intermediate bond yields. In spread sectors, the Fund's allocation to emerging markets was positive as the sector benefited from strong investor demand and improving credit momentum. Treasury Inflation Protected Securities (TIPS) were another source of value added. During the year, we opportunistically added TIPS to take advantage of higher inflation accruals due to the surge in energy prices and undervalued breakeven inflation rates. In the corporate bond market, amid increasing negative headlines and event risk, our defensive security selection was positive for portfolio returns. Finally, our allocation to higher quality bonds in the commercial mortgage and asset backed sectors positively impacted performance. As we begin 2006, we anticipate the Fed to pause soon given policymakers have moderated their hawkish inflation tone and expressed caution in tightening too aggressively. Meanwhile, as low risk premiums persist, the Fund's sector positioning remains defensive. We continue to capitalize on opportunities to purchase insurance in the credit default market for select issuers with a high probability of negative event risk. In the structured market, there are attractively priced opportunities in the asset backed sector with diversified pools of mortgages. We have moved the Fund's duration from shorter than the index to neutral given that we are near the end of the tightening cycle. Finally, in a flat yield curve environment, we favor intermediate bonds which should benefit portfolio returns as we believe interest rates will likely fall in the front end of the curve when the Fed pauses. As always, we look forward to serving you in 2006. /s/ Catherine Powers /s/ Marc Seidner Catherine Powers Marc Seidner 2 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Investment Grade Bond Fund and the Lehman Brothers U.S. Aggregate Index - -------------------------------------------------------------------------------- Years Ended 12/31 Average Annual Total Returns (for period ended 12/31/2005) [GRAPHIC] Since Inception 1 Year 3 Years 5 Years 6/1/2000 - ------------------------------------ 2.63% 3.66% 5.69% 6.70%
Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains and assuming a constant rate of performance each year. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Lipper Inc. 3 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Shareholder Expense Example - ------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Paid Beginning Ending During Period(+) Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - ---------------------------------------------------------------------------------- Actual $1,000.00 $1,001.80 $2.02 Hypothetical (5% return per year before expenses) $1,000.00 $1,023.19 $2.04
(+) Expenses are equal to the Fund's annualized expense ratio of 0.40%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 4 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Portfolio Information as of December 31, 2005 (Unaudited) - --------------------------------------------------------------------------------
Summary of Combined Ratings - -------------------------------------------------------------------------------- Percentage of Quality Breakdown Investments - -------------------------------------------------------------------------------- AAA and higher 58.4% AA 6.2 A 10.9 BBB 24.5 ------ Total 100.0%
Based on ratings from Standard & Poor's and/or Moody's Investors Services. If a security receives split (different) ratings from multiple rating organizations, the Fund treats the security as being rated in the higer rating category.
Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- FNMA TBA 5.000 1/1/2036 7.4% FNMA TBA 4.500 1/1/2021 4.2 U.S. Treasury Bond 5.250 11/15/2028 2.5 FNMA TBA 5.000 1/1/2021 2.7 U.S. Treasury Note 4.750 5/15/2014 1.6 FNMA 5.500 10/1/2033 1.4 FNMA 5.500 2/1/2033 1.3 DLJ Commercial Mortgage Corp. 1998-CF2 B1 7.042 11/12/2031 1.0 FNMA 5.500 11/1/2024 1.0 Northern Rock PLC 144A 5.600 4/30/2014 0.9 ---- 24.0%
* Excluding short-term investments and investment of cash collateral.
Percentage of Economic Sector Allocation Investments - ---------------------------------------------------------------- Treasury/Agency 18.9% Mortgage pass thru 28.7 Credit 32.8 ABS/CMO/CMBS 19.6 ----- 100.0%
The Fund is actively managed. Current holdings may be different than those presented above. 5 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--123.0% BONDS AND NOTES--110.6% Asset Backed--16.1% Accredited Mortgage Loan Trust 2005-1 A2A (a) 4.47875% 4/25/2035 $ 9,613 $ 9,614 Accredited Mortgage Loan Trust 2005-2 A2A (a) 4.47875 7/25/2035 16,841 16,839 Accredited Mortgage Loan Trust 2005-3 A2 (a) 4.47875 9/25/2035 42,493 42,496 ACE Securities Corp. 2005-HE1 A2A (a) 4.49875 2/25/2035 12,284 12,287 Americredit Automobile Receivables Trust 2005-DA A2 4.75000 11/6/2008 25,000 24,992 Ameriquest Mortgage Securities Inc. 2003-8 AF3 4.37000 10/25/2033 49,221 49,049 Bear Stearns Asset Backed Securities, Inc. 2005-HE2 1A1 (a) 4.48875 2/25/2035 12,032 12,034 Bear Stearns Asset Backed Securities, Inc. 2005-HE3 1A1 (a) 4.45875 3/25/2035 43,955 43,961 Capital One Multi-Asset Execution Trust 2004-C1 C1 3.40000 11/16/2009 58,000 57,043 Capital One Prime Auto Receivables Trust 2004-1 A3 2.02000 11/15/2007 4,266 4,239 Chec Loan Trust LLC 2004-2 A1 (a) (g) 4.54875 1/25/2025 11,329 11,330 Chase Manhattan Auto Owner Trust 2003-A A3 1.52000 5/15/2007 18,518 18,482 Chase Manhattan Auto Owner Trust 2003-C CTFS 2.78000 6/15/2010 48,737 47,842 Citigroup Mortgage Loan Trust, Inc. 2005-WF2 AF7 5.24900 8/25/2035 55,000 54,401 Countrywide Alternative Loan Trust 2005-J4 2A1B (a) 4.49875 7/25/2035 21,892 21,878 Countrywide Asset-Backed Certificates 2005-2 2A1 (a) 4.28375 8/25/2035 12,267 12,268 Credit-Based Asset Servicing and Securitization 2005-CB7 AF1 5.20800 11/25/2035 47,574 47,477 Ford Credit Auto Owner Trust 2005-B B 4.64000 4/15/2010 35,000 34,645 Fremont Home Loan Trust 2005-1 2A1 (a) 4.47875 6/25/2035 11,523 11,527 Green Tree Financial Corp. 1994-7 M1 9.25000 3/15/2020 23,614 24,806 Home Equity Asset Trust 2005-5 2A1 (a) 4.48875 11/25/2035 34,883 34,885 Honda Auto Receivables Owner Trust 2005-5 A1 4.22063 11/15/2006 57,872 57,821 Hyundai Auto Receivables Trust 2004-A B 3.46000 8/15/2011 62,000 60,368 Merrill Lynch Mortgage Investors, Inc. 2005-NC1 A2A (a) 4.48875 10/25/2035 2,400 2,400 Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 A2A (a) 4.47875 9/25/2035 8,065 8,066 Morgan Stanley ABS Capital I 2005-WMC2 A2A (a) 4.45875 2/25/2035 10,662 10,663 Morgan Stanley Home Equity Loans 2005-2 A2A (a) 4.46875 5/25/2035 65,453 65,421 Nomura Asset Acceptance Corp. 2005-WF1 2A5 5.15900 3/25/2035 28,000 27,323 Opteum Mortgage Acceptance Corp. 2005-1 A2 (a) 4.51875 2/25/2035 39,524 39,524 Origen Manufactured Housing 2005-A A1 4.06000 7/15/2013 40,065 39,845 Popular ABS Mortgage Pass--Thru Trust 2005-5 AF6 5.33100 11/25/2035 25,000 24,789 Popular ABS Mortgage Pass--Thru Trust 2005-D AF1 5.36100 1/25/2036 23,797 23,782 Residential Asset Mortgage Products, Inc. 2003-RS9 MI1 5.80000 10/25/2033 25,000 24,908 Residential Asset Mortgage Products, Inc. 2005-RS2 AII1 (a) 4.48875 2/25/2035 39,525 39,538 Residential Asset Mortgage Products, Inc. 2005-RS3 AI1 (a) 4.47875 3/25/2035 34,218 34,223 Residential Asset Mortgage Products, Inc., 2004-RS8 AI2 3.81000 1/25/2026 62,951 62,691 Residential Asset Securities Corp. 2004-KS10 AI1 (a) 4.54875 10/25/2013 8,655 8,656 Residential Asset Securities Corp. 2005-EMX1 AI1 (a) 4.47875 3/25/2035 16,463 16,466 Soundview Home Equity Loan Trust 2005-M M3 5.82500 5/25/2035 40,000 39,842 Specialty Underwriting & Residential Finance 2004-BC4 A2A (a) 4.52875 10/25/2035 15,946 15,949 Specialty Underwriting & Residential Finance 2005-BC1 A1A (a) 4.48875 12/25/2035 12,468 12,469 Structured Adjustable Rate Mortgage Loan 2005-8XS A1 (a) 4.47875 4/25/2035 16,783 16,783 USAA Auto Owner Trust 2004-1 A3 2.06000 4/15/2008 43,090 42,595 WFS Financial Owner TR2004-3 B 3.51000 2/17/2012 22,603 22,129 WFS Financial Owner Trust 2003-3 A4 3.25000 5/20/2011 62,000 61,024 WFS Financial Owner Trust 2004-4 C 3.21000 5/17/2012 35,764 35,043 WFS Financial Owner Trust 2005-2 B 4.57000 11/19/2012 56,000 55,590 Whole Auto Loan Trust 2003-1 C 3.13000 3/15/2010 20,845 20,679 Total Asset Backed (Cost $1,471,000) ---------- 1,460,682 ----------
The accompanying notes are an integral part of the financial statements. 6 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------- Collateralized Mortgage Obligations--13.0% GNMA 2004-23B 2.94600% 3/16/2019 $ 67,000 $ 63,834 GNMA 2004-9A 3.36000 8/16/2022 63,712 61,131 GNMA 2003-48 AC 2.71200 2/16/2020 47,875 45,955 GNMA 2003-72 A 3.20620 4/16/2018 26,603 25,789 GNMA 2003-88 AC 2.91410 6/16/2018 26,538 25,486 GNMA 2003-96 B 3.60720 8/16/2018 70,000 68,006 GNMA 2004-12A 3.11000 1/16/2019 57,333 54,901 GNMA 2004-25 AC 3.37700 1/16/2023 58,823 56,618 GNMA 2004-43 A 2.82200 12/16/2019 60,622 57,926 GNMA 2004-51 A 4.14500 2/16/2018 57,114 55,986 GNMA 2004-57 A 3.02200 1/16/2019 31,674 30,399 GNMA 2004-67 A 3.64800 9/16/2017 44,433 43,397 GNMA 2004-77 A 3.40200 3/16/2020 50,673 48,913 GNMA 2004-97 AB 3.08400 4/16/2022 59,579 57,051 GNMA 2005-12 A 4.04400 5/16/2021 20,324 19,873 GNMA 2005-14 A 4.13000 2/16/2027 63,607 62,173 GNMA 2005-32 B 4.38500 8/16/2030 34,000 33,363 GNMA 2005-50 A 4.01500 11/16/2026 37,583 36,653 GNMA 2005-52 A 4.28700 1/16/2030 18,814 18,446 GNMA 2005-87 A 4.44900 3/16/2025 24,941 24,521 GNMA 2005-29 A 4.01600 7/16/2027 26,921 26,208 Nomura Asset Acceptance Corp. 2005-AP2 A5 4.97600 5/25/2035 28,000 27,099 Structured Asset Mortgage Investments, Inc. 1998-2 B 6.00546 4/30/2030 2,220 2,207 Washington Mutual 2003-AR10 A5 4.06884 10/25/2033 72,000 70,594 Washington Mutual 2004-AR7 A6 3.94563 7/25/2034 67,000 64,814 Washington Mutual 2004-AR9 A7 4.18088 8/25/2034 47,000 46,034 Washington Mutual 2005-AR4 A4B 4.67939 4/25/2035 56,000 54,845 ---------- Total Collateralized Mortgage Obligations (Cost $1,212,401) 1,182,222 ---------- Corporate--27.9% Banking--3.0% JPMorgan Chase & Co. 5.12500 9/15/2014 44,000 43,556 MBNA Corp. 6.12500 3/1/2013 15,000 15,906 Regions Financial Corp. (a) 4.38000 8/8/2008 50,000 49,991 Suntrust Capital II 7.90000 6/15/2027 59,000 63,231 Wells Fargo & Co. (c) 6.37500 8/1/2011 30,000 32,155 Zions Bancorporation 2.70000 5/1/2006 32,000 31,792 Zions Bancorporation 6.00000 9/15/2015 36,000 37,621 --------- 274,252 --------- Basic Materials--2.0% Cabot Corp. 144A 5.25000 9/1/2013 60,000 58,362 Celulosa Arauco y Constitution SA 5.62500 4/20/2015 31,000 30,774 ICI Wilmington, Inc. 4.37500 12/1/2008 9,000 8,770 ICI Wilmington, Inc. 5.62500 12/1/2013 36,000 35,833 Temple-Inland 6.62500 1/15/2018 10,000 10,303 Westvaco Corp. 7.95000 2/15/2031 19,000 21,865 Weyerhaeuser Co. 7.37500 3/15/2032 13,000 14,452 --------- 180,359 --------- Communications--1.9% Comcast Corp. (c) 5.50000 3/15/2011 35,000 35,190 New Cingular Wireless Services, Inc. 8.75000 3/1/2031 12,000 15,898 News America Holdings, Inc. 7.70000 10/30/2025 20,000 22,947
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------- Communications (continued) SBC Communications, Inc. 5.625 6/15/2016 $ 23,000 $ 23,142 Sprint Capital Corp. 8.750 3/15/2032 32,000 42,467 Time Warner, Inc. 6.750 4/15/2011 23,000 24,152 Verizon Global Funding Corp. 7.750 6/15/2032 11,000 13,095 -------- 176,891 -------- Consumer Cyclical--0.4% DaimlerChrysler NA Holding Corp. 8.500 1/18/2031 9,000 10,890 Darden Restaurants 6.000 8/15/2035 20,000 18,942 Heinz (H.J.) Co. 144A 6.428 12/1/2008 10,000 10,273 ------ 40,105 ------ Consumer Noncyclical--1.5% Aramark Services, Inc. 7.000 7/15/2006 21,000 21,193 Aramark Services, Inc. 6.375 2/15/2008 16,000 16,365 Coors Brewing Co. 6.375 5/15/2012 10,000 10,597 RR Donnelley & Sons Co. 4.950 4/1/2014 50,000 46,683 Safeway, Inc. (c) 7.250 2/1/2031 20,000 21,582 Wyeth 5.500 2/1/2014 16,000 16,207 -------- 132,627 -------- Energy--1.6% Amerada Hess Corp. 7.300 8/15/2031 23,000 26,618 Amoco Co. 6.500 8/1/2007 50,000 51,244 Chevron Phillips 7.000 3/15/2011 18,000 19,340 Enbridge Energy Partners 6.300 12/15/2034 15,000 15,208 XTO Energy, Inc. 7.500 4/15/2012 29,000 32,439 -------- 144,849 -------- Financial--10.8% Aegon NV 5.75000 12/15/2020 10,000 10,151 Archstone-Smith Operating Trust REIT 5.000 8/15/2007 16,000 15,991 Archstone-Smith Operating Trust REIT 5.250 5/1/2015 11,000 10,848 Arden Realty LP 5.250 3/1/2015 16,000 16,167 Bear Stearns Cos., Inc. 4.500 10/28/2010 21,000 20,501 Boeing Capital Corp. 7.375 9/27/2010 43,000 47,316 Boston Properties, Inc. 6.250 1/15/2013 18,000 18,883 Caterpillar Financial Service Corp. 3.10000 5/15/2007 35,000 34,243 CBA Capital Trust I 144A 5.805 6/30/2015 46,000 47,369 Citigroup, Inc. 4.750 12/15/2010 20,000 19,667 Commercial Net Lease Realtor REIT 6.15000 12/15/2015 10,000 10,149 Countrywide Home Loans, Inc. 4.00000 3/22/2011 20,000 18,819 Credit Suisse FB USA, Inc. 5.12500 8/15/2015 25,000 24,758 Duke Realty LP 3.500 11/1/2007 34,000 33,079 Duke Realty LP 7.750 11/15/2009 14,000 15,194 EOP Operating LP 7.000 7/15/2011 32,000 34,251 Erac USA Finance Co. 144A 7.950 12/15/2009 48,000 52,751 ERP Operating LP 4.750 6/15/2009 8,000 7,907 ERP Operating LP 5.125 3/15/2016 20,000 19,263 Federal Realty Investment 5.650 6/1/2016 10,000 10,057 Glencore Funding LLC 144A 6.000 4/15/2014 62,000 58,314 Goldman Sachs Group, Inc. 4.500 6/15/2010 20,000 19,545 Healthcare Realty Trust, Inc. 8.12500 5/1/2011 30,000 33,228 HSBC Finance Corp. (c) 4.750 4/15/2010 18,000 17,733 International Lease Finance Corp. 4.75000 1/13/2012 23,000 22,425 Jefferies Group, Inc. 7.500 8/15/2007 43,000 44,590 Jefferies Group, Inc. 5.500 3/15/2016 5,000 4,939
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------- Financial (continued) John Deere Capital Corp. 4.50000% 8/25/2008 $ 30,000 $ 29,683 John Deere Capital Corp. 4.40000 7/15/2009 28,000 27,522 Mack-Cali Realty LP REIT 5.05000 4/15/2010 10,000 9,886 Mack-Cali Realty LP REIT 5.12500 1/15/2015 11,000 10,714 MassMutual Global Funding II 144A 3.80000 4/15/2009 37,000 35,863 Merrill Lynch & Co. (c) 4.12500 9/10/2009 27,000 26,198 Morgan Stanley 4.75000 4/1/2014 39,000 37,404 Prudential Financial, Inc. 4.10400 11/15/2006 19,000 18,875 Quest Diagnostics, Inc. 144A 5.12500 11/1/2010 10,000 9,997 Regency Centers LP 5.25000 8/1/2015 4,000 3,927 Residential Capital Corp. 6.37500 6/30/2010 48,000 48,774 Simon Property Group LP 4.87500 8/15/2010 26,000 25,639 Willis Group North America 5.62500 7/15/2015 26,000 25,990 --------- 978,610 --------- Industrial--1.4% American Standard, Inc. 7.62500 2/15/2010 20,000 21,498 Raytheon Co. 5.50000 11/15/2012 8,000 8,182 Republic Services, Inc. 6.08600 3/15/2035 34,000 34,681 Sealed Air Corp. 144A 5.62500 7/15/2013 29,000 28,787 Waste Management, Inc. 6.87500 5/15/2009 16,000 16,870 Waste Management, Inc. 7.37500 8/1/2010 5,000 5,441 Waste Management, Inc. 7.00000 7/15/2028 11,000 12,393 --------- 127,852 --------- Services--1.7% Harrahs Operating Co., Inc. 8.00000 2/1/2011 20,000 22,103 May Dept Stores 6.65000 7/15/2024 35,000 36,799 Metlife, Inc. 5.00000 6/15/2015 58,000 56,887 Nuveen Investments, Inc. 5.00000 9/15/2010 15,000 14,759 Sovereign Bancorp. 144A 4.80000 9/1/2010 25,000 24,502 --------- 155,050 --------- Transportation--0.6% Fedex Corp. 2.65000 4/1/2007 26,000 25,291 Norfolk Southern Corp. 6.75000 2/15/2011 12,000 12,945 Ryder System, Inc. 5.00000 6/15/2012 16,000 15,231 --------- 53,467 --------- Utilities--3.0% Appalachian Power Co. 5.95000 5/15/2033 19,000 19,085 Assurant, Inc. 6.75000 2/15/2034 16,000 17,389 Dominion Resources, Inc. 7.19500 9/15/2014 15,000 16,665 Dominion Resources, Inc. (a) 4.81938 9/28/2007 30,000 30,013 FirstEnergy Corp. 6.45000 11/15/2011 16,000 16,960 Niagara Mohawk Power Corp. 7.75000 10/1/2008 13,000 13,880 Nisource Finance Corp. 5.25000 9/15/2017 20,000 19,454 Oneok, Inc. 5.20000 6/15/2015 23,000 22,586 Pacific Gas & Electric Co. 3.60000 3/1/2009 15,000 14,394 Pepco Holdings, Inc. 5.50000 8/15/2007 28,000 28,169 Public Service Co. of Colorado 4.37500 10/1/2008 28,000 27,649 Southern California Edison Co. (a) 4.43000 1/13/2006 44,000 43,998 --------- 270,242 --------- Total Corporate (Cost $2,573,411) 2,534,304 ---------
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- Municipal Bonds-0.6% Sacramento County California Pension Funding (b) (Cost $52,487) 0.00000% 7/10/2030 $ 56,000 $ 54,640 -------- Sovereign Bonds-0.7% Republic of South Africa 9.12500 5/19/2009 39,000 43,729 United Mexican States (c) 6.62500 3/3/2015 20,000 21,900 -------- Total Sovereign Bonds (Cost $65,864) 65,629 -------- Yankee Bonds-5.5% Amvescap PLC 5.37500 2/27/2013 35,000 34,492 BHP Billiton Finance 5.25000 12/15/2015 10,000 10,040 Koninklijke KPN NV 8.37500 10/1/2030 35,000 41,474 ING Groep NV 5.77500 11/30/2049 15,000 15,203 British Sky Broadcasting PLC 6.87500 2/23/2009 28,000 29,332 Deutsche Telekom International Finance BV 8.25000 6/15/2030 30,000 38,156 Falconbridge Ltd. 5.37500 6/1/2015 5,000 4,821 Falconbridge Ltd. 6.00000 10/15/2015 10,000 10,098 National Westminster Bank PLC (g) 7.75000 10/16/2007 77,000 80,430 Northern Rock PLC 144A 5.60000 4/30/2014 90,000 90,503 Pearson Dollar Finance PLC 144A 4.70000 6/1/2009 33,000 32,462 Potash Corp. of Saskatchewan 4.87500 3/1/2013 36,000 35,105 St. George Bank Ltd. 144A 5.30000 10/15/2015 51,000 51,228 Telecom Italia Capital SA 4.87500 10/1/2010 25,000 24,510 Total Yankee Bonds (Cost $501,517) -------- 497,854 -------- Pass Thru Securities-41.3% Agency Pass Thru-30.8% FHLMC Gold 4.50000 10/1/2009 48,154 47,463 FHLMC Gold 4.50000 4/1/2010 51,863 51,041 FHLMC Gold 3.50000 9/1/2010 7,491 7,129 FHLMC Gold 6.00000 5/1/2017 48,591 49,600 FNMA 4.00000 5/1/2010 56,060 54,215 FNMA 3.53000 7/1/2010 37,340 35,191 FNMA 5.00000 10/1/2011 71,877 71,597 FNMA 4.06000 6/1/2013 28,000 25,870 FNMA 6.50000 12/1/2015 10,633 10,939 FNMA 6.00000 4/1/2017 86,336 88,253 FNMA 6.00000 6/1/2017 21,234 21,706 FNMA 6.00000 7/1/2017 9,578 9,791 FNMA 5.50000 11/1/2024 96,826 96,698 FNMA 5.50000 12/1/2024 23,881 23,850 FNMA 5.50000 1/1/2025 73,598 73,500 FNMA 7.50000 2/1/2029 13,657 14,345 FNMA 7.50000 9/1/2029 1,128 1,183 FNMA 7.00000 11/1/2031 2,986 3,121 FNMA 7.00000 5/1/2032 25,987 27,119 FNMA 7.00000 6/1/2032 49,603 51,763 FNMA 5.50000 2/1/2033 134,756 133,807 FNMA 5.50000 10/1/2033 137,151 136,145 FNMA 5.50000 1/1/2034 31,621 31,390
The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- Agency Pass Thru (continued) FNMA 5.50000% 1/1/2034 $ 46,330 $ 45,990 FNMA (TBA) (d) 4.50000 1/1/2021 425,000 413,445 FNMA (TBA) (d) 5.00000 1/1/2021 275,000 271,992 FNMA (TBA) (d) 5.00000 1/1/2036 770,000 745,938 FNMA (TBA) (d) 5.50000 1/1/2021 80,000 80,475 FNMA Grantor Trust 2001-T6 B 6.08800 5/25/2011 76,000 80,181 FNMA Grantor Trust 2002-T11 A 4.76878 4/25/2012 31,925 31,805 GNMA 8.00000 8/15/2025 12,219 13,097 GNMA 8.00000 11/15/2025 16,991 18,212 GNMA 8.00000 5/15/2026 4,431 4,749 GNMA 8.00000 11/15/2026 11,600 12,432 GNMA 6.50000 7/15/2032 14,947 15,619 ---------- 2,799,651 ---------- NonAgency Pass Thru-10.5% Banc of America Commercial Mortgage, Inc. 2005-2 A2 4.24700 7/10/2043 44,000 43,382 Bear Stearns Commercial Mortgage Securities 2003-T12 A3 4.24000 8/13/2039 43,000 41,477 Bear Stearns Commercial Mortgage Securities 2005-T20 A2 5.12700 10/12/2042 45,000 45,079 Calwest Industrial Trust 2002-CALW A 144A 6.12700 2/15/2017 82,000 86,303 Chase Commercial Mortgage Securities Corp. 1997-1 D 7.37000 6/19/2029 39,000 40,065 Chase Commercial Mortgage Securities Corp. 1997-1 E 7.37000 6/19/2029 67,000 68,946 Chase Commercial Mortgage Securities Corp. 1997-2 C 6.60000 12/19/2029 75,000 76,984 Citigroup/Deutsche Bank Commercial Mortgage 2005-CD1 A2FX 5.22540 7/15/2044 20,000 20,131 Crown Castle Towers LLC, 2005-1A D 144A 5.61200 6/15/2035 45,000 43,830 DLJ Commercial Mortgage Corp. 1998-CF2 A1B 6.24000 11/12/2031 40,000 41,226 DLJ Commercial Mortgage Corp. 1998-CF2 B1 7.04214 11/12/2031 100,000 105,067 JP Morgan Chase Commercial Mortgage Sec. Co. 2005-LDP4 A2 4.79000 10/15/2042 30,000 29,599 JP Morgan Chase Commercial Mortgage Security Co. 2005-LDP5 A2 5.19800 12/15/2044 20,000 20,082 LB Commercial Conduit Mortgage Trust 1999-C1 B 6.93000 6/15/2031 27,000 28,589 Merrill Lynch Mortgage Trust, Inc. 2005-CIP1 A2 4.96000 7/12/2038 25,000 24,857 Morgan Stanley Capital 1998-HF1 E 7.35074 3/15/2030 74,000 77,383 Morgan Stanley Capital I 1999-CAM1 A4 7.02000 3/15/2032 36,000 37,988 Morgan Stanley Dean Witter Capital I 2001-PPM A2 6.40000 2/15/2031 31,739 32,715 Morgan Stanley Dean Witter Capital I 2001-PPM A3 6.54000 2/15/2031 25,629 26,495 Mortgage Capital Funding, Inc. 1997-MC2 C 6.88100 11/20/2027 70,000 72,007 ---------- 962,205 ---------- Total Pass Thru Securities (Cost $3,811,668) 3,761,856 ---------- US Treasury Obligations-5.5% U.S. Treasury Bond (c) 5.25000 11/15/2028 250,000 272,676 U.S. Treasury Note (c) 3.50000 2/15/2010 70,000 67,708 U.S. Treasury Note (c) (f) 4.75000 5/15/2014 155,000 158,772 ---------- Total US Treasury Obligations (Cost $495,741) 499,156 ---------- TOTAL BONDS AND NOTES (Cost $10,184,089) 10,056,343 ---------- Contract PURCHASED OPTIONS-0.0% Size -------- U.S. Treasury Note 4.25% Put, Strike Price 97.171, 2/6/06 95,000 214 ---------- TOTAL PURCHASED OPTIONS (Cost $1,188) 214 ----------
The accompanying notes are an integral part of the financial statements. 11 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS--3.3% U.S. Government Agency--2.8% FHLMC Discount Note (e) 4.000% 1/13/2006 $ 100,000 $ 99,856 FNMA Discount Note (c) (e) 4.128 1/12/2006 155,000 154,786 ----------- 254,642 ----------- U.S. Treasury--0.5% U.S. Treasury Bill (e) (f) 3.938 3/9/2006 50,000 49,648 ----------- Total Short Term Investments (Cost $304,283) 304,290 ----------- INVESTMENT OF CASH COLLATERAL--9.1% Shares ------ BlackRock Cash Strategies L.L.C. (h) (Cost $831,212) 4.310 831,212 831,212 ----------- TOTAL UNAFFILIATED INVESTMENTS (Cost $11,320,772) 11,192,059 ----------- AFFILIATED INVESTMENTS--3.0% Dreyfus Institutional Preferred Plus Money Market Fund (h) (i) (Cost $275,803) 4.060 275,803 275,803 ----------- Total Investments--126.0% (Cost $11,596,575) 11,467,862 ----------- Liabilities in Excess of Other Assets--(26.0%) (2,373,239) ----------- NET ASSETS--100.0% $ 9,094,623 ===========
Notes to Schedule of Investments 144A -- Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the year end, the value of these securities amounted to $614,421 or 6.8% of net assets. FHLMC -- Federal Home Loan Mortgage Company FNMA -- Federal National Mortgage Association GNMA -- Government National Mortgage Association REIT -- Real Estate Investment Trust TBA -- To Be Announced (a) Variable Rate Security; rate indicated as of 12/31/05. (b) Zero coupon security. (c) Security, or a portion thereof, was on loan at 12/31/05. (d) Delayed Delivery contract. (e) Rate noted is yield to maturity. (f) Denotes all or part of security pledged as collateral. (g) Step bond; rate indicated as of 12/31/05. (h) Stated rate is the seven day yield for the fund at year end. (i) Affiliated institutional money market fund. The accompanying notes are an integral part of the financial statements. 12 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005, the Fund held the following futures contracts:
Underlying Face Unrealized Contract Position Expiration Date Amount at Value Gain/(Loss) - ---------------------------------------------------------------------------------------------------- US 5 Year Treasury (12 Contracts) Long 3/22/2006 $1,271,099 $ 5,027 US 10 Year Treasury (1 Contract) Short 3/22/2006 108,078 (1,328) US 2 Year Treasury (5 Contracts) Short 3/31/2006 1,025,563 (418) ---------- ------- $2,404,740 $ 3,281 ---------- -------
At December 31, 2005, the Fund held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - -------------------------------------------------------------------------------------------------------------------------------- Citigroup Centurytel, Inc., 7.875% due 8/15/2012 Buy (1.19%) 9/20/2015 $65,000 $ (313) Deutsche Bank Koninklijike KPN N.V., 8.00% due 10/01/2010 Buy (0.850%) 12/20/2010 50,000 52 JPMorgan Koninklijike KPN N.V., 8.00% due 10/01/2010 Buy (0.86%) 12/20/2010 60,000 37 Morgan Stanley & Co. Wendy's International, Inc., 6.2500% due 11/15/2011 Buy (0.97%) 12/20/2015 40,000 536 ------ $ 312 ======
Pay/Receive Unrealized Interest Rate Swaps Floating Expiration Notional Appreciation/ Counterparty Floating Rate Index Rate Fixed Rate Date Amount (Depreciation) - -------------------------------------------------------------------------------------------------------------------------------- Merrill Lynch USD--LIBOR--BBA Pay 4.1725% 5/13/2008 $200,000 $ (2,832) Merrill Lynch USD--LIBOR--BBA Receive 4.6425% 5/13/2015 200,000 3,717 -------- $ 885 ========
The Fund held the following written option contracts at December 31,2005:
Expiration Written Put Option Security Strike Price Date Contracts Premium Value - ----------------------------------------------------------------------------------------------------------- U.S. Treasury Note 4.25% Put 95.609 2/06/06 1 $1,188 $ (114) ======= ====== ======
The accompanying notes are an integral part of the financial statements. 13 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $816,124 (Note 7)) Unaffiliated issuers, at value (Note 1A) (cost $11,320,772) $11,192,059 Affiliated issuers, at value (Note 1A) (cost $275,803) 275,803 Receivable from Advisor 128 Receivable for securities sold 322,465 Interest receivable 70,470 Receivable for Fund shares sold 427,895 Unrealized appreciation on swap contracts, (Note 6) 4,342 Prepaid expenses 5,717 ----------- Total assets 12,298,879 Liabilities Payable for investments purchased $ 1,773,927 Collateral for securities on loan (Note 7) 831,212 Distributions payable 496,983 Due to Custodian 50,039 Options written, at value (premium received $1,188) (Note 6) 114 Unrealized depreciation on swap contracts, (Note 6) 3,145 Accrued chief compliance officer fee (Note 2) 404 Accrued professional fees 31,580 Accrued administrative service fee (Note 2) 128 Accrued accounting, administration, custody and transfer agent fees (Note 2) 11,661 Accrued trustees' fees and expenses (Note 2) 1,541 Accrued expenses and other liabilities 3,522 ----------- Total liabilities 3,204,256 ----------- Net Assets $ 9,094,623 =========== Net Assets consist of: Paid-in capital $ 9,246,910 Accumulated net realized loss (22,104) Distributions in excess of net investment income (7,022) Net unrealized depreciation (123,161) ----------- Total Net Assets $ 9,094,623 =========== Shares of beneficial interest outstanding 485,577 =========== Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 18.73 ===========
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $1,506,307 Dividend income from affiliated investment (Note 1F) 14,380 Security lending income (Note 7) 4,546 ---------- Total investment income 1,525,233 Expenses Investment advisory fee (Note 2) $ 139,755 Accounting, administration, custody and transfer agent fees (Note 2) 119,871 Professional fees 52,535 Registration fees 14,500 Trustees' fees and expenses (Note 2) 8,001 Insurance expense 9,500 Miscellaneous 11,218 ---------- Total expenses 355,380 Deduct: Waiver of investment advisory fee (Note 2) (139,755) Reimbursement of fund operating expenses (75,870) ---------- Total expense deductions 215,625 ---------- Net expenses 139,755 ---------- Net investment income 1,385,478 Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 38,865 Financial futures transactions 91,290 Written options transactions 616 Swap transactions (2,461) ---------- Net realized gain (loss) 128,310 Change in unrealized appreciation (depreciation) on: Investments (506,854) Financial futures contracts (3,433) Written options (3,280) Swap contracts 1,410 ---------- Net change in unrealized appreciation (depreciation) (512,157) ---------- Net realized and unrealized gain (loss) on investments (383,847) ---------- Net Increase in Net Assets from Operations $1,001,631 ==========
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income (loss) $ 1,385,478 $ 2,186,333 Net realized gain (loss) 128,310 1,276,348 Change in net unrealized appreciation (depreciation) (512,157) (709,054) ----------- ----------- Net increase (decrease) in net assets from investment operations 1,001,631 2,753,627 ----------- ----------- Distributions to Shareholders (Note 1C) From net investment income (1,470,098) (2,343,659) From net realized gains on investments (300,897) (1,026,990) ----------- ----------- Total distributions to shareholders (1,770,995) (3,370,649) ----------- ----------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 5,230,124 2,823,448 Value of shares issued to shareholders in reinvestment of distributions 942,835 1,632,872 Cost of shares redeemed (47,909,871) (14,862,788) ----------- ----------- Net increase (decrease) in net assets from Fund share transactions (41,736,912) (10,406,468) ----------- ----------- Total Increase (Decrease) in Net Assets (42,506,276) (11,023,490) Net Assets At beginning of year 51,600,899 62,624,389 ----------- ----------- At end of year [including distributions in excess of net investment income and undistributed net investment income of ($7,022) and $26,421] $ 9,094,623 $51,600,899 =========== ===========
The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Net Asset Value, Beginning of the year $ 20.01 $ 20.31 $ 20.80 $ 20.41 $ 20.65 -------- -------- -------- -------- -------- From Operations: Net investment income* (a) 0.80 0.74 0.69 0.89 1.27 Net realized and unrealized gain (loss) on investments (0.28) 0.17 0.09 0.79 0.59 -------- -------- -------- -------- -------- Total from investment operations 0.52 0.91 0.78 1.68 1.86 -------- -------- -------- -------- -------- Less Distributions to Shareholders: From net investment income (1.27) (0.80) (0.78) (0.91) (1.30) From net realized gain on investments (0.53) (0.41) (0.49) (0.38) (0.80) -------- -------- -------- -------- -------- Total distributions to shareholders (1.80) (1.21) (1.27) (1.29) (2.10) -------- -------- -------- -------- -------- Net Asset Value, End of Year $ 18.73 $ 20.01 $ 20.31 $ 20.80 $ 20.41 ======== ======== ======== ======== ======== Total Return (b) 2.63% 4.53% 3.81% 8.44% 9.21% Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.40% 0.40% 0.40% 0.40% 0.21% Net Investment Income (to average daily net assets)* 3.98% 3.59% 3.30% 4.30% 6.00% Portfolio Turnover: (c) Inclusive 336% 275% 457% 391% 357% Exclusive 119% 127% -- -- -- Net Assets, End of Year (000's omitted) $ 9,095 $ 51,601 $ 62,624 $ 84,101 $ 63,564 - ----------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income (a) $ 0.68 $ 0.67 $ 0.63 $ 0.83 $ 1.17 Ratios (to average daily net assets): Expenses 1.02% 0.75% 0.70% 0.69% 0.68% Net investment income 3.36% 3.24% 3.00% 4.01% 5.53%
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of expense waivers. (c) Beginning in 2004, the portfolio turnover ratio is presented inclusive and exclusive of the effect of rolling forward purchase commitments. The accompanying notes are an integral part of the financial statements. 17 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Investment Grade Bond Fund (the "Fund") is a separate diversified investment series of the Trust. The objective of the Fund is to maximize total return, consistent with preserving principal and liquidity, primarily through the generation of current income and, to a lesser extent, capital appreciation. The Fund seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in investment grade fixed income securities including, but not limited to, government, agency, corporate and mortgage and asset-backed issues. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Fund acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity. Realized gains and losses from securities sold are recorded on the identified cost basis. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales and amortization and/or accretion of premiums and discounts on certain securities. Permanent book and tax basis differences will result in reclassifications among undistributed net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Expenses The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated among funds of the Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds. 18 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- E. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. F. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions With Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities, is payable monthly at the annual rate of 0.40% of the Fund's average daily net assets. Standish Mellon voluntarily agreed to limit total Fund operating expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.40% of the Fund's average daily net assets for the year ended December 31, 2005. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived its investment advisory fee in the amount of $139,755 and reimbursed the Fund $75,870 for other operating expenses. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $6,992 during the year ended December 31, 2005. The Fund has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Fund. For these services the Fund pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $112,879 during the year ended December 31, 2005. The Fund entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Fund's lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon Bank received $1,835 for the year ended December 31, 2005. See Note 7 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,269. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005 the Fund was charged $128 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows:
Purchases Sales ------------ ------------ U.S. Government Securities $116,280,261 $137,533,049 ============ ============ Investments (non-U.S. Government Securities) $ 13,804,197 $ 43,306,481 ============ ============
19 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows:
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 261,106 137,236 Shares issued to shareholders reinvestment of distributions declared 48,779 81,343 Shares redeemed (2,402,674) (723,366) ---------- -------- Net increase (decrease) (2,092,789) (504,787) ========== ========
At December 31, 2005, two shareholders of record held approximately 92% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. The fee does not apply to shares that were acquired through reinvestment of distributions. For the period ended December 31, 2005, the Fund did not collect any redemption fees. During the year ended December 31, 2005, the Investment Grade Bond Fund had a redemption-in-kind valued at $40,050,635, of which $2,547,407 was distributed in cash and $37,503,228 was transacted via an in-kind redemption of investment securities. For tax purposes, this was a tax free exchange transaction. For accounting purposes gains and losses resulting from the redemptions-in-kind are included in realized gain/loss from securities in the Statement of operations. The Fund realized a loss of $144,717. (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its taxable income for its fiscal year. The tax basis components of distributable earnings and the federal tax cost as of December 31, 2005, was as follows: Unrealized appreciation $ 36,420 Unrealized depreciation (167,137) ----------- Net unrealized appreciation/depreciation (130,717) =========== Cost for federal income tax purposes $11,598,579 ===========
Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows:
2005 2004 ---------- ---------- Ordinary income $1,666,639 $2,934,513 Capital gains 104,356 436,136 ---------- ---------- $1,770,995 $3,370,649 ========== ==========
The Fund elected to defer to its fiscal year ended December 31, 2006 $16,819 of capital losses recognized during the period November 1, 2005 to December 31, 2005. (6) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Fund may trade the following instruments with off-balance sheet risk: 20 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Fund may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. Options, both held and written by the Fund, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Fund is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. During the year ended December 31, 2005, the Fund entered into the following transactions:
Number of Written Put Option Transactions Contracts Premiums --------- --------- Outstanding, beginning of year 1 $ (7,607) Options written 7 (394) Options expired (4) 17,473 Options closed (3) (8,284) --------- --------- Outstanding, end of year 1 $ 1,188 ========= ========= Number of Written Call Options Transactions Contracts Premiums Outstanding, beginning of year 1 $ (3,609) Options written 6 (8,244) Options expired (5) 17,857 Options closed (2) (6,004) --------- --------- Outstanding, end of year 0 0 ========= =========
At December 31, 2005 the Fund held options. See Schedule of Investments for further details. Futures contracts The Fund may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Fund deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Fund's exposure to the 21 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- underlying instrument, while selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Fund enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December, 31, 2005, the Fund held open financial futures contracts. See the Schedule of Investments for further details. Swap agreements The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Fund had swap agreements outstanding. See the Schedule of Investments for further details. (7) Security Lending: The Fund may lend its securities to financial institutions which the Fund deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Fund on the next business day. For the duration of a loan, the Fund receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Fund bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Fund. In the event of borrower default, the Fund generally has the right to use the collateral to offset losses incurred. The Fund may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Fund also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Fund's obligations due on the loans. The Fund loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $113,443 of which, $108,897 was rebated to borrowers or paid in fees. At December 31, 2005, the Fund had securities valued at $816,124 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. 22 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (8) Delayed Delivery Transactions: The Fund may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Fund instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Fund may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. At December 31, 2005, the Portfolio held delayed delivery securities. See Schedule of Investments for further details. (9) Line of Credit: The Fund, and other funds in the Trust and subtrusts in Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolio/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $827 for the Fund. During the year ended December 31, 2005, the Fund had average borrowings outstanding of $338,597 for eleven days and incurred $432 of interest expense. 23 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Investment Grade Bond Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Investment Grade Bond Fund, (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 24 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from the Fund's investment adviser, Standish Mellon Asset Management Company LLC ("Standish Mellon"), a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance and any material portfolio manager and strategy changes that may have affected the Fund in the prior year, as well as the Fund's "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Fund and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Fund's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Fund by Standish Mellon. In their deliberations as to the continuation of the Fund's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Fund's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Fund effectively. 25 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board for at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund outperformed its peer group average return for the one-year period (5.00% vs. 4.92%) but underperformed its peer group average returns for the three-year period (4.73% vs. 5.43%) and five-year period (6.81% vs. 7.20%). Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Fund to Standish Mellon. The Lipper data presenting the Fund's "net advisory fees" included fees paid by the Fund, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Trust's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Fund's advisory fees to those peers that include administrative fees within a blended advisory fee. The Fund's contractual advisory fee was 0.40%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.455%. The Fund's net advisory fee, after giving effect to expense limitations, was 0.08%, below the peer group median net advisory fee of 0.438%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Fund's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Fund relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Fund relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.40% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 0.50% notwithstanding the fact that all of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 26 Mellon Institutional Funds Investment Trust Standish Mellon Investment Grade Bond Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 27 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Trustee Number of Remuneration Principal Portfolios in Other (period Name Term of Office Occupation(s) Fund Complex Directorships ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ------------------------------------------------------------------------------------------------------------------------------------ Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None $1,508 c/o Decision Resources, Inc. 11/3/1986 Decision Resources, Inc. 260 Charles Street ("DRI") (biotechnology Waltham, MA 02453 research and consulting 9/30/40 firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street 32 None $1,635 c/o Essex Street Associates 11/3/1986 Associates (family P.O. Box 5600 investment trust office) Beverly, MA 01915 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 32 None $1,508 c/o Harvard University 9/13/1989 Professor of Political Littaver Center 127 Economy, Harvard Cambridge, MA 02138 University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, Mertens 32 None $1,508 P.O. Box 2333 11/3/1986 House, Inc. (hospice) New London, NH 03257 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, President Since 2003 President and Chief 32 None $0 The Boston Company and Chief Operating Officer of Asset Management, LLC Executive Officer The Boston Company One Boston Place Asset Management, LLC; Boston, MA 02108 formerly Senior Vice President 7/24/65 and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
28 Principal Officers who are Not Trustees
Principal Name Term of Office Occupation(s) Address, and Position(s) and Length of During Past Date of Birth Held with Trust Time Served 5 Years - ------------------------------------------------------------------------------------------------------------------------------------ Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Asset Management and Secretary Mellon Asset Management ("MAM"); formerly First One Boston Place Vice President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer since 1999; Mellon Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager One Boston Place of Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management Mellon Asset Management Compliance and Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
29 [LOGO]Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6946AR1205 [LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Enhanced Yield Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Economic activity continued at a robust level in 2005. Real gross domestic product grew between 3.5% and 4% during the year. Employment growth was solid and consumer spending, housing and corporate profitability were all strong. The economic strength occurred in spite of two major hurricanes, skyrocketing gas and oil prices and a Federal Reserve bent on raising short-term interest rates. Such resiliency is impressive and is due in part to the combined accommodative monetary and fiscal policies over the prior several years. The Federal Reserve raised the overnight funds rate throughout the year, tightening by 25 basis points at each meeting. The overnight funds rate ended the year at 4.25%, up 200 basis points from the beginning of the year. Other short-term interest rates rose similarly; however, the amount of increase lessened as the term of the interest rate lengthened. As a result, the yield curve dramatically flattened during the year. Whereas the overnight interest rate rose 200 basis points, the yield on the 2-year Treasury note rose only 133 basis points, the 5-year note only 74 basis points and the 10-year note only 17 basis points. The resulting yield curve is almost perfectly flat out through 10 years, with the 2-year note yielding 4.40% and the 10-year note yielding 4.39%. The prospects for economic growth in 2006 are good. Strong corporate balance sheets and consumer spending should help offset a probable slowdown in housing. Fiscal policy remains stimulative. Monetary policy is approaching a neutral posture. One more tightening by the Federal Reserve is anticipated by the market this year, taking the overnight rate to 4.50%. Performance for the Fund was negatively impacted by the increase in short-term interest rates throughout the year. Performance for the Fund was 2.66% for 2005. During the year, the benchmark was changed from iMoneyNet to the 6-month Treasury Bill index. This change was made to be more consistent with the Fund's strategy and to more closely align the Fund's benchmark with that of other short-duration funds. Performance for the iMoneyNet benchmark was 2.65%. The Treasury total return for 2005 was 3.10%. During a period of rising interest rates, longer duration portfolios generally underperform. Somewhat offsetting the negative duration impact, the fund invests a high percentage of its assets in higher yielding asset-backed and corporate securities. In addition, the Fund benefited from its holding of TIPS (inflation indexed Treasury securities) during the year. /s/ Laurie Carroll /s/ Johnson Moore Laurie Carroll Johnson Moore 2 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Enhanced Yield Fund with the Merrill Lynch 6 Month T-Bill Index and the iMoneyNet All-Taxable Average - -------------------------------------------------------------------------------- [LINE GRAPH] [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 10 Years 1/1/1989 - -------------------------------------------------------------------------------- 2.66% 1.63% 2.82% 4.28% 5.29% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Bloomberg Inc. ** Source: iMoneyNet Fund Report (1) The Merrill Lynch (ML) 6-month US Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to but not beyond 6 months from the rebalancing date. Effective May 1, 2005, the fund changed its benchmark from the iMoneyNet Fund Average Index to the ML 6-month US Treasury Bill Index because the adviser believes the ML 6-month Treasury Bill Index is more consistent with the characteristics and duration target of the fund. 3 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - ------------------------------------------------------------------------------------ Actual $1,000.00 $1,016.20 $1.27 Hypothetical (5% return per year before expenses) $1,000.00 $1,023.59 $1.28
- ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.25%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 4 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Percentage of Economic Sector Allocation Investments - -------------------------------------------------------------------------------- Treasury/Agency 7.2% Credit 4.5 Floating rate credit 31.3 Asset-Backed 17.6 Floating rate asset-backed 30.9 CMBS 2.8 Cash & equivalents 5.7 ----- 100.0%
Percentage of Top Ten Holdings* Rate Maturity Investments - ------------------------------------------------------------------------------------------------------ U.S. Treasury Inflation-Indexed Bond 3.625 1/15/2008 7.0% Citibank Credit Card Issuance Trust 2004-A1 A1 2.550 1/20/2009 3.4 Merrill Lynch & Co. 4.541 2/6/2009 2.8 Genworth Financial, Inc. 4.641 6/15/2007 2.8 Wachovia Corp. 4.460 7/20/2007 2.8 Metropolitan Life Global Funding I 144A 4.147 10/5/2007 2.8 Gracechurch Card Funding PLC 4 A 4.419 6/15/2008 2.8 Wells Fargo & Co. 4.410 3/10/2008 2.8 World Financial Network Credit Card Master Trust 2004-B A 4.469 7/15/2010 2.8 Residential Asset Securities Corp.-EMX2 A2 (a) 4.539 7/25/2035 2.8 ---- 32.8%
* Excluding short-term investments and investment of cash collateral. Summary of Combined Ratings - -------------------------------------------------------------------------------- Percentage of Quality Breakdown Investments - -------------------------------------------------------------------------------- AAA & Higher 49.4% AA 17.8 A 23.2 BBB 3.9 P1 0.5 P2 5.2 ----- Total 100.0% Based on ratings from Standard & Poor's and/or Moody's Investors Services. If a security receives split (different) ratings from multiple rating organizations, the Fund treats the security as being rated in the higer rating category. The Standish Mellon Enhanced Yield Fund invests all of its investable assets in an interest of the Standish Mellon Enhanced Yield Portfolio (See Note 1 of the Fund's Notes to Financial Statements). The Portfolio is actively managed. Current holdings may be different than those presented above. The accompanying notes are an integral part of the financial statements. 5 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investment in Standish Mellon Enhanced Yield Portfolio (Portfolio), at value (Note 1A) $ 38,713,166 Receivable from Advisor 1,051 Receivable for Fund shares sold 146 Prepaid expenses 3,203 ------------ Total assets 38,717,566 Liabilities Distributions payable $ 31,479 Payable for Fund shares redeemed 95 Accrued administrative services fee (Note 2) 1,051 Accrued chief compliance officer fees (Note 2) 429 Accrued transfer agent fees (Note 2) 3,490 Accrued professional fees 18,106 Accrued trustees' fees and expenses (Note 2) 500 Other accrued expenses and liabilities 3,059 --------- Total liabilities 58,209 ------------ Net Assets $ 38,659,357 ============ Net Assets consist of: Paid-in capital $ 41,312,072 Accumulated net realized loss (2,358,262) Net unrealized depreciation (294,453) ------------ Total Net Assets $ 38,659,357 ============ Shares of beneficial interest outstanding 2,017,619 ============ Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 19.16 ============
The accompanying notes are an integral part of the financial statements. 6 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income allocated from Portfolio $ 2,073,424 Expenses allocated from Portfolio (187,292) ------------ Net investment income allocated from Portfolio 1,886,132 Expenses Registration fees $ 35,798 Professional fees 38,748 Transfer agent fees (Note 2) 8,378 Shareholder reporting fees 6,103 Shareholder services expense 1,051 Trustees' fees (Note 2) 1,990 Insurance expense 1,048 Miscellaneous 8,721 --------- Total expenses 101,837 Deduct: Reimbursement of Fund operating expenses (Note 2) (101,837) --------- Net expenses -- ------------ Net investment income 1,886,132 ------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) allocated from Portfolio on: Investments (196,071) Financial futures transactions (104,983) --------- Net realized gain (loss) (301,054) Change in unrealized appreciation (depreciation) allocated from Portfolio on: Investments (155,746) Financial futures contracts 46,488 --------- Net change in unrealized appreciation (depreciation) (109,258) ------------ Net realized and unrealized gain (loss) on investments (410,312) ------------ Net Increase in Net Assets from Operations $ 1,475,820 ============
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Investment Operations Net investment income $ 1,886,132 $ 1,280,177 Net realized gain (loss) (301,054) (63,934) Change in net unrealized appreciation (depreciation) (109,258) (423,401) ----------------- ----------------- Net increase (decrease) in net assets from investment operations 1,475,820 792,842 ----------------- ----------------- Distributions to Shareholders (Note 1C) From net investment income (1,940,395) (1,475,658) ----------------- ----------------- Total distributions to shareholders (1,940,395) (1,475,658) ----------------- ----------------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 15,151,988 62,046,776 Value of shares issued to shareholders in reinvestment of distributions 1,492,509 1,074,063 Redemption fees credited to capital 50 - Cost of shares redeemed (44,750,240) (137,044,992) ----------------- ----------------- Net increase (decrease) in net assets from Fund share transactions (28,105,693) (73,924,153) ----------------- ----------------- Total Increase (Decrease) in Net Assets (28,570,268) (74,606,969) Net Assets At beginning of year 67,229,625 141,836,594 ----------------- ----------------- At end of year (including undistributed net investment income of $0 and $1,458) $ 38,659,357 $ 67,229,625 ================= =================
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ----------- ----------- Net Asset Value, Beginning of the Year $ 19.32 $ 19.48 $ 19.55 $ 19.55 $ 19.36 ---------- ---------- ---------- ----------- ----------- From Operations: Net investment income* (a) 0.62 0.27 0.31 0.58 0.95 Net realized and unrealized gain (loss) on investments (0.11) (0.12) (0.04) 0.03 0.21 ---------- ---------- ---------- ----------- ----------- Total from investment operations 0.51 0.15 0.27 0.61 1.16 ---------- ---------- ---------- ----------- ----------- Less Distributions to Shareholders: From net investment income (0.67) (0.31) (0.34) (0.61) (0.97) ---------- ---------- ---------- ----------- ----------- Total distributions to shareholders (0.67) (0.31) (0.34) (0.61) (0.97) ---------- ---------- ---------- ----------- ----------- Net Asset Value, End of Year $ 19.16 $ 19.32 $ 19.48 $ 19.55 $ 19.55 ========== ========== ========== =========== =========== Total Return (b) 2.66% 0.75% 1.48% 3.14% 6.14% Ratios/Supplemental Data: Expenses (to average daily net assets) *(c) 0.32% 0.45% 0.36% 0.36% 0.36% Net Investment Income (to average daily net assets) * 3.24% 1.33% 1.60% 2.99% 4.89% Net Assets, End of Year (000's omitted) $ 38,659 $ 67,230 $ 141,837 $ 146,620 $ 133,939
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share (a) $ 0.57 $ 0.25 $ 0.30 $ 0.56 $ 0.94 Ratios (to average daily net assets): Expenses (c) 0.62% 0.51% 0.43% 0.46% 0.41% Net investment income 2.95% 1.27% 1.53% 2.89% 4.84%
(a) Calculated based on average shares outstanding, (b) Total return would have been lower in the absence of expense waivers. (c) Includes the Fund's share of the Standish Mellon Enhanced Yield Portfolio's allocated expenses. The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Enhanced Yield Fund (the "Fund") is a separate diversified investment series of the Trust. The Fund invests all of its investable assets in an interest of the Standish Mellon Enhanced Yield Portfolio (the "Portfolio"), a subtrust of the Mellon Institutional Funds Master Portfolio (the "Portfolio Trust"), which is organized as a New York trust and has the same investment objective as the Fund. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in dollar-denominated money market instruments, short-term fixed income securities and asset backed securities of U.S. and foreign governments, banks and companies. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio (100% at December 31, 2005). The performance of the Fund is directly affected by the performance of the Portfolio. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations The Fund records its investment in the Portfolio at value. The Portfolio values its securities at value as discussed in Note 1A of the Portfolio's Notes to Financial Statements, which are included elsewhere in this report. B. Securities transactions and income Securities transactions in the Portfolio are recorded as of the trade date. Currently, the Fund's net investment income consists of the Fund's pro rata share of the net investment income of the Portfolio, less all expenses of the Fund determined in accordance with accounting principles generally accepted in the United States of America. All realized and unrealized gains and losses of the Fund are allocated from the Portfolio. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions from capital gains, if any, after reduction of capital losses will be declared and distributed at least annually. In determining the amounts of its dividends, the Fund will take into account its share of the income, gains or losses, expenses, and any other tax items of the Portfolio. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences which may result in reclassifications, are primarily due to differing treatments for post-October losses, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among accumulated net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust and/or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. E. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. 10 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (2) Investment Advisory Fee and Transactions With Affiliates: The Fund does not directly pay any investment advisory fees, but indirectly bears its pro rata share of the compensation paid by the Portfolio to Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary Mellon Financial Corporation, for such services. See Note 2 of the Portfolio's Notes to Financial Statements which are included elsewhere in this report. Standish Mellon voluntarily agreed to limit the total operating expenses of the Fund and its pro rata share of the Portfolio expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.45% of the Fund's average daily net assets for the period from January 1, 2005 through April 30, 2005 and 0.25% for the period from May 1, 2005 to December 31, 2005. Pursuant to these agreements, for the year ended December 31, 2005, Standish Mellon voluntarily reimbursed the Fund for $102,888 of its operating expenses. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $8,378 during the year ended December 31, 2005. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,293. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005, the Fund was charged $1,051 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Investment Transactions: Increases and decreases in the Fund's investment in the Portfolio for the year ended December 31, 2005, aggregated $16,645,003 and $46,674,285, respectively. The Fund receives a proportionate share of the Portfolio's income, expenses, and realized and unrealized gains and losses based on applicable tax allocation rules. Book/tax differences arise when changes in proportionate interest for funds investing in the Portfolio occur. (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 786,928 3,186,297 Shares issued to shareholders for reinvestment of distributions 77,632 55,316 Shares redeemed (2,327,112) (7,042,292) ---------- ---------- Net increase (decrease) (1,462,552) (3,800,679) ========== ========== At December 31, 2005, seven shareholders of record held approximately 47% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and their costs associated with short-term trading in the Fund. The fee does not apply to shares that were acquired through reinvestment of distributions. For the period ended December 31, 2005, the Fund received $50 in redemption fees. 11 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: 2005 2004 ------------ ----------- Undistributed ordinary income -- $ 1,458 Capital loss carry forward $ (2,231,167) (2,356,373) At December 31, 2005, the Fund, for federal income tax purposes, has capital loss carryovers of $2,231,167 which will reduce the Fund's taxable income arising from net realized gain on investment, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are as follows: Capital Loss Expiration Carryover Date ------------ ----------- $ 80,787 12/31/2006 848,377 12/31/2007 816,280 12/31/2008 228,931 12/31/2012 256,792 12/31/2013 ------------ $ 2,231,167 ============ It is uncertain whether the Fund will be able to realize the benefits of the losses before they expire. Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ------------ ----------- Ordinary income $ 1,940,395 $ 1,475,658 The Fund elected to defer to its fiscal year ending December 31, 2006 $134,356 of capital losses recognized during the period November 1, 2004 to December 31, 2005. See corresponding master portfolio for tax basis unrealized appreciated (depreciation) information. 12 Mellon Institutional Funds Investment Trust Standish Mellon Enhanced Yield Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Enhanced Yield Fund: In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Enhanced Yield Fund, formerly known as Standish Mellon Short-Term Asset Reserve Fund, (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included agreement of the amount of the investment in the Portfolio at December 31, 2005 to the Portfolio's records, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 13 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--101.6% BONDS AND NOTES--93.4% Asset Backed--39.9% Advanta Business Card Master Trust 2005-C1 C1 (a) 4.880% 8/22/2011 $ 500,000 $ 503,170 American Express Issuance Trust 2005-1 C (a) 4.699 8/15/2011 500,000 501,810 Asset Backed Funding Certificates 2005-WMC1 M4 (a) 4.969 6/25/2035 500,000 498,648 Bear Stearns Alt-A Trust 2005-1 A1 (a) 4.659 1/25/2035 349,286 346,146 Chase Funding Mortgage Loan Asset Backed 2003-3 2A2 (a) 4.649 4/25/2033 452,057 452,882 Chase Manhattan Auto Owner Trust 2003-B A4 2.570 2/16/2010 1,000,000 974,956 Citibank Credit Card Issuance Trust 2004-A1 A1 2.550 1/20/2009 1,250,000 1,220,841 Citigroup Mortgage Loan Trust, Inc. 2005-OPT4 A2B (a) 4.529 7/25/2035 355,000 354,887 Collegiate Funding Services Education Loan 2005-A A1 (a) 4.539 9/29/2014 509,085 508,800 Countrywide Alternative Loan Trust 2005--65CB 1A5(a) 5.129 1/25/2036 998,597 999,409 Countrywide Asset-Backed Certificates 2005-7 3AV1 (a) 4.499 11/25/2035 335,088 335,086 Countrywide Home Loans 2004-16 1A1 (a) 4.779 9/25/2034 519,964 520,802 First USA Credit Card Master Trust 1997-4 A (a) 4.580 2/17/2010 750,000 752,200 Gracechurch Card Funding PLC (a) 4.679 9/15/2010 500,000 499,766 Gracechurch Card Funding PLC 4 A (a) 4.419 6/15/2008 1,000,000 1,000,288 GS Auto Loan Trust 2004-1 A4 2.650 5/16/2011 315,000 305,109 Honda Auto Receivables Owner Trust 2002-4 A4 2.700 3/17/2008 404,833 400,361 M & I Auto Loan Trust 2003-1 A4 2.970 4/20/2009 700,000 684,461 Opteum Mortgage Acceptance Corp. 2005-5 2A1A 5.470 12/25/2035 498,936 498,710 Option One Mortgage Loan Trust 2004-1 (a) 4.669 1/25/2034 90,571 90,625 Option One Mortgage Loan Trust 2005-4 M4 (a) 4.979 11/25/2035 500,000 499,797 Residential Asset Securities Corp. 2005-EMX2 A2 (a) 4.539 7/25/2035 1,000,000 1,000,089 Residential Asset Securities Corp. 2005-EMX4 M7 (a) 5.629 11/25/2035 500,000 498,859 Slm Student Loan Trust 2004-9 A2 (a) 4.220 10/25/2012 602,150 600,964 Wachovia Auto Owner Trust 2004-B A4 3.440 3/21/2011 400,000 388,420 World Financial Network Credit Card Master Trust 2004-B A (a) 4.469 7/15/2010 1,000,000 1,000,095 ------------ Total Asset Backed (Cost $15,516,152) 15,437,181 ------------ Collateralized Mortgage Obligations--2.6% Mound Financing PLC 3A A1-1 144A (a) 4.440 2/8/2008 1,000,000 999,844 ------------ Total Collateralized Mortgage Obligations (Cost $1,000,000) Corporate--33.2% Banking--9.0% Bank One Texas 6.250 2/15/2008 750,000 769,307 US Bank NA (a) 4.480 10/1/2007 700,000 700,871 Wachovia Corp. (a) (b) 4.460 7/20/2007 1,000,000 1,001,204 Wells Fargo & Co. (a) 4.410 3/10/2008 1,000,000 1,000,250 ------------ 3,471,632 ------------ Brokerages--9.0% Bear Stearns Co., Inc. (a) 4.393 4/29/2008 700,000 701,290 JPMorgan Chase & Co. (a) 4.610 12/12/2006 850,000 851,419 Merrill Lynch & Co. (a) 4.541 2/6/2009 1,000,000 1,002,809 Morgan Stanley 5.800 4/1/2007 935,000 944,530 ------------ 3,500,048 ------------
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Expected Par Value Security Rate Maturity Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- Financial--10.7% Caterpillar Financial Services Corp. (a) 4.392% 2/11/2008 $ 750,000 $ 750,860 CIT Group, Inc. (a) 4.901 9/22/2006 900,000 902,476 Citigroup, Inc. (a) 4.310 11/1/2007 750,000 750,554 Genworh Financial, Inc. (a) 4.641 6/15/2007 1,000,000 1,001,872 Western Corp. Federal Credit Union (a) 4.400 2/15/2008 750,000 750,295 ------------ 4,156,057 ------------ Insurance--4.5% Metropolitan Life Global Funding I 144A (a) 4.147 10/5/2007 1,000,000 1,000,847 Principal Life, Inc., Funding (a) 4.480 12/7/2007 750,000 750,248 ------------ 1,751,095 ------------ Total Corporate (Cost $12,896,537) 12,878,832 ------------ Yankee Bonds--2.3% HBOS Treasury Services PLC 144A (a) (Cost $900,000) 4.203 1/12/2007 900,000 901,320 ------------ U.S. Government Agency--8.8% Government Backed--7.8% FHLMC 5.000 6/15/2016 559,186 558,732 FHLMC 4.500 1/15/2019 391,283 389,207 FHLMC 5.000 1/15/2023 448,686 448,329 FHLMC 5.000 9/15/2024 866,374 865,577 FNMA 4.500 5/25/2012 597,181 593,540 FNMA 5.250 4/25/2025 150,532 147,466 ------------ Total Government Backed (Cost $3,059,182) 3,002,851 ------------ Pass Thru Securities--1.0% FHLMC 2.614 7/15/2011 29,939 29,661 FHLMC 5.500 10/15/2018 366,986 368,157 ------------ Total Pass Thru Securities (Cost $408,587) 397,818 ------------ Total US Government Agency (Cost $3,467,769) 3,400,669 ------------ US Treasury Obligations--6.6% U.S. Treasury Inflation-Indexed Bond (Cost $2,662,904) 3.625 1/15/2008 2,472,045 2,538,384 ------------ TOTAL BONDS AND NOTES (Cost $36,443,362) 36,156,230 ------------ SHORT TERM INVESTMENTS--5.7% Commercial Paper--5.2% Fortune Brands, Inc. (c) 4.300 1/3/2006 2,000,000 2,000,000 ------------ U.S. Government--0.5% FNMA Discount Note (c) (d) 4.140 2/8/2006 200,000 199,160 ------------ TOTAL SHORT-TERM INVESTMENTS (Cost $2,199,172) 2,199,160 ------------ Investment Of Cash Collateral--2.5% Shares ------------ BlackRock Cash Strategies L.L.C. (e) (Cost $978,500) 4.310 978,500 978,500 ------------ TOTAL UNAFFILIATED INVESTMENTS (Cost $39,621,034) 39,333,890 ------------
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Value Security Rate Shares (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- AFFILIATED INVESTMENTS--0.5% Dreyfus Institutional Preferred Plus Money Market (e) (g) (Cost $183,610) 4.060% 183,610 $ 183,610 ------------ Total Investments--102.1% (Cost $39,804,644) 39,517,500 ------------ Liabilities in Excess of Other Assets--(2.1%) (804,334) ------------ NET ASSETS--100.0% $ 38,713,166 ============
Notes to Schedule of Investments 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $2,902,011 or 7.5% of net assets. FHLMC--Federal Home Loan Mortgage Company FNMA--Federal National Mortgage Association (a) Variable Rate Security; rate indicated as of 12/31/05. (b) Security, or a portion of thereof, was on loan at December 31, 2005. (c) Rate noted is yield to maturity. (d) Denotes all of part of security pledged as collateral. (e) Stated rate is the seven-day yield for the fund at year end. (g) Affiliated institutional money market fund. At December 31, 2005 the Portfolio held the following futures contracts:
Underlying Face Unrealized Contract Position Expiration Date Amount at Value Gain/(Loss) - --------------------------------------------------------------------------------------------------- US 2 Year Treasury Note (36 Contracts) Long 4/15/2006 $ 7,396,875 $ (10,210) US 5 Year Treasury Note (37 Contracts) Short 3/31/2006 3,932,984 (1,821) EURO BOND (2 Contracts) Short 12/15/2008 475,375 (488) EURO BOND (2 Contracts) Short 3/17/2008 478,125 1,837 EURO BOND (2 Contracts) Short 6/16/2008 478,000 1,812 EURO BOND (2 Contracts) Short 9/15/2008 477,600 1,561 ---------- $ (7,309) ==========
The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $951,189) (Note 6) Unaffiliated issuers, at value (Note 1A) (cost $39,621,034) $ 39,333,890 Affiliated issuers (Note 1F), at value (Note 1A) (cost $183,610) 183,610 Interest and dividends receivable 197,554 Prepaid expenses 1,776 ------------ Total assets 39,716,830 Liabilities Collateral for securities on loan (Note 6) $ 978,500 Accrued advisor fees (Note 2) 167 Variation margin payable 580 Accrued professional fees 18,842 Accrued accounting, administration and custody fees (Note 2) 3,087 Accrued trustees' fees and expenses (Note 2) 2,162 Accrued expenses and other liabilities 326 --------- Total liabilities 1,003,664 ------------ Net Assets (applicable to investors' beneficial interest) $ 38,713,166 ============
The accompanying notes are an integral part of the financial statements. 17 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 1,962,791 Interest income from affiliated investments (Note 1F) 108,011 Security lending income (Note 6) 2,622 ----------- Total investment income 2,073,424 Expenses Investment advisory fee (Note 2) $ 126,580 Accounting, administration and custody fees (Note 2) 77,337 Professional fees 33,091 Trustees' fees and expenses (Note 2) 7,980 Insurance expense 9,083 Miscellaneous 1,913 ----------- Total expenses 255,984 Deduct Waiver of investment advisory fee (Note 2) (68,692) ----------- Net expenses 187,292 ----------- Net investment income 1,886,132 Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments (196,071) Financial futures transactions (104,983) ----------- Net realized gain (loss) (301,054) Change in unrealized appreciation (depreciation) on: Investments (155,746) Financial futures contracts 46,488 ----------- Change in net unrealized appreciation (depreciation) (109,258) ----------- Net realized and unrealized gain (loss) (410,312) ----------- Net Increase in Net Assets from Operations $ 1,475,820 ===========
The accompanying notes are an integral part of the financial statements. 18 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Investment Operations Net investment income $ 1,886,132 $ 1,314,045 Net realized gain (loss) (301,054) (63,934) Change in net unrealized appreciation (depreciation) (109,258) (423,401) ------------ ------------- Net increase (decrease) in net assets from investment operations 1,475,820 826,710 ------------ ------------- Capital Transactions Contributions 16,645,003 63,157,972 Withdrawals (46,674,285) (138,574,542) ------------ ------------- Net increase (decrease) in net assets from capital transactions (30,029,282) (75,416,570) ------------ ------------- Total Increase (Decrease) in Net Assets (28,553,462) (74,589,860) Net Assets At beginning of year 67,266,628 141,856,488 ------------ ------------- At end of year $ 38,713,166 $ 67,266,628 ============ =============
The accompanying notes are an integral part of the financial statements. 19 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- --------- --------- --------- Total Return (a) 2.66% 0.79% 1.48% 3.14% 6.15% Ratios: Expenses (to average daily net assets)* 0.32% 0.41% 0.36% 0.36% 0.35% Net Investment Income (to average daily net assets)* 3.24% 1.36% 1.60% 2.99% 4.89% Portfolio Turnover 75% 39% 113% 160% 174% Net Assets, End of Year (000's omitted) $ 38,713 $ 67,267 $ 141,856 $ 146,771 $ 134,055
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Ratios (to average daily net assets): Expenses 0.44% N/A 0.37% 0.38% N/A Net investment income 3.12% N/A 1.59% 2.97% N/A (a) Total return for the Portfolio has been calculated based on the total return for the invested Fund, assuming all distributions were invested, and adjusted for the difference in expenses as set out in the notes to the financial statements. Total return would have been lower in the absence of expense waivers. The accompanying notes are an integral part of the financial statements. 20 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was organized as a master trust fund under the laws of the State of New York on January 18, 1996 and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Enhanced Yield Portfolio (the "Portfolio") is a separate diversified investment series of the Portfolio Trust. The Fund's Board of Trustees approved, effective May 1, 2005, the change in the Fund's name from "Standish Mellon Short-Term Asset Reserve Fund" to "Standish Mellon Enhanced Yield Portfolio". The objective of the Portfolio is to achieve a high level of current income consistent with preserving principal and liquidity. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in dollar-denominated money market instruments, short-term fixed income securities and asset-backed securities of U.S. and foreign governments, banks and companies. At December 31, 2005 there was one fund, Standish Mellon Enhanced Yield Fund (the "Fund"), invested in the Portfolio. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio. The Fund's proportionate interest at December 31, 2005 was 100%. The following is a summary of significant accounting policies followed by the Portfolio in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Portfolio acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity method on long-term debt securities and short-term securities with greater than sixty days to maturity. Realized gains and losses from securities sold are recorded on the identified cost basis. The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. C. Income taxes The Portfolio is treated as a disregarded entity for federal tax purposes. No provision is made by the Portfolio for federal or state income taxes on any taxable income of the Portfolio because each investor in the Portfolio is ultimately responsible for the payment of any taxes. Since the Portfolio's investor is a regulated investment company that invests all or substantially all of its assets in the Portfolio, the Portfolio normally must satisfy the source of income and diversification requirements applicable to regulated investment companies (under the Internal Revenue Code) in order for its investors to satisfy them. 21 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- D. Commitments and contingencies In the normal course of business, the Portfolio may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Portfolio under these arrangements is unknown, as this would involve future claims that may be made against the Portfolio that have not yet occurred. However, based on experience, the Portfolio expects the risks of loss to be remote. E. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. F. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions with Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities is paid monthly at the annual rate of 0.25%, for the period from January 1, 2005 through April 30, 2005 and 0.20% for the period from May 1, 2005 to December 31, 2005, of the Portfolio's average daily net assets. Standish Mellon voluntarily agreed to limit the total operating expenses of the Fund and its pro rata share of the Portfolio expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.45% of the Fund's average daily net assets for the period from January 1, 2005 through April 30, 2005 and to 0.25% for the period from May 1, 2005 to December 31, 2005. Pursuant to these agreements, for the period ended December 31, 2005, Standish Mellon voluntarily waived a portion of its investment advisory fee in the amount of $68,692. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Portfolio has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Portfolio. For these services the Portfolio pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Portfolio was charged $77,337 during the year ended December 31, 2005. The Portfolio entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Portfolio lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon Bank received $1,145 for the year ended December 31, 2005. See Note 6 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Portfolio for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ------------ ------------ U.S. Government Securities $ 7,263,885 $ 5,131,634 ============ ============ Investments (non-U.S. Government Securities) $ 30,906,753 $ 57,887,186 ============ ============ 22 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (4) Federal Taxes: The cost and unrealized appreciation (depreciation) in value of the investment securities owned at December 31, 2005, as computed on a federal income tax basis, were as follows: Aggregate cost $ 39,804,690 ============ Gross unrealized appreciation $ 20,421 Gross unrealized depreciation (307,611) ------------ Net unrealized appreciation (depreciation) $ (287,190) ============ (5) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Portfolio may trade the following financial instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Portfolio may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Portfolio's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Portfolio's exposure to the underlying instrument, or hedge other Portfolio investments. Options, both held and written by the Portfolio, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Portfolio is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. The Fund did not enter into option transactions during the year ended December 31 2005. Futures contracts The Portfolio may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Portfolio deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Portfolio each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Portfolio. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Portfolio's exposure to the underlying instrument, while selling futures tends to decrease the Portfolio's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Portfolio may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Portfolio enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December 31, 2005, the Portfolio held open financial futures contracts. See the Schedule of Investments for further details. 23 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (6) Security Lending: The Portfolio may lend its securities to financial institutions which the Portfolio deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Portfolio on the next business day. For the duration of a loan, the Portfolio receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Portfolio bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Portfolio. In the event of borrower default, the Portfolio generally has the right to use the collateral to offset losses incurred. The Portfolio may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Portfolio also bears the risk in the event that the interest and/or dividends received on invested collateral are not sufficient to meet the Portfolio's obligations due on the loans. The Portfolio loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $57,106 of which, $54,484 was rebated to borrowers or paid in fees. At December 31, 2005, the Portfolio had securities valued at $951,189 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (7) Delayed Delivery Transactions: The Portfolio may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Portfolio instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Portfolio may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Portfolio holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Portfolio may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Portfolio did not enter into any delayed delivery transactions during the year ended December 31, 2005. (8) Line of Credit: The Portfolio, and other subtrusts in the Portfolio Trust and funds in the Trust are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolios/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $748 for the Portfolio. During the year ended December 31, 2005, the Portfolio had average borrowings outstanding of $133,523 on a total of thirteen days and incurred $193 of interest expense. 24 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Master Portfolio and Investors of Standish Mellon Enhanced Yield Portfolio: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Enhanced Yield Portfolio, formerly known as Standish Mellon Short-Term Asset Reserve Portfolio, (the "Portfolio") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 25 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. The Fund is not a party to an investment advisory agreement directly with any investment adviser and does not invest directly in portfolio securities. Instead, the Fund invests all of its investable assets in the Standish Mellon Enhanced Yield Portfolio (the "Portfolio"), which is managed by Standish Mellon Asset Management Company LLC ("Standish Mellon"). The Fund's Board of Trustees determines annually whether the Fund should continue to invest in the Portfolio. The members of the Fund's Board of Trustees also serve as the Board of Trustees of the Portfolio. In that capacity, they consider annually whether to continue the investment advisory agreement between the Portfolio and Standish Mellon. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from Standish Mellon a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance (rather than the Portfolio alone) and any material portfolio manager and strategy changes that may have affected the Fund and Portfolio in the prior year, as well as "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Portfolio and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Portfolio and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Portfolio's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Portfolio by Standish Mellon. In their deliberations as to the continuation of the Portfolio's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Portfolio's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Portfolio effectively. 26 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund (rather than the Portfolio alone) against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (1.59% vs. 2.56%), three-year period (1.59% vs. 2.66%) and five-year period (3.09% vs. 3.25%). The Trustees requested that Standish Mellon arrange for a presentation to the Board, as part of the usual fund reporting cycle, to explain the reasons for the Fund's underperformance and efforts by Standish Mellon to improve the Fund's performance. Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Portfolio to Standish Mellon. The Lipper data presenting the Portfolio's "net advisory fees" included fees paid by the Portfolio, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Portfolio's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Portfolio's advisory fees to those peers that include administrative fees within a blended advisory fee. The Portfolio's contractual advisory fee was 0.25%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.36%. The Portfolio's net advisory fee, after giving effect to expense limitations, was 0.209%, below the peer group median net advisory fee of 0.301%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Portfolio's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Portfolio relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Portfolio relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable relative to overall industry averages and to the nature and quality of the services provided. The Board also considered the Fund's (rather than solely the Portfolio's) expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.449% (after giving effect to expense limitations) was equal to the median net expense ratio of the peer group of 0.449%. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Portfolio and Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Portfolio and Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Portfolio and Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Portfolio and Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Portfolio and Fund grow. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 27 Mellon Institutional Funds Master Portfolio Standish Mellon Enhanced Yield Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 28 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ------------------------------------------------------------------------------------------------------------------------------------ Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None Fund: $500 c/o Decision Resources, Inc. 11/3/1986 Decision Resources, Portfolio: $1,642 260 Charles Street Inc. ("DRI") Waltham, MA 02453 (biotechnology 9/30/40 research and consulting firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex 32 None Fund: $500 c/o Essex Street Associates 11/3/1986 Street Associates Portfolio: $1,802 P.O. Box 5600 (family investment Beverly, MA 01915 trust office) 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph 32 None Fund: $500 c/o Harvard University 9/13/1989 Maier, Professor of Portfolio: $1,642 Littaver Center 127 Political Economy, Cambridge, MA 02138 Harvard University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, 32 None Fund: $500 P.O. Box 2333 11/3/1986 Mertens House, Inc. Portfolio: $1,642 New London, NH 03257 (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, Since 2003 President and Chief 32 None $0 The Boston Company President and Operating Officer of Asset Management, LLC Chief Executive The Boston Company One Boston Place Officer Asset Management, Boston, MA 02108 LLC; formerly Senior 7/24/65 Vice President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
29 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ---------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Mellon Asset Management and Secretary Operations, Mellon Asset Management One Boston Place ("MAM"); formerly First Vice President, MAM Boston, MA 02108 and Mellon Global Investments 2/20/61 Steven M. Anderson Vice President Vice President since Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer 1999; Treasurer since Mellon Asset Management One Boston Place 2002 Boston, MA 02108 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Mellon Asset Management President Compliance, Mellon Asset Management One Boston Place ("MAM"); formerly Manager of Shareholder Boston, MA 02108 Services, MAM, Shareholder Representative, 1/19/71 Standish Mellon Asset Management Company LLC Mary T. Lomasney Chief Compliance Since 2005 First Vice President, Mellon Asset Mellon Asset Management Officer Management and Chief Compliance Officer, One Boston Place Mellon Funds Distributor and Mellon Optima Boston, MA 02108 L/S Strategy Fund, LLC; formerly Director, 4/8/57 Blackrock, Inc., Senior Vice President, State Street Research & Management Company ("SSRM"), Vice President, SSRM
30 THIS PAGE INTENTIONALLY LEFT BLANK 31 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK [LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon High Yield Bond Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Market Environment For 2005, the Standish Mellon High Yield Bond Fund returned +3.70% as compared to the Merrill Lynch Master II Master Index mark of +2.74% and the Merrill Lynch Constrained High Yield Index total of +2.78%. The Lehman Aggregate Index reported a return of 2.43% for 2005, below that of High Yield and 3 Month Treasury Bills (+3.05%). During the year, the benchmark for the Fund was changed from the Master II Index to the Constrained Index, which limits individual issuer credit exposures to 2% of the index. Otherwise, both indexes use similar methodology. The benchmark change was made to mitigate the extremely large index weightings of more than 6% resulting from the downgrades of GM (May 31, 2005) and Ford Motor Company (December 31, 2005). Unconstrained weighting positions of that size are inconsistent with the management of a diversified fixed income portfolio. In 2005, three industry groups stood out as significant underperformers. The automotive (-7.72%) and auto parts and suppliers (-11.76%) subsectors reflected the well documented struggles of the two largest U.S. auto producers, GM and Ford. The financial pain created by this situation was felt most acutely by the parts suppliers to GM and Ford, as that sector absorbed a number of bankruptcies including Delphi, and Collins and Aikman, and badly hurt the credit standing of many other companies. The other major industry credit news in 2005 concerned the airlines (-10.71%), which were stung by long-running labor cost problems, brutal competition, and rising fuel costs. The last of the laggard sectors was paper and forestry, which fell -4.27%, hurt by weak newsprint demand and rising energy costs. Actual defaults in the high yield market were in the 2%-3% range in 2005 and are projected by the major rating agencies to remain in the same area for the next year. Despite some significant damage and disruption from two hurricanes, general economic conditions were quite strong. That said however, over the last 12 months the general tenor of the news in the fixed income market has taken a turn for the worse. An actively tightening Federal Reserve, along with a string of financial problems in the U.S. auto industry, Calpine, Refco, Delphi, and the airlines, all contributed to nervousness among fixed income investors. The investment grade credit market also had credit issues primarily stemming from event risk. A number of companies, frustrated by lagging equity market valuations, pursued leveraging transactions or outright sales that harmed prices of covenant-free debt issues. Portfolio Strategy Review and Results In a year when many of the outperforming sectors were small, relative performance was more a function of what a portfolio did not hold than what it did. Our careful credit selection and very modest industry exposure to the airlines and the auto industry served us well in 2005. For example, underweights in autos, paper and 2 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Calpine securities all were benefits to Fund performance in 2005. In addition, despite a privatizing transaction, the Georgia Pacific bonds held as an overweight position in the Fund contained restrictive covenants, which led them to be tendered out at favorable levels. Although the Fund did have exposure to some of the strong performing wireless and telecom companies, our holdings were more concentrated in the senior securities and stronger credits which lagged the performance of some of the highest yielding issues. While 2005 had its share of bad news being absorbed by the market, one positive item for investors has been the greater yield levels offered on recently priced new deals. Going forward, however, the market will also be looking for stronger credit quality among the companies coming to market. Strong credits have been poorly represented amongst new issues in 2005, which were dominated by lower-rated, leveraging transactions. Investment Outlook As 2006 begins the high yield marketplace exhibits reasonable investor demand and a general expectation of stable credit conditions. Key elements to future performance will be efficient credit management and risk control, hopefully combined with the appearance of some worthwhile new financing opportunities. /s/ Jonathan Uhrig Jonathan Uhrig 3 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon High Yield Bond Fund, Merrill Lynch High Yield Master II Index and Merrill Lynch U.S. High Yield Master II Constrained Index - -------------------------------------------------------------------------------- [PERFORMANCE GRAPH] [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 6/2/1997 - -------------------------------------------------------------------------------- 3.70% 11.45% 8.03% 6.06% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Lipper Inc. ** Source: Bloomberg Inc. (1) The Merrill Lynch Master II High Yield ("ML Master II") Index is an unmanaged market value-weighted index of all domestic and Yankee high yield bonds. Effective July 1, 2005, the fund changed its benchmark from the ML Master II Index to the Merrill Lynch High Yield Constrained ("ML Constrained") Index because the adviser believes the ML Constrained Index is more consistent with the diversification limitations of the fund. The ML Constrained Index is comprised of all of the bonds held in the ML Master II Index, but this index caps single issuer exposure to 2% of the index. 4 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $1,000.00 $1,021.90 $2.55 Hypothetical (5% return per year before expenses) $1,000.00 $1,022.68 $2.55 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.50%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 5 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Summary of Combined Ratings - ------------------------------------------------------ Percentage of Quality Breakdown Investments - ------------------------------------------------------ Treasury 7.7% AA 0.1 A 0.5 BBB 9.6 BB 43.9 B 35.5 CCC 1.9 C/D/NR 0.8 ----- Total 100.0% Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- Chevy Chase Bank FSB 6.875% 12/1/2013 2.2% Douglas Dynamics LLC 144A 7.750 1/15/2012 1.8 Sovereign Capital Trust IV 4.375% CVT Pfd 4.375 1.6 Qwest Corp. 7.875 9/1/2011 1.5 AES Corp. 144A 8.750 5/15/2013 1.5 Freescale Semiconductor Inc. 6.875 7/15/2011 1.4 Crown Cork & Seal Co, Inc. 7.375 12/15/2026 1.4 Rite Aid Corp. 12.500 9/15/2006 1.2 Stater Brothers Holdings 8.125 6/15/2012 1.2 Dynegy Holdings, Inc. 144A 9.875 7/15/2010 1.1 ---- 14.9% * Excluding short-term investments and investment of cash collateral. Percentage of Economic Sector Allocation Investments - ------------------------------------------------------ Banking 3.8% Basic industry 10.7 Brokerage 0.0 Capital goods 11.1 Consumer cyclical 7.1 Consumer non-cyclical 8.5 Energy 8.6 Finance 1.0 Insurance 0.0 Media 5.3 Municipals 0.7 Real estate 0.6 Services cyclical 11.7 Services non-cyclical 2.4 Technology 1.9 Telecommunications 7.9 Utility 9.9 Emerging markets 1.0 Agency 0.1 Cash & equivalents 7.7 ----- 100.0% 6 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investment in Standish Mellon High Yield Bond Portfolio (Portfolio), at value (Note 1A) $ 17,597,396 Receivable for Fund shares sold 80,406 Receivable from Advisor 334 Prepaid expenses 2,733 ------------- Total assets 17,680,869 Liabilities Distributions payable $ 57,108 Accrued chief compliance officer fee (Note 2) 392 Payable for Fund shares redeemed 24,867 Accrued professional fees 23,930 Accrued transfer agent fees (Note 2) 2,864 Accrued trustees' fees and expenses (Note 2) 495 Accrued administrative services expense (Note 2) 334 Other accrued expenses and liabilities 2,070 ----------- Total liabilities 112,060 ------------- Net Assets $ 17,568,809 ============= Net Assets consist of: Paid-in capital $ 27,542,591 Accumulated net realized loss (10,243,980) Undistributed net investment income 2,537 Net unrealized appreciation 267,661 ------------- Total Net Assets $ 17,568,809 ============= Shares of beneficial interest outstanding 1,111,233 ============= Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 15.81 =============
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Statement of Operations for the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income allocated from Portfolio $ 1,939,452 Expenses allocated from Portfolio (132,095) ------------- Net investment income allocated from Portfolio 1,807,357 Expenses Professional fees $ 44,025 Registration fees 21,939 Transfer agent fees (Note 2) 7,268 Shareholder services expense (Note 2) 877 Trustees' fees (Note 2) 2,496 Shareholder reporting fees 4,515 Insurance expense 947 Miscellaneous 5,442 ----------- Total expenses 87,509 Deduct: Reimbursement of Fund operating expenses (Note 2) (87,509) ----------- Net expenses -- ------------- Net investment income 1,807,357 ------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) allocated from Portfolio on: Investments 1,164,137 Swap transactions 4,907 Foreign currency transactions and forward foreign currency exchange transactions 98,513 ----------- Net realized gain (loss) 1,267,557 Change in unrealized appreciation (depreciation) allocated from Portfolio on: Investments (2,870,133) Swap contracts (12,983) Foreign currency translations and forward foreign currency exchange contracts 53,899 ----------- Change in net unrealized appreciation (depreciation) (2,829,217) ------------- Net realized and unrealized gain (loss) on investments (1,561,660) ------------- Net Inrease in Net Assets from Operations $ 245,697 =============
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 1,807,357 $ 4,084,505 Net realized gain (loss) 1,267,557 1,476,264 Change in net unrealized appreciation (depreciation) (2,829,217) (438,129) ----------------- ----------------- Net increase (decrease) in net assets from investment operations 245,697 5,122,640 ----------------- ----------------- Distributions to Shareholders (Note 1C) From net investment income (1,881,356) (3,992,711) ----------------- ----------------- Total distributions to shareholders (1,881,356) (3,992,711) ----------------- ----------------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 4,184,283 6,909,820 Value of shares issued to shareholders in reinvestment of distributions 1,683,595 3,688,577 Redemption fees credited to capital 602 248 Cost of shares redeemed (43,337,322) (12,091,338) ----------------- ----------------- Net increase (decrease) in net assets from Fund share transactions (37,468,842) (1,492,693) ----------------- ----------------- Total Increase (Decrease) in Net Assets (39,104,501) (362,764) Net Assets At beginning of period 56,673,310 57,036,074 ----------------- ----------------- At end of period (including undistributed net investment income of $2,537 and $107,560) $ 17,568,809 $ 56,673,310 ================= =================
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, ---------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- Net Asset Value, Beginning of Period $ 16.52 $ 16.19 $ 14.34 $ 14.88 $ 15.88 -------- -------- -------- -------- -------- From Operations: Net investment income* (a) 1.13 1.18 1.21 1.26 1.40 Net realized and unrealized gains (loss) on investments (0.54) 0.31 1.85 (0.59) (1.18) -------- -------- -------- -------- -------- Total from investment operations 0.59 1.49 3.06 0.67 0.22 -------- -------- -------- -------- -------- Less Distributions to Shareholders: From net investment income (1.30) (1.16) (1.21) (1.21) (1.21) From net realized gains on investments -- -- -- -- (0.01) -------- -------- -------- -------- -------- Total distributions to shareholders (1.30) (1.16) (1.21) (1.21) (1.22) -------- -------- -------- -------- -------- Net Asset Value, End of Period $ 15.81 $ 16.52 $ 16.19 $ 14.34 $ 14.88 ======== ======== ======== ======== ======== Total Return (b) 3.70% 9.56% 21.76% 4.70% 1.52% Ratios/Supplemental data: Expenses (to average daily net assets)* (c) 0.50% 0.50% 0.50% 0.50% 0.50% Net Investment Income (to average daily net assets)* 6.84% 7.28% 7.79% 8.68% 8.86% Net Assets, End of Period (000's omitted) $ 17,569 $ 56,673 $ 57,036 $ 44,059 $ 46,302
- ---------- * For the periods indicated, the investment advisor voluntarily agreed not to impose a portion of its investment advisory fee and/or reimbursed the Fund for all or a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share(a) $ 0.97 $ 1.12 $ 1.13 $ 1.21 $ 1.33 Ratios (to average daily net assets): Expenses 1.45% 0.87% 1.00% 1.01% 0.97% Net investment income 5.89% 6.91% 7.29% 8.17% 8.39%
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of expense waivers. (c) Includes the Fund's share of the Portfolio's allocated expenses. The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon High Yield Bond Fund (the "Fund") is a separate diversified investment series of the Trust. The Fund invests all of its investable assets in an interest in the Standish Mellon High Yield Bond Portfolio (the "Portfolio"), a subtrust of the Mellon Institutional Funds Master Portfolio (the "Portfolio Trust"), which is organized as a New York trust and has the same investment objective as the Fund. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities issued by U.S. and foreign governments, companies and banks, as well as tax-exempt securities, preferred stocks and warrants. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio (100% at December 31, 2005). The performance of the Fund is directly affected by the performance of the Portfolio. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations The Fund records its investment in the Portfolio at value. The Portfolio values its securities at value as discussed in Note 1A of the Portfolio's Notes to Financial Statements, which are included elsewhere in this report. B. Securities transactions and income Securities transactions in the Portfolio are recorded as of the trade date. Currently, the Fund's net investment income consists of the Fund's pro rata share of the net investment income of the Portfolio, less all expenses of the Fund determined in accordance with accounting principles generally accepted in the United States of America. All realized and unrealized gains and losses of the Fund are allocated pro rata among the investors in the Portfolio. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions from capital gains, if any, after reduction of capital losses will be declared and distributed at least annually. In determining the amounts of its dividends, the Fund will take into account its share of the income, gains or losses, expenses, and any other tax items of the Portfolio. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, foreign currency gains and losses, post-October losses, and amortization and/or accretion of premiums and discounts on certain securities. Permanent book and tax basis differences will result in reclassifications among accumulated net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust and/or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. 11 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- E. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. (2) Investment Advisory Fee and Transactions With Affiliates: The Fund does not directly pay any investment advisory fees, but indirectly bears its pro rata share of the compensation paid by the Portfolio to Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, for such services. See Note 2 of the Portfolio's Notes to Financial Statements which are included elsewhere in this report. Standish Mellon voluntarily agreed to limit the total operating expenses of the Fund and its pro rata share of the Portfolio expenses (excluding commissions, taxes and extraordinary expenses) to 0.50% of the Fund's average daily net assets. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily reimbursed the Fund for $87,509 of its operating expenses. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $7,268 during the year ended December 31, 2005. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,256. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005, the Fund was charged $334 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Investment Transactions: Increases and decreases in the Fund's investment in the Portfolio for the period ended December 31, 2005, aggregated $5,802,546 and $45,178,933, respectively. The Fund receives a proportionate share of the Portfolio's income, expenses, and realized and unrealized gains and losses based on applicable tax allocation rules. Book/tax differences arise when changes in proportionate interest for funds investing in the Portfolio occur. (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 257,259 428,139 Shares issued to shareholders in reinvestment of distributions 104,233 227,570 Shares redeemed (2,681,089) (747,381) ----------------- ----------------- Net increase (decrease) (2,319,597) (91,672) ================= ================= 12 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Notes to Financial Statements - -------------------------------------------------------------------------------- At December 31, 2005, three shareholders of record held approximately 73% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and their costs associated with short-term trading in the Fund. The fee does not apply to shares that were acquired through reinvestment of distributions. For the period ended December 31, 2005, the Fund received $602 in redemption fees. During the year, the Standish Mellon High Yield Bond Fund had a redemption-in-kind valued at $35,215,618, of which $3,822,450 was distributed in cash and $31,393,168 was transacted via an in-kind redemption of investment securities. For tax purposes, this was a tax free exchange transaction. For accounting purposes gains and losses resulting from the redemptions-in-kind are included in realized gain/loss from securities in the statement of operations. The Fund realized a $1,167,955 gain. (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: 2005 ------------ Undistributed ordinary income $ 8,979 Accumulated losses 10,170,982 At December 31, 2005, the Fund, for federal income tax purposes, has capital loss carryovers of $10,170,982 which will reduce the Fund's taxable income arising from net realized gain on investment, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are a follows: Capital Loss Carry Over Expiration Date ------------ --------------- $ 1,473,489 12/31/2008 4,484,343 12/31/2009 4,197,096 12/31/2010 16,054 12/31/2013 ------------ $ 10,170,982 ============ It is uncertain whether the Fund will be able to realize the benefits of the losses before they expire. The Fund elected to defer to its fiscal year ended December 31, 2006 $41,090 of capital losses recognized during the period November 1, 2005 to December 31, 2005. Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ----------- ----------- Ordinary income $ 1,881,356 $ 3,992,711 See corresponding master portfolio for tax basis unrealized appreciated (depreciation) information. 13 Mellon Institutional Funds Investment Trust Standish Mellon High Yield Bond Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon High Yield Bond Fund: In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon High Yield Bond Fund (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included agreement of the amount of the investment in the Portfolio at December 31, 2005 to the Portfolio's records, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 14 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--95.0% BONDS AND NOTES--88.8% Convertible Corporate Bonds--0.4% Centerpoint Energy, Inc. 144A CVT 2.875% 1/15/2024 25,000 $ 26,906 Xcel Energy, Inc. 144A 7.500 11/21/2007 15,000 23,213 Sinclair Broadcast Group, Inc. (c) 4.875 7/15/2018 25,000 21,656 ----------- Total Convertible Corporate Bonds (Cost $65,988) 71,775 ----------- Corporate--76.8% Banking--2.3% Chevy Chase Bank FSB 6.875 12/1/2013 345,000 355,350 Colonial Bank 9.375 6/1/2011 35,000 41,095 ----------- 396,445 ----------- Basic Industry--6.9% Airgas, Inc. 6.250 7/15/2014 10,000 9,825 Compression Polymers Holdings 144A 10.500 7/1/2013 15,000 14,550 Earle M Jorgenson Co. 9.750 6/1/2012 35,000 37,450 Equistar Chemicals LP/Equistar Funding Corp. 10.625 5/1/2011 55,000 60,500 Freeport-McMoRan Copper & Gold, Inc. 10.125 2/1/2010 60,000 65,925 Freeport-McMoRan Copper & Gold, Inc. 6.875 2/1/2014 65,000 65,650 Georgia-Pacific Corp. 8.000 1/15/2024 75,000 71,625 International Steel Group, Inc. 6.500 4/15/2014 75,000 75,000 KRATON Polymers LLC/Capital Corp. 8.125 1/15/2014 5,000 4,800 Lubrizol Corp. 4.625 10/1/2009 75,000 73,509 Lubrizol Corp. 5.500 10/1/2014 100,000 100,266 Lyondell Chemical Co. 9.625 5/1/2007 55,000 57,406 Nalco Co. 7.750 11/15/2011 25,000 25,688 Nalco Co. 8.875 11/15/2013 100,000 104,750 Neenah Paper, Inc. 7.375 11/15/2014 5,000 4,513 Standard Pacific Corp. 6.500 8/15/2010 80,000 76,300 Steel Dynamics, Inc. 9.500 3/15/2009 110,000 115,775 Stone Container Corp. 8.375 7/1/2012 115,000 111,263 Temple-Inland (b) 6.625 1/15/2018 70,000 72,118 United States Steel Corp. 9.750 5/15/2010 34,000 36,975 Westlake Chemical Corp. 8.750 7/15/2011 33,000 35,310 ----------- 1,219,198 ----------- Capital Goods--7.7% Accuride Corp 8.500 2/1/2015 85,000 83,725 Alliant Techsystems, Inc. 8.500 5/15/2011 35,000 36,750 Alliant Techsystems, Inc. 144A 2.750 2/15/2024 15,000 16,181 Ball Corp. 6.875 12/15/2012 10,000 10,325 Berry Plastics 10.750 7/15/2012 55,000 59,125 CCM Merger, Inc. 144A 8.000 8/1/2013 40,000 38,400 Crown Cork & Seal Co, Inc. 7.375 12/15/2026 240,000 219,600 Esterline Technologies Corp. 7.750 6/15/2013 40,000 41,800 Goodman Global Holdings 144A (a) 7.491 6/15/2012 130,000 128,700 L-3 Communications Corp. 7.625 6/15/2012 50,000 52,625 L-3 Communications Corp. 6.125 7/15/2013 85,000 84,363 L-3 Communications Corp. 144A 3.000 8/1/2035 20,000 19,775 Leucadia National Corp. 7.000 8/15/2013 90,000 89,550 Norcraft Finance Co. 9.000 11/1/2011 15,000 15,525 Owens-Brockway 7.750 5/15/2011 50,000 52,188
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------- Capital Goods (continued) Owens-Illinois, Inc. 7.500% 5/15/2010 95,000 $ 96,425 Owens-Illinois, Inc. (b) 7.800 5/15/2018 120,000 119,400 Silgan Holdings, Inc. 6.750 11/15/2013 70,000 69,650 Solo Cup Co. (b) 8.500 2/15/2014 25,000 21,875 Texas Industries, Inc. 144A 7.250 7/15/2013 5,000 5,188 Trinity Industries LE 6.500 3/15/2014 100,000 98,500 ----------- 1,359,670 ----------- Consumer Cyclical--5.2% Cinemark USA, Inc. 9.000 2/1/2013 45,000 47,588 Couche-Tard 7.500 12/15/2013 35,000 36,050 DR Horton, Inc. 8.500 4/15/2012 75,000 80,131 Keystone Automotive Operation, Inc. 9.750 11/1/2013 35,000 30,275 Leslie's Poolmart 7.750 2/1/2013 40,000 40,100 Neiman Marcus Group, Inc. 144A 9.000 10/15/2015 25,000 25,563 Pinnacle Entertainment, Inc. (b) 8.750 10/1/2013 55,000 58,575 Rite Aid Corp. (e) 12.500 9/15/2006 190,000 198,788 Rite Aid Corp. 8.125 5/1/2010 70,000 71,225 Rite Aid Corp. 9.500 2/15/2011 45,000 47,475 Russell Corp. 9.250 5/1/2010 62,000 62,853 Speedway Motorsports, Inc. 6.750 6/1/2013 160,000 162,000 True Temper Sports, Inc. 8.375 9/15/2011 35,000 31,500 Visteon Corp. 8.250 8/1/2010 30,000 25,500 ----------- 917,623 ----------- Consumer Noncyclical--5.9% Alliance One International 144A 11.000 5/15/2012 25,000 22,000 Altria Group, Inc. 7.000 11/4/2013 45,000 49,241 ANR Pipeline Co. 7.000 6/1/2025 10,000 9,899 Chattem, Inc. 7.000 3/1/2014 70,000 71,050 Corrections Corp Of America 7.500 5/1/2011 20,000 20,700 Del Monte Corp. 8.625 12/15/2012 75,000 79,688 Domino's, Inc. 8.250 7/1/2011 38,000 39,710 Elizabeth Arden, Inc. 7.750 1/15/2014 20,000 20,200 Goodyear Tire & Rubber 144A 9.000 7/1/2015 95,000 93,575 Ingles Markets, Inc. 8.875 12/1/2011 50,000 51,750 Mohegan Tribal Gaming 7.125 8/15/2014 105,000 107,494 Penn National Gaming Inc. 6.875 12/1/2011 25,000 25,250 Penn National Gaming Inc. 6.750 3/1/2015 20,000 19,650 Psychiatric Solutions, Inc. 7.750 7/15/2015 20,000 20,650 Scotts Co. 6.625 11/15/2013 30,000 30,375 Seneca Gaming Corp. 144A 7.250 5/1/2012 15,000 15,094 Smithfield Foods, Inc. 7.000 8/1/2011 25,000 25,500 Smithfield Foods, Inc. 7.750 5/15/2013 55,000 58,163 Southern Natural Gas Co. 8.875 3/15/2010 15,000 16,031 Stater Brothers Holdings 8.125 6/15/2012 200,000 198,000 Stater Brothers Holdings (a) 7.991 6/15/2010 65,000 65,000 ----------- 1,039,020 ----------- Energy--7.7% ANR Pipeline Co. 7.375% 2/15/2024 20,000 20,562 Dynegy Holdings, Inc. 144A 9.875 7/15/2010 165,000 180,881 El Paso Natural Gas Co. 8.625 1/15/2022 90,000 102,113 El Paso Natural Gas Co. 8.375 6/15/2032 45,000 50,825
The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------- Energy (continued) El Paso Production Holding Co. 7.750 6/1/2013 55,000 $ 57,063 FPL Energy National Wind 144A 6.125 3/25/2019 97,390 95,293 Frontier Oil Corp. 6.625 10/1/2011 35,000 35,700 Houston Exploration Co. 7.000 6/15/2013 50,000 48,000 Newfield Exploration Co. 8.375 8/15/2012 55,000 58,850 Newfield Exploration Corp. 6.625 9/1/2014 60,000 61,050 Peabody Energy Corp. 6.875 3/15/2013 40,000 41,600 Pogo Producing Co. 6.625 3/15/2015 75,000 73,125 Premcor Refining Group, Inc. 9.500 2/1/2013 65,000 72,452 Southern Natural Gas Co. 7.350 2/15/2031 45,000 46,166 Tennessee Gas Pipeline Co. 8.375 6/15/2032 60,000 68,076 Transcontinental Gas Pipe Line Corp. 8.875 7/15/2012 110,000 125,950 Williams Cos., Inc. 7.875 9/1/2021 160,000 173,200 Williams Cos., Inc. 7.750 6/15/2031 40,000 42,200 ----------- 1,353,106 ----------- Financial--3.2% Arch Western Finance 6.750 7/1/2013 25,000 25,469 BCP Crystal Holding Corp. 9.625 6/15/2014 69,000 76,763 Crystal US Holdings Corp. 0.000 10/1/2014 92,000 67,620 E*Trade Financial Corp. 144A 7.375 9/15/2013 15,000 15,188 Ford Motor Credit Co 7.375 10/28/2009 35,000 31,041 General Motors Acceptance Corp. 7.750 1/19/2010 110,000 102,728 General Motors Acceptance Corp. (b) 8.000 11/1/2031 50,000 47,894 Glencore Funding LLC 144A 6.000 4/15/2014 65,000 61,135 Residential Capital Corp. 6.375 6/30/2010 105,000 106,692 Residential Capital Corp. 6.875 6/30/2015 30,000 31,878 ----------- 566,408 ----------- Industrial--4.1% Browning-Ferris Industries 9.250 5/1/2021 35,000 36,050 Columbus McKinnon Corp. 144A 8.875 11/1/2013 25,000 26,000 Cooper Standard Auto 8.375 12/15/2014 25,000 19,000 Crown Americas Inc. 144A 7.750 11/15/2015 65,000 67,275 Crown Americas Inc. 144A 7.625 11/15/2013 120,000 124,500 Douglas Dynamics LLC 144A 7.750 1/15/2012 290,000 279,850 Gibraltar Industries, Inc. 144A 8.000 12/1/2015 35,000 35,263 Southern Peru Copper Corp. 144A 6.375 7/27/2015 100,000 99,818 Terex Corp. 7.375 1/15/2014 30,000 29,700 ----------- 717,456 ----------- Media--5.7% Cablevision Systems Corp. (a) 8.716 4/1/2009 115,000 116,150 CBD Media, Inc. 8.625 6/1/2011 50,000 51,000 CSC Holdings, Inc. 8.125 8/15/2009 65,000 65,650 Dex Media West LLC/Dex Media Finance Co. 8.500 8/15/2010 25,000 26,188 Dex Media West LLC/Dex Media Finance Co. 9.875 8/15/2013 28,000 31,080 Dex Media, Inc. 8.000 11/15/2013 30,000 30,600 DirecTV Holdings LLC 8.375 3/15/2013 58,000 62,350 Echostar DBS Corp. 5.750% 10/1/2008 54,000 52,920 Entercom Radio LLC/Entercom Capital, Inc. 7.625 3/1/2014 15,000 15,038 MCI, Inc. 6.908 5/1/2007 63,000 63,473 Nextel Communications Inc. 6.875 10/31/2013 85,000 88,673
The accompanying notes are an integral part of the financial statements. 17 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------- Media (continued) PX Escrow Corp. 9.625 2/1/2006 105,000 $ 101,287 Radio One, Inc. 8.875 7/1/2011 45,000 47,475 RH Donnelley Finance Corp. 144A 10.875 12/15/2012 105,000 118,388 Salem Communications Corp. 7.750 12/15/2010 130,000 134,713 ------------ 1,004,985 ------------ Real Estate--0.6% BF Saul REIT 7.500 3/1/2014 100,000 101,750 ------------ Services: Cyclical--7.4% AMC Entertainment, Inc. 8.000 3/1/2014 65,000 58,825 Ameristar Casinos, Inc. 10.750 2/15/2009 170,000 180,200 Chumash Casino & Resort Enterprises 144A 9.520 7/15/2010 55,000 58,438 DPL, Inc. 6.875 9/1/2011 110,000 115,913 Gaylord Entertainment Co. 6.750 11/15/2014 40,000 39,200 Hawaiian Telcom Communication 144A (a) 9.948 5/1/2013 35,000 33,775 Hertz Corp. 144A 8.875 1/1/2014 40,000 40,750 Hertz Corp. 144A 10.500 1/1/2016 20,000 20,600 Isle of Capri Casinos, Inc. 7.000 3/1/2014 100,000 97,500 Kansas City Southern Railway 7.500 6/15/2009 85,000 87,763 Meristar Hospitality Corp. 9.500 4/1/2010 60,000 70,875 Meristar Hospitality Operationg Partnership LP (b) 10.500 6/15/2009 65,000 68,494 Mohegan Tribal Gaming Authority 8.000 4/1/2012 65,000 68,413 Service Corp Interational 144A 7.500 6/15/2017 25,000 24,813 Sierra Pacific Resources 8.625 3/15/2014 100,000 108,199 Station Casinos, Inc. 6.000 4/1/2012 110,000 109,725 Turning Stone Casino Resort Enterprise 144A 9.125 2/15/2010 85,000 87,550 Williams Scotsman, Inc. 8.500 10/1/2015 20,000 20,700 ------------ 1,291,733 ------------ Services: Non-Cyclical--3.8% Allied Waste North America 8.500 12/1/2008 50,000 52,500 Coventry Health Care, Inc. 5.875 1/15/2012 135,000 136,350 HCA, Inc. 8.750 9/1/2010 80,000 88,480 HCA, Inc. 7.875 2/1/2011 150,000 161,274 Kinetic Concepts, Inc. 7.375 5/15/2013 29,000 29,580 Plastipak Holdings, Inc. 144A 8.500 12/15/2015 90,000 90,900 Tenet Healthcare Corp. 144A 9.250 2/1/2015 110,000 109,175 ------------ 668,259 ------------ Technology & Electronics--1.8% Communications & Power Industries, Inc. 8.000 2/1/2012 10,000 9,975 Fisher Scientific Intl. 6.750 8/15/2014 125,000 130,313 Nevada Power Co. 6.500 4/15/2012 45,000 46,125 Nevada Power Co. 5.875 1/15/2015 90,000 89,309 Panamsat Corp. 9.000 8/15/2014 22,000 23,045 PQ Corp. 144A 7.500 2/15/2013 10,000 9,300 SunGard Data Systems Inc. 144A (a) 8.525 8/15/2013 15,000 15,525 ------------ 323,592 ------------ Telecommunications--4.8% Airgate PCS Inc. (a) 7.900 10/15/2011 15,000 15,488 Alamosa Delaware, Inc. 8.500 1/31/2012 105,000 113,531 Consolidated Comm Holdings 9.750 4/1/2012 52,000 55,380 Qwest Communications International 144A 7.500% 2/15/2014 130,000 133,575
The accompanying notes are an integral part of the financial statements. 18 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------------- Telecommunications (continued) Qwest Communications International, Inc. (a) 7.840 2/15/2009 65,000 $ 65,894 Qwest Corp. 7.875 9/1/2011 225,000 242,438 Rural Cellular Corp. 9.875 2/1/2010 25,000 26,375 Rural Cellular Corp. 8.250 3/15/2012 30,000 31,650 Ubiquitel Operating Co. 9.875 3/1/2011 80,000 88,600 US Unwired, Inc. (a) 8.741 6/15/2010 65,000 66,788 ------------ 839,719 ------------ Utilities--9.7% AES Corp. 8.875 2/15/2011 102,000 110,288 AES Corp. 144A 8.750 5/15/2013 215,000 234,081 CMS Energy Corp. 9.875 10/15/2007 60,000 64,200 CMS Energy Corp. 7.750 8/1/2010 50,000 52,438 CMS Energy Corp. 8.500 4/15/2011 30,000 32,663 El Paso Natural Gas Co. 7.500 11/15/2026 55,000 56,785 Enterprie Products Oper 4.625 10/15/2009 85,000 82,904 Freescale Semiconductor 7.125 7/15/2014 20,000 21,300 Freescale Semiconductor Inc. (b) (e) 6.875 7/15/2011 210,000 220,500 Freescale Semiconductor, Inc. (a) 6.900 7/15/2009 55,000 56,513 Mirant North America LLC 144A 7.375 12/31/2013 130,000 131,463 Monongahela Power Co. 6.700 6/15/2014 35,000 38,310 MSW Energy Holdings 7.375 9/1/2010 110,000 113,025 NorthWestern Corp. 5.875 11/1/2014 25,000 25,047 NRG Energy, Inc. 8.000 12/15/2013 27,000 30,105 Reliant Energy, Inc. 9.250 7/15/2010 25,000 25,000 TECO Energy, Inc. 7.500 6/15/2010 25,000 26,625 Texas Genco LLC/Financing 144A 6.875 12/15/2014 65,000 70,363 Texas Utilities Corp. 4.800 11/15/2009 85,000 81,759 Transcont Gas Pipe Corp 7.000 8/15/2011 75,000 78,281 Txu Corp. 5.550 11/15/2014 170,000 161,472 ------------ 1,713,122 ------------ Total Corporate Bonds (Cost $13,287,259) 13,512,086 ------------ Municipal--1.3% Erie County NY Tobacco Asset Securitization Corp. 6.000 6/1/2028 25,000 24,485 Mashantucket West Pequot 144A 5.912 9/1/2021 120,000 119,900 South Carolina Tobacco Settlement Authority 6.000 5/15/2022 30,000 31,544 Tobacco Settlement Authority Iowa 6.500 6/1/2023 60,000 60,261 ------------ Total Municipal (Cost $231,382) 236,190 ------------ Sovereign Bonds--1.0% Republic of Argentina 2.000 1/3/2010 25,000 16,073 Republic of Argentina (b) 8.280 12/31/2033 14,425 12,117 Republic of Brazil 8.750 2/4/2025 5,000 5,525 Republic of Brazil (a) 5.250 4/15/2012 22,942 22,655 Republic of Brazil (b) 10.125 5/15/2027 5,000 6,288 Republic of Colombia 10.000 1/23/2012 5,000 5,950 Republic of Colombia 10.750 1/15/2013 5,000 6,200 Republic of Colombia 8.125 5/21/2024 5,000 5,400 Republic of Peru (c) 5.000 3/7/2017 16,400 15,457 Republic of Venezuela (a) (b) 5.194 4/20/2011 15,000 14,700 Russian Federation 5.000 3/31/2030 30,000 33,825 Russian Ministry of Finance 3.000 5/14/2008 25,000 23,656 ------------ Total Sovereign Bonds (Cost $148,141) 167,846
The accompanying notes are an integral part of the financial statements. 19 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------------- Yankee Bonds--7.7% Aes Gener SA 7.500% 3/25/2014 40,000 $ 40,615 Braskem Sa 144A 12.500 11/5/2008 10,000 11,675 Intelsat Bermuda Ltd. 144A (a) 8.695 1/15/2012 90,000 91,463 INVISTA 144A 9.250 5/1/2012 155,000 165,463 Jean Coutu Group, Inc. (b) 7.625 8/1/2012 75,000 73,875 JSG Funding PLC 9.625 10/1/2012 50,000 50,000 Nell AF Sarl 144A 8.375 8/15/2015 75,000 74,250 Noble Group Ltd. 144A 6.625 3/17/2015 100,000 92,089 Norampac, Inc. 6.750 6/1/2013 40,000 38,600 Nova Chemicals Corp. (b) 6.500 1/15/2012 45,000 43,594 Quebecor Media, Inc. 11.125 7/15/2011 50,000 54,125 Rogers Wireless Inc. (b) 8.000 12/15/2012 50,000 52,938 Rogers Wireless, Inc. (a) 7.616 12/15/2010 55,000 56,788 Royal Caribbean Cruises Ltd. 8.000 5/15/2010 150,000 162,918 Royal Caribbean Cruises Ltd. 8.750 2/2/2011 155,000 175,150 Russel Metals, Inc. 6.375 3/1/2014 25,000 24,250 Stena AB 9.625 12/1/2012 25,000 27,156 Stena AB 7.500 11/1/2013 25,000 24,000 Telenet Group Holding NV 144A (c) 11.500 6/15/2014 46,000 37,720 Tembec Industries, Inc. 7.750 3/15/2012 55,000 29,425 Wind Acquisition Finance SA 144A 10.750 12/1/2015 20,000 20,650 ------------ Total Yankee Bonds (Cost $1,346,337) 1,346,744 ------------ Foreign Denominated--1.6% Euro--1.6% Central European Distribution Corp. 144A 8.000 7/25/2012 EUR 50,000 64,057 Culligan Finance Corp., BV 144A 8.000 10/1/2014 30,000 38,123 General Motors Acceptance Corp. 5.375 6/6/2011 30,000 31,426 NTL Cable Plc 8.750 4/15/2014 60,000 75,271 Remy Cointreau S.A. 144A 6.500 7/1/2010 20,000 25,297 Telenet Communications NV 144A 9.000 12/15/2013 40,000 52,405 ------------ Total Foreign Denominated (Cost $269,621) 286,579 ------------ TOTAL BONDS AND NOTES (Cost $15,348,728) 15,621,220 ------------ COMMON STOCK--0.1% Shares --------- MCI, Inc. (Cost $0) USD 949 18,724 ------------ CONVERTIBLE PREFERRED STOCKS--1.7% Fannie Mae 7.00% CVT Pfd 300 16,350 Sovereign Capital Trust IV 4.375% CVT Pfd 5,900 258,125 Tyco International Group SA 3.125% 144A CVT Pfd 20,000 27,250 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $328,000) 301,725 ------------ WARRANTS--0.0% Republic of Argentina Warrant, 12/15/2035 (d) (Cost $0) 39,306 2,044 ------------ INVESTMENT OF CASH COLLATERAL--4.4% BlackRock Cash Strategies L.L.C. (f) (Cost $771,627) 4.130 771,627 771,627 ------------ TOTAL UNAFFILIATED INVESTMENTS (Cost $16,448,355) 16,715,340 ------------
The accompanying notes are an integral part of the financial statements. 20 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Value Security Description Rate Shares (Note 1A) - ------------------------------------------------------------------------------------------------- AFFILIATED INVESTMENTS--9.2% Dreyfus Institutional Preferred Plus Money Market Fund (f)(g) (Cost $1,612,327) 4.030% USD 1,612,327 $ 1,612,327 ----------- Total Investments--104.2% (Cost $18,060,682) 18,327,667 ----------- Liabilities in Excess of Other Assets--(4.2%) (730,271) ----------- NET ASSETS--100.0% $17,597,396 ===========
Notes to Schedule of Investments: 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $3,386,136 or 19.2% of net assets. CVT--Convertible REIT--Real Estate Investment Trust EUR--Euro (a) Variable Rate Security; rate indicated is as of 12/31/2005 (b) Security, or a portion of thereof, was on loan at December 31, 2005. (c) Step up security; rate indicated is as of 12/31//2005. (d) Non-income producing. (e) Denotes all or part of security pledged as collateral. (f) Stated rate is the seven-day yield for the fund at year end. (g) Affiliated institutional money market fund. At December 31, 2005 the Portfolio held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain/(Loss) - ------------------------------------------------------------------------------------------------ Brazilian Real 80,000 2/22/2006 $ 33,691 $ 27,220 $ (6,471) Brazilian Real 80,000 2/22/2006 32,865 30,155 (2,710) Euro 244,000 3/15/2006 289,981 292,810 2,829 --------- ---------- -------- Total $ 356,537 $ 350,185 $ (6,352) ========= ========== ========
Local Principal Contract Value at USD Amount Unrealized Contracts to Receive Amount Value Date December 31, 2005 to Deliver Gain - ------------------------------------------------------------------------------------------------ Brazilian Real 160,000 2/22/2006 $ 67,383 $ 54,589 $ 12,794 ========= ========== =========
At December 31, 2005, the Portfolio held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - --------------------------------------------------------------------------------------------------------------------------------- Bear Stearns Ukraine Government, 7.650% due 6/11/2013 Sell 2.840% 12/20/2009 $ 25,000 $ 1,322 JPMorgan Cooper Tire & Rubber Company 7.75 % due 12/15/2009 Buy (1.070) 9/20/2010 20,000 1,422 Merrill Lynch Dow Jones CDX.NA.IG.4 7-10% tranche Buy (0.305) 6/20/2010 188,900 (306) Merrill Lynch Meadwestvaco Corp., 6.850% due 4/1/2012 Buy (0.770) 6/20/2009 170,000 (1,892) Merrill Lynch Georgia-Pacific Corp. 8.125% due 5/15/2011 Sell 1.600 6/20/2009 170,000 (6,250) Morgan Stanley & Co. Dow Jones CDX.NA.IG.4 7-10% tranche Buy (0.350) 6/20/2010 300,100 (876) Morgan Stanley & Co. Wendy's International, Inc., 6.25% due 11/15/2011 Buy (0.620) 12/20/2010 200,000 1,694 ---------- $ (4,886) ==========
Interest Rate Floating Rate Pay/Receive Fixed Expiration Notional Unrealized/ Swaps Counterparty Index Floating Rate Rate Date Amount (Depreciation) - --------------------------------------------------------------------------------------------------------------------------------- Bear Stearns USD--LIBOR--BBA Pay 3.907% 11/19/2009 $ 25,000 $ (839) ==========
The accompanying notes are an integral part of the financial statements. 21 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $749,973 (Note 6)) Unaffiliated issuers, at value (Note 1A) (cost $16,448,355) $16,715,340 Affiliated issuers, at value (Note 1A) (cost $1,612,327) (Note 1H) 1,612,327 Foreign currency, at value (cost $6,825) 6,813 Receivable for investments sold 33,272 Interest and dividends receivable 309,999 Unrealized appreciation on forward foreign currency exchange contracts (Note 5) 15,623 Unrealized appreciation on swap contracts (Note 5) 4,438 Prepaid expenses 2,062 ----------- Total assets 18,699,874 Liabilities Collateral for securities on loan (Note 6) $ 771,627 Payable for investments purchased 275,146 Unrealized depreciation on forward foreign currency exchange contracts (Note 5) 9,181 Unrealized depreciation on swap contracts (Note 5) 10,163 Due to Custodian 653 Accrued professional fees 22,997 Accrued accounting, administration and custody fees (Note 2) 8,843 Accrued trustees' fees and expenses (Note 2) 3,596 Other accrued expenses and liabilities 272 ----------- Total liabilities 1,102,478 ----------- Net Assets (applicable to investors' beneficial interest) $17,597,396 ===========
The accompanying notes are an integral part of the financial statements. 22 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Statements of Operations For the Year Ended December 31 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 1,875,476 Dividend income from affiliated investments (Note 1H) 20,956 Security lending income (Note 6) 10,126 Dividend income (net of foreign withholding taxes of $338) 32,894 ----------- Total investment Income 1,939,452 Expenses Investment advisory fee (Note 2) $ 132,645 Accounting, administration and custody fees (Note 2) 108,624 Professional fees 34,654 Trustees' fees and expenses (Note 2) 8,542 Insurance expense 8,500 Miscellaneous 1,967 ----------- Total expenses 294,932 Deduct: Waiver of investment advisory fee (Note 2) (132,645) Reimbursement of Fund operating expenses (Note 2) (30,192) ----------- Total expense deductions (162,837) ----------- Net expenses 132,095 ----------- Net investment income 1,807,357 Realized and Unrealized Gain (Loss) Net realized gain (loss) Investment security transactions 1,164,137 Swap transactions 4,907 Foreign currency transactions and forward foreign currency exchange contracts 98,513 ----------- Net realized gain (loss) 1,267,557 Change in unrealized appreciation (depreciation) Investment securities (2,870,133) Swaps (12,983) Foreign currency and forward currency exchange contracts 53,899 ----------- Change in net unrealized appreciation (depreciation) (2,829,217) ----------- Net realized and unrealized gain (loss) (1,561,660) ----------- Net Increase in Net Assets from Operations $ 245,697 ===========
The accompanying notes are an integral part of the financial statements. 23 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets From Operations Net investment income $ 1,807,357 $ 4,084,657 Net realized gain (loss) 1,267,557 1,476,264 Change in net unrealized appreciation (depreciation) (2,829,217) (438,129) ------------ ------------ Net increase(decrease) in net assets from investment operations 245,697 5,122,792 ------------ ------------ Capital Transactions Contributions 5,802,546 10,724,449 Withdrawals (45,178,933) (16,197,718) ------------ ------------ Net increase (decrease) in net assets from capital transactions (39,376,387) (5,473,269) ------------ ------------ Total Increase (Decrease) in Net Assets (39,130,690) (350,477) Net Assets At beginning of period 56,728,086 57,078,563 ------------ ------------ At end of period $ 17,597,396 $ 56,728,086 ============ ============
The accompanying notes are an integral part of the financial statements. 24 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------- 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- Total Return (a) 3.70% 9.56% 21.76% 4.71% 1.54% Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.50% 0.50% 0.50% 0.50% 0.50% Net Investment Income (to average daily net assets)* 6.84% 7.28% 7.79% 8.66% 8.87% Portfolio Turnover 25% 51% 80% 130% 117% Net Assets, End of Period (000's omitted) $17,597 $56,728 $57,079 $44,144 $47,048
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Ratios (to average daily net assets): Expenses 1.12% 0.76% 0.85% 0.82% 0.81% Net investment income 6.22% 7.02% 7.44% 8.34% 8.56%
(a) Total return for the Portfolio has been calculated based on the total return for the invested Fund, assuming all distributions were reinvested, and adjusted for the difference in expenses as set out in the notes to the financial statements. Total return would have been lower in the absence of expense waivers. The accompanying notes are an integral part of the financial statements. 25 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was organized as a master trust fund under the laws of the State of New York on January 18, 1996 and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon High Yield Bond Portfolio (the "Portfolio") is a separate diversified investment series of the Portfolio Trust. The objective of the Portfolio is to maximize total return, consisting primarily of a high level of income. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities issued by U.S. and foreign governments, companies and banks, as well as tax-exempt securities, preferred stocks and warrants. At December 31, 2005 there was one fund, Standish Mellon Fixed Income Fund (the "Fund"), invested in the Portfolio. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio. The Fund's proportionate interest at December 31, 2005 was 100%. The following is a summary of significant accounting policies followed by the Portfolio in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Portfolio acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield-to-maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. C. Income taxes The Portfolio is treated as a disregarded entity for federal tax purposes. No provision is made by the Portfolio for federal or state income taxes on any taxable income of the Portfolio because each investor in the Portfolio is ultimately responsible for the payment of any taxes. Since the Portfolio's investor is a regulated investment company that invests all or substantially all of its assets in the Portfolio, the Portfolio normally must satisfy the source of income and diversification requirements applicable to regulated investment companies (under the Internal Revenue Code) in order for its investors to satisfy them. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. 26 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. F. Commitments and contingencies In the normal course of business, the Portfolio may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Portfolio under these arrangements is unknown, as this would involve future claims that may be made against the Portfolio that have not yet occurred. However, based on experience, the Portfolio expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions with Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities is paid monthly at the annual rate of 0.50% of the Portfolio's average daily net assets. Standish Mellon voluntarily agreed to limit the Portfolio's total annual operating expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.50% of the Portfolio's average daily net assets for the year ended December 31, 2005. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived its investment advisory fee in the amount of $132,645 and reimbursed the Portfolio $30,192. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Portfolio has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Portfolio. For these services the Portfolio pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Portfolio was charged $108,624 during the year ended December 31, 2005. The Portfolio entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Portfolio lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon bank received $10,126 for the year ended December 31, 2005. See Note 6 for further details. 27 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Portfolio for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ----------- ------------ Investments (non-U.S. Government Securities) $ 6,971,949 $ 44,303,988 =========== ============ (4) Federal Taxes: The cost and unrealized appreciation (depreciation) in value of the investment securities owned at December 31, 2005, as computed on a federal income tax basis, were as follows: Aggregate Cost $ 18,092,590 ============ Gross unrealized appreciation 499,345 Gross unrealized depreciation (264,268) ------------ Net unrealized appreciation (depreciation) $ 235,077 ============ (5) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Portfolio may trade the following financial instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Portfolio may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Portfolio's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Portfolio's exposure to the underlying instrument, or hedge other Portfolio investments. Options, both held and written by the Portfolio, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Portfolio is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. The Fund did not enter into any options transactions during the year ended December 31 2005. 28 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- Forward currency exchange contracts The Portfolio may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Portfolio primarily to protect the value of the Portfolio's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts is included in the Statement of Assets and Liabilities. At December 31, 2005, the Portfolio held open forward currency exchange contracts. See the Schedule of Investments for further details. Futures contracts The Portfolio may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Portfolio deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Portfolio each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Portfolio. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Portfolio's exposure to the underlying instrument, while selling futures tends to decrease the Portfolio's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Portfolio may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Portfolio enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The Fund did not enter into any futures contracts during the year ended December 31, 2005. Swap Agreements The Portfolio may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Portfolio may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Portfolio may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Portfolio owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Portfolio earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Portfolio held open swap contracts. See the Schedule of Investments for further details. 29 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (6) Security Lending: The Portfolio may lend its securities to financial institutions which the Portfolio deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Portfolio on the next business day. For the duration of a loan, the Portfolio receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Portfolio bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Portfolio. In the event of borrower default, the Portfolio generally has the right to use the collateral to offset losses incurred. The Portfolio may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Portfolio also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Portfolio's obligations due on the loans. The Portfolio loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $ 73,132 of which, $63,006 was rebated to borrowers or paid in fees. At December 31, 2005, the Portfolio had securities valued at $749,973 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (7) Delayed Delivery Transactions: The Portfolio may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Portfolio instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Portfolio may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Portfolio holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Portfolio may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Portfolio did not enter into any delayed delivery transactions during the year ended December 31, 2005. (8) Line of Credit: The Portfolio, and other subtrusts in the Portfolio Trust and funds in the Trust are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolios/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $687 for the Portfolio. During the year ended December 31, 2005, the Portfolio had average borrowings outstanding of $591,247 on a total of thirty eight days and incurred $2,063 of interest expense. 30 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of the Mellon Institutional Funds Master Portfolio and Investors of Standish Mellon High Yield Bond Portfolio: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon High Yield Bond Portfolio (the "Portfolio") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 31 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. The Fund is not a party to an investment advisory agreement directly with any investment adviser and does not invest directly in portfolio securities. Instead, the Fund invests all of its investable assets in the Standish Mellon High Yield Bond Portfolio (the "Portfolio"), which is managed by Standish Mellon Asset Management Company LLC ("Standish Mellon"). The Fund's Board of Trustees determines annually whether the Fund should continue to invest in the Portfolio. The members of the Fund's Board of Trustees also serve as the Board of Trustees of the Portfolio. In that capacity, they consider annually whether to continue the investment advisory agreement between the Portfolio and Standish Mellon. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from Standish Mellon a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance (rather than the Portfolio alone) and any material portfolio manager and strategy changes that may have affected the Fund and Portfolio in the prior year, as well as "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Portfolio and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Portfolio and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Portfolio's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Portfolio by Standish Mellon. In their deliberations as to the continuation of the Portfolio's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Portfolio's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Portfolio effectively. 32 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund (rather than the Portfolio alone) against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund outperformed its peer group average return for the five-year period (8.05% vs. 6.56%) but underperformed its peer group average returns for the one-year period (10.19% vs. 11.19%) and three-year period (14.06% vs. 16.05%). The Trustees requested that Standish Mellon arrange for a presentation to the Board, as part of the usual fund reporting cycle, to explain the Fund's performance issues and efforts by Standish Mellon to improve the Fund's performance. Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Portfolio to Standish Mellon. The Lipper data presenting the Portfolio's "net advisory fees" included fees paid by the Portfolio, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Portfolio's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Portfolio's advisory fees to those peers that include administrative fees within a blended advisory fee. The Portfolio's contractual advisory fee was 0.50%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.678%. The Portfolio's net advisory fee, after giving effect to expense limitations, was 0.171%, below the peer group median net advisory fee of 0.552%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Portfolio's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Portfolio relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Portfolio relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable relative to overall industry averages and to the nature and quality of the services provided. The Board also considered the Fund's (rather than solely the Portfolio's) expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.502% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 0.837% notwithstanding the fact that most of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Portfolio and Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Portfolio and Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Portfolio and Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Portfolio and Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Portfolio and Fund grow. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 33 Mellon Institutional Funds Master Portfolio Standish Mellon High Yield Bond Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 34 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Portfolios Trustee Principal in Fund Other Remuneration Name Term of Office Occupation(s) Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen Held by December 31, Date of Birth Held with Trust Time Served 5 Years by Trustee Trustee 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None Fund: $500 c/o Decision Resources, 11/3/1986 Decision Resources, Inc. Portfolio: $1,348 Inc. ("DRI") (biotechnology 260 Charles Street research and consulting Waltham, MA 02453 firm); formerly Chairman 9/30/40 of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street 32 None Fund: $500 c/o Essex Street 11/3/1986 Associates (family Portfolio: $1,457 Associates investment trust office) P.O. Box 5600 Beverly, MA 01915 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 32 None Fund: $500 c/o Harvard University 9/13/1989 Professor of Political Portfolio: $1,348 Littaver Center 127 Economy, Harvard Cambridge, MA 02138 University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, 32 None Fund: $500 P.O. Box 2333 11/3/1986 Mertens House, Inc. Portfolio: $1,348 New London, NH 03257 (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, President Since 2003 President and Chief 32 None $0 The Boston Company and Chief Operating Officer of Asset Management, LLC Executive Officer The Boston Company One Boston Place Asset Management, LLC; Boston, MA 02108 formerly Senior Vice 7/24/65 President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
35 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Asset Management and Secretary Mellon Asset Management ("MAM"); formerly First One Boston Place Vice President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer since 1999; Mellon Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager One Boston Place of Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management Mellon Asset Management Compliance and Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
36 THIS PAGE INTENTIONALLY LEFT BLANK [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6943AR1205 [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Opportunistic High Yield Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Market Environment For 2005, the Standish Mellon High Yield Bond Fund returned +3.55% as compared to the Merrill Lynch Master II Index mark of +2.74% and the Merrill Lynch Constrained High Yield Index total of +2.78%. The Lehman Aggregate Index reported a return of 2.43% for 2005, below that of High Yield and 3 Month Treasury Bills (+3.05%). During the year, the benchmark for the Fund was changed from the Master II Index to the Constrained Index, which limits individual issuer credit exposures to 2% of the index. Otherwise, both indexes use similar methodology. The benchmark change was made to mitigate the extremely large index weightings of more than 6% resulting from the downgrades of GM (May 31, 2005) and Ford Motor Company (December 31, 2005). Unconstrained weighting positions of that size are inconsistent with the management of a diversified fixed income portfolio. In 2005, three industry groups stood out as significant underperformers. The automotive (-7.72%) and auto parts and suppliers (-11.76%) subsectors reflected the well documented struggles of the two largest U.S. auto producers, GM and Ford. The financial pain created by this situation was felt most acutely by the parts suppliers to GM and Ford, as that sector absorbed a number of bankruptcies including Delphi, and Collins and Aikman, and badly hurt the credit standing of many other companies. The other major industry credit news in 2005 concerned the airlines (-10.71%), which were stung by long-running labor cost problems, brutal competition, and rising fuel costs. The last of the laggard sectors was paper and forestry, which fell -4.27%, hurt by weak newsprint demand and rising energy costs. Actual defaults in the high yield market were in the 2%-3% range in 2005 and are projected by the major rating agencies to remain in the same area for the next year. Despite some significant damage and disruption from two hurricanes, general economic conditions were quite strong. That said however, over the last 12 months the general tenor of the news in the fixed income market has taken a turn for the worse. An actively tightening Federal Reserve, along with a string of financial problems in the U.S. auto industry, Calpine, Refco, Delphi, and the airlines, all contributed to nervousness among fixed income investors. The investment grade credit market also had credit issues primarily stemming from event risk. A number of companies, frustrated by lagging equity market valuations, pursued leveraging transactions or outright sales that harmed prices of covenant-free debt issues. Portfolio Strategy Review and Results In a year when many of the outperforming sectors were small, relative performance was more a function of what a portfolio did not hold than what it did. Our careful credit selection and very modest industry exposure to the airlines and the auto industry served us well in 2005. For example, underweights in autos, paper and Calpine securities all were benefits to Fund performance in 2005. In addition, despite a privatizing transaction, the Georgia Pacific bonds held as an overweight position in the Fund contained restrictive 2 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- covenants, which led them to be tendered out at favorable levels. Although the Fund did have exposure to some of the strong performing wireless and telecom companies, our holdings were more concentrated in the senior securities and stronger credits which lagged the performance of some of the highest yielding issues. While 2005 had its share of bad news being absorbed by the market, one positive item for investors has been the greater yield levels offered on recently priced new deals. Going forward, however, the market will also be looking for stronger credit quality among the companies coming to market. Strong credits have been poorly represented amongst new issues in 2005, which were dominated by lower-rated, leveraging transactions. Investment Outlook As 2006 begins the high yield marketplace exhibits reasonable investor demand and a general expectation of stable credit conditions. Key elements to future performance will be efficient credit management and risk control, hopefully combined with the appearance of some worthwhile new financing opportunities. /s/ Jonathan Uhrig Jonathan Uhrig 3 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Opportunistic High Yield Fund, Merrill Lynch High Yield Master II Index and Merrill Lynch U.S. High Yield Master II Constrained Index - -------------------------------------------------------------------------------- [LINE GRAPH] [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 4/2/2001 - -------------------------------------------------------------------------------- 3.55% 11.81% 8.07% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Lipper Inc. ** Source: Bloomberg Inc. (1) The Merrill Lynch Master II High Yield ("ML Master II") Index is an unmanaged market value-weighted index of all domestic and Yankee high yield bonds. Effective July 1, 2005, the fund changed its benchmark from the ML Master II Index to the Merrill Lynch High Yield Constrained ("ML Constrained") Index because the adviser believes the ML Constrained Index is more consistent with the diversification limitations of the fund. The ML Constrained Index is comprised of all of the bonds held in the ML Master II Index, but this index caps single issuer exposure to 2% of the index. 4 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $1,000.00 $1,021.30 $0.51 Hypothetical (5% return per year before expenses) $1,000.00 $1,024.70 $0.51 - ---------- + Expenses are equal to the Fund's annualized expense ratio of .10%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 5 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Summary of Combined Ratings - -------------------------------------------------------------------------------- Percentage of Quality Breakdown Investments - -------------------------------------------------------------------------------- Treasury 3.0% AA 0.1 A 1.2 BBB 6.8 BB 44.7 B 43.1 CCC 0.3 NR 0.8 ----- Total 100.0% Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- Chevy Chase Bank FSB 6.875 12/1/2013 2.1% Sovereign Capital Trust IV 4.375% CVT Pfd 1.8 AES Corp. 144A 8.750 5/15/2013 1.6 Freescale Semiconductor, Inc. 6.875 7/15/2011 1.5 Nevada Power Co. 6.500 4/15/2012 1.5 Qwest Corp. 7.875 9/1/2011 1.2 Crown Americas Inc.144A 7.625 11/15/2013 1.2 Georgia-Pacific Corp. 8.000 1/15/2024 1.2 Dynegy Holdings, Inc. 144A 9.875 7/15/2010 1.2 Transcontinental Gas Pipe Line Corp. 8.875 7/15/2012 1.1 ---- 14.4% * Excluding short-term investments and investment of cash collateral. Percentage of Summary of Industries Investments - --------------------------------------------------------- Banking 4.2% Basic industry 12.0 Brokerage 0.0 Capital goods 12.3 Consumer cyclical 7.9 Consumer non-cyclical 6.7 Energy 9.8 Finance 1.3 Insurance 0.0 Media 7.8 Municipals 0.8 Real estate 0.6 Services cyclical 11.9 Services non-cyclical 2.5 Technology 2.4 Telecommunications 5.3 Utility 11.4 Agency 0.1 Cash & Equivalents 3.0 ----- 100.0% The Fund is actively managed. Current holdings may be different than those presented above. 6 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------ UNAFFILIATED INVESTMENTS--103.5% BONDS AND NOTES--95.1% Convertible Corporate Bonds--0.4% Centerpoint Energy, Inc. 144A CVT 2.875% 1/15/2024 USD 25,000 $ 26,906 Xcel Energy, Inc. 144A 7.500 11/21/2007 40,000 61,900 ------------ Total Convertible Corporate Bonds (Cost $65,000) 88,806 ------------ Corporate--83.9% Banking--2.2% Chevy Chase Bank FSB (e) 6.875 12/1/2013 430,000 442,900 ------------ Basic Industry--10.2% Airgas, Inc. 6.250 7/15/2014 25,000 24,563 Arch Western Finance 6.750 7/1/2013 55,000 56,031 Ball Corp. 6.875 12/15/2012 95,000 98,088 Berry Plastics 10.750 7/15/2012 95,000 102,125 Compression Polymers Holdings 144A 10.500 7/1/2013 35,000 33,950 Earle M Jorgenson Co. 9.750 6/1/2012 100,000 107,000 Equistar Chemicals LP/ Equistar Funding Corp. 10.125 9/1/2008 60,000 65,100 Equistar Chemicals LP/Equistar Funding Corp. 10.625 5/1/2011 15,000 16,500 Freeport-McMoRan Copper & Gold, Inc. 6.875 2/1/2014 70,000 70,700 Freeport-McMoRan Copper & Gold, Inc. 10.125 2/1/2010 40,000 43,950 Georgia-Pacific Corp. 8.000 1/15/2024 260,000 248,300 International Steel Group, Inc. 6.500 4/15/2014 100,000 100,000 Jefferson Smurfit Corp. US 8.250 10/1/2012 150,000 144,000 KRATON Polymers LLC/Capital Corp. 8.125 1/15/2014 15,000 14,400 Lubrizol Corp. 4.625 10/1/2009 150,000 147,019 Lyondell Chemical Co. 9.625 5/1/2007 50,000 52,188 Nalco Co. 7.750 11/15/2011 190,000 195,225 Neenah Paper, Inc. 7.375 11/15/2014 10,000 9,025 Peabody Energy Corp. 6.875 3/15/2013 105,000 109,200 Standard Pacific Corp. 6.500 8/15/2010 100,000 95,375 Steel Dynamics, Inc. 9.500 3/15/2009 100,000 105,250 Stone Container Corp. 8.375 7/1/2012 70,000 67,725 Temple-Inland 6.625 1/15/2018 80,000 82,421 Westlake Chemical Corp. (e) 8.750 7/15/2011 39,000 41,730 ------------ 2,029,865 ------------ Capital Goods--8.6% Alliant Techsystems, Inc. 8.500 5/15/2011 50,000 52,500 Alliant Techsystems, Inc. 144A 2.750 2/15/2024 35,000 37,756 CCM Merger, Inc. 144A (b) 8.000 8/1/2013 50,000 48,000 Church & Dwight Co.,Inc. 6.000 12/15/2012 105,000 103,425 Crown Cork & Seal Co, Inc. 8.000 4/15/2023 150,000 144,000 Esterline Technologies Corp. 7.750 6/15/2013 70,000 73,150 Gibraltar Industries, Inc. 144A 8.000 12/1/2015 30,000 30,225 L-3 Communications Corp. 7.625 6/15/2012 150,000 157,875 L-3 Communications Corp. 144A 3.000 8/1/2035 25,000 24,719 L-3 Communications Corp. 144A 6.375 10/15/2015 25,000 24,938 Leslie's Poolmart 7.750 2/1/2013 70,000 70,175 Leucadia National Corp. 7.000 8/15/2013 75,000 74,625 Neiman Marcus Group, Inc. 144A 9.000 10/15/2015 30,000 30,675 Norcraft Finance Co. 9.000 11/1/2011 40,000 41,400
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------ Capital Goods (continued) Owens-Brockway 7.750% 5/15/2011 USD 155,000 $ 161,781 Owens-Illinois, Inc. 7.500 5/15/2010 210,000 213,150 Quiksilver, Inc. 144A 6.875 4/15/2015 100,000 96,250 Silgan Holdings, Inc. 6.750 11/15/2013 120,000 119,400 Solo Cup Co. (b) 8.500 2/15/2014 50,000 43,750 Texas Industries, Inc. 144A 7.250 7/15/2013 40,000 41,500 Trinity Industries LE 6.500 3/15/2014 115,000 113,275 ------------ 1,702,569 ------------ Consumer Cyclical--2.9% CSC Holdings, Inc. 8.125 7/15/2009 70,000 70,700 Domino's, Inc. 8.250 7/1/2011 26,000 27,170 DR Horton, Inc. 8.500 4/15/2012 150,000 160,261 Fisher Scientific International 6.750 8/15/2014 65,000 67,763 Keystone Automotive Operation, Inc. 9.750 11/1/2013 40,000 34,600 PQ Corp. 144A 7.500 2/15/2013 10,000 9,300 Russell Corp. 9.250 5/1/2010 50,000 50,688 Scotts Co. 6.625 11/15/2013 140,000 141,750 Visteon Corp. 8.250 8/1/2010 15,000 12,750 ------------ 574,982 ------------ Consumer Non-Cyclical--5.4% Alliance One International 144A 11.000 5/15/2012 50,000 44,000 Altria Group, Inc. 7.000 11/4/2013 50,000 54,712 Amerigas Partners LP 7.250 5/20/2015 50,000 51,000 Chattem, Inc. 7.000 3/1/2014 60,000 60,900 Del Monte Corp. 8.625 12/15/2012 65,000 69,063 Elizabeth Arden, Inc. 7.750 1/15/2014 40,000 40,400 Goodyear Tire & Rubber 144A (b) 9.000 7/1/2015 115,000 113,275 Hertz Corp. 144A 8.875 1/1/2014 45,000 45,844 Hertz Corp. 144A (b) 10.500 1/1/2016 20,000 20,600 Ingles Markets, Inc. 8.875 12/1/2011 60,000 62,100 Rite Aid Corp. 12.500 9/15/2006 140,000 146,475 Rite Aid Corp. 9.500 2/15/2011 75,000 79,125 Smithfield Foods, Inc. 7.000 8/1/2011 25,000 25,500 Smithfield Foods, Inc. 7.750 5/15/2013 70,000 74,025 Stater Brothers Holdings 8.125 6/15/2012 65,000 64,350 Stater Brothers Holdings (a) 7.991 6/15/2010 125,000 125,000 ------------ 1,076,369 ------------ Energy--9.9% CMS Energy Corp. 8.900 7/15/2008 200,000 213,750 Colorado Interstate Gas 5.950 3/15/2015 50,000 48,294 Colorado Interstate Gas 144A 6.800 11/15/2015 175,000 178,811 Dynegy Holdings, Inc. 144A 9.875 7/15/2010 225,000 246,656 El Paso Natural Gas Co. 7.500 11/15/2026 110,000 113,569 El Paso Natural Gas Co. 8.625 1/15/2022 50,000 56,730 El Paso Production Holding Co. 7.750 6/1/2013 45,000 46,688 Frontier Oil Corp. 6.625 10/1/2011 25,000 25,500 Houston Exploration Co. 7.000 6/15/2013 40,000 38,400 Newfield Exploration Corp. 6.625 9/1/2014 100,000 101,750 Newfield Exploration Corp. 7.625 3/1/2011 60,000 64,200 Pacific Energy Partners/Finance 144A 6.250 9/15/2015 30,000 29,550 Pogo Producing Co. 6.625 3/15/2015 50,000 48,750
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------ Energy (continued) Premcor Refining Group, Inc. 9.500% 2/1/2013 USD 40,000 $ 44,586 Southern Natural Gas Co. 8.875 3/15/2010 25,000 26,718 Tennessee Gas Pipeline Co. 8.375 6/15/2032 150,000 170,191 Transcontinental Gas Pipe Line Corp. 8.875 7/15/2012 200,000 229,000 Williams Cos., Inc. 8.750 3/15/2032 65,000 75,400 Williams Cos., Inc. 7.875 9/1/2021 200,000 216,500 ------------ 1,975,043 ------------ Financial--3.6% BCP Crystal Holding Corp. 9.625 6/15/2014 116,000 129,050 E*Trade Financial Corp. 144A 7.375 9/15/2013 20,000 20,250 Ford Motor Credit Co. 7.375 10/28/2009 70,000 62,082 General Motors Acceptance Corp. 7.750 1/19/2010 200,000 186,777 General Motors Acceptance Corp. (b) 8.000 11/1/2031 60,000 57,473 Glencore Funding LLC 144A 6.000 4/15/2014 75,000 70,541 Residential Capital Corp. 6.375 6/30/2010 125,000 127,014 Residential Capital Corp. (b) 6.875 6/30/2015 40,000 42,503 Wind Acquisition Finance SA 144A 10.750 12/1/2015 25,000 25,813 ------------ 721,503 ------------ Industrial--3.6% Browning-Ferris Industries 9.250 5/1/2021 50,000 51,500 Cooper Standard Auto 8.375 12/15/2014 35,000 26,600 Crown Americas Inc. 144A 7.625 11/15/2013 240,000 249,000 Crown Americas Inc. 144A 7.750 11/15/2015 140,000 144,900 Douglas Dynamics LLC 144A 7.750 1/15/2012 155,000 149,575 Goodman Global Holdings 144A (a) 7.491 6/15/2012 100,000 99,000 ------------ 720,575 ------------ Media--5.2% Cablevision Systems Corp. (a) 8.716 4/1/2009 125,000 126,250 Dex Media West LLC/Dex Media Finance Co. 8.500 8/15/2010 85,000 89,038 DirecTV Holdings LLC 8.375 3/15/2013 30,000 32,250 Echostar DBS Corp. 5.750 10/1/2008 65,000 63,700 Entercom Radio LLC/Entercom Capital, Inc. 7.625 3/1/2014 50,000 50,125 Lamar Media Corp. 7.250 1/1/2013 20,000 20,750 PX Escrow Corp. (c) 9.625 2/1/2006 160,000 154,342 Radio One, Inc. 8.875 7/1/2011 150,000 158,250 RH Donnelley Finance Corp. 144A 10.875 12/15/2012 135,000 152,213 Salem Communications Corp. 7.750 12/15/2010 130,000 134,713 Sinclair Broadcast Group, Inc. (d) 4.875 7/15/2018 60,000 51,975 ------------ 1,033,606 ------------ Real Estate--1.1% Beazer Homes USA 6.875 7/15/2015 85,000 81,494 BF Saul REIT 7.500 3/1/2014 125,000 127,188 ------------ 208,682 ------------ Services: Cyclical--9.2% Ameristar Casinos, Inc. 10.750 2/15/2009 140,000 148,400 Chumash Casino & Resort Enterprises 144A 9.520 7/15/2010 105,000 111,563 Cinemark USA, Inc. 9.000 2/1/2013 75,000 79,313 Corrections Corp Of America 7.500 5/1/2011 60,000 62,100 Gaylord Entertainment Co. 8.000 11/15/2013 55,000 57,613
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------ Services: Cyclical (continued) Host Marriott LP (b) 7.000% 8/15/2012 USD 100,000 $ 102,500 Isle of Capri Casinos, Inc. 7.000 3/1/2014 90,000 87,750 Meristar Hospitality Operating Partnership LP (b) 10.500 6/15/2009 100,000 105,375 MGM Mirage, Inc 8.500 9/15/2010 150,000 162,563 Mohegan Tribal Gaming Authority 7.125 8/15/2014 145,000 148,444 Mohegan Tribal Gaming Authority 8.000 4/1/2012 175,000 184,188 Penn National Gaming, Inc. 6.875 12/1/2011 25,000 25,250 Penn National Gaming, Inc. 6.750 3/1/2015 60,000 58,950 Seneca Gaming Corp. 144A 7.250 5/1/2012 25,000 25,156 Speedway Motorsports, Inc. 6.750 6/1/2013 205,000 207,563 Station Casinos, Inc. 6.000 4/1/2012 150,000 149,625 True Temper Sports, Inc. 8.375 9/15/2011 65,000 58,500 Turning Stone Casino Resort Enterprise 144A 9.125 12/15/2010 45,000 46,350 ------------ 1,821,203 ------------ Services: Non-Cyclical--4.0% Allied Waste North America 8.500 12/1/2008 50,000 52,500 Coventry Health Care, Inc. 8.125 2/15/2012 60,000 63,750 Davita, Inc. (b) 7.250 3/15/2015 50,000 50,625 HCA, Inc. 7.875 2/1/2011 175,000 188,152 HCA, Inc. 8.750 9/1/2010 50,000 55,300 Kinetic Concepts, Inc. 7.375 5/15/2013 91,000 92,820 Plastipak Holdings, Inc. 144A 8.500 12/15/2015 110,000 111,100 Psychiatric Solutions, Inc. 7.750 7/15/2015 25,000 25,813 Service Corp International 144A 7.500 6/15/2017 30,000 29,775 Tenet Healthcare Corp. 144A (b) 9.250 2/1/2015 100,000 99,250 Williams Scotsman, Inc. 8.500 10/1/2015 30,000 31,050 ------------ 800,135 ------------ Technology & Electronics--2.4% Communications & Power Industries, Inc. 8.000 2/1/2012 25,000 24,938 Freescale Semiconductor, Inc. (b) 6.875 7/15/2011 310,000 325,500 Freescale Semiconductor, Inc. (a) 6.900 7/15/2009 100,000 102,750 Sungard Data Systems Inc. 144A (a) 8.525 8/15/2013 20,000 20,700 ------------ 473,888 ------------ Telecommunications--5.1% AT&T Corp. (d) 9.750 11/15/2031 50,000 62,806 Consolidated Communication Holdings, Inc. 9.750 4/1/2012 59,000 62,835 Hawaiian Telecom Communication 144A (a) 9.948 5/1/2013 30,000 28,950 Nextel Communications, Inc. 5.950 3/15/2014 150,000 150,786 Nextel Communications, Inc. 6.875 10/31/2013 30,000 31,296 Qwest Communications International 144A 7.500 2/15/2014 185,000 190,088 Qwest Corp. 7.200 11/10/2026 115,000 111,550 Qwest Corp. 7.875 9/1/2011 240,000 258,600 Rural Cellular Corp. 8.250 3/15/2012 50,000 52,750 Sierra Pacific Resources 8.625 3/15/2014 50,000 54,099 ------------ 1,003,760 ------------ Utilities--10.5% AES Corp. 9.375 9/15/2010 60,000 65,550 AES Corp. (b) 8.875 2/15/2011 123,000 132,994 AES Corp. 144A 8.750 5/15/2013 310,000 337,513 DPL, Inc. 6.875 9/1/2011 50,000 52,688 FPL Energy Wind Funding LLC 144A 6.876 6/27/2017 87,100 86,991 Mirant North America LLC 144A 7.375 12/31/2013 150,000 151,688
The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------ Utilities (continued) Monongahela Power Co. 6.700% 6/15/2014 USD 65,000 $ 71,147 MSW Energy Holdings 8.500 9/1/2010 50,000 53,250 MSW Energy Holdings 7.375 9/1/2010 95,000 97,613 Nevada Power Co. 6.500 4/15/2012 300,000 307,500 NorthWestern Corp. 5.875 11/1/2014 35,000 35,066 NRG Energy, Inc. 8.000 12/15/2013 66,000 73,590 Reliant Energy, Inc. 9.250 7/15/2010 55,000 55,000 TECO Energy, Inc. 7.500 6/15/2010 50,000 53,250 TECO Energy, Inc. 6.750 5/1/2015 10,000 10,350 Texas Genco LLC/Financing 144A 6.875 12/15/2014 50,000 54,125 Txu Corp. 4.800 11/15/2009 175,000 168,328 Txu Corp. 5.550 11/15/2014 205,000 194,716 Whiting Petroleum Corp. 7.250 5/1/2013 75,000 75,938 ------------ 2,077,297 ------------ Total Corporate (Cost $16,462,280) 16,662,377 ------------ Municipal Bonds--1.5% Erie County NY Tobacco Asset Securitization Corp. 6.000 6/1/2028 25,000 24,485 Mashantucket West Pequot 144A 5.912 9/1/2021 150,000 149,876 South Carolina Tobacco Settlement Authority 6.000 5/15/2022 50,000 52,574 Tobacco Settlement Authority Iowa 6.500 6/1/2023 75,000 75,326 ------------ Total Municipal Bonds (Cost $294,378) 302,261 ------------ Yankee Bonds--7.6% Bombardier, Inc. 144A (b) 6.300 5/1/2014 100,000 87,500 Intelsat Bermuda Ltd. 144A (a) 8.695 1/15/2012 85,000 86,381 INVISTA 144A 9.250 5/1/2012 180,000 192,150 Jean Coutu Group, Inc. (b) 7.625 8/1/2012 50,000 49,250 JSG Funding PLC 9.625 10/1/2012 50,000 50,000 Nell AF Sarl 144A 8.375 8/15/2015 75,000 74,250 Noble Group Ltd. 144A 6.625 3/17/2015 125,000 115,111 Norampac, Inc. 6.750 6/1/2013 120,000 115,800 Nova Chemicals Corp. (b) 6.500 1/15/2012 105,000 101,719 Quebecor Media, Inc. 11.125 7/15/2011 95,000 102,838 Rogers Wireless Inc. (b) 8.000 12/15/2012 60,000 63,525 Rogers Wireless, Inc. 7.250 12/15/2012 50,000 52,563 Rogers Wireless, Inc. (a) 7.616 12/15/2010 60,000 61,950 Royal Caribbean Cruises Ltd. 8.000 5/15/2010 100,000 108,612 Royal Caribbean Cruises Ltd. 8.750 2/2/2011 110,000 124,300 Russel Metals, Inc. 6.375 3/1/2014 50,000 48,500 Stena AB 7.500 11/1/2013 70,000 67,200 ------------ Total Yankee Bonds (Cost $1,498,173) 1,501,649 ------------ Foreign Denominated--1.7% Euro--1.7% Culligan Finance Corp., BV 144A 8.000 10/1/2014 EUR 35,000 44,477 General Motors Acceptance Corp. 5.375 6/6/2011 45,000 47,139 Hornbach Baumarkt AG 144A 6.125 11/15/2014 15,000 17,753 NTL Cable PLC 8.750 4/15/2014 35,000 43,908 Remy Cointreau S.A. 144A 6.500 7/1/2010 40,000 50,595 Telenet Communications NV 144A 9.000 12/15/2013 100,000 131,073 ------------ Total Foreign Denominated (Cost $246,160) 334,945 ------------ TOTAL BONDS AND NOTES (COST $18,565,991) 18,890,038 ------------
The accompanying notes are an integral part of the financial statements. 11 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Value Security Description Rate Shares (Note 1A) - ------------------------------------------------------------------------------------------------------------ CONVERTIBLE PREFERRED STOCKS--2.2% Fannie Mae 7.00% CVT Pfd (e) 300 $ 16,350 Sovereign Capital Trust IV 4.375% CVT Pfd (e) 8,850 387,188 Tyco International Group SA 3.125% 144A CVT Pfd 25,000 34,046 ------------ TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $482,496) 437,584 ------------ INVESTMENT OF CASH COLLATERAL--6.2% BlackRock Cash Strategies L.L.C. (f) (Cost $1,225,630) 4.130% 1,225,630 1,225,630 ------------ TOTAL UNAFFILIATED INVESTMENTS (Cost $20,274,117) 20,553,252 ------------ AFFILIATED INVESTMENTS--3.2% Dreyfus Institutional Preferred Plus Money Market Fund (f) (g) (Cost $635,870) 4.060 635,870 635,870 ------------ Total Investments--106.7% (Cost $20,909,987) 21,189,122 Liabilities in Excess of Other Assets--(6.7%) (1,331,803) ------------ NET ASSETS--100.0% $ 19,857,319 ============
Notes to Schedule of Investments: 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At year end, the value of these securities amounted to $4,332,608 or 21.8% of net assets. CVT--Convertible EUR--Euro REIT--Real Estate Investment Trust (a) Variable Rate Security; rate indicated is as of 12/31/2005. (b) Security, or a portion of thereof, was on loan at December 31, 2005. (c) Security valued at fair value using methods determined in good faith by or under the direction of the Board of Trustees. (d) Step up security; rate indicated is as of 12/31//2005. (e) Denotes all or part of security pledged as collateral. (f) Stated yield is the seven day yield for the fund at year end. (g) Affiliated institutional money market fund. At December 31, 2005 the Fund held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain - -------------------------------------------------------------------------------------------- Euro 296,000 3/15/2006 $ 351,780 $ 355,282 $ 3,502 ============= ========== ==========
At December 31, 2005, the Fund held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - ------------------------------------------------------------------------------------------------------------------------------------ JPMorgan Cooper Tire & Rubber Co., 7.750% due 12/15/2009 Buy (1.07%) 9/20/2010 $ 25,000 $ 1,777 Morgan Stanley Dow Jones CDX.NA.IG.4 7-10% Tranche Buy (0.35%) 6/20/2010 385,400 (1,125) Merrill Lynch Dow Jones CDX.NA.IG.4 7-10% Tranche Buy (0.305%) 6/20/2010 242,600 (392) Merrill Lynch Georgia-Pacific Corp., 8.125%, 5/15/2011 Sell 1.600% 6/20/2009 420,000 (15,441) Merrill Lynch Meadwestvaco Corp., 6.850% due 4/1/2012 Buy (0.77%) 6/20/2009 420,000 (4,674) Morgan Stanley & Co. Wendy's International, Inc., 6.25% due 11/15/2011 Buy (0.62%) 12/20/2010 240,000 2,033 --------- $ (17,822) =========
The accompanying notes are an integral part of the financial statements. 12 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $1,194,995 (Note 7)) Unaffiliated issuers, at value (Note 1A) (cost $20,274,117) $ 20,553,252 Affiliated issuers, at value (Note 1A) (cost $635,870) (Note 1H) 635,870 Foreign currency, at value (cost $11,133) 11,105 Unrealized appreciation on swap contracts, (Note 6) 3,810 Unrealized appreciation on forward currency exchange contracts (Note 6) 3,502 Interest and dividends receivable 373,366 Prepaid expenses 2,961 --------------- Total assets 21,583,866 Liabilities Collateral for securities on loan (Note 7) $ 1,225,630 Payable for Fund shares redeemed 300,000 Distribution payable 129,667 Due to Custodian 3,074 Unrealized depreciation on swap contracts, (Note 6) 21,632 Accrued professional fees 35,965 Accrued accounting, administration, custody and transfer agent fees (Note 2) 6,967 Accrued trustees' fees and expenses (Note 2) 743 Accrued Chief Compliance Officer fees (Note 2) 404 Other accrued expenses and other liabilities 2,465 ----------- Total liabilities 1,726,547 --------------- Net Assets $ 19,857,319 =============== Net Assets consist of: Paid-in capital $ 35,839,033 Accumulated net realized loss (16,256,473) Undistributed net investment income 10,051 Net unrealized appreciation 264,708 --------------- Total Net Assets $ 19,857,319 =============== Shares of beneficial interest outstanding 1,181,020 =============== Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 16.81 ===============
The accompanying notes are an integral part of the financial statements. 13 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 1,299,121 Dividend income from affiliated investments (Note 1H) 37,733 Security lending income (Note 7) 8,909 Dividend income 23,162 -------------- 1,368,925 Expenses Investment advisory fee (Note 2) $ 76,753 Accounting, administration, custody, and transfer agent fees (Note 2) 72,579 Professional fees 52,360 Registration fees 9,250 Trustees' fees and expenses (Note 2) 3,241 Insurance expense 6,100 Miscellaneous 9,536 ------------ 229,819 Deduct: Waiver of investment advisory fee (Note 2) (76,753) Reimbursement of Fund operating expenses (Note 2) (133,878) ------------ Total expense deductions (210,631) ------------ Net expenses 19,188 -------------- Net investment income 1,349,737 Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments (50,755) Foreign currency transactions and forward currency exchange transactions 37,254 Swap transactions 17,042 ------------ Net realized gain 3,541 Change in unrealized appreciation (depreciation) on: Investments (674,816) Foreign currency translations and forward currency exchange contracts 8,710 Swap contracts (22,539) ------------ Net change in net unrealized appreciation (depreciation) (688,645) -------------- Net realized and unrealized gain (loss) on investments (685,104) -------------- Net Increase in Net Assets from Operations $ 664,633 ==============
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 1,349,737 $ 2,632,850 Net realized gain (loss) 3,541 2,633,830 Change in net unrealized appreciation (depreciation) (688,645) (1,788,291) ------------ ------------ Net increase (decrease) in net assets from investment operations 664,633 3,478,389 ------------ ------------ Distributions to Shareholders (Note 1C) From net investment income (1,451,950) (2,893,284) ------------ ------------ Total distributions to shareholders (1,451,950) (2,893,284) ------------ ------------ Fund Share Transactions (Note 4) Net proceeds from sale of shares 7,614,232 1,609,132 Value of shares issued to shareholders in reinvestment of distributions 998,844 1,369,851 Cost of shares redeemed (5,822,713) (27,553,173) ------------ ------------ Net increase (decrease) in net assets from Fund share transactions 2,790,363 (24,574,190) ------------ ------------ Total Increase (Decrease) in Net Assets 2,003,046 (23,989,085) Net Assets At beginning of year 17,854,273 41,843,358 ------------ ------------ At end of year(including undistributed net investment income of $10,051 and $34,540, respectively) $ 19,857,319 $ 17,854,273 ============ ============
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Financial Highlights - --------------------------------------------------------------------------------
For the Period April 2, 2001 Year Ended December 31, (commencement -------------------------------------------------- of operations) to 2005 2004 2003 2002 December 31, 2001 ----------- ----------- ----------- ----------- ----------------- Net Asset Value, Beginning of Year $ 17.47 $ 17.64 $ 15.72 $ 16.36 $ 20.00 From Investment Operations: Net investment income * (a) 1.21 1.38 1.36 1.41 1.34 Net realized and unrealized gain (loss) on investments (0.61) 0.47 1.97 (0.46) (1.93) ----------- ----------- ----------- ----------- ------------ Total from investment operations 0.60 1.85 3.33 0.95 (0.59) ----------- ----------- ----------- ----------- ------------ Less Distributions to Shareholders: From net investment income (1.26) (2.02) (1.41) (1.58) (2.98) From tax return of capital -- -- -- (0.01) (0.07) ----------- ----------- ----------- ----------- ------------ Total distributions to shareholders (1.26) (2.02) (1.41) (1.59) (3.05) ----------- ----------- ----------- ----------- ------------ Net Asset Value, End of Year $ 16.81 $ 17.47 $ 17.64 $ 15.72 $ 16.36 =========== =========== =========== =========== ============ Total Return (b) 3.55% 10.85% 21.77% 6.07% (2.91)%(c) Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.10% 0.10% 0.10% 0.10% 0.10%(d) Net Investment Income (to average daily net assets)* 7.03% 7.57% 8.00% 8.78% 9.46%(d) Portfolio Turnover 42% 36% 133% 121% 191%(c) Net Assets, End of Year (000's omitted) $ 19,857 $ 17,854 $ 41,843 $ 39,032 $ 46,193
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share (a) $ 1.02 $ 1.25 $ 1.22 $ 1.31 $ 1.28 Ratios (to average daily net assets): Expenses 1.20% 0.83% 0.91% 0.73% 0.54%(d) Net investment income 5.93% 6.84% 7.19% 8.15% 9.02%(d)
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of fee waivers and expense limitations. (c) Not annualized. (d) Computed on an annualized basis. The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Opportunistic High Yield Bond Fund (the "Fund") is a separate non-diversified investment series of the Trust. The objective of the Fund is to maximize total return, consistent with preserving principal, primarily through the generation of current income and, to a lesser extent, capital appreciation by investing, under normal circumstances, at least 80% of net assets in below investment grade fixed income securities. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Fund acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield-to-maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, amortization and/or accretion of premiums and discounts on certain securities and capital loss carryforwards. Permanent book and tax basis differences will result in reclassifications among undistributed net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. 17 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. F. Expenses The majority of expenses of the Trust are directly identifiable to an individual fund. Expenses which are not readily identifiable to a specific fund are allocated among funds of the Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds. G. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Transactions With Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities, is payable monthly at the annual rate of 0.40% of the Fund's average daily net assets. Standish Mellon voluntarily agreed to limit total Fund operating expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.10% of the Fund's average daily net assets for the year ended December 31, 2005. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived its investment advisory fee in the amount of $76,753 and reimbursed the Fund for $133,878 of its operating expenses. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $6,310 during the year ended December 31, 2005. The Fund has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Fund. For these services the Fund pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $66,269 during the year ended December 31, 2005. The Fund entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Fund's lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon Bank received $3,837 for the year ended December 31, 2005. See Note 7 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,269 for fees payable to Mellon Private Wealth Management. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Trust pays the legal fees for the independent counsel of the Trustees. 18 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ----------- ----------- Investments (non-U.S. Government Securities) $ 9,678,100 $ 7,492,433 =========== =========== (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 439,323 91,564 Shares issued to shareholders in reinvestment of distributions declared 58,759 78,037 Shares redeemed (339,279) (1,519,183) -------- ---------- Net increase (decrease) 158,803 (1,349,582) ======== ========== At December 31, 2005, seven shareholders of record held approximately 90% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. The fee does not apply to shares that were acquired through reinvestment of distributions. For the year ended December 31, 2005, the Fund did not collect any redemption fees (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its taxable income for its fiscal year. The tax basis components of distributable earnings and the federal tax cost as of December 31, 2005, was as follows: Unrealized appreciation $ 566,798 Unrealized depreciation (301,355) ----------- Net unrealized appreciation/depreciation 265,443 =========== Undistributed ordinary income 13,553 Undistributed long term capital gain -- Cost for federal income tax purposes 20,923,679 19 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ----------- ----------- Ordinary income $ 1,451,950 $ 2,893,284 At December 31, 2005, the Fund, for federal income tax purposes, has capital loss carryovers of $16,242,781 which will reduce the Fund's taxable income arising from net realized gain on investments, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are as follows: Capital Loss Carry Over Expiration Date ------------ --------------- $ 8,800,951 12/31/2010 7,303,547 12/31/2011 138,283 12/31/2013 ------------ $ 16,242,781 ============ It is uncertain whether the Fund will be able to realize the benefits of the losses before they expire. (6) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Fund may trade the following instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Fund may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. Options, both held and written by the Fund, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Fund is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. The Fund did not enter into any options transactions during the year ended December 31 2005. Forward currency exchange contracts The Fund may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Fund primarily to protect the value of the Fund's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts are included in the Statement of Assets and Liabilities. At December 31, 2005, the Fund held currency exchange contracts. See the Schedule of Investments for further details. 20 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Futures contracts The Fund may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Fund deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Fund's exposure to the underlying instrument, while selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Fund enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. The Fund did not enter into any futures contracts during the year ended December 31 2005. Swap agreements The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Fund had swap agreements outstanding. See the Schedule of Investments for further details. (7) Security Lending: The Fund may lend its securities to financial institutions which the Fund deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Fund on the next business day. For the duration of a loan, the Fund receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Fund bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Fund. In the event of borrower default, the Fund generally has the right to use the collateral to offset losses incurred. The Fund may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Fund also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Fund's obligations due on the loans. The Fund loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $46,066 of which, $37,157 was rebated to borrowers or paid in fees. At December 31, 2005, the Fund had securities valued at $1,194,995 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. 21 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (8) Delayed Delivery Transactions: The Fund may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Fund instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Fund may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Fund did not enter into any delayed delivery transactions during the year ended December 31, 2005. (9) Line of Credit: The Fund, and other funds in the Trust and subtrusts in Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolio/funds at the end of each quarter. For the period ended December 31, 2005, the facility fee was $296 for the Fund. During the year ended December 31, 2005, the Fund had average borrowings outstanding of $334,000 on a total of two days and incurred $53 of interest expense. 22 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Opportunistic High Yield Bond Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Opportunistic High Yield Bond Fund, (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, and the period April 2, 2001 (commencement of operations) through December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 23 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from the Fund's investment adviser, Standish Mellon Asset Management Company LLC ("Standish Mellon"), a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance and any material portfolio manager and strategy changes that may have affected the Fund in the prior year, as well as the Fund's "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Fund and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Fund's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Fund by Standish Mellon. In their deliberations as to the continuation of the Fund's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Fund's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Fund effectively. 24 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board for at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one- and three-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (10.70% vs. 11.21%) and three-year period (14.45% vs. 16.07%). Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Fund to Standish Mellon. The Lipper data presenting the Fund's "net advisory fees" included fees paid by the Fund, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Trust's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Fund's advisory fees to those peers that include administrative fees within a blended advisory fee. The Fund's contractual advisory fee was 0.40%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.678%. The Fund's net advisory fee, after giving effect to expense limitations, was 0.043%, well below the peer group median net advisory fee of 0.552%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Fund's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Fund relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Fund relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.10% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 0.837% notwithstanding the fact that most of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 25 Mellon Institutional Funds Investment Trust Standish Mellon Opportunistic High Yield Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 26 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - --------------------------------------------------------------------------------------------------------------------------------- Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None $ 723 c/o Decision Resources, Inc. 11/3/1986 Decision Resources, 260 Charles Street Inc. ("DRI") Waltham, MA 02453 (biotechnology 9/30/40 research and consulting firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street 32 None $ 777 c/o Essex Street Associates 11/3/1986 Associates (family P.O. Box 5600 investment trust Beverly, MA 01915 office) 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 32 None $ 723 c/o Harvard University 9/13/1989 Professor of Littaver Center 127 Political Economy, Cambridge, MA 02138 Harvard University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, 32 None $ 723 P.O. Box 2333 11/3/1986 Mertens House, Inc. New London, NH 03257 (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, Since 2003 President and Chief 32 None $ 0 The Boston Company President and Operating Officer of Asset Management, LLC Chief Executive The Boston Company One Boston Place Officer Asset Management, Boston, MA 02108 LLC; formerly Senior 7/24/65 Vice President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
27 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - --------------------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President and Since 2003 Senior Vice President and Head of Operations, Mellon Mellon Asset Management Secretary Asset Management ("MAM"); formerly First Vice President, One Boston Place MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President and Vice President since Vice President and Mutual Funds Controller, Mellon Asset Mellon Asset Management Treasurer 1999; Treasurer Management One Boston Place since 2002 Boston, MA 02108 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Operations, Mellon Asset Management President Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager of One Boston Place Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Compliance Since 2005 First Vice President, Mellon Asset Management and Chief Mellon Asset Management Officer Compliance Officer, Mellon Funds Distributor and Mellon One Boston Place Optima L/S Strategy Fund, LLC; formerly Director, Boston, MA 02108 Blackrock, Inc., Senior Vice President, State Street 4/8/57 Research & Management Company ("SSRM"), Vice President, SSRM
28 THIS PAGE INTENTIONALLY LEFT BLANK [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6949AR1205 [LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon International Fixed Income Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- International bond markets hedged to the dollar produced some of the best bond returns of all the fixed income sectors in 2005. The Standish Mellon International Fixed Income Fund returned 4.72% for 2005, after all expenses, compared to a return of 5.60% for the J.P. Morgan Non-U.S. Government Bond Index. Low single digit returns in most major bond markets represented a decent outcome in 2005 considering that central banks have started a global tightening cycle and headline inflation is up on the back of high oil prices. The European Central Bank raised interest rates in the fourth quarter by 0.25% but that did not damage the positive return on bonds. European bonds were among the best performers in the hedged index for 2005 as economic growth disappointed in the first half of the year. European core inflation also dropped to 1.5% during 2005, and that provided a tail wind to bonds. Finally, the long end of European bond markets has performed very well as pension reforms in various countries are providing a demand for long duration bonds. European yield curves also flattened considerably during the year, making long duration bonds the best performing bonds in 2005. Japan's economy surprised on the strong side in 2005. the Japanese stock market was one of the best performing global markets which hurt the performance of Japanese bonds. Nevertheless, returns for Japanese bonds benefited from the carry associated with hedging back to the dollar and managed to outperform U.S. Treasury returns over the year. The star performer within the index was Canada where returns were driven by the fact that the Bank of Canada has lagged U.S. Federal Reserve rate increases, opening a sizeable gap in short rate spreads of 1% between these two countries. Also, the strong Canadian dollar has eased upward pressure on interest rates. The non-government sectors of the international bond markets were not a major source of positive or negative return in 2005. Security selection in high yield and corporate bonds certainly added value as some sectors, like autos, performed poorly. Emerging markets was the best performing sector once again among the non-government sectors as credit quality continued to improve and capital flowed freely into the sector. The Fund underperformed its benchmark during the year. Our positions in investment grade and high yield corporate bonds and emerging market securities were the largest positive contributors relative to our benchmark. The results of our country weightings were mixed. We were underweight in Japan and the U.S. but lost value by not overweighting the long end of the European yield curve. We had a long duration position in Australia that lagged the benchmark. The Australian housing market deteriorated significantly but this did not lead to the interest rate cuts from the Reserve Bank of Australia that we expected. The Bank of England did cut interest rates to offset weak consumer demand that was partially driven by weak housing and that helped U.K. bonds to solid performance in 2005. Duration positioning was another negative factor as long duration bonds outperformed despite strong economic growth and rising short-term yields. Our process emphasizes value in bond markets and given the low level of real yields, we were surprised at the performance of long-duration bonds in 2005. 2 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Our outlook for international bonds in 2006 is favorable. We believe that the performance of global economies will be close to trend, yet the behavior of central banks around the world could be quite different. The Fed will probably pause in raising interest rates while Europe and Canada and perhaps also Japan continue to raise interest rates. We believe opportunities for added value can be found in the higher real yielding markets of Australia, the U.K., Sweden and even the U.S. if the housing market exerts a large drag on economic growth. In a global tightening cycle Japan may end up being a good diversifying position if economic growth peters out. Non-government sectors such as corporate and emerging market bonds, have increased in value quite a bit over the past two years and we believe that these sectors will not perform as well as in the past but that the sector still offers opportunities to add-value through security selection. During the year we changed portfolio managers on the International Fixed Income Fund. Charles Dolan and Thomas Fahey have assumed management responsibility of the fund while Chuck Cook pursues new responsibilities within the firm. We appreciate your continued support and look forward to working on your behalf over the next year. /s/ Thomas Fahey /s/ Charles Dolan Thomas Fahey Charles Dolan 3 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon International Fixed Income Fund and the JP Morgan Non-US Hedged Index - -------------------------------------------------------------------------------- [GRAPH] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 10 Years 1/3/1991 - -------------------------------------------------------------------------------- 4.72% 4.83% 5.00% 7.06% 8.22% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Bloomberg Inc. 4 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $ 1,000.00 $ 1,015.80 $ 3.00 Hypothetical (5% return per year before expenses) $ 1,000.00 $ 1,022.28 $ 3.01 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.59%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).The Example reflects the combined expenses of the Fund and the master portfolio in which it invests all its assets. 5 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- U.S. Treasury Inflation-Indexed Bond 0.875 4/15/2010 9.4% Deutsche Republic 4.750 7/4/2034 6.4 Queensland Treasury Corp. 0.000 6/14/2011 6.2 Swedish Government 5.250 3/15/2011 4.6 Development Bank of Japan 1.700 9/20/2022 3.7 KFW International Finance 1.750 3/23/2010 3.2 Deutsche Republic 3.250 7/4/2015 3.2 Canadian Government 5.500 6/1/2010 3.0 Singapore Government Bond 3.500 7/1/2012 2.9 United Kingdom Gilt 4.750 6/7/2010 2.5 ---- 45.1% Summary of Combined Ratings - --------------------------------------------------- Percentage of Quality Breakdown Investments - --------------------------------------------------- AAA 64.2% AA 10.1 A 5.1 BBB 9.9 BB 6.8 B 1.3 Below B 2.6 ----- Total 100.0% * Excluding short-term investments and investment of cash collateral. Percentage of Economic Sector Allocation Investments - --------------------------------------------------- Government 60.8% Corporate 29.0 Emerging Markets 5.3 Cash & equivalents 4.9 ----- 100.0% The Fund is actively managed. Current holdings may be different than those presented above. 6 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments - December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--96.3% BONDS AND NOTES--94.2% Corporate--2.1% Basic Materials--0.1% Georgia-Pacific Corp. 8.000% 1/15/2024 USD 180,000 $ 171,900 ------------- Communications--0.5% Qwest Corp. 144A (a) 7.741 6/15/2013 550,000 593,313 ------------- Financial--1.5% Chevy Chase Bank FSB 6.875 12/1/2013 380,000 391,400 Glencore Funding LLC 144A 6.000 4/15/2014 430,000 404,433 Residential Capital Corp. (a) 5.896 6/29/2007 245,000 245,606 Residential Capital Corp. (a) 5.670 11/21/2008 745,000 745,978 ------------- 1,787,417 ------------- Total Corporate Bonds (Cost $2,532,787) 2,552,630 ------------- Sovereign Bonds--5.1% Argentina Bonos (a) 4.005 8/3/2012 675,000 528,525 Egyptian Treasury Bill 144A 7.500 3/23/2006 2,035,000 2,089,558 Egyptian Treasury Bill 144A 9.000 7/14/2006 535,000 555,020 Republic of Brazil (a) 5.250 4/15/2012 412,949 407,787 Republic of Panama 8.875 9/30/2027 445,000 529,550 Republic of South Africa 9.125 5/19/2009 275,000 308,344 Republic of Turkey 11.500 1/23/2012 625,000 792,969 Russian Federation 11.000 7/24/2018 360,000 530,550 Russian Ministry of Finance 3.000 5/14/2008 570,000 539,363 ------------- Total Sovereign Bonds (Cost $6,191,499) 6,281,666 ------------- Yankee Bonds--0.2% Rogers Wireless, Inc. (Cost $255,000) 7.500 3/15/2015 255,000 275,400 ------------- Foreign Denominated--77.4% Australia--8.2% Australian Government Bond 6.000 2/15/2017 AUD 3,230,000 2,522,660 Queensland Treasury Corp. 6.000 6/14/2011 10,020,000 7,569,999 ------------- 10,092,659 ------------- Canada--4.5% Canadian Government 5.500 6/1/2010 CAD 4,040,000 3,695,655 Canadian Pacific Railway Ltd. 144A 4.900 6/15/2010 2,000,000 1,757,052 ------------- 5,452,707 ------------- Denmark--1.8% Realkredit Danmark A/S 4.000 1/1/2006 DKK 13,965,000 2,216,209 ------------- Euro--34.0% ASIF III 5.125 5/10/2007 EUR 500,000 607,660 Autostrade SpA (a) 2.902 6/9/2011 900,000 1,074,169 Belgium Government Bond 4.250 9/28/2013 2,240,000 2,832,233 Bombardier, Inc. 5.750 2/22/2008 420,000 497,070 Bundesobligation 4.500 8/17/2007 40,000 48,574 Bundesobligation 3.000 4/11/2008 350,000 415,179
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments - December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------- Euro (continued) Bundesobligation 3.250% 4/9/2010 EUR 1,885,000 $ 2,250,092 Bundesrepub Deutschland 5.250 7/4/2010 1,320,000 1,704,587 Citigroup Inc. (a) 2.624 6/3/2011 675,000 799,240 Deutsche Bundesrepublik 5.000 7/4/2011 1,590,000 2,060,010 Deutsche Cap Trust IV (a) 5.330 9/29/2049 600,000 769,890 Deutsche Republic 4.500 1/4/2013 2,160,000 2,763,397 Deutsche Republic 3.250 7/4/2015 3,295,000 3,884,623 Deutsche Republic 4.750 7/4/2034 5,500,000 7,841,316 FCE Bank PLC (a) 2.895 6/28/2006 2,320,000 2,674,057 General Motors Acceptance Corp. 4.375 9/26/2006 440,000 504,889 Glencore Finance Europe SA/Luxembourg 5.375 9/30/2011 465,000 565,021 GMAC International Finance BV (a) 4.014 8/4/2006 690,000 783,950 Hellenic Republic Government Bond 3.700 7/20/2015 1,845,000 2,217,938 Kappa Beheer BV 10.625 7/15/2009 365,000 447,278 Kingdom of Denmark 3.125 10/15/2010 1,210,000 1,432,884 Linde Finance BV 6.000 7/29/2049 545,000 661,971 MPS Capital Trust I 7.990 2/7/2011 550,000 770,825 Netherlands Government Bond 5.500 7/15/2010 1,475,000 1,923,760 Owens-Brockway Glass Containers 6.750 12/1/2014 520,000 609,266 Resona Bank Ltd. 144A 4.125 1/10/2049 310,000 364,291 Sogerim 7.000 4/20/2011 385,000 529,043 Sumitomo Mitsui Banking Corp. 144A (a) 4.375 7/15/2049 575,000 689,381 ------------- 41,722,594 ------------- United Kingdom--8.2% Barclays Bank PLC 6.000 9/15/2026 GBP 240,000 431,039 Bat International Finance PLC 6.375 12/12/2019 155,000 290,941 British Telecom PLC 7.125 12/7/2006 330,000 580,776 Deutsche Telekom International Finance BV 7.125 9/26/2012 305,000 586,414 HBOS Capital Funding LP (c) 6.461 11/30/2048 155,000 300,626 Inco 15.750 7/15/2006 796,000 1,430,608 Transco Holdings PLC 7.000 12/16/2024 140,000 302,637 United Kingdom Gilt 4.250 6/7/2032 720,000 1,289,572 United Kingdom Gilt (b) 4.750 6/7/2010 1,755,000 3,089,537 United Kingdom Gilt 8.000 9/27/2013 825,000 1,780,472 ------------- 10,082,622 ------------- Japan--11.7% Development Bank of Japan 1.600 6/20/2014 JPY 170,000,000 1,475,970 Development Bank of Japan 1.700 9/20/2022 553,000,000 4,597,233 European Investment Bank 1.400 6/20/2017 272,700,000 2,275,801 Japan Finance Corp. 1.550 2/21/2012 228,000,000 1,984,246 KFW International Finance 1.750 3/23/2010 450,000,000 3,983,381 ------------- 14,316,631 ------------- Singapore--2.9% Singapore Government Bond 3.500 7/1/2012 SGD 5,880,000 3,613,189 ------------- Sweden--6.1% Swedish Government 8.000 8/15/2007 SEK 13,215,000 1,805,184 Swedish Government 5.250 3/15/2011 41,075,000 5,685,883 ------------- 7,491,067 ------------- Total Foreign Denominated (Cost $96,571,590) 94,987,678 -------------
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments - December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------- U.S. Treasury Obligations--9.4% U.S. Treasury Inflation-Indexed Bond (b) (Cost $11,716,780) 0.875% 4/15/2010 USD 12,138,644 $ 11,539,771 ------------- TOTAL BONDS AND NOTES (Cost $117,267,656) 115,637,145 ------------- Contract Size PURCHASED OPTIONS--0.2% --------- EUR Put/USD Call, Strike Price 1.20, 2/23/06 4,115,000 86,827 EUR Put/USD Call, Strike Price 1.20, 3/16/06 4,155,000 91,410 EUR Put/USD Call, Strike Price 1.18, 4/5/06 3,745,000 54,935 iTRAXX Europe Series 4 Version 1, Strike Price .50, 6/20/2006 5,000,000 3,465 ------------- TOTAL PURCHASED OPTIONS (COST $187,826) 236,637 ------------- SHORT TERM INVESTMENTS--1.6% U.S. Treasury--1.6% Treasury Bill (d)(e) 3.870 3/2/2006 1,620,000 1,609,909 Treasury Bill (b)(d) 3.800 3/9/2006 150,000 148,945 Treasury Bill (d)(e) 3.810 3/16/2006 150,000 148,827 ------------- Total Short Term Investments-- (Cost $1,907,107) 1,907,681 ------------- Shares ---------- INVESTMENT OF CASH COLLATERAL--0.3% BlackRock Cash Strategies L.L.C. (f) (Cost $420,000) 4.31 420,000 420,000 ------------- TOTAL UNAFFILIATED INVESTMENTS (Cost $119,782,589) 118,201,463 ------------- AFFILIATED INVESTMENTS--2.5% Dreyfus Institutional Preferred Plus Money Market Fund (f)(g) (Cost $3,086,777) 4.06 3,086,777 3,086,777 ------------- TOTAL INVESTMENTS--98.8% (Cost $122,869,366) 121,288,240 OTHER ASSETS, LESS LIABILITIES--1.2% 1,433,046 ------------- NET ASSETS--100.0% $ 122,721,286 =============
Notes to Schedule of Investments 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $6,453,048 or 5.3% of net assets. AUD--Australian Dollar CAD--Canadian Dollar DKK--Danish Krone EUR--Euro GBP--British Pound JPY--Japanese Yen SGD--Singapore Dollar SEK--Swedish Krona (a) Variable Rate Security; rate indicated is as of 12/31/2005. (b) Denotes all or part of security segregated as collateral. (c) Step up security, rate indicated is as of 12/31/2005. (d) Rate noted is yield to maturity. (e) Security, or a portion of thereof, was on loan at December 31, 2005. (f) Stated rate is the seven-day yield for the fund at year end. (g) Affiliated institutional money market fund. The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments--December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005 the Fund held the following futures contracts:
Underlying Face Unrealized Contract Position Expiration Date Amount at Value Gain/(Loss) - ------------------------------------------------------------------------------------------------------- US 10 Year Treasury (70 Contracts) Short 3/18/2006 $ 7,607,031 $ (51,491) US 5 Year Treasury (85 Contracts) Short 3/31/2006 9,046,523 7,105 ----------- $ (44,386) ===========
At December 31, 2005, the Fund held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain/(Loss) - ---------------------------------------------------------------------------------------------------------------------- Australian Dollar 13,870,000 3/15/2006 $ 10,147,750 $ 10,286,132 $ 138,382 Brazilian Real 2,200,000 2/10/2006 929,486 789,524 (139,962) British Pound Sterling 5,710,000 3/15/2006 9,821,628 10,113,780 292,152 Canadian Dollar 6,470,000 3/15/2006 5,576,505 5,565,504 (11,001) Danish Krone 17,040,000 3/15/2006 2,715,646 2,759,291 43,645 Euro 34,285,000 3/15/2006 40,745,837 41,383,710 637,873 Japanese Yen 1,709,210,000 3/15/2006 14,627,592 14,891,599 264,007 Singapore Dollar 7,145,000 3/15/2006 4,308,629 4,306,059 (2,570) Swedish Krona 59,540,000 3/15/2006 7,538,236 7,611,869 73,633 --------------- ------------ ----------- Total $ 96,411,309 $ 97,707,468 $ 1,296,159 =============== ============ ===========
Local Principal Contract Value at USD Amount Unrealized Contracts to Receive Amount Value Date December 31, 2005 to Deliver Gain - ---------------------------------------------------------------------------------------------------------------------- Brazilian Real 2,200,000 2/10/2006 $ 929,486 $ 733,333 $ 196,153 Brazilian Real 1,330,000 3/15/2006 556,881 548,906 7,975 --------------- ------------ ----------- Total $ 1,486,367 $ 1,282,239 $ 204,128 =============== ============ ===========
Percentage of Country Allocation Investments --------------------------------------------------- Euro 34.3% U.S. 23.6 Japan 11.8 U.K. 8.3 Australia 8.3 Sweden 6.2 Canada 4.5 Singapore 3.0 ----- 100.0% The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005, the Fund held the following open swap contracts:
Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Counterparty Entity Protection Fixed Rate Date - ----------------------------------------------------------------------------------------------------------------- Bear Stearns Alcoa, Inc., 6.000% due 1/15/2012 Buy (0.415%) 6/20/2010 Bear Stearns Alcoa, Inc., 6.500% due 6/01/2011 Buy (0.52%) 6/20/2010 Bear Stearns Conocophillips, 4.750% due 10/15/2012 Buy (0.31%) 6/20/2010 Bear Stearns Nucor Corp., 4.875% due 10/01/2012 Buy (0.40%) 6/20/2010 Bear Stearns Ukraine Government, 7.650% due 6/11/2013 Sell 2.840% 12/20/2009 Deutsche Bank Republic of Brazil, 12.25%, due 3/6/2030 Sell 1.450% 10/20/2008 Goldman Sachs Consolidated Natural Gas Co., 6.000% due 10/15/2010 Sell 0.200% 3/20/2006 JPMorgan British American Tobacco PLC, 4.875% due 2/25/2009 Sell 0.425% 12/20/2010 JPMorgan Daimlerchrysler AG, 7.20% due 9/1/2009 Sell 0.700% 12/20/2010 JPMorgan Degussa AG, 5.125% due 12/10/2013 Buy (1.75%) 12/20/2010 JPMorgan Dow Jones CDX.EM.4 Sell 1.800% 12/20/2010 JPMorgan France Telecom, 7.25% due 1/28/2013 Sell 0.660% 12/20/2015 JPMorgan Glencore International AG, 5.375%, due 9/30/2011 Sell 1.480% 12/20/2010 JPMorgan ICI Wilmington, 5.625% due 12/1/2013 Sell 0.510% 12/20/2010 JPMorgan iTraxx Europe HiVol Series 4 Version 1 Buy (0.70%) 12/20/2010 JPMorgan Republic of Panama, 8.875% due 9/30/2027 Sell 1.500% 12/20/2010 JPMorgan Republic of Peru, 8.75% due 11/21/2033 Buy (1.700%) 12/20/2010 JPMorgan Telecom Italia SPA, 6.25% due 2/1/2012 Sell 0.520% 12/20/2010 JPMorgan Volkswagen, 4.875% due 5/22/2013 Sell 0.450% 12/20/2010 Morgan Stanley & Co. Wendy's International, Inc., 6.25% due 11/15/2011 Buy (0.62%) 12/20/2010 Unrealized Credit Default Swaps Notional Appreciation/ Counterparty Amount (Depreciation) - ------------------------------------------------------ Bear Stearns $ 328,000 USD $ (3,018) Bear Stearns 727,000 USD (9,775) Bear Stearns 1,055,000 USD (3,946) Bear Stearns 494,000 USD (218) Bear Stearns 840,000 USD 44,404 Deutsche Bank 1,020,000 USD 5,598 Goldman Sachs 6,140,000 USD 2,057 JPMorgan 600,000 EUR 2,607 JPMorgan 600,000 EUR (109) JPMorgan 1,000,000 EUR (23,998) JPMorgan 2,360,000 USD (6,685) JPMorgan 475,000 EUR (9,237) JPMorgan 600,000 EUR 6,729 JPMorgan 600,000 EUR 47 JPMorgan 2,975,000 EUR (3,348) JPMorgan 378,000 USD 765 JPMorgan 378,000 USD 7,638 JPMorgan 600,000 EUR (1,657) JPMorgan 600,000 EUR 566 Morgan Stanley & Co. 960,000 USD 8,133 ---------- $ 16,553 ==========
Interest Rate Swaps Floating Rate Pay/Receive Fixed Expiration Counterparty Index Floating Rate Rate Date - -------------------------------------------------------------------------------------------------------------------- Bear Stearns USD--LIBOR--BBA Pay 3.907% 11/19/2009 Interest Rate Swaps Notional Unrealized/ Counterparty Amount (Depreciation) - ------------------------------------------------------- Bear Stearns $ 840,000 $ (28,197) ==========
The accompanying notes are an integral part of the financial statements. 11 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- During the period ended December 31, 2005, the Portfolio entered into the following option transactions:
Written Put Options Security Strike Price Expiration Date Contracts Premiums Value - ------------------------------------------------------------------------------------------------- USD Put/EUR Call 1.2800 2/23/2006 1 41,971 $ 1,646 USD Put/EUR Call 1.2800 3/16/2006 1 48,559 3,740 USD Put/EUR Call 1.2600 4/05/2006 1 36,139 11,348 - -------- -------- 3 126,669 $ 16,734 = ======== ========
Written Call Options Security Strike Price Expiration Date Contracts Premiums Value - ------------------------------------------------------------------------------------------------- EUR Put/USD Call, Strike Price 1.1200 4/05/2006 1 $ 18,351 $ 10,048 ======== ========
The accompanying notes are an integral part of the financial statements. 12 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $412,089) (Note 7): Unaffiliated issuers, at value (cost $119,782,589) $ 118,201,463 Affiliated issuers, at value (cost $3,086,777) 3,086,777 Foreign currency, at value (cost $1,511,774) 1,502,823 Receivable for investments sold 150,000 Receivable for Fund shares sold 370,062 Swap premiums paid 43,570 Interest and dividends receivable 2,129,811 Unrealized appreciation on forward currency exchange contracts (Note 6) 1,653,820 Unrealized appreciation on swap contracts (Note 6) 78,544 Receivable for variation margin on open futures contracts (Note 6) 16,016 Prepaid expenses 8,460 -------------- Total assets 127,241,346 Liabilities Collateral for securities on loan (Note 7) $ 420,000 Payable for swap premium 30,680 Bank loan payable (Note 9) 150,000 Payable for Fund shares redeemed 1,584,672 Distributions payable 1,990,679 Unrealized depreciation on forward currency exchange contracts (Note 6) 153,533 Options written, at value (premium received $145,020) (Note 6) 26,782 Unrealized depreciation on swap contracts (Note 6) 90,188 Accrued chief compliance officer fee (Note 2) 404 Accrued administrator services fee (Note 2) 534 Accrued accounting, custody, administration and transfer agent fees (Note 2) 27,738 Accrued professional fees 33,764 Accrued trustees' fees and expenses (Note 2) 7,266 Other accrued expenses and liabilities 3,820 ------------ Total liabilities 4,520,060 -------------- Net Assets $ 122,721,286 ============== Net Assets consist of: Paid-in capital $ 171,129,527 Accumulated net realized loss (47,943,516) Distribution in excess of net investment income (403,751) Net unrealized depreciation (60,974) -------------- Total Net Assets $ 122,721,286 ============== Shares of beneficial interest outstanding 6,994,044 ============== Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 17.55 ==============
The accompanying notes are an integral part of the financial statements. 13 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income (Including $1,914 of foreign tax expense) $ 8,568,102 Dividend income from affiliated investments (Note 1H) 230,232 Security lending income (Note 7) 23,750 -------------- 8,822,084 Expenses Investment advisory fee (Note 2) $ 869,424 Accounting, custody, administration and transfer agent fees (Note 2) 199,911 Professional fees 73,012 Registration fees 48,500 Trustees' fees and expenses (Note 2) 28,951 Insurance expense 17,700 Miscellaneous 20,936 ------------ Total expenses 1,258,434 -------------- Net investment income 7,563,650 -------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 6,916,278 Financial futures transactions 22,447 Swap transactions 287,591 Foreign currency transactions and forward foreign currency exchange contracts 14,754,311 ------------ Net realized gain 21,980,627 Change in unrealized appreciation (depreciation) on: Investments (25,435,361) Financial futures contracts 170,922 Written options contracts 118,238 Swap contracts (28,438) Foreign currency translation and forward foreign currency exchange contracts 4,873,235 ------------ Change in net unrealized appreciation (depreciation) (20,301,404) -------------- Net realized and unrealized gain on investments 1,679,223 -------------- Net Increase in Net Assets from Operations $ 9,242,873 ==============
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 7,563,650 $ 12,558,484 Net realized gain (loss) 21,980,627 24,418,678 Change in net unrealized appreciation (depreciation) (20,301,404) (17,717,832) -------------- -------------- Net increase (decrease) in net assets from investment operations 9,242,873 19,259,330 -------------- -------------- Distributions to Shareholders (Note 1E) From net investment income (33,162,511) (9,610,131) -------------- -------------- Total distributions to shareholders (33,162,511) (9,610,131) -------------- -------------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 35,702,518 150,767,160 Value of shares issued to shareholders in reinvestment of distributions 29,233,578 7,662,711 Redemption fees credited to capital 534 542 Cost of shares redeemed (220,701,823) (235,449,182) -------------- -------------- Net increase (decrease) in net assets from Fund share transactions (155,765,193) (77,018,769) -------------- -------------- Total Increase (Decrease) in Net Assets (179,684,831) (67,369,570) Net Assets At beginning of year 302,406,117 369,775,687 -------------- -------------- At end of year [including distributions in excess of net investment income and undistributed net investment income of ($403,751) and $7,577,775] $ 122,721,286 $ 302,406,117 ============== ==============
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- --------- Net Asset Value, Beginning of the period $ 21.35 $ 21.02 $ 20.04 $ 19.43 $ 18.97 --------- --------- --------- --------- --------- From Operations: Net investment income (a) 0.75 0.75 0.66 0.75 0.76 Net realized and unrealized gain (loss) on investments 0.23 0.27 0.32 0.46 0.01 --------- --------- --------- --------- --------- Total from investment operations 0.98 1.02 0.98 1.21 0.77 --------- --------- --------- --------- --------- Less Distributions to Shareholders: From net investment income (4.78) ( 0.69) -- (0.47) (0.31) From tax return of capital -- -- -- (0.13) -- --------- --------- --------- --------- --------- Total distributions to shareholders (4.78) (0.69) -- (0.60) (0.31) --------- --------- --------- --------- --------- Net Asset Value, End of Period $ 17.55 $ 21.35 $ 21.02 $ 20.04 $ 19.43 ========= ========= ========= ========= ========= Total Return 4.72% 4.90% 4.89% 6.44% 4.07% Ratios/Supplemental Data: Expenses (to average daily net assets) 0.58% 0.57% 0.59% 0.59% 0.56% Net Investment Income (to average daily net assets) 3.49% 3.43% 3.20% 3.89% 3.94% Portfolio Turnover 168% 170% 185% 159% 211% Net Assets, End of Period (000's omitted) $ 122,721 $ 302,406 $ 369,706 $ 364,460 $ 422,626
- ---------- (a) Calculated based on average shares outstanding. The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon International Fixed Income Fund (the "Fund") is a separate diversified investment series of the Trust. The objective of the Fund is to maximize total return while realizing a market level of income consistent with preserving principal and liquidity. The Fund seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities. The Fund also invests, under normal circumstances, at least 65% of net assets in non-U.S. dollar denominated fixed income securities of foreign governments and companies located in various countries, including emerging markets. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or secutities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Fund acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of secutities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among undistributed net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. 17 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets F. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated among funds of the Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions With Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities, is payable monthly at the annual rate of 0.40% of the Fund's average daily net assets. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $18,712 during the year ended December 31, 2005. The Fund has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Fund. For these services the Fund pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $181,199 during the period ended December 31, 2005. The Fund entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Fund's lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon bank received $10,102 for the year ended December 31, 2005. See Note 7 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,269. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Trust pays the legal fees for the independent counsel of the Trustees. 18 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005, the Fund was charged $534 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ------------- ------------- U.S. Government Securities $ 26,671,616 $ 14,967,234 ============= ============= Investments (non-U.S. Government Securities) $ 296,380,274 $ 449,395,651 ============= ============= (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 1,676,512 7,133,087 Shares issued to shareholders for reinvestment of distributions 1,578,442 359,246 Shares redeemed (10,425,328) (10,924,014) ----------- ----------- Net increase (decrease) (7,170,374) (3,431,681) =========== =========== At December 31, 2005, five shareholders of record held approximately 36% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. The fee does not apply to shares that were acquired through reinvestment of distributions. For the year ended December 31, 2005, the Fund received $534 in redemption fees. (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its taxable income for its fiscal year. The tax basis components of distributable earnings and the federal tax cost as of December 31, 2005, were as follows: Unrealized appreciation $ 1,363,077 Unrealized depreciation (3,042,923) ------------- Net unrealized appreciation (depreciation) (1,679,846) Undistributed ordinary income 1,050,632 Cost for federal income tax purposes 122,968,086 19 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- At December 31, 2005 the Fund, for federal income tax purposes, has capital loss carryover of $47,802,072 which will reduce the Fund's taxable income arising from net realized gain on investmets, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are as follows: Capital Loss Carry Over Expiration Date ------------ --------------- $ 14,471,720 12/31/2007 19,786,516 12/31/2008 6,955,771 12/31/2009 6,588,065 12/31/2010 ------------ $ 47,802,072 ============ The Fund utilized $4,676,061 in capital loss carry forwards. It is uncertain whether the Fund will be able to realized the benefits of the losses before they expire. Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ------------ ----------- Ordinary income $ 33,162,511 $ 9,610,131 The Fund elected to defer to its fiscal year ending December 31, 2006 $24,119 of capital losses recognized during the period November 1, 2005 to December 31, 2005. (6) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Fund may trade the following instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Fund may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. Options, both held and written by the Fund, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Fund is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. 20 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Transactions in written call and put options were as follows: Number of Written Put Option Transactions Contracts Premiums --------- ----------- Outstanding, beginning of period 0 $ 0 Options written 3 126,669 Options expired 0 0 --------- ----------- Outstanding, end of period 3 $ 126,669 --------- ----------- Number of Written Call Options Transactions Contracts Premiums --------- ----------- Outstanding, beginning of period 0 $ 0 Options written 1 18,351 Options expired 0 0 --------- ----------- Outstanding, end of period 1 $ 18,351 --------- ----------- At December 31, 2005, the Fund held options. See Schedule of Investments for further details. Forward currency exchange contracts The Portfolio may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Portfolio primarily to protect the value of the Portfolio's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts is included in the Statement of Assets and Liabilities. At December 31, 2005, the Portfolio held foreign currency exchange contracts. See schedule of investments for further details. Futures contracts The Fund may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Fund deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Fund's exposure to the underlying instrument, while selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Fund enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December 31, 2005, the Fund held open financial futures contracts. See the Schedule of Investments for further details. 21 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Swap agreements The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Fund held open swap contracts. See the Schedule of Investments for further details. (7) Security Lending: The Fund may lend its securities to financial institutions which the Fund deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Fund on the next business day. For the duration of a loan, the Fund receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Fund bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Fund. In the event of borrower default, the Fund generally has the right to use the collateral to offset losses incurred. The Fund may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Fund also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Fund's obligations due on the loans. The Fund loaned securities during the period ended December 31, 2005 and earned interest on the invested collateral of $600,261 of which, $576,511 was rebated to borrowers or paid in fees. At December 31, 2005, the Fund had securities valued at $412,089 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (8) Delayed Delivery Transactions: The Fund may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Fund instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Fund may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Fund did not enter into any delayed delivery transactions during the year ended December 31, 2005. 22 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (9) Line of Credit: The Fund, and other funds in the Trust and subtrusts in Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolio/funds at the end of each quarter. For the period ended December 31, 2005, the facility fee was $4,225 for the Fund. During the year ended December 31, 2005, the Fund had average borrowings outstanding of $802,188 for a total of sixteen days and incurred $1,346 of interest expense. 23 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of the Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon International Fixed Income Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of invesments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon International Fixed Income Fund (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 1, 2006 24 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from the Fund's investment adviser, Standish Mellon Asset Management Company LLC ("Standish Mellon"), a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance and any material portfolio manager and strategy changes that may have affected the Fund in the prior year, as well as the Fund's "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Fund and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Fund's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Fund by Standish Mellon. In their deliberations as to the continuation of the Fund's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Fund's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Fund effectively. 25 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board for at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (6.96% vs. 7.90%), three-year period (5.80% vs. 8.69%) and five-year period (5.68% vs. 7.92%). Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Fund to Standish Mellon. The Lipper data presenting the Fund's "net advisory fees" included fees paid by the Fund, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Trust's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Fund's advisory fees to those peers that include administrative fees within a blended advisory fee. The Fund's contractual advisory fee was 0.40%, in the 2nd quintile (1st being the best) of its peer group of funds, the median fee of which was 0.535%. The Fund's net advisory fee was 0.405%, below the peer group median net advisory fee of 0.485%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Fund's advisory fee is reasonable relative to its peer group averages. The Board also compared the fees payable by the Fund relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Fund relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.537% was lower than the median net expense ratio of the peer group of 0.733% notwithstanding the fact that most of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had experienced profits in operating the Fund in both 2003 and 2004 and concluded these were not excessive. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 26 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 27 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ----------------------------------------------------------------------------------------------------------------------------------- Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None $ 5,497 c/o Decision Resources, 11/3/1986 Decision Resources, Inc. Inc. ("DRI") (biotechnology 260 Charles Street research and consulting Waltham, MA 02453 firm); formerly 9/30/40 Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street 32 None $ 6,225 c/o Essex Street 11/3/1986 Associates (family Associates investment trust P.O. Box 5600 office) Beverly, MA 01915 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 32 None $ 5,497 c/o Harvard University 9/13/1989 Professor of Political Littaver Center 127 Economy, Harvard Cambridge, MA 02138 University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, Mertens 32 None $ 5,497 P.O. Box 2333 11/3/1986 House, Inc. (hospice) New London, NH 03257 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, President Since 2003 President and Chief 32 None $ 0 The Boston Company and Chief Operating Officer of Asset Management, LLC Executive Officer The Boston Company One Boston Place Asset Management, LLC; Boston, MA 02108 formerly Senior 7/24/65 Vice President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
28 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - -------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Asset Management and Secretary Mellon Asset Management ("MAM"); formerly First One Boston Place Vice President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer since 1999; Mellon Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager One Boston Place of Shareholder Services, MAM, Shareholder Boston, MA 02108 Representative, Standish Mellon Asset Management 1/19/71 Company LLC Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management Mellon Asset Management Compliance and Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
29 [LOGO] MELLON -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6931AR1205 [LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon International Fixed Income Fund II - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Management Discussion and Analysis - -------------------------------------------------------------------------------- International bond markets produced negative returns in 2005. The low single digit returns produced in local bond markets were offset by negative currency returns, while the U.S. dollar appreciated during the year versus most currencies in the J.P. Morgan Non-U.S. Government Bond Index. The Standish Mellon International Fixed Income Fund II returned (9.95%)% for 2005, after all expenses, compared to a return of (9.24%)% for the index. Low single digit returns in most major bond markets represented a decent outcome in 2005 considering that central banks have started a global tightening cycle and headline inflation is up on the back of high oil prices. The European Central Bank raised interest rates in the fourth quarter by 0.25% but that did not damage the positive return on bonds. European bonds were good performers within the index for 2005 as economic growth disappointed in the first half of the year. European core inflation also dropped to 1.5% during 2005, and that provided a tail wind to bonds. Finally, the long end of European bond markets has performed very well as pension reform in various countries is providing a demand for long duration bonds. European yield curves also flattened considerably during the year, making long duration bonds the best performing bonds in 2005. Japan's economy surprised on the strong side in 2005. The Japanese stock market was one of the best performing global markets which hurt the performance of Japanese bonds. Returns for Japanese bonds were the worst in the index for 2005. The two highest performers within the index were Canada and the U.K. Canada's positive return was driven by the fact that the Bank of Canada has lagged U.S. Federal Reserve rate increases, opening a sizeable gap in short rate spreads of 1% between these two countries. Also, the strong Canadian dollar has eased upward pressure on interest rates. U.K. yields performed well as the Bank of England was one of the only central banks to cut interest rates in 2005, as the drag from housing hit consumer demand. Even though the local bond returns were positive in all markets within the index, the currency portion of total return had the most significant impact. Only Canada produced a positive total return when including the currency. The positive bond returns in other markets were reduced by the appreciation of the dollar against the yen, euro and sterling. The non-government sectors of the international bond markets were not a major source of positive or negative return in 2005. Security selection in high yield and corporate bonds certainly added value as some sectors, like autos, performed poorly. Emerging markets was the best performing sector once again among the non-government sectors as credit quality continued to improve and capital flowed freely into the sector. The Fund underperformed its benchmark during the year. Our positions in investment grade and high yield corporate bonds and emerging market securities were the largest positive contributor relative to our benchmark. The results of our country weightings were mixed. We were underweight in Japan but lost value by not overweighting the long end of the European yield curve. Duration positioning was another negative factor as long duration bonds outperformed despite strong economic growth and rising short-term yields. Our process emphasizes value in bond markets and, given the low level of real yields, we were surprised at the performance of long-duration bonds in 2005. 2 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Management Discussion and Analysis - -------------------------------------------------------------------------------- Our outlook for international bonds in 2006 is favorable. We believe that the performance of global economies will be close to trend, yet the behavior of central banks around the world could be quite different. The Fed will probably pause in raising interest rates while Europe and Canada and perhaps also Japan continue to raise interest rates. We believe opportunities for added value can be found in the higher real yielding markets of Australia, the U.K., Sweden and even the U.S. if the housing market exerts a large drag on economic growth. In a global tightening cycle Japan may end up being a good diversifying position if economic growth peters out. Non-government sectors such as corporate and emerging market bonds have increased in value quite a bit over the past two years, and we believe that these sectors will not perform as well as in the past but that the sector still offers opportunities to add value through security selection. During the year we changed portfolio managers on the International Fixed Income Fund II. Charles Dolan and Thomas Fahey have assumed management responsibility of the fund while Chuck Cook pursues new responsibilities within the firm. We appreciate your continued support and look forward to working on your behalf over the next year. /s/ Thomas Fahey /s/ Charles Dolan Thomas Fahey Charles Dolan 3 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Comparison of Change in Value of $100,000 Investment in Standish Mellon International Fixed Income Fund II and J.P. Morgan Non-U.S. Unhedged Index - -------------------------------------------------------------------------------- [GRAPH] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 6/30/1999 - -------------------------------------------------------------------------------- (9.95)% 6.61% 6.87% 5.25% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains and assuming a constant rate of performance each year. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Bloomberg Inc. 4 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $ 1,000.00 $ 963.60 $ 3.71 Hypothetical (5% return per year before expenses) $ 1,000.00 $ 1,021.42 $ 3.82 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.75%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 5 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Summary of Combined Ratings ------------------------------------------------------- Percentage of Quality Breakdown Investments ------------------------------------------------------- AAA 59.0% AA 15.2 A 8.1 BBB 6.7 BB 5.8 B 1.0 Below B 4.2 ----- Total 100.0% Percentage of Top Ten Holdings* Rate Maturity Investments ---------------------------------------------------------------------- Bundesobligation 4.500 8/17/2007 7.3% Swedish Government 5.250 3/15/2011 6.1 Bundesrepub Deutschland 5.250 7/4/2010 5.4 Belgium Government Bond 4.250 9/28/2013 5.2 Deutsche Republic 4.750 7/4/2034 5.0 Hellenic Republic Government Bond 3.700 7/20/2015 4.5 Development Bank of Japan 1.700 9/20/2022 4.3 Queensland Treasury Corp. 0.000 6/14/2011 4.2 Netherlands Government Bond 5.500 7/15/2010 3.8 United Kingdom Gilt 4.750 6/7/2010 3.7 ----- 49.5% * Excluding short-term investments and investment of cash collateral. Percentage of Economic Sector Allocation Investments ------------------------------------------------------- Government 69.3% Corporate 23.9 Emerging Markets 5.9 Cash & equivalents 0.9 ----- 100.0% The Fund is actively managed. Current holdings may be different than those presented above. 6 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--97.4% BONDS AND NOTES--95.9% Corporate--1.5% Basic Materials--0.2% Georgia-Pacific Corp. 8.000% 1/15/2024 USD 70,000 $ 66,850 ------------ Communications--0.3% Qwest Corp. 144A (a) 7.741 6/15/2013 125,000 134,844 ------------ Financial--1.0% Chevy Chase Bank FSB 6.875 12/1/2013 45,000 46,350 Glencore Funding LLC 144A 6.000 4/15/2014 105,000 98,757 Residential Capital Corp. 6.375 6/30/2010 45,000 45,725 Residential Capital Corp. (b) 6.875 6/30/2015 80,000 85,007 Residential Capital Corp. (a) 5.896 6/29/2007 55,000 55,136 Residential Capital Corp. (a) 5.670 11/21/2008 155,000 155,204 ------------ 486,179 ------------ Total Corporate (Cost $678,195) 687,873 ------------ Sovereign Bonds--4.5% Argentina Bonos (a) 4.005 8/3/2012 250,000 195,750 Egyptian Treasury Bill 144A 7.500 3/23/2006 480,000 492,869 Egyptian Treasury Bill 144A 9.000 7/14/2006 115,000 119,303 Republic of Brazil 8.000 1/15/2018 115,000 124,085 Republic of Brazil (a) 2.063 4/15/2012 65,001 64,189 Republic of El Salvador 7.650 6/15/2035 65,000 66,950 Republic of Panama 8.875 9/30/2027 95,000 113,050 Republic of Philippines 9.375 1/18/2017 105,000 120,225 Republic of South Africa 9.125 5/19/2009 35,000 39,244 Republic of South Africa 7.375 4/25/2012 50,000 55,500 Republic of Turkey 11.500 1/23/2012 150,000 190,313 Russian Federation 11.000 7/24/2018 20,000 29,475 Russian Federation 5.000 3/31/2030 330,000 372,075 Russian Ministry of Finance 3.000 5/14/2008 140,000 132,475 ------------ Total Sovereign Bonds (Cost $2,064,015) 2,115,503 ------------ Yankee Bonds--0.3% Naftogaz Ukrainy 8.125 9/30/2009 100,000 103,500 Rogers Wireless, Inc. 7.500 3/15/2015 25,000 27,000 ------------ Total Yankee Bonds (Cost $130,131) 130,500 ------------ US Treasury Obligations--2.8% U.S. Treasury Inflation-Indexed Bond (b) 0.875 4/15/2010 678,166 644,708 U.S. Treasury Note (b) 4.250 8/15/2013 650,000 644,186 ------------ Total US Treasury Obligations (Cost $1,317,899) 1,288,894 ------------ Foreign Denominated--86.8% Argentina--0.2% Republic of Argentina 0.698 9/30/2014 ARS 330,000 108,802 ------------ Australia--6.3% Australian Government Bond 6.000 2/15/2017 AUD 1,335,000 1,042,647 Queensland Treasury Corp. 0.000 6/14/2011 2,480,000 1,873,613 ------------ 2,916,260 ------------
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------------------------------- Brazil--0.3% Republic of Brazil 12.500% 1/5/2016 BRL 285,000 $ 122,267 ------------ Canada--3.4% Canadian Government Bond 5.000 6/1/2014 CAD 560,000 517,128 Canadian Pacific Railway Ltd. 144A 4.900 6/15/2010 95,000 83,460 Province of Ontario 5.200 3/8/2007 555,000 484,184 Quebec Province 4.500 11/29/2007 560,000 484,949 ------------ 1,569,721 ------------ Denmark--0.3% Realkredit Danmark A/S 4.000 1/1/2006 DKK 735,000 116,643 ------------ Euro--46.3% ASIF III 5.125 5/10/2007 EUR 180,000 218,758 Autostrade SpA (a) 2.552 6/9/2011 200,000 238,704 Belgium Government Bond 4.250 9/28/2013 1,830,000 2,313,833 Bombardier, Inc. 5.750 2/22/2008 100,000 118,350 Bundesobligation (c) 4.500 8/17/2007 2,675,000 3,248,397 Bundesobligation (b) 3.000 4/11/2008 165,000 195,727 Bundesobligation 3.250 4/9/2010 340,000 405,852 Bundesrepub Deutschland 5.250 7/4/2010 1,880,000 2,427,745 Citigroup Inc. (a) 2.237 6/3/2011 110,000 130,246 Deutsche Bundesrepublik (c) 4.000 7/4/2009 270,000 330,108 Deutsche Cap Trust IV (a) 5.330 9/29/2049 85,000 109,068 Deutsche Republic (c) 4.500 1/4/2013 1,005,000 1,285,747 Deutsche Republic 3.250 7/4/2015 795,000 937,261 Deutsche Republic 4.750 7/4/2034 1,550,000 2,209,825 FCE Bank PLC (a) 2.389 6/28/2006 770,000 887,510 French Treasury Note 5.000 1/12/2006 255,000 301,949 GE Capital European Funding (a) 2.198 5/4/2011 110,000 130,127 General Motors Acceptance Corp. 4.375 9/26/2006 60,000 68,849 Glencore Finance Europe SA/Luxembourg 5.375 9/30/2011 190,000 230,869 GMAC International Finance BV (a) 3.876 8/4/2006 275,000 312,444 Hellenic Republic Government Bond 3.700 7/20/2015 1,670,000 2,007,564 Kappa Beheer BV 10.625 7/15/2009 20,000 24,508 Kingdom of Denmark 3.125 10/15/2010 760,000 899,993 Linde Finance BV 6.000 7/29/2049 120,000 145,755 MPS Capital Trust I 7.990 2/7/2011 85,000 119,128 Netherlands Government Bond 5.500 7/15/2010 1,305,000 1,702,039 Owens-Brockway Glass Containers 6.750 12/1/2014 60,000 70,300 Resona Bank Ltd. 144A 4.125 1/10/2049 70,000 82,259 Sogerim 7.000 4/20/2011 100,000 137,414 Sumitomo Mitsui Banking Corp. 144A (a) 4.375 7/15/2049 130,000 155,860 Telenet Communications NV 144A 9.000 12/15/2013 50,000 65,536 ------------ 21,511,725 ------------ Japan--11.8% Development Bank of Japan 1.600 6/20/2014 JPY 70,000,000 607,752 Development Bank of Japan 1.700 9/20/2022 230,000,000 1,912,050 European Investment Bank 1.400 6/20/2017 85,000,000 709,362 Japan Finance Corp. 1.550 2/21/2012 132,000,000 1,148,774 KFW International Finance 1.750 3/23/2010 125,000,000 1,106,495 ------------ 5,484,433 ------------
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ---------------------------------------------------------------------------------------------------------------------------- Mexico--0.3% Mexican Fixed Rate Bonds 8.000% 12/19/2013 MXN 1,735,000 $ 161,045 ------------ Singapore--2.4% Singapore Government Bond 3.500 7/1/2012 SGD 1,850,000 1,136,803 ------------ Sweden--7.2% Swedish Government 8.000 8/15/2007 SEK 4,420,000 603,777 Swedish Government 5.250 3/15/2011 19,525,000 2,702,785 ------------ 3,306,562 ------------ United Kingdom--8.3% Barclays Bank PLC 6.000 9/15/2026 GBP 90,000 161,640 Bat International Finance PLC 6.375 12/12/2019 60,000 112,622 British Telecom PLC 7.125 12/7/2006 125,000 219,991 Deutsche Telekom International Finance BV 7.125 9/26/2012 115,000 221,107 HBOS Capital Funding LP (d) 6.461 11/30/2048 60,000 116,372 Inco 15.750 7/15/2006 200,000 359,449 Transco Holdings PLC 7.000 12/16/2024 50,000 108,085 United Kingdom Gilt 4.750 6/7/2010 925,000 1,628,389 United Kingdom Gilt 8.000 9/27/2013 285,000 615,072 United Kingdom Gilt 4.250 6/7/2032 175,000 313,433 ------------ 3,856,160 ------------ Total Foreign Denominated (Cost $41,648,506) 40,290,421 ------------ TOTAL BONDS AND NOTES (COST $45,838,746) 44,513,191 ------------ PURCHASED OPTIONS--0.1% Contract Size ------------- EUR Put/USD Call, Strike Price 1.20, 2/23/06 USD 955,000 20,151 EUR Put/USD Call, Strike Price 1.20, 3/16/06 960,000 21,120 EUR Put/USD Call, Strike Price 1.18, 4/5/06 955,000 14,009 iTRAXX Europe Series 4 Version 1, Strike Price .50, 6/20/2006 (e) EUR 1,950,000 1,351 ------------ TOTAL PURCHASED OPTIONS (Cost$46,149) 56,631 ------------ SHORT-TERM INVESTMENTS--0.2% U.S. Treasury Bills--0.2% Par Value --------- U.S.Treasury Bill (c) (e) 3.800 3/9/2006 USD 50,000 49,648 U.S.Treasury Bill (b)(c)(e) 3.810 3/16/2006 50,000 49,608 ------------ TOTAL SHORT-TERM INVESTMENTS (COST $99,243) 99,256 ------------ INVESTMENT OF CASH COLLATERAL--1.2% Shares ------ BlackRock Cash Strategies L.L.C. (f) (Cost $563,194) 4.310 USD 563,194 563,194 ------------ TOTAL UNAFFILIATED INVESTMENTS (Cost $46,547,332) 45,232,272 ------------ AFFILIATED INVESTMENTS--0.4% Dreyfus Institutional Preferred Money Market Plus Fund (f)(g) (Cost $172,084) 4.060 172,084 172,084 ------------ TOTAL INVESTMENTS--97.8% (Cost $46,719,416) 45,404,356 ------------ Other Assets, Less Liabilities--2.2% 1,009,492 ------------ NET ASSETS--100% $ 46,413,848 ============
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- Notes to Schedule of Investments 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified buyers. At the period end, the value of these securities amounted to $1,150,629 or 2.5% of net assets. ARS--Argentina Peso AUD--Australian Dollar BRL--Brazilian Real CAD--Canadian Dollar DKK--Danish Krone EUR--Euro GBP--British Pound JPY--Japanese Yen MXN--Mexican Peso SEK--Swedish Krone SGD--Singapore Dollar (a) Variable Rate Security; rate indicated is as of 12/31/2005. (b) Security, or a portion thereof, was on loan at December 31, 2005. (c) Denotes all or part of security segregated as collateral. (d) Step up security; rate indicated is as of 12/31/05. (e) Rate noted is yield to maturity. (f) Stated yield is the seven day yield for the fund at year end. (g) Affiliated institutional money market fund. At December 31, 2005, the Fund held the following futures contracts:
Underlying Face Unrealized Contracts to Receive Position Expiration Date Amount at Value Gain/(Loss) - ------------------------------------------------------------------------------------------------------ U.S. 5 Year Treasury Note (30 Contracts) Short 3/31/2006 $ 3,192,891 $ 2,444 U.S. 10 Year Treasury Note (9 Contracts) Short 3/31/2006 978,047 (6,649) Euro--Bobl (6 Contracts) Short 3/10/2006 793,931 365 Euro--Bund (4 Contracts) Short 3/15/2006 566,113 (4,872) -------- $ (8,712) ========
At December 31, 2005, the Fund held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain/(Loss) - ----------------------------------------------------------------------------------------------------- Australian Dollar 3,300,000 3/15/2006 $ 2,414,388 $ 2,457,896 $ 43,508 Brazilian Real 365,000 2/10/2006 154,210 131,074 (23,136) British Pound Sterling 310,000 3/15/2006 533,223 549,084 15,861 Canadian Dollar 600,000 3/15/2006 517,141 518,659 1,518 Euro 1,320,000 3/15/2006 1,568,745 1,583,981 15,236 Japanese Yen 95,000,000 3/15/2006 813,020 821,494 8,474 Swedish Krona 27,080,000 3/15/2006 3,428,542 3,462,030 33,488 Singapore Dollar 2,000,000 3/15/2006 1,206,054 1,205,330 (724) ------------ ----------- --------- Total $ 10,635,323 $10,729,548 $ 94,225 ============ =========== =========
Local Principal Contract Value at USD Amount Unrealized Contracts to Receive Amount Value Date December 31, 2005 to Deliver Gain/(Loss) - ----------------------------------------------------------------------------------------------------- Brazilian Real 365,000 2/10/2006 $ 154,210 $ 121,667 $ 32,543 Brazilian Real 280,000 3/15/2006 117,238 115,559 1,679 Danish Krone 6,505,000 3/15/2006 1,036,695 1,048,788 (12,093) Euro 1,715,000 3/15/2006 2,038,183 2,059,887 (21,704) Japanese Yen 1,394,110,000 3/15/2006 11,930,934 12,071,573 (140,639) ------------ ----------- --------- Total $ 15,277,260 $15,417,474 $(140,214) ============ =========== =========
The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005, the Fund held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - ---------------------------------------------------------------------------------------------------------------------------------- Bear Stearns Alcoa, Inc., 6.000% due 1/15/2012 Buy (0.415)% 6/20/2010 72,000 USD $ (662) Bear Stearns Alcoa, Inc., 6.500% due 6/1/2011 Buy (0.52)% 6/20/2010 158,000 USD (2,124) Bear Stearns Conocophillips, 4.750% due 10/15/2012 Buy (0.31)% 6/20/2010 230,000 USD (860) Bear Stearns Nucor Corp., 4.875% due 10/01/2012 Buy (0.40)% 6/20/2010 108,000 USD (48) Bear Stearns Ukraine Government, 7.650% due 6/11/2013 Sell 2.840% 12/20/2009 80,000 USD 4,229 Deutsche Bank Republic of Brazil, 12.25%, due 3/6/2030 Sell 1.450% 10/20/2008 240,000 USD 1,317 Goldman Sachs Consolidated Natural Gas Co., 6.000% due 10/15/2010 Sell 0.200% 3/20/2006 1,440,000 USD 482 JPMorgan Dow Jones CDX.EM.4 Sell 1.800% 12/20/2010 917,000 USD (2,598) JPMorgan Daimlerchrysler AG, 7.20% due 9/1/2009 Sell 0.700% 12/20/2010 225,000 EUR (41) JPMorgan Degussa AG, 5.125% due 12/10/2013 Buy (1.75)% 12/20/2010 375,000 EUR (8,999) JPMorgan France Telecom, 7.25% due 1/28/2013 Sell 0.660% 12/20/2015 100,000 EUR (1,945) JPMorgan British American Tobacco PLC, 4.875% due 2/25/2009 Sell 0.425% 12/20/2010 225,000 EUR 978 JPMorgan Glencore International AG, 5.375%, due 9/30/2011 Sell 1.480% 12/20/2010 225,000 EUR 2,523 JPMorgan ICI Wilmington, 5.625% due 12/1/2013 Sell 0.510% 12/20/2010 225,000 EUR 18 JPMorgan iTraxx Europe HiVol Series 4 Version 1 Buy (0.70)% 12/20/2010 1,175,000 EUR (1,322) JPMorgan Republic of Panama, 8.875% due 9/30/2027 Sell 1.500% 12/20/2010 145,000 USD 294 JPMorgan Republic of Peru, 8.75% due 11/21/2033 Buy (1.70)% 12/20/2010 145,000 USD 2,930 JPMorgan Telecom Italia SPA, 6.25% due 2/1/2012 Sell 0.520% 12/20/2010 225,000 EUR (621) JPMorgan Volkswagen, 4.875% due 5/22/2013 Sell 0.450% 12/20/2010 225,000 EUR 212 Morgan Stanley Wendy's International, Inc., 6.25% due 11/15/2011 Buy (0.62)% 12/20/2010 370,000 USD 3,134 --------- $ (3,103) =========
Unrealized Interest Rate Swaps Floating Rate Pay/Receive Expiration Notional Appreciation/ Counterparty Index Floating Fixed Rate Date Amount (Depreciation) - ------------------------------------------------------------------------------------------------------------------------------------ Bear Stearns USD--LIBOR--BBA Pay 3.907% 11/19/2009 $ 80,000 $ (2,685) ========
The accompanying notes are an integral part of the financial statements. 11 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- The Fund held the following written option contracts at December 31, 2005:
Written Put Options Strike Price Expiration Date Contracts Premium Value - ------------------------------------------------------------------------------------ USD Put/EUR Call 1.2800 2/23/2006 1 $ 9,741 $ 382 USD Put/EUR Call 1.2800 3/16/2006 1 11,219 864 USD Put/EUR Call 1.2600 4/05/2006 1 9,216 2,894 - ------- ------ 3 $30,176 $4,140 = ======= ======
Written Call Option Strike Price Expiration Date Contracts Premium Value - ------------------------------------------------------------------------------------- EUR Put/USD Call 1.1200 4/05/2006 1 $ 4,680 $ 2,562 ======= =======
Percentage of Country Allocation Net Assets ------------------------------------ Euro 47.8% Japan 12.2 U.K. 8.6 Canada 3.5 Denmark 0.0 Sweden 7.4 Australia 6.5 U.S. 10.6 Singapore 2.5 Mexico 0.4 Brazil 0.3 Argentina 0.2 ----- 100.0% The accompanying notes are an integral part of the financial statements. 12 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $547,809) (Note 7) Unaffiliated issuers, at value (Note 1A) (cost $46,547,332) $ 45,232,272 Affiliated issuers, at value (Note 1A) (cost $172,084) (Note 1H) 172,084 Foreign Currency (cost, $516,834) 513,172 Receivable for Fund shares sold 362,563 Receivable from Advisor 164 Swap premium paid 17,012 Unrealized appreciation on forward currency exchange contracts (Note 6) 152,307 Unrealized appreciation on swap contracts (Note 6) 16,117 Interest and dividends receivable 845,946 Receivable for variation margin (Note 6) 1,546 Prepaid expenses 11,387 ------------ Total assets 47,324,570 Liabilities Payable for Fund shares redeemed $ 21,302 Collateral for securities on loan (Note 7) 563,194 Unrealized depreciation on forward currency exchange contracts (Note 6) 198,296 Distributions payable 34,871 Payable for swap premiums 11,921 Unrealized depreciation on swap contracts (Note 6) 21,905 Due to Custodian 9,710 Options written, at value (premium received $46,149) (Note 6) 6,702 Accrued chief compliance officer (Note 2) 404 Accrued professional fees 31,175 Accrued administrative service fees (Note 2) 867 Accrued accounting, administration, custody and transfer agent fees (Note 2) 7,955 Accrued trustees' fees and expenses (Note 2) 1,325 Accrued expenses and other liabilities 1,095 --------- Total liabilities 910,722 ------------ Net Assets $ 46,413,848 ============ Net Assets consist of: Paid-in capital $ 48,619,253 Accumulated net realized gain 113,405 Distributions in excess of net investment income (954,782) Net unrealized depreciation (1,364,028) ------------ Total Net Assets $ 46,413,848 ============ Shares of beneficial interest outstanding 2,189,083 ============ Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 21.20 ============
The accompanying notes are an integral part of the financial statements. 13 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income (net of foreign withholding tax of $813) $ 1,859,838 Dividend income from affiliated investments (Note 1H) 85,410 Security lending income (Note 7) 4,985 ------------ 1,950,233 Expenses Investment advisory fee (Note 2) $ 192,358 Accounting, administration, custody, and transfer agent fees (Note 2) 117,686 Professional fees 51,844 Registration fees 23,750 Trustees' fees and expenses (Note 2) 7,476 Insurance expense 7,150 Miscellaneous 12,076 ------------ Total Expenses 412,340 Deduct: Waiver of investment advisory fee (Note 2) (51,602) ------------ Net expenses 360,738 ------------ Net investment income 1,589,495 ------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 836,520 Financial futures transactions (26,110) Written options transactions (2,154) Foreign currency transactions and forward currency exchange contracts (1,924,660) Swap transactions 45,493 ------------ Net realized gain (loss) (1,070,911) Change in unrealized appreciation (depreciation) on: Investments (5,170,199) Financial futures contracts 3,523 Written options contracts 28,154 Foreign currency translations and forward currency exchange contracts (440,420) Swap contracts (7,669) ------------ Net change in net unrealized appreciation (depreciation) (5,586,611) ------------ Net realized and unrealized gain (loss) on investments 6,657,522 ------------ Net Decrease in Net Assets from Operations $ (5,068,027) ============
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 1,589,495 $ 1,337,696 Net realized gain (loss) (1,070,911) 1,508,254 Change in net unrealized appreciation (depreciation) (5,586,611) 1,775,281 ------------ ------------ Net increase (decrease) in net assets from investment operations (5,068,027) 4,621,231 ------------ ------------ Distributions to Shareholders (Note 1E) From net investment income (1,400,043) (1,965,761) ------------ ------------ Total distributions to shareholders (1,400,043) (1,965,761) ------------ ------------ Fund Share Transactions (Note 4) Net proceeds from sale of shares 18,026,659 28,789,234 Value of shares issued to shareholders in reinvestment of distributions 1,334,158 1,946,429 Cost of shares redeemed (16,193,309) (7,660,029) ------------ ------------ Net increase (decrease) in net assets from Fund share transactions 3,167,508 23,075,634 ------------ ------------ Total Increase (Decrease) in Net Assets (3,300,562) 25,731,104 Net Assets At beginning of year 49,714,410 23,983,306 ------------ ------------ At end of year [including distributions in excess of net investment income and undistributed net investment income of ($954,782) and $304,457] $ 46,413,848 $ 49,714,410 ============ ============
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------- ---------- ---------- ---------- ---------- Net Asset Value, Beginning of Period $ 24.23 $ 22.97 $ 21.66 $ 17.83 $ 18.87 ---------- ---------- ---------- ---------- ---------- From Operations: Net investment income *(a) 0.74 0.88 0.77 0.73 0.73 Net realized and unrealized gain (loss) on investments (3.12) 1.52 3.81 3.10 (1.74) ---------- ---------- ---------- ---------- ---------- Total from investment operations (2.38) 2.40 4.58 3.83 (1.01) ---------- ---------- ---------- ---------- ---------- Less Distributions to Shareholders: From net investment income (0.65) (1.14) (3.27) -- (0.03) ---------- ---------- ---------- ---------- ---------- Total distributions to shareholders (0.65) (1.14) (3.27) -- (0.03) ---------- ---------- ---------- ---------- ---------- Net Asset Value, End of Period $ 21.20 $ 24.23 $ 22.97 $ 21.66 $ 17.83 ========== ========== ========== ========== ========== Total Return (b) (9.95%) 10.73% 21.51% 21.48% (5.31%) Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.75% 0.75% 0.55% 0.55% 0.55% Net Investment Income (to average daily net assets)* 3.31% 3.93% 3.34% 3.87% 3.99% Portfolio Turnover 139% 132% 192% 178% 205% Net Assets, End of Period (000's omitted) $ 46,414 $ 49,714 $ 23,983 $ 21,202 $ 40,337
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share (a) $ 0.72 $ 0.84 $ 0.60 $ 0.60 $ 0.68 Ratios (to average daily net assets): Expenses 0.86% 0.91% 1.30% 1.23% 0.85% Net investment income 3.20% 3.77% 2.59% 3.19% 3.69%
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of fee waivers and expense limitations. The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon International Fixed Income II Fund (the "Fund") is a separate diversified investment series of the Trust. The objective of the Fund is to maximize total return while realizing a market level of income consistent with preserving principal and liquidity. The Fund seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities, and at least 65% of net assets in non-U.S. dollar denominated fixed income securities of foreign governments and companies located in various countries, including emerging markets. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or secutities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Fund acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of secutities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among undistributed net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. 17 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets F. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific fund are allocated among funds of the Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions With Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities, is payable monthly at the annual rate of 0.40% of the Fund's average daily net assets. Standish Mellon voluntarily agreed to limit total Fund operating expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.75% of the Fund's average daily net assets for the year ended December 31, 2005. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived a portion of its investment advisory fee in the amount of $51,602. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $7,823 during the year ended December 31, 2005. The Fund has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Fund. For these services the Fund pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $109,863 during the year ended December 31, 2005. The Fund entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Fund's lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon Bank received $2,131 for the year December 31, 2005. See Note 7 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the period ended December 31, 2005, the Fund was charged $2,269. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Trust pays the legal fees for the independent counsel of the Trustees. 18 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005 the Fund was charged $867 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ----------- ----------- U.S. Government Securities $ 4,410,834 $ 2,594,019 =========== =========== Investments (non-U.S. Government Securities) $61,207,036 $56,304,982 =========== =========== (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 796,615 1,262,514 Shares issued to shareholders in reinvestment of distributions declared 59,347 83,344 Shares redeemed (719,016) (337,694) -------- --------- Net increase (decrease) 136,946 1,008,164 ======== ========= At December 31, 2005, three shareholders of record held approximately 82% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. The fee does not apply to shares that were acquired through reinvestment of distributions. For the year ended December 31, 2005, the Fund did not collect any redemption fees (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its taxable income for its fiscal year. The tax basis components of distributable earnings and the federal tax cost as of December 31, 2005, was as follows: Unrealized appreciation $ 202,664 Unrealized depreciation (1,597,334) ----------- Net unrealized appreciation/depreciation (1,394,670) Undistributed ordinary income 178,627 Cost for federal income tax purposes 46,799,026 19 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ---------- ---------- Ordinary income $1,400,043 $1,965,761 The Fund elected to defer to its fiscal year ending December 31, 2006 $989,812 of currency losses recognized during the period November 1, 2005 to December 31, 2005. (6) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Fund may trade the following instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Fund may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. Options, both held and written by the Fund, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Fund is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. Transactions in written call and put options were as follows: Number of Written Put Option Transactions Contracts Premiums --------- -------- Outstanding, beginning of period 0 $ 0 Options written 3 30,176 Options expired 0 0 Options closed 0 0 --------- -------- Outstanding, end of period 3 $ 30,176 ========= ======== Number of Written Call Options Transactions Contracts Premiums --------- -------- Outstanding, beginning of period 0 $ 0 Options written 1 4,680 Options expired 0 0 Options closed 0 0 --------- -------- Outstanding, end of period 1 $ 4,680 ========= ======== See Schedule of Investments for further details. 20 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- Forward currency exchange contracts The Portfolio may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Portfolio primarily to protect the value of the Portfolio's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts is included in the Statement of Assets and Liabilities. At December 31, 2005, the Portfolio held open foreign currency exchange contracts. See Schedule of Investments for further details. Futures contracts The Fund may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Fund deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Fund's exposure to the underlying instrument, while selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Fund enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December 31, 2005, the Fund held open financial futures contracts. See the Schedule of Investments for further details. Swap agreements The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Fund held open swap contracts. See the Schedule of Investments for further details. 21 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Notes to Financial Statements - -------------------------------------------------------------------------------- (7) Security Lending: The Fund may lend its securities to financial institutions which the Fund deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Fund on the next business day. For the duration of a loan, the Fund receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Fund bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Fund. In the event of borrower default, the Fund generally has the right to use the collateral to offset losses incurred. The Fund may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Fund also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Fund's obligations due on the loans. The Fund loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $141,111 of which, $136,126 was rebated to borrowers or paid in fees. At December 31, 2005, the Fund had securities valued at $547,809 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (8) Delayed Delivery Transactions: The Fund may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Fund instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Fund may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Fund did not enter into any delayed delivery transactions during the year ended December 31, 2005. (9) Line of Credit: The Fund, and other funds in the Trust and subtrusts in Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolio/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $563 for the Fund. During the year ended December 31, 2005, the Fund had average borrowing outstanding of $609,000 for one day and incurred $81 of interest expense. 22 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of the Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon International Fixed Income Fund II: In our opinion, the accompanying statement of assets and liabilities, including the schedule of invesments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon International Fixed Income Fund II (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 1, 2006 23 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from the Fund's investment adviser, Standish Mellon Asset Management Company LLC ("Standish Mellon"), a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance and any material portfolio manager and strategy changes that may have affected the Fund in the prior year, as well as the Fund's "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Fund and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Fund's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Fund by Standish Mellon. In their deliberations as to the continuation of the Fund's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Fund's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Fund effectively. 24 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board for at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (5.19% vs. 7.37%), three-year period (10.60% vs. 11.36%) and five-year period (7.86% vs. 9.00%). The Trustees requested that Standish Mellon arrange for a presentation to the Board, as part of the usual fund reporting cycle, to explain the reasons for the Fund's underperformance and efforts by Standish Mellon to improve the Fund's performance. Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Fund to Standish Mellon. The Lipper data presenting the Fund's "net advisory fees" included fees paid by the Fund, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Trust's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Fund's advisory fees to those peers that include administrative fees within a blended advisory fee. The Fund's contractual advisory fee was 0.40%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.619%. The Fund's net advisory fee, after giving effect to expense limitations, was 0.276%, below the peer group median net advisory fee of 0.468%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Fund's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Fund relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Fund relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.747% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 0.836% notwithstanding the fact that all of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 25 Mellon Institutional Funds Investment Trust Standish Mellon International Fixed Income Fund II Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 26 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ------------------------------------------------------------------------------------------------------------------------------------ Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None $1,069 c/o Decision Resources, Inc. 11/3/1986 Decision Resources, 260 Charles Street Inc. ("DRI") Waltham, MA 02453 (biotechnology 9/30/40 research and consulting firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex 32 None $1,180 c/o Essex Street Associates 11/3/1986 Street Associates P.O. Box 5600 (family Beverly, MA 01915 investment trust 11/14/43 office) Benjamin M. Friedman Trustee Trustee since William Joseph 32 None $1,069 c/o Harvard University 9/13/1989 Maier, Professor Littaver Center 127 of Political Cambridge, MA 02138 Economy, Harvard 8/5/44 University John H. Hewitt Trustee Trustee since formerly Trustee, 32 None $1,069 P.O. Box 2333 11/3/1986 Mertens House, New London, NH 03257 Inc. (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, Since 2003 President and 32 None $ 0 The Boston Company President Chief Operating Asset Management, LLC and Chief Officer of The One Boston Place Executive Boston Company Boston, MA 02108 Officer Asset Management, 7/24/65 LLC; formerly Senior Vice President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
27 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ----------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Mellon Asset Management and Secretary Asset Management ("MAM"); formerly First Vice President, One Boston Place MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Mellon Asset Management and Treasurer since 1999; Management One Boston Place Treasurer since Boston, MA 02108 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Operations, Mellon Asset Management President Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager of One Boston Place Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Compliance Since 2005 First Vice President, Mellon Asset Management and Chief Mellon Asset Management Officer Compliance Officer, Mellon Funds Distributor and Mellon One Boston Place Optima L/S Strategy Fund, LLC; formerly Director, Boston, MA 02108 Blackrock, Inc., Senior Vice President, State Street 4/8/57 Research & Management Company ("SSRM"), Vice President, SSRM
28 THIS PAGE INTENTIONALLY LEFT BLANK [LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6945AR1205 [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Emerging Markets Debt Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [MELLON LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- The emerging market debt asset class had another strong year as it outperformed other asset classes for the third year in a row in 2005. Overall, there was spread tightening as a result of strong fundamentals, improving credit quality and strategic inflows into the asset class. There were also periodic sell-offs, led mostly by exogenous forces, such as rising short-term rates in the U.S. and equity market volatility. Over 2005, the Emerging Markets Debt Fund outperformed the JP Morgan index by 256 basis points; it returned 13.29% versus the JP Morgan EMBI Global index, which returned 10.73%. The Dominican Republic was the best performing market, returning 24.2%, followed by the Philippines which returned 20.6%. Other notable performers included Venezuela at 16.1% and Uruguay at 16.3%. Russia and Brazil returned 13.29% and 13.21% respectively, while Mexico underperformed the market, returning 8.1%. During the year, the tug of war between positive credit fundamentals and inflows to the asset class on the one hand, and exogenous factors like the Federal Reserve rhetoric on the other hand, persisted in emerging markets. However, several key factors dominated the market in 2005: on the positive side, strong commodity prices and further consolidation in oil prices, continued improvements in emerging market countries' macroeconomic fundamentals and new strategic inflows into the asset class. On the negative side, U.S. Fed rate hikes, inflation scares and sporadic episodes of risk aversion in the equity markets spooked the market. The year began with a sell-off in emerging markets, mostly driven by a surge in issuance as well as U.S. Treasury volatility. The market soon calmed down, but in April spreads widened again. Volatility and risk aversion continued to dominate the second quarter as the markets focused on issues related to Ford and GM, hedge fund correlation trades and fears over a slowdown in U.S. growth. Reacting to these factors, credit spreads widened and equity markets sold off. Emerging markets spreads widened, but unlike the 2004 sell-off, the market's strong fundamental backdrop and continued improvement in credits limited the extent of the widening. By the end of the second quarter though, external risk dissipated and the market began focusing on emerging markets fundamentals. Argentina successfully restructured its defaulted debt, which was upgraded by Moody's, a boost to the asset class. In Europe, as expected, France and The Netherlands rejected the EU constitution. While this was disappointing, the impact on Turkey and other accession countries was muted. Finally, the resurgence of oil prices was supportive for credits like Russia and Venezuela, further improving sentiment toward emerging markets, and driving emerging markets spreads much tighter. In the third quarter, strong inflows and favorable fundamentals dominated emerging markets markets, driving spreads tighter, and ignoring the uncertain external environment. U.S. monetary policy was a key risk as the Federal Reserve kept on tightening rates, however, several key factors were favorable for the sector. 2 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- First, the trend of rising commodity prices was a plus: while it threatened global growth, it remained a key support to the asset class given that most emerging market countries are large exporters of oil and other natural resources. This helped strengthen the current account and fiscal account position for most countries. Further, excess cash from oil exports receipts has enabled countries like Russia to continue to buy back their external debt. Second, equity market volatility, a key driver of emerging markets, remained low. Third, strategic inflows at the end of the third quarter helped spreads grind tighter. In terms of performance, the Fund began the year on a soft note, and was flat to the index in the first quarter. We had positioned the portfolio for stable to slightly tighter spreads, keeping beta higher than the index and increasing spread duration. However, performance turned around, and the Fund outperformed the JP Morgan EMBI Global Index every quarter for the rest of the year as the Fund correctly overweighed credits like the Dominican Republic, Brazil, Russia, Venezuela and the Philippines. The outlook for 2006 is positive as we expect the emerging markets asset class to continue to differentiate itself from other asset classes. Fundamentals have improved significantly, and positive technicals, such as strategic inflows, are expected to continue. Another positive is that many emerging markets pre-financed in 2005 for 2006, so there should be less financing needs in 2006. On the external side, we feel that the Fed is close to the end of its tightening cycle. This is usually positive for emerging markets as well. Some of the risks in our outlook include an unfavorable global economic backdrop or a significant geopolitical scare. Further, we expect some particular uncertainties due to the multiple elections in Latin America. We do not expect the broader spreads to widen by much, but the risk would be country specific. We thank you for your continued support. /s/ John L. Peta /s/ Boris Segura John L. Peta Boris Segura 3 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Emerging Markets Debt Fund and the JP Morgan EMBI Global Index - -------------------------------------------------------------------------------- [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 03/26/2001 - -------------------------------------------------------------------------------- 13.29% 17.65% 15.74% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Bloomberg Inc. 4 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $1,000.00 $1,064.80 $2.19 Hypothetical (5% return per year before expenses) $1,000.00 $1,023.29 $2.14 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.42%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 5 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- Russian Federation 5.000 3/31/2030 9.7% Republic of Brazil 5.250 4/15/2012 3.2 Republic of Brazil 8.750 2/4/2025 2.7 Republic of Brazil 8.000 1/15/2018 2.7 Republic of Brazil 11.000 8/17/2040 2.6 Pemex Project Funding Master Trust 8.625 2/1/2022 2.4 United Mexican States 8.125 12/30/2019 2.4 Republic of Brazil 11.000 1/11/2012 2.4 Republic of Turkey 11.875 1/15/2030 2.3 Republic of Turkey 11.750 6/15/2010 2.2 ------- 32.6% * Excluding short-term investments and investment of cash collateral. 6 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--99.8% BONDS AND NOTES--96.4% Corporate--9.5% Consumer Goods--1.8% Argentine Beverages Finance 144A 7.375% 3/22/2012 USD 30,000 $ 30,150 Celulosa Arauco y Constitution SA (e) 5.625 4/20/2015 70,000 69,489 Innova S de RL 9.375 9/19/2013 45,000 49,950 ----------- 149,589 ----------- Energy--6.5% Morgan Stanley Bank AG for OAO Gazprom 144A 9.625 3/1/2013 100,000 120,625 National Power Corp. 144A (a) 8.630 8/23/2011 35,000 37,607 Pemex Project Funding Master Trust 6.625 6/15/2035 55,000 55,138 Pemex Project Funding Master Trust 7.375 12/15/2014 55,000 61,105 Pemex Project Funding Master Trust 8.625 2/1/2022 155,000 190,263 Salomon Brothers AF for OAO Siberian Oil Co. 10.750 1/15/2009 40,000 45,244 Salomon Brothers AF for Tyumen Oil Co. 11.000 11/6/2007 30,000 32,559 ----------- 542,541 ----------- Utilities--1.2% Cent Elet Brasileiras SA 144A 7.750 11/30/2015 100,000 102,000 ----------- Total Corporate (Cost $768,400) 794,130 ----------- Sovereign Bonds--78.9% Banco Nacional de Comercio Exterior SNC 144A (e) 3.875 1/21/2009 140,000 134,400 Dominican Republic 9.040 1/23/2018 41,956 44,159 Egyptian Treasury Bill 144A 7.500 3/23/2006 70,000 71,877 Egyptian Treasury Bill 144A 9.000 7/14/2006 100,000 103,742 Lebanese Republic 8.500 1/19/2016 35,000 36,575 Ministry Finance Russia 3.000 5/14/2011 60,000 53,550 Nigeria Promissory Notes Series RC 5.092 1/5/2010 265,000 74,200 Republic of Argentina 2.000 1/3/2010 57,000 36,645 Republic of Argentina (a) 4.005 8/3/2012 105,000 82,215 Republic of Argentina (c) 1.330 12/31/2038 70,000 23,100 Republic of Argentina (b) (e) 8.280 12/31/2033 77,776 65,332 Republic of Brazil 14.500 10/15/2009 55,000 70,538 Republic of Brazil 10.000 8/7/2011 75,000 87,188 Republic of Brazil 8.875 10/14/2019 45,000 50,423 Republic of Brazil 8.750 2/4/2025 200,000 221,000 Republic of Brazil 8.250 1/20/2034 150,000 159,225 Republic of Brazil (e) 11.000 8/17/2040 160,000 206,240 Republic of Brazil 14.500 10/15/2009 50,000 64,125 Republic of Brazil (a) 5.250 4/15/2012 257,711 254,489 Republic of Brazil (b) 11.000 1/11/2012 155,000 189,100 Republic of Brazil (b) 8.000 1/15/2018 193,000 208,247 Republic of Colombia 10.000 1/23/2012 95,000 113,050 Republic of Colombia 8.125 5/21/2024 30,000 32,400 Republic of Colombia (a) 6.142 11/16/2015 100,000 102,000 Republic of Costa Rica 144A 8.050 1/31/2013 40,000 42,860 Republic of Ecuador (c) 7.000 8/15/2030 35,000 31,850 Republic of Ecuador 144A 9.375 12/15/2015 100,000 93,250 Republic of El Salvador 8.250 4/10/2032 60,000 66,300 Republic of El Salvador 144A 7.650 6/15/2035 35,000 36,050 Republic of Indonesia 7.250 4/20/2015 35,000 35,919
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------- Sovereign Bonds (continued) Republic of Indonesia 144A 8.500 10/12/2035 USD 100,000 $ 108,750 Republic of Panama 7.125 1/29/2026 55,000 55,688 Republic of Panama 8.875 9/30/2027 120,000 142,800 Republic of Peru 9.875% 2/6/2015 120,000 144,000 Republic of Peru 8.750 11/21/2033 15,000 16,875 Republic of Philippines 8.375 2/15/2011 65,000 70,200 Republic of Philippines 9.375 1/18/2017 140,000 160,300 Republic of Philippines 10.625 3/16/2025 45,000 57,150 Republic of Philippines (b) 9.500 2/2/2030 90,000 105,750 Republic of Serbia 3.750 11/1/2024 70,000 62,300 Republic of South Africa 7.375 4/25/2012 95,000 105,450 Republic of Turkey 11.750 6/15/2010 145,000 177,625 Republic of Turkey 7.250 3/15/2015 45,000 47,363 Republic of Turkey 7.375 2/5/2025 110,000 113,575 Republic of Turkey 11.875 1/15/2030 18,000 27,675 Republic of Turkey (b) 11.875 1/15/2030 120,000 184,500 Republic of Uruguay 7.500 3/15/2015 100,000 102,750 Republic of Venezuela 10.750 9/19/2013 90,000 110,700 Republic of Venezuela 8.500 10/8/2014 30,000 33,000 Republic of Venezuela 7.650 4/21/2025 80,000 81,700 Republic of Venezuela 9.250 9/15/2027 145,000 171,825 Republic of Venezuela (a) 5.194 4/20/2011 110,000 107,800 Republic of Vietnam 144A 6.875 1/15/2016 100,000 104,250 Russian Federation 12.750 6/24/2028 80,000 146,800 Russian Federation 5.000 3/31/2030 692,000 780,230 Russian Ministry of Finance 3.000 5/14/2008 85,000 80,431 United Mexican States 8.375 1/14/2011 90,000 102,600 United Mexican States 6.625 3/3/2015 30,000 32,850 United Mexican States 8.125 12/30/2019 155,000 190,263 United Mexican States 6.750 9/27/2034 40,000 43,750 United Mexican States (b) 6.375 1/16/2013 90,000 95,625 ----------- Total Sovereign Bonds (Cost $6,273,500) 6,554,624 ----------- Yankee Bonds--5.8% Braskem Sa 144A 12.500 11/5/2008 45,000 52,538 Kazkommerts International Bank 144A 8.000 11/3/2015 100,000 105,810 Naftogaz Ukrainy 8.125 9/30/2009 100,000 103,500 Telefonos de Mexico SA de CV 4.750 1/27/2010 130,000 127,715 VTB CAP (Vneshtorgbank) 144A (a) 5.250 9/21/2007 100,000 100,147 ----------- Total Yankee (Cost $485,466) 489,710 ----------- Foreign Denominated--2.2% Argentina--1.3% Republic of Argentina 0.698 9/30/2014 ARS 160,000 52,752 Republic of Argentina 2.000 1/3/2016 90,000 52,693 ----------- 105,445 ----------- Mexico--0.9% Mexican Fixed Rate Bonds 8.000 12/19/2013 MXN 800,000 74,256 ----------- Total Foreign Denominated (Cost $274,485) 179,701 ----------- TOTAL BONDS AND NOTES (Cost $7,801,851) 8,018,165 -----------
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Value Security Description Rate Shares (Note 1A) - -------------------------------------------------------------------------------------------------------------- WARRANTS--0.3% Republic of Argentina Warrant, 12/15/2035 (d) 311,923 $ 16,220 United Mexican States Warrant, 10/10/2006 (d) 135 5,397 ----------- Total Warrants (Cost $3,380) 21,617 ----------- Contract OPTIONS--0.0% Size -------- Dow Jones CDX. EM Series 4, exercise rate 100.9%, 2/21/2006 (premium paid $960) 150,000 1,200 ----------- SHORT-TERM INVESTMENTS--4.8% INVESTMENT OF CASH COLLATERAL--3.1% Shares -------- BlackRock Cash Strategies L.L.C. (f) (Cost $254,310) 4.310 254,310 254,310 ----------- TOTAL UNAFFILIATED INVESTMENTS (Cost $8,060,501) 8,295,292 ----------- AFFILIATED INVESTMENTS--1.7% Dreyfus Institutional Preferred Plus Money Market Fund (f) (g) (Cost $140,356) 4.060 140,356 140,356 ----------- TOTAL INVESTMENTS--101.5% (Cost $8,200,857) 8,435,648 ----------- Liabilities in Excess of Other Assets--(1.5%) (123,275) ----------- NET ASSETS--100.0% $ 8,312,373 ===========
Notes to Schedule of Investments 144A-Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the year end, the value of these securities amounted to $1,244,056 or 15.0% of net assets. ARS--Argentina Peso MXN--Mexican Peso (a) Variable Rate Security; rate indicated as of 12/31/05. (b) Security, or a portion of thereof, was on loan at 12/31/05. (c) Stepup bond, rate indicated as of 12/31/05 (d) Non-income producing. (e) Denotes all or part of security pledged as collateral. (f) Stated rate is the seven day yield for the fund at year end. (g) Affiliated institutional money market fund. At December 31, 2005 the Fund held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain/(Loss) - ------------------------------------------------------------------------------------------------- Brazilian Real 415,000 1/17/2006 $ 176,574 $ 150,794 $ (25,780) Brazilian Real 175,000 2/1/2006 74,115 72,494 (1,621) Brazilian Real 420,000 2/22/2006 176,879 139,278 (37,601) Mexican Peso 383,000 3/15/2006 36,056 35,267 (789) Turkish Lira 78,000 4/3/2006 56,479 56,481 2 --------- --------- --------- Total $ 520,103 $ 454,314 $ (65,789) ========= ========= =========
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005 the Fund held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Receive Amount Value Date December 31, 2005 to Receive Gain/(Loss) - ------------------------------------------------------------------------------------------------- Brazilian Real 415,000 1/17/2006 $ 176,573 $ 134,697 $ 41,876 Brazilian Real 175,000 2/1/2006 74,115 67,895 6,220 Brazilian Real 420,000 2/22/2006 176,879 143,296 33,583 Brazilian Real 210,000 5/25/2006 86,198 86,659 (461) Turkish Lira 156,000 4/3/2006 112,959 111,625 1,334 --------- --------- --------- Total $ 626,724 $ 544,172 $ 82,552 ========= ========= =========
At December 31, 2005, the Fund held the following open swap contracts:
Credit Default Swaps Reference Buy/Sell Expiration Notional Unrealized Counterparty Entity Protection Fixed Rate Date Amount Appreciation - --------------------------------------------------------------------------------------------------------------------------- Bear Stearns Ukraine Government, 7.650% due 6/11/2013 Sell 2.84% 12/20/2009 $110,000 $ 5,817 Deutsche Bank Republic of Brazil, 12.25%, due 3/6/2030 Sell 1.45% 10/20/2008 331,000 1,817 Deutsche Bank Gazprom, 9.125%, due 4/25/2007 Sell 1.04% 11/20/2007 325,000 1,764 JP Morgan Republic of Panama, 8.875% due 9/30/2027 Sell 1.50% 12/20/2010 44,000 87 JP Morgan Republic of Peru, 8.75% due 11/21/2033 Buy (1.70%) 12/20/2010 44,000 889 ------- $10,374 =======
At December 31, 2005, the Fund held the following written option call contract:
Exercise Expiration Notional Security Counter Party Rate Date Amount Premium Value - -------------------------------------------------------------------------------------------- Dow Jones CDX.EM Series 4 Deutsche Bank 1.80% 2/21/2006 $300,000 $960 $1,200
Percentage of Geographic Region Investments ------------------------------------------------------------------- Latin America 57.0% Europe 28.0 Asia 7.6 Africa 4.0 Middle East 1.6 Cash & equivalents 1.8 ----- 100.0% 10 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $246,521 (Note 7)) Unaffiliated issuers, at value (Note 1A) (cost $8,060,501) $8,295,292 Affiliated issuers, at value (Note 1A) (cost $140,356) (Note 1H) 140,356 Foreign currency (cost $1,437) 1,419 Receivable for securities sold 29,464 Interest and dividends receivable 162,089 Unrealized appreciation on forward currency exchange contracts (Note 6) 83,015 Unrealized appreciation on swap contracts, (Note 6) 10,374 Prepaid expenses 18,336 ---------- Total assets 8,740,345 Liabilities Collateral for securities on loan (Note 7) $ 254,310 Payable for securities purchased 1,040 Unrealized depreciation on forward currency exchange contracts (Note 6) 66,252 Options written (premium received $960) (Note 6) 1,200 Distributions payable 58,695 Accrued accounting, administration, custody and transfer agent fees (Note 2) 5,658 Accrued chief compliance officer fee (Note 2) 403 Accrued professional fees 37,601 Accrued trustees' fees and expenses (Note 2) 632 Other accrued expenses and liabilities 2,181 --------- Total liabilities 427,972 ---------- Net Assets $8,312,373 ---------- Net Assets consist of: Paid-in capital $8,046,778 Accumulated net realized gain 20,839 Distributions in excess of net investment income (16,939) Net unrealized appreciation 261,695 ---------- Total Net Assets $8,312,373 ========== Shares of beneficial interest outstanding 425,649 ========== Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 19.53 ==========
The accompanying notes are an integral part of the financial statements. 11 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 610,382 Dividend income from affiliated investments (Note 1H) 4,872 Securitity lending income (Note 7) 8,389 ---------- Total investment income 623,643 Expenses Investment advisory fee (Note 2) $ 38,879 Accounting, administration, custody, and transfer agent fees (Note 2) 56,657 Professional fees 53,849 Registration fees 5,825 Trustees' fees and expenses (Note 2) 2,894 Insurance expense 4,900 Miscellaneous 9,048 --------- 172,052 Deduct: Waiver of investment advisory fee (Note 2) (38,879) Reimbursement of Fund operating expenses (Note 2) (105,373) --------- Total expense deductions (144,252) --------- Net expenses 27,800 ---------- Net investment income 595,843 Realized and Unrealized Gain (Loss) on: Net realized gain (loss) Investments 577,768 Financial future transactions 9,607 Foreign currency transactions and forward currency exchange transactions 48,120 Swap transactions 2,773 --------- Net realized gain 638,268 Change in unrealized appreciation (depreciation) on: Investments (418,263) Futures contracts 4,733 Foreign currency translations and forward currency exchange contracts 14,633 Swap contracts 6,276 Written options contracts (240) --------- Net change in net unrealized appreciation (depreciation) (392,861) ---------- Net realized and unrealized gain (loss) on investments 245,407 ---------- Net Increase in Net Assets from Operations $ 841,250 ==========
The accompanying notes are an integral part of the financial statements. 12 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 595,843 $ 1,148,795 Net realized gain (loss) 638,268 618,467 Change in net unrealized appreciation (depreciation) (392,861) 111,845 ------------- ----------- Net increase (decrease) in net assets from investment operations 841,250 1,879,107 ------------- ----------- Distributions to Shareholders (Note 1C) From net investment income (535,695) (1,054,097) From net realized gains on investments (800,032) (668,039) ------------- ----------- Total distributions to shareholders (1,335,727) (1,722,136) ------------- ----------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 3,475,000 3,011,075 Value of shares issued to shareholders in reinvestment of distributions 1,162,757 1,122,390 Cost of shares redeemed (6,833,029) (9,520,626) ------------- ----------- Net increase (decrease) in net assets from Fund share transactions (2,195,272) (5,387,161) ------------- ----------- Total Increase (Decrease) in Net Assets (2,689,749) (5,230,190) Net Assets At beginning of year 11,002,122 16,232,312 ------------- ----------- At end of year [including distributions in excess of net investment income ($16,939) and ($16,065)] $ 8,312,373 $11,002,122 ============= ===========
The accompanying notes are an integral part of the financial statements. 13 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Financial Highlights - --------------------------------------------------------------------------------
For the Period March 26, 2001 Year Ended December 31, (commencement ---------------------------------------- of operations) to 2005 2004 2003 2002 December 31, 2001 ------ ------- ------- ------ ----------------- Net Asset Value, Beginning of the Year $20.37 $ 20.81 $ 18.39 $17.67 $20.00 ------ ------- ------- ------ ------ From Investment Operations: Net investment income * (a) 1.57 1.56 1.61 1.59 1.58 Net realized and unrealized gain (loss) on investmets 0.98 0.72 3.59 0.65 0.10 ------ ------- ------- ------ ------ Total from investment operations 2.55 2.28 5.20 2.24 1.68 ------ ------- ------- ------ ------ Less Distributions to Shareholders: From net investment income (1.40) (1.53) (1.32) (1.52) (3.90) From net realized gain on investments (1.99) (1.19) (1.46) -- -- From tax return of capital -- -- -- -- (0.11) ------ ------- ------- ------ ------ Total distributions to shareholders (3.39) (2.72) (2.78) (1.52) (4.01) ------ ------- ------- ------ ------ Net Asset Value, End of Year $19.53 $ 20.37 $ 20.81 $18.39 $17.67 ====== ======= ======= ====== ====== Total Return (b) 13.29% 11.54% 28.82% 13.20% 8.94%(c) Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.36% 0.30% 0.30% 0.30% 0.30%(d) Net Investment Income (to average daily net 7.67% 7.53% 7.64% 8.83% 10.33%(d) assets)* Portfolio Turnover 172% 228% 224% 421% 505%(c) Net Assets, End of Year (000's omitted) $8,314 $11,002 $16,232 $7,269 $3,702
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share (a) $ 1.19 $ 1.37 $ 1.26 $ 1.23 $ 1.34 Ratios (to average daily net assets): Expenses 2.22% 1.23% 1.92% 2.31% 1.82%(d) Net investment income 5.81% 6.60% 6.02% 6.82% 8.81%(d)
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of fee waivers and expense limitations. (c) Not annualized. (d) Computed on an annualized basis. The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Emerging Markets Debt Fund (the "Fund") is a separate non-diversified investment series of the Trust. The Fund's Board of Trustees approved, effective November 1, 2005, the change in the Fund's name from "Standish Mellon Opportunistic Emerging Markets Debt Fund" to "Standish Mellon Emerging Markets Debt Fund". The objective of the Fund is to generate a high total return through a combination of capital appreciation and income. The fund seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities issued by governments, companies and banks of emerging markets, as well as preferred stocks, warrants and tax-exempt bonds. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Fund acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield-to-maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences, which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among undistributed net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. 15 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets F. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust are directly identifiable to an individual Fund. Expenses which are not readily identifiable to a specific Fund are allocated among funds of the Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions With Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities, is paid monthly at the annual rate of 0.50% of the Fund's average daily net assets. Standish Mellon voluntarily agreed to limit total Fund operating expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.30% of the Fund's average daily net assets for the period from January 1, 2005 to October 31, 2005 and 0.65% for the period November 1, 2005 to December 31, 2005. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived its investment advisory fee in the amount of $38,879 and reimbursed the Fund for $105,373 of other operating expenses. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $6,379 during the year ended December 31, 2005. The Fund has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Fund. For these services the Fund pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $50,278 during the year ended December 31, 2005. 16 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- The Fund entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Fund's lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon bank received $3,602 for the year ended December 31, 2005. See Note 7 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the period ended December 31, 2005, the Fund was charged $2,269 for fees payable to Mellon Private Wealth Management. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005, were as follows: Purchases Sales ----------- ----------- U.S. Government Securities $ 371,445 $ 370,740 =========== =========== Investments (non-U.S. Government Securities) $12,737,655 $15,786,655 =========== =========== (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ------------------ Shares sold 170,232 158,814 Shares issued to shareholders reinvestment of distributions declared 59,293 55,260 Shares redeemed (343,898) (454,120) -------- -------- Net increase (decrease) (114,373) (240,046) ======== ======== At December 31, 2005, seven shareholders of record held approximately 99.96% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and other costs associated with short-term trading. The fee does not apply to shares that were acquired through reinvestment of distributions. For the year ended December 31, 2005, the Fund did not collect any redemption fees. 17 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes all of its taxable income for its fiscal year. The tax basis components of distributable earnings and the federal tax cost as of December 31, 2005, was as follows: Unrealized appreciation $ 375,223 Unrealized depreciation (150,565) ----------- Net unrealized appreciation/depreciation 224,658 Undistributed ordinary income 18,708 Undistributed long term capital gain 12,264 Cost for federal income tax purposes 8,210,990 Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ----------- ----------- Ordinary income $ 1,197,960 $ 1,653,944 Capital gains-long term 137,767 68,192 ----------- ----------- $ 1,335,727 $ 1,722,136 =========== =========== The Fund elected to defer to its fiscal year ending December 31, 2006 $1,511 of currenct losses recognized during the period November 1, 2004 to December 31, 2005. (6) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Fund may trade the following instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Fund may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Fund's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Fund's exposure to the underlying instrument, or hedge other Fund investments. Options, both held and written by the Fund, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Fund is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. During the year ended December 31, 2005, the Fund entered into the following transactions: Number of Contracts Premiums --------- -------- Outstanding, beginning of period 0 $ - Options written 1 960 --------- -------- Outstanding, end of year 1 $ 960 ========= ======== The Fund had option transactions outstanding during the year ended December 31, 2005. See the Schedule of Investments for future details. 18 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- Forward currency exchange contracts The Fund may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Fund primarily to protect the value of the Fund's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts are included in the Statement of Assets and Liabilities. At December 31, 2005, the Fund held foreign currency exchange contracts. See the Schedule of Investments for further details. Futures contracts The Fund may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Fund deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Fund. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Fund's exposure to the underlying instrument, while selling futures tends to decrease the Fund's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Fund enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December, 31, 2005, the Fund did not hold any financial futures contracts. Swap agreements The Fund may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Fund may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Fund owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Fund earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Fund had swap agreements outstanding. See the Schedule of Investments for further details. 19 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (7) Security Lending: The Fund may lend its securities to financial institutions which the Fund deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Fund on the next business day. For the duration of a loan, the Fund receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Fund bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Fund. In the event of borrower default, the Fund generally has the right to use the collateral to offset losses incurred. The Fund may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Fund also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Fund's obligations due on the loans. The Fund loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $35,278 of which, $26,889 was rebated to borrowers or paid in fees. At December 31, 2005, the Fund had securities valued at $246,521 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (8) Delayed Delivery Transactions: The Fund may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Fund instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Fund may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Fund holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Fund may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. The Fund did not enter into any delayed delivery transactions during the year ended December 31, 2005. (9) Line of Credit: The Fund, and other funds in the Trust and subtrusts in Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolio/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $169 for the Fund. During the year ended December 31, 2005, the Fund had average borrowings outstanding of $24,290 for a total of thirty-one days and incurred $86 of interest expense. 20 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Emerging Markets Debt Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Emerging Markets Debt Fund, formerly Standish Mellon Opportunistic Emerging Markets Debt Fund, (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended and the period March 26, 2001 (commencement of operations) through December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 21 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from the Fund's investment adviser, Standish Mellon Asset Management Company LLC ("Standish Mellon"), a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance and any material portfolio manager and strategy changes that may have affected the Fund in the prior year, as well as the Fund's "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Fund and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Fund's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Fund by Standish Mellon. In their deliberations as to the continuation of the Fund's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Fund's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Fund effectively. 22 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board for at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one- and three-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (20.22% vs. 20.69%) and three-year period (21.11% vs. 22.83%). Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Fund to Standish Mellon. The Lipper data presenting the Fund's "net advisory fees" included fees paid by the Fund, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Trust's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Fund's advisory fees to those peers that include administrative fees within a blended advisory fee. The Fund's contractual advisory fee was 0.50%, in the 1st (best) quintile of its peer group of funds, the median fee of which was 0.754%. The Fund's net advisory fee, after giving effect to expense limitations, was 0.098%, well below the peer group median net advisory fee of 0.715%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Fund's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Fund relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Fund relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.30% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 1.054% notwithstanding the fact that all of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 23 Mellon Institutional Funds Investment Trust Standish Mellon Emerging Markets Debt Fund Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Fund's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 24 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ------------------------------------------------------------------------------------------------------------------------------------ Samuel C. Fleming Trustee Trustee since Chairman Emeritus, 32 None $611 c/o Decision Resources, Inc. 11/3/1986 Decision Resources, Inc. 260 Charles Street ("DRI") (biotechnology Waltham, MA 02453 research and consulting 9/30/40 firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street 32 None $637 c/o Essex Street Associates 11/3/1986 Associates (family P.O. Box 5600 investment trust office) Beverly, MA 01915 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, 32 None $611 c/o Harvard University 9/13/1989 Professor of Political Littaver Center 127 Economy, Harvard Cambridge, MA 02138 University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, 32 None $611 P.O. Box 2333 11/3/1986 Mertens House, Inc. New London, NH 03257 (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, Since 2003 President and Chief 32 None $0 The Boston Company President and Operating Officer of Asset Management, LLC Chief Executive The Boston Company One Boston Place Officer Asset Management, LLC; Boston, MA 02108 formerly Senior Vice 7/24/65 President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM
25 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ------------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Asset Management and Secretary Mellon Asset Management ("MAM"); formerly First One Boston Place Vice President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer since 1999; Mellon Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager One Boston Place of Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management Mellon Asset Management Compliance and Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
26 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK [MELLON LOGO] Mellon -------------------------- MELLON INSTITUTIONAL FUNDS One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6947AR1205 [LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Fixed Income Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- The economy grew steadily in 2005 despite continuous rate hikes by the U.S. Federal Reserve, sharply higher energy prices and major disruptions from Hurricanes Katrina and Rita. Job gains remained surprisingly strong with a 12-month moving average of 168,000 jobs, and the unemployment rate fell to 5%. Inflation news was generally positive as CPI, excluding food and energy, hovered in the area of 2% and the latest release of the Fed's preferred measure of inflation, core personal consumption expenditures, posted a moderate 1.8% rise year over year. Against this backdrop, short term interest rates rose significantly more than long term rates, leaving the slope between 2- and 10-year Treasuries virtually flat by year-end. In an environment where the Fed's inflation-fighting credibility and policy transparency has been quite good, interest rate volatility has fallen. Similarly, risk premiums have remained low during 2005. However, there has been a notable pickup in event risk in the corporate market over the course of the year which started with downgrades in the auto sector and spread more broadly with increasing merger activity and leveraged buy out rumors. As we close the year, slowing growth prospects, moderate inflation and a likely decline in the housing market lead us to expect that the Fed is nearly done raising rates. For the latest year, the Standish Mellon Fixed Income Fund outperformed the Lehman Brothers U.S. Aggregate Index. Over the 12-month period ended December 31, 2005, the Fund returned 2.96% net of fees compared to 2.43% for the index. The Fund's yield curve strategy contributed strongly to excess returns as we implemented a barbell position (overweight cash and long bonds versus underweight intermediate maturities) which capitalized on the yield curve flattening. Similarly, a shorter-than-benchmark duration was advantageous given significantly higher intermediate bond yields. In spread sectors, the Fund's allocation to emerging markets was quite positive as the sector benefited from strong investor demand and improving credit momentum. Given rising U.S. rates relative to many global markets, the Fund's hedged position in European bonds added to returns. Treasury Inflation Protected Securities (TIPS) were another source of value added. During the year, we opportunistically added TIPS to take advantage of higher inflation accruals due to the surge in energy prices and undervalued breakeven inflation rates. In the corporate bond market, amid increasing negative headlines and event risk, our defensive security selection was positive for portfolio returns. Finally, our allocation to higher quality bonds in the commercial mortgage and asset backed sectors positively impacted performance. As we begin 2006, we anticipate the Fed to pause soon given policymakers have moderated their hawkish inflation tone and expressed caution in tightening too aggressively. Meanwhile, as low risk premiums persist, the Fund's sector positioning remains defensive. We continue to capitalize on opportunities to purchase insurance in the credit default market for select issuers with a high probability of negative event risk. In the structured market, there are attractively priced opportunities in the asset backed sector with diversified pools of mortgages. We have moved the Fund's duration from shorter-than-the-index to neutral given that we are near the end of the tightening cycle. Finally, in a flat yield curve environment, we favor intermediate bonds which should benefit portfolio returns as we believe interest rates will likely fall in the front end of the curve when the Fed pauses. As always, we look forward to serving you in 2006. /s/ Catherine Powers Catherine Powers Marc Seidner 2 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Fixed Income Fund and the Lehman Brothers U.S. Aggregate Index - -------------------------------------------------------------------------------- [LINE GRAPH] [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 10 Years 3/30/1987 - -------------------------------------------------------------------------------- 2.96% 4.65% 5.99% 5.94% 7.56% * Source: Lipper Inc. Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. 3 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $ 1,000.00 $ 1,003.80 $ 2.17 Hypothetical (5% return per year before expenses) $ 1,000.00 $ 1,023.04 $ 2.19 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.43%, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period). 4 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Percentage of Summary of Combined Ratings Investments - ------------------------------------------------------------- Quality Breakdown - ------------------------------------------------------------- AAA and higher 64.4% AA 2.8 A 8.7 BBB 19.5 BB 2.7 B 1.9 ----- 100.0 Based on ratings from Standard & Poor's and/or Moody's Investors Services. If a security receives split (different) ratings from multiple rating organizations, the Fund treats the security as being rated in the higher rating category. Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- FNMA (TBA) 6.000 1/1/2036 7.0% U.S. Treasury Note 3.625 4/30/2007 6.0 FNMA (TBA) 4.500 1/1/2021 5.5 U.S. Treasury Notes 3.500 2/15/2010 4.4 FNMA (TBA) 5.000 1/1/2021 3.0 FNMA (TBA) 5.500 1/1/2036 2.6 U.S. Treasury Bond 5.250 11/15/2028 2.4 U.S. Treasury Note 4.750 5/15/2014 1.2 FNMA (TBA) 6.000 1/1/2021 1.2 FNMA (TBA) 5.500 1/1/2025 0.8 ---- 34.1% * Excluding short-term investments and investment of cash collateral. Percentage of Economic Sector Allocation Investments - ----------------------------------------------------------- Treasury/Agency 24.8% Mortgage pass through 29.5 Credit 32.8 ABS/CMO/CMBS 9.8 Nondollar 0.6 Emerging markets 2.5 ----- 100.0% The Standish Mellon Fixed Income Fund invests all of its investable assets in an interest of the Standish Mellon Fixed Income Portfolio (See Note 1 of the Fund's Notes to Financial Statements). The Portfolio is actively managed. Current holdings may be different than those presented above. The accompanying notes are an integral part of the financial statements. 5 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Statement of Assets and Liabilities December 31, 2005 - --------------------------------------------------------------------------------
Assets Investment in Standish Mellon Fixed Income Portfolio (Portfolio), at value (Note 1A) $ 457,799,857 Receivable for Fund shares sold 444,492 Prepaid expenses 7,308 ---------------- Total assets 458,251,657 Liabilities Distributions payable $ 2,274,109 Payable for Fund shares redeemed 18,951 Accrued administrative services expense (Note 2) 31,738 Accrued transfer agent fees (Note 2) 6,811 Accrued professional fees 22,616 Accrued trustees' fees (Note 2) 500 Accrued chief compliance officer fee (Note 2) 404 Other accrued expenses and liabilities 5,285 --------------- Total liabilities 2,360,414 ---------------- Net Assets $ 455,891,243 ---------------- Net Assets consist of: Paid-in capital $ 640,671,216 Accumulated net realized loss (184,094,466) Distributions in excess of net investment income (282,143) Net unrealized depreciation (403,364) ---------------- Total Net Assets $ 455,891,243 ================ Shares of beneficial interest outstanding 23,183,508 ================ Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 19.66 ================
The accompanying notes are an integral part of the financial statements. 6 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Statement of Operations For the Year Ended December 31, 2005 - --------------------------------------------------------------------------------
Investment Income (Note 1B) Income allocated from Portfolio $ 21,109,034 Expenses allocated from Portfolio (2,076,858) ------------- Net investment income allocated from Portfolio 19,032,176 Expenses Transfer agent fees (Note 2) $ 29,115 Registration fees 41,249 Professional fees 45,576 Administrative services expenses (Note 2) 31,738 Trustees' fees and expenses (Note 2) 2,001 Insurance expense 1,900 Industry Association fees 7,926 Miscellaneous 5,522 --------------- Total expenses 165,027 ------------- Net investment income 18,867,149 ------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) allocated from Portfolio on: Investments 637,983 Financial futures transactions 140,603 Written options transactions 445,713 Foreign currency transactions and forward currency exchange transactions 1,413,087 Swap transactions 440,129 --------------- Net realized gain (loss) 3,077,515 Change in unrealized appreciation (depreciation) allocated from Portfolio on: Investments (8,659,451) Financial futures contracts 346,498 Written options contracts 31,242 Foreign currency translation and forward currency exchange contracts 186,791 Swap contracts 64,410 --------------- Net change in net unrealized appreciation (depreciation) (8,030,510) ------------- Net realized and unrealized gain (loss) on investments (4,952,995) ------------- Net Increase in Net Assets from Operations $ 13,914,154 =============
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Investment Operations Net investment income $ 18,867,149 $ 19,532,026 Net realized gain (loss) 3,077,515 20,499,067 Change in net unrealized appreciation (depreciation) (8,030,510) (13,157,811) --------------- ------------- Net increase (decrease) in net assets from investment operations 13,914,154 26,873,282 --------------- ------------- Distributions to Shareholders (Note 1C) From net investment income (22,878,370) (27,209,831) --------------- ------------- Total distributions to shareholders (22,878,370) (27,209,831) --------------- ------------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 51,996,373 46,761,132 Value of shares issued to shareholders in reinvestment of distributions 15,442,638 18,592,134 Cost of shares redeemed (65,890,204) (197,499,402) --------------- ------------- Net increase (decrease) in net assets from Fund share transactions 1,548,807 (132,146,136) --------------- ------------- Total Increase (Decrease) in Net Assets (7,415,409) (132,482,685) Net Assets At beginning of year 463,306,652 595,789,337 --------------- ------------- At end of year [including distributions in excess of income and undistributed net investment income of ($282,143) and $1,584,919] $ 455,891,243 $ 463,306,652 =============== =============
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- ----------- Net Asset Value, Beginning of the Year $ 20.08 $ 20.08 $ 19.70 $ 18.93 $ 18.92 --------- --------- --------- --------- ----------- From Operations: Net investment income* (a) 0.82 0.77 0.75 0.93 1.22 Net realized and unrealized gains (loss) on investments (0.23) 0.36 0.28 0.71 0.10 --------- --------- --------- --------- ----------- Total from investment operations 0.59 1.13 1.03 1.64 1.32 --------- --------- --------- --------- ----------- Less Distributions to Shareholders: From net investment income (1.01) (1.13) (0.65) (0.87) (1.31) --------- --------- --------- --------- ----------- Total distributions to shareholders (1.01) (1.13) (0.65) (0.87) (1.31) --------- --------- --------- --------- ----------- Net Asset Value, End of Year $ 19.66 $ 20.08 $ 20.08 $ 19.70 $ 18.93 ========= ========= ========= ========= =========== Total Return (b) 2.96% 5.74% 5.24% 8.89% 7.16% Ratios/Supplemental data: Expenses (to average daily net assets)* (c) 0.49% 0.48% 0.42% 0.38% 0.38% Net Investment Income (to average daily net assets)* 4.09% 3.77% 3.76% 4.86% 6.35% Net Assets, End of Year (000's omitted) $ 455,891 $ 463,307 $ 595,789 $ 941,240 $ 1,475,570
- ---------- * For the periods indicated, the investment advisor voluntarily agreed not to impose a portion of its investment advisory fee and/or reimbursed the Fund for all or a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been:
Net investment income per share (a) N/A N/A $ 0.73 $ 0.93 N/A Ratios (to average daily net assets): Expenses (c) N/A N/A 0.45% 0.42% N/A Net investment income N/A N/A 3.73% 4.82% N/A
(a) Calculated based on average shares outstanding. (b) Total return would have been lower in the absence of expense waivers. (c) Includes the Fund's share of the Portfolio's allocated expenses. The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Fixed Income Fund (the "Fund") is a separate diversified investment series of the Trust. The Fund invests all of its investable assets in an interest of the Standish Mellon Fixed Income Portfolio (the "Portfolio"), a subtrust of the Mellon Institutional Funds Master Portfolio (the "Portfolio Trust"), which is organized as a New York trust and has the same investment objective as the Fund. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of net assets in fixed income securities issued by U.S. and foreign governments and companies. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio (100% at December 31, 2005). The performance of the Fund is directly affected by the performance of the Portfolio. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations The Fund records its investment in the Portfolio at value. The Portfolio values its securities at value as discussed in Note 1A of the Portfolio's Notes to Financial Statements, which are included elsewhere in this report. B. Securities transactions and income Securities transactions in the Portfolio are recorded as of the trade date. Currently, the Fund's net investment income consists of the Fund's pro rata share of the net investment income of the Portfolio, less all expenses of the Fund determined in accordance with accounting principles generally accepted in the United States of America. All realized and unrealized gains and losses of the Fund are allocated in the Portfolio. The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions from capital gains, if any, after reduction of capital losses will be declared and distributed at least annually. In determining the amounts of its dividends, the Fund will take into account its share of the income, gains or losses, expenses, and any other tax items of the Portfolio. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, foreign currency gains and losses, post-October losses, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among accumulated net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust and/or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. 10 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- E. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. (2) Investment Advisory Fee and Transactions With Affiliates: The Fund does not directly pay any investment advisory fees, but indirectly bears its pro rata share of the compensation paid by the Portfolio to Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, for such services. See Note 2 of the Portfolio's Notes to Financial Statements which are included elsewhere in this report. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $29,115 during the year ended December 31, 2005. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,269. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005 the Fund was charged $31,738. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Investment Transactions: Increases and decreases in the Fund's investment in the Portfolio for the year ended December 31, 2005, aggregated $67,138,420 and $88,960,526, respectively. The Fund receives a proportionate share of the Portfolio's income, expenses, and realized and unrealized gains and losses based on applicable tax allocation rules. Book/tax differences arise when changes in proportionate interest for funds investing in the Portfolio occur. (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows:
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 2,590,559 2,338,169 Shares issued to shareholders for reinvestment of distributions 777,096 927,191 Shares redeemed (3,260,750) (9,861,429) ---------- ---------- Net increase (decrease) 106,905 (6,596,069) ========== ==========
11 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- At December 31, 2005, one shareholder of record held approximately 7% of the total outstanding shares of the Fund. Investment activity of this shareholder could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and their costs associated with short-term trading in the Fund. The fee does not apply to shares that were acquired through reinvestment of distributions. (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Amount ------------- Undistributed ordinary income $ -- Accumulated losses (181,733,972) At December 31, 2005, the Fund, for federal income tax purposes, has capital loss carryovers of $181,733,972 which will reduce the Fund's taxable income arising from net realized gain on investment, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are as follows: Capital Loss Expiration Carryover Date ------------- ---------- $ 27,099,636 12/31/2007 118,614,149 12/31/2008 36,020,187 12/31/2009 ------------- 181,733,972 ============= It is uncertain whether the Fund will be able to realize the benefits of the losses before they expire. The Fund elected to defer to its fiscal year ended December 31, 2006 $1,684,620 of capital losses and $282,143 of currency losses recognized during the period November 1, 2005 to December 31, 2005. Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ------------- ------------- Ordinary income $ 22,878,370 $ 27,209,831 See corresponding master portfolio for tax basis unrealized appreciated (depreciation) information. 12 Mellon Institutional Funds Investment Trust Standish Mellon Fixed Income Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Fixed Income Fund: In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Fixed Income Fund, (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included agreement of the amount of the investment in the Portfolio at December 31, 2005 to the Portfolio's records, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 13 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ UNAFFILIATED INVESTMENTS--138.6% BONDS AND NOTES--112.6% Asset Backed--18.4% Accredited Mortgage Loan Trust 2005-1 A2A (a) 4.479% 4/25/2035 $ 370,783 $ 370,829 Accredited Mortgage Loan Trust 2005-2 A2A (a) 4.479 7/25/2035 887,159 887,062 Accredited Mortgage Loan Trust 2005-3 A2 (a) 4.479 9/25/2035 1,466,022 1,466,118 ACE Securities Corp. 2005-HE1 A2A (a) 4.499 2/25/2035 473,817 473,919 American Express Credit Account Master Trust 2004-C 144A (a) 4.869 2/15/2012 3,295,584 3,302,343 Americredit Automobile Receivables Trust 2005-DA A2 4.750 11/6/2008 1,475,000 1,474,531 Bear Stearns Asset Backed Securities, Inc. 2005-HE2 1A1 (a) 4.489 2/25/2035 495,433 495,523 Bear Stearns Asset Backed Securities, Inc. 2005-HE3 1A1 (a) 4.459 3/25/2035 395,593 395,652 Capital Auto Receivables Asset Trust 2004-2 D 144A 5.820 5/15/2012 1,950,000 1,934,675 Capital One Auto Finance Trust 4.480 10/15/2008 1,400,000 1,396,958 Capital One Master Trust 2001-2 C 144A (a) (f) 5.469 1/15/2009 2,000,000 2,002,027 Capital One Multi-Asset Execution Trust 2003-B2 B2 (f) 3.500 2/17/2009 725,000 722,065 Capital One Multi-Asset Execution Trust 2004-C1 C1 3.400 11/16/2009 2,950,000 2,901,326 Centex Home Equity 2005-D AV1 (a) 4.489 10/25/2035 1,524,393 1,524,490 Centex Home Equity Co. LLC 2004-2 A1 (a) (f) 4.549 1/25/2025 401,245 401,277 Chase Credit Card Master Trust 2004-2 C (a) (f) 4.919 9/15/2009 1,000,000 1,004,194 Chase Manhattan Auto Owner Trust 2003-A A3 1.520 5/15/2007 92,592 92,409 Chase Manhattan Auto Owner Trust 2005-B A2 4.770 3/15/2008 1,500,000 1,499,868 Citibank Credit Card Issuance Trust 2001-C3 C3 (f) 6.650 5/15/2008 2,810,000 2,828,260 Citigroup Mortgage Loan Trust, Inc. 2005-OPT3 A1A (a) 4.469 5/25/2035 854,680 854,866 Citigroup Mortgage Loan Trust, Inc. 2005-WF2 AF2 4.922 8/25/2035 1,823,611 1,816,748 Citigroup Mortgage Loan Trust, Inc. 2005-WF2 AF7 5.249 8/25/2035 1,900,000 1,879,309 Countrywide Alternative Loan Trust 2005-J4 2A1B (a) 4.499 7/25/2035 912,155 911,580 Countrywide Asset-Backed Certificates 2005-2 2A1 (a) (f) 4.469 8/25/2035 487,067 487,125 Credit-Based Asset Servicing and Securitization 2005-CB4 AV1 (a) 4.479 8/25/2035 787,060 787,056 Credit-Based Asset Servicing and Securitization 2005-CB7 AF1 5.208 11/25/2035 2,378,675 2,373,837 Credit-Based Asset Servicing and Securitization 2005-CB8 AF1B 5.451 12/25/2035 2,200,731 2,199,477 CS First Boston Mortgage Securities Corp. 2002-HE4 6.940 8/25/2032 650,000 656,723 First Franklin Mortgage Loan Asset Backed 2005-FFH3 2A1 (a) 4.509 9/25/2035 1,432,237 1,432,412 Ford Credit Auto Owner Trust 2005-B B 4.640 4/15/2010 1,350,000 1,336,325 Fremont Home Loan Trust 2005-1 2A1 (a) 4.479 6/25/2035 487,519 487,660 Green Tree Financial Corp. 1994-7 M1 9.250 3/15/2020 927,676 974,517 Harley-Davidson Motorcycle Trust 2001-3 B (f) 3.720 10/15/2009 685,735 679,135 Home Equity Asset Trust 2005-5 2A1 (a) 4.489 11/25/2035 1,993,297 1,993,433 Home Equity Asset Trust 2005-8 2A1 (a) 4.489 2/25/2036 1,155,239 1,155,436 Honda Auto Receivables Owner Trust 2004-1 A3 (f) 2.400 2/21/2008 1,318,199 1,303,134 Honda Auto Receivables Owner Trust 2005-5 A1 (f) 4.221 11/15/2006 2,739,284 2,736,878 JP Morgan Mortgage Acquisition Corp. 2005-FRE1 A2F1 5.375 10/25/2035 2,375,182 2,373,037 MBNA Credit Card Master Note Trust 2001-C3 C3 6.550 12/15/2008 3,000,000 3,027,369 Merrill Lynch Mortgage Investors, Inc. 2005-NC1 A2A (a) 4.489 10/25/2035 98,582 98,591 Merrill Lynch Mortgage Investors, Inc. 2005-WMC1 A2A (a) 4.479 9/25/2035 237,925 237,960 MMCA Automobile Trust 2002-1 Cl B (f) 5.370 1/15/2010 315,866 315,026 Morgan Stanley ABS Capital I 2005-WMC2 A2A (a) 4.459 2/25/2035 418,854 418,912 Morgan Stanley ABS Capital I 2005-WMC6 A2A (a) 4.489 7/25/2035 920,093 920,168 Morgan Stanley Home Equity Loans 2005-2 A2A (a) 4.469 5/25/2035 523,627 523,367 Nomura Asset Acceptance Corp. 2005-WF1 2A5 5.159 3/25/2035 880,000 858,714 Opteum Mortgage Acceptance Corp. 2005-1 A2 (a) 4.519 2/25/2035 335,955 335,951
The accompanying notes are an integral part of the financial statements. 14 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Asset Backed (continued) Origen Manufactured Housing 5.140% 2/15/2014 $ 2,012,000 $ 2,012,056 Origen Manufactured Housing 2005-A A1 4.060 7/15/2013 1,556,098 1,547,561 Park Place Securities,Inc. 2005-WHQ1 A3A (a) 4.489 3/25/2035 587,489 587,581 Popular ABS Mortgage Pass--Through Trust 2005-D AF1 5.361 1/25/2036 2,165,521 2,164,138 Residential Asset Mortgage Products, Inc. 4.294 10/25/2035 1,907,162 1,907,231 Residential Asset Mortgage Products, Inc. 2004-RS12 AII1 (a) 4.509 6/25/2027 1,005,397 1,005,700 Residential Asset Mortgage Products, Inc. 2005-RS2 AII1 (a) 4.489 2/25/2035 523,702 523,883 Residential Asset Mortgage Products, Inc. 2005-RS3 AI1 (a) 4.479 3/25/2035 1,393,535 1,393,747 Residential Asset Securities Corp. 2004-KS10 AI1 (a) (f) 4.549 10/25/2013 310,678 310,717 Residential Asset Securities Corp. 2005-AHL2 A1 (a) 4.479 10/25/2035 1,722,192 1,722,255 Residential Asset Securities Corp. 2005-EMX1 AI1 (a) 4.479 3/25/2035 665,772 665,902 Residential Asset Securities Corp. 2005-EMX3 AI1 (a) 4.489 9/25/2035 1,391,112 1,391,320 Saxon Asset Securities Trust 2005-3 A2A (a) (f) 4.499 11/25/2035 1,264,646 1,264,737 Soundview Home Equity Loan Trust 2005-M M3 5.825 5/25/2035 500,000 498,030 Specialty Underwriting & Residential Finance 2004-BC4 A2A (a) (f) 4.529 10/25/2035 642,351 642,463 Specialty Underwriting & Residential Finance 2005-BC1 A1A (a) (f) 4.489 12/25/2035 512,063 512,132 Structured Adjustable Rate Mortgage Loan 2005-8XS A1 (a) 4.479 4/25/2035 1,033,308 1,033,308 Vanderbilt Mortgage Finance 1999-A 1A6 6.750 3/7/2029 1,110,000 1,154,719 WFS Financial Owner Trust 2003-3 A4 3.250 5/20/2011 2,425,000 2,386,818 WFS Financial Owner Trust 2004-1 D (f) 3.170 8/22/2011 987,859 972,261 WFS Financial Owner Trust 2004-4 C 3.210 5/17/2012 1,392,752 1,364,666 WFS Financial Owner Trust 2004-4 Cl A2 2.500 12/17/2007 383,805 382,428 WFS Financial Owner Trust 2005-2 B 4.570 11/19/2012 675,000 670,062 ------------ Total Asset Backed (Cost $84,918,932) 84,461,987 ------------ Collateralized Mortgage Obligations--5.8% GNMA 2003-48 AC (f) 2.712 2/16/2020 2,103,076 2,018,709 GNMA 2003-72 A (f) 3.206 4/16/2018 2,046,098 1,983,506 GNMA 2003-88 AC 2.914 6/16/2018 1,443,957 1,386,745 GNMA 2003-96 B (f) 3.607 8/16/2018 615,000 597,482 GNMA 2004-12A 3.110 1/16/2019 1,112,434 1,065,251 GNMA 2004-25 AC 3.377 1/16/2023 839,644 808,174 GNMA 2004-43 A 2.822 12/16/2019 1,284,829 1,227,687 GNMA 2004-51 A (f) 4.145 2/16/2018 1,934,517 1,896,291 GNMA 2004-57 A 3.022 1/16/2019 940,894 903,022 GNMA 2004-67 A (f) 3.648 9/16/2017 678,834 663,013 GNMA 2004-77 A 3.402 3/16/2020 791,763 764,265 GNMA 2004-97 AB (f) 3.084 4/16/2022 1,921,897 1,840,347 GNMA 2005-32 B 4.385 8/16/2030 1,365,000 1,339,416 GNMA 2005-87 A 4.449 3/16/2025 1,321,853 1,299,617 GNMA 2005-9 A 4.026 5/16/2022 1,720,908 1,680,138 GNMA 2005-90 A 3.760 9/16/2028 1,850,000 1,787,563 GNMA 2005-29 A 4.016 7/16/2027 1,105,668 1,076,396 Nomura Asset Acceptance Corp. 2005-AP2 A5 4.976 5/25/2035 950,000 919,446 Structured Asset Mortgage Investments, Inc. 1998-2 B 6.005 4/30/2030 47,421 47,146 Washington Mutual 2003-AR10 A6 (a) 4.067 10/25/2033 1,800,000 1,759,089 Washington Mutual 2004-AR9 A7 4.181 8/25/2034 1,250,000 1,224,312 Washington Mutual 2005-AR4 A4B 4.679 4/25/2035 450,000 440,719 ------------ Total Collateralized Mortgage Obligations (Cost $27,358,448) 26,728,334 ------------
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Corporate--27.8% Banking--3.5% Chevy Chase Bank FSB 6.875% 12/1/2013 $ 1,370,000 $ 1,411,100 City National Corp. 5.125 2/15/2013 940,000 934,503 Colonial Bank NA 6.375 12/1/2015 800,000 822,610 JPMorgan Chase & Co 5.125 9/15/2014 1,600,000 1,583,858 MBNA Corp. 6.125 3/1/2013 1,575,000 1,670,160 Provident Capital Trust I 8.600 12/1/2026 590,000 627,486 Rabobank Capital Funding Trust III 144A 5.254 10/15/2049 1,450,000 1,421,764 Regions Financial Corp. (a) 4.380 8/8/2008 1,675,000 1,674,682 Sovereign Bancorp. 144A 4.800 9/1/2010 1,150,000 1,127,076 US Bank NA (a) 4.313 9/29/2006 2,625,000 2,625,423 Wells Fargo & Co. (b) 6.375 8/1/2011 850,000 911,071 Zions Bancorporation 6.000 9/15/2015 1,145,000 1,196,569 ------------ 16,006,302 ------------ Basic Materials--2.6% Cabot Corp. 144A 5.250 9/1/2013 900,000 875,434 Celulosa Arauco Constitu 5.625 4/20/2015 215,000 213,431 Georgia-Pacific Corp. 8.000 1/15/2024 980,000 935,900 ICI Wilmington, Inc. 4.375 12/1/2008 335,000 326,441 ICI Wilmington, Inc. 5.625 12/1/2013 1,365,000 1,358,679 International Flavors & Fragrances, Inc. (f) 6.450 5/15/2006 950,000 954,536 International Steel Group, Inc. 6.500 4/15/2014 940,000 940,000 Lubrizol Corp. 6.500 10/1/2034 1,400,000 1,461,648 Lubrizol Corp. (b) 4.625 10/1/2009 930,000 911,515 RPM International, Inc. 4.450 10/15/2009 645,000 618,473 RPM International, Inc. 6.250 12/15/2013 1,145,000 1,154,291 Temple-Inland (b) 6.625 1/15/2018 875,000 901,476 Westvaco Corp. 7.950 2/15/2031 525,000 604,169 Weyerhaeuser Co. 7.375 3/15/2032 530,000 589,206 ------------ 11,845,199 ------------ Communications--1.9% Comcast Corp. (b) 5.500 3/15/2011 325,000 326,763 New Cingular Wireless Services, Inc. 8.750 3/1/2031 430,000 569,672 News America Holdings Inc. 7.700 10/30/2025 1,000,000 1,147,371 SBC Communications, Inc. 5.625 6/15/2016 710,000 714,375 Sprint Capital Corp. (f) 8.750 3/15/2032 1,720,000 2,282,578 TCI Communications, Inc. 7.875 2/15/2026 825,000 952,237 Time Warner, Inc. 6.750 4/15/2011 1,100,000 1,155,098 Univision Communications, Inc. 7.850 7/15/2011 917,000 1,009,132 Verizon Global Funding Corp. 5.850 9/15/2035 735,000 708,299 ------------ 8,865,525 ------------ Consumer Cyclical--1.4% Caesars Entertainment, Inc. 8.500 11/15/2006 520,000 533,614 Caesars Entertainment, Inc. 8.875 9/15/2008 900,000 973,125 Crown Americas Inc. 144A 7.625 11/15/2013 720,000 747,000 Crown Americas Inc. 144A 7.750 11/15/2015 410,000 424,350 DaimlerChrysler NA Holding Corp. 4.875 6/15/2010 380,000 371,027 DaimlerChrysler NA Holding Corp. (b) 8.500 1/18/2031 325,000 393,256 Darden Restaurants 6.000 8/15/2035 650,000 615,610
The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Consumer Cyclical (continued) Heinz (H.J.) Co. 144A 6.428% 12/1/2008 $ 525,000 $ 539,317 Mohegan Tribal Gaming Authority 8.000 4/1/2012 840,000 884,100 Station Casinos, Inc. 6.000 4/1/2012 850,000 847,875 ------------ 6,329,274 ------------ Consumer Noncyclical--1.8% Altria Group, Inc. 7.000 11/4/2013 900,000 984,819 Aramark Services, Inc. (f) 7.000 7/15/2006 2,290,000 2,311,022 Aramark Services, Inc. 7.000 5/1/2007 1,225,000 1,252,387 RR Donnelley & Sons Co. 4.950 4/1/2014 1,710,000 1,596,571 Safeway, Inc. 7.250 2/1/2031 830,000 895,635 Stater Brothers Holdings 8.125 6/15/2012 865,000 856,350 Wyeth 5.500 2/1/2014 555,000 562,189 ------------ 8,458,973 ------------ Energy--1.1% Amerada Hess Corp. 6.650 8/15/2011 500,000 537,276 Amerada Hess Corp. 7.300 8/15/2031 865,000 1,001,051 Southern Natural Gas Co. 6.700 10/1/2007 1,910,000 1,929,652 XTO Energy, Inc. 7.500 4/15/2012 1,220,000 1,364,654 ------------ 4,832,633 ------------ Financial--7.0% Aegon NV 5.750 12/15/2020 1,205,000 1,223,224 American International Group, Inc. 144A 5.050 10/1/2015 595,000 583,951 Archstone-Smith Operating Trust REIT 5.000 8/15/2007 850,000 849,533 Archstone-Smith Operating Trust REIT 5.250 5/1/2015 200,000 197,234 Arden Realty LP REIT 5.200 9/1/2011 780,000 790,105 Bear Stearns Cos., Inc. 4.500 10/28/2010 905,000 883,490 Boeing Capital Corp. 7.375 9/27/2010 1,055,000 1,160,882 Boston Properties LP 5.625 4/15/2015 675,000 682,174 CIT Group, Inc. 4.750 8/15/2008 985,000 981,250 Commercial Net Lease Realtor REIT 6.150 12/15/2015 475,000 482,080 Countrywide Home Loans, Inc. 4.000 3/22/2011 604,000 568,327 Credit Suisse FB USA, Inc. 5.125 8/15/2015 1,000,000 990,333 Duke Realty LP 5.875 8/15/2012 1,150,000 1,189,629 Duke Realty LP 7.750 11/15/2009 915,000 993,022 Duke Realty LP 6.950 3/15/2011 25,000 26,802 EOP Operating LP 7.000 7/15/2011 1,100,000 1,177,377 Erac USA Finance Co. 144A 7.950 12/15/2009 1,000,000 1,098,983 ERP Operating LP 6.625 3/15/2012 200,000 214,785 ERP Operating LP 5.125 3/15/2016 735,000 707,926 Federal Realty Investment Trust REIT 5.650 6/1/2016 750,000 754,248 Glencore Funding LLC 144A 6.000 4/15/2014 1,320,000 1,241,515 Goldman Sachs Group, Inc. 4.500 6/15/2010 1,145,000 1,118,956 Healthcare Realty Trust, Inc. 8.125 5/1/2011 540,000 598,107 HSBC Financial Capital Trust IX (a) 5.911 11/30/2035 600,000 605,104 International Lease Finance Corp. 4.750 1/13/2012 650,000 633,747 Jefferies Group, Inc. 7.750 3/15/2012 1,920,000 2,135,015 John Deere Capital Corp. 4.400 7/15/2009 665,000 653,646 Lehman Brothers E-Capital Trust I 144A (a) 5.150 8/19/2065 250,000 250,625 Leucadia National Corp. 7.000 8/15/2013 1,160,000 1,154,200
The accompanying notes are an integral part of the financial statements. 17 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Financial (continued) Mack-Cali Realty LP REIT 5.050% 4/15/2010 $ 350,000 $ 346,021 Mack-Cali Realty LP REIT 5.125 1/15/2015 550,000 535,717 MassMutual Global Funding II 144A 3.800 4/15/2009 650,000 630,033 Mizuho JGB Investment 144A (a) 9.870 8/30/2049 975,000 1,078,293 Morgan Stanley 4.750 4/1/2014 1,350,000 1,294,740 Phoenix Cos., Inc. 6.675 2/16/2008 445,000 449,167 Regency Centers LP 5.250 8/1/2015 300,000 294,514 Residential Capital Corp. 6.125 11/21/2008 850,000 852,067 Residential Capital Corp. 6.375 6/30/2010 1,990,000 2,022,069 Simon Property Group LP 4.875 8/15/2010 795,000 783,973 ------------ 32,232,864 ------------ Industrial--2.3% American Standard, Inc. 7.375 2/1/2008 500,000 520,894 American Standard, Inc. 7.625 2/15/2010 1,000,000 1,074,877 Enterprise Products Operations 6.650 10/15/2034 1,750,000 1,806,978 ILFC E-Capital Trust I 144A (a) 5.900 12/21/2065 360,000 361,414 L-3 Communications Corp. 144A (f) 6.375 10/15/2015 240,000 239,400 L-3 Communications Corp. 7.625 6/15/2012 1,450,000 1,526,125 Northrop Grumman Corp. 7.125 2/15/2011 545,000 593,883 Raytheon Co. 5.500 11/15/2012 380,000 388,645 Raytheon Co. 6.750 8/15/2007 248,000 254,069 Sealed Air Corp. 144A 5.625 7/15/2013 570,000 565,814 Southern Peru Copper Corp. 144A (f) 7.500 7/27/2035 590,000 587,870 Waste Management, Inc. 6.875 5/15/2009 1,220,000 1,286,312 Waste Management, Inc. 7.375 8/1/2010 275,000 299,281 Waste Management, Inc. 7.000 7/15/2028 900,000 1,013,989 Waste Management, Inc. 7.375 5/15/2029 35,000 40,903 ------------ 10,560,454 ------------ Services--2.0% ACE Capital Trust II 9.700 4/1/2030 405,000 563,530 AON Corp. 8.205 1/1/2027 650,000 772,101 Coventry Health Care, Inc 5.875 1/15/2012 1,145,000 1,156,450 CVS Corp. 4.000 9/15/2009 360,000 346,241 Harrahs Operating Co., Inc. 8.000 2/1/2011 825,000 911,745 May Dept Stores 6.650 7/15/2024 1,145,000 1,203,854 Medco Health Solutions Inc. 7.250 8/15/2013 310,000 340,540 Metlife, Inc. 5.000 6/15/2015 2,150,000 2,108,739 MGM Mirage, Inc. 6.000 10/1/2009 410,000 407,438 Nextel Communications, Inc. 5.950 3/15/2014 565,000 567,959 Nuveen Investments, Inc. 5.000 9/15/2010 600,000 590,357 ------------ 8,968,954 ------------ Transportation--0.9% CSX Corp. 6.250 10/15/2008 865,000 892,246 FedEx Corp. 2.650 4/1/2007 1,090,000 1,060,262 Norfolk Southern Corp. 6.750 2/15/2011 325,000 350,601 Ryder System, Inc. 5.000 6/15/2012 720,000 685,403 Union Pacific Corp. 3.875 2/15/2009 1,400,000 1,352,628 ------------ 4,341,140 ------------
The accompanying notes are an integral part of the financial statements. 18 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Technology & Electronics--0.2% Freescale Semiconductor Inc. (b) 6.875% 7/15/2011 $ 335,000 $ 351,750 Quest Diagnostics, Inc. 144A 5.125 11/1/2010 450,000 449,872 ------------ 801,622 ------------ Utilities--3.1% Appalachian Power Co. 5.950 5/15/2033 450,000 452,022 Assurant, Inc. 6.750 2/15/2034 600,000 652,075 Consumers Energy Co. 5.375 4/15/2013 995,000 987,768 Dominion Resources, Inc. 7.195 9/15/2014 1,380,000 1,533,134 Dominion Resources, Inc. (a) 4.819 9/28/2007 1,140,000 1,140,504 FirstEnergy Corp. 6.450 11/15/2011 650,000 688,998 FPL Energy National Wind 144A 5.608 3/10/2024 224,809 223,975 Mirant North America LLC 144A 7.375 12/31/2013 510,000 515,738 Nevada Power Co. 5.875 1/15/2015 275,000 272,889 Niagara Mohawk Power Corp. 7.750 10/1/2008 1,000,000 1,067,695 Nisource Finance Corp. 5.250 9/15/2017 800,000 778,147 Oneok, Inc. 5.200 6/15/2015 475,000 466,445 Pacific Gas & Electric Co. 3.600 3/1/2009 550,000 527,798 Pepco Holdings, Inc. 5.500 8/15/2007 850,000 855,144 Public Service Co. of Colorado 4.375 10/1/2008 930,000 918,338 Republic Services, Inc. 6.086 3/15/2035 1,450,000 1,479,033 Southern California Edison Co. (a) (f) 4.430 1/13/2006 1,550,000 1,549,946 ------------ 14,109,649 ------------ Total Corporate (Cost $127,473,339) 127,352,589 ------------ Municipal Bonds--0.9% Badger Tobacco Asset Securitization Corp. Wis 6.125 6/1/2027 910,000 958,221 Erie County NY Tob Asset Securitization Corp. 6.000 6/1/2028 980,000 959,792 Sacramento County California Pension Funding (c) (f) 0.000 7/10/2030 1,675,000 1,634,331 Tobacco Settlement Authority Iowa 6.500 6/1/2023 475,000 477,066 ------------ Total Municipal Bonds (Cost $3,840,885) 4,029,410 ------------ Sovereign Bonds--1.5% Argentina Bonos (a) 4.005 8/3/2012 1,485,000 1,162,755 Banco Nacional de Desenvolvimento Economico e Social (a) 5.727 6/16/2008 1,325,000 1,321,688 Republic of El Salvador 144A 8.500 7/25/2011 870,000 974,400 Republic of South Africa 9.125 5/19/2009 1,485,000 1,665,056 Ukraine Government 144A (a) 7.343 8/5/2009 545,000 588,600 United Mexican States 6.625 3/3/2015 1,055,000 1,155,225 ------------ Total Sovereign Bonds (Cost $6,777,150) 6,867,724 ------------ Yankee Bonds--4.7% Amvescap PLC 5.375 2/27/2013 1,090,000 1,074,175 Bombardier, Inc. 144A (b) 6.300 5/1/2014 2,090,000 1,828,750 British Sky Broadcasting PLC 6.875 2/23/2009 115,000 120,470 British Sky Broadcasting PLC (f) 8.200 7/15/2009 1,055,000 1,153,060 Celulosa Arauco y Constitucion SA 5.125 7/9/2013 935,000 903,841 Chuo Mitsui Trust & Banking Co. Ltd. 144A (a) 5.506 2/15/2049 1,235,000 1,196,730 Deutsche Telekom International Finance BV 8.250 6/15/2030 1,320,000 1,678,867
The accompanying notes are an integral part of the financial statements. 19 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ Yankee Bonds (continued) Export-Import Bank of Korea 4.500% 8/12/2009 $ 895,000 $ 879,014 Falconbridge Ltd. 5.375 6/1/2015 100,000 96,413 Falconbridge Ltd. 6.000 10/15/2015 480,000 484,683 ING Groep NV (a) 5.775 11/30/2049 860,000 871,612 Ispat Inland Ulc 9.750 4/1/2014 330,000 373,725 Nippon Life Insurance 144A 4.875 8/9/2010 1,000,000 984,538 Northern Rock PLC 144A 5.600 4/30/2014 640,000 643,575 Pearson Dollar Finance PLC 144A 4.700 6/1/2009 875,000 860,743 Resona Bank Ltd. 144A 5.850 1/10/2049 1,015,000 1,010,711 Royal KPN NV 8.375 10/1/2030 1,815,000 2,150,737 Sappi Papier Holding AG 144A 6.750 6/15/2012 1,076,000 1,027,588 St. George Bank Ltd. 144A 5.300 10/15/2015 890,000 893,970 Sumitomo Mitsui Banking 144A (a) 5.625 7/15/2049 675,000 672,473 Teck Cominco Ltd. 7.000 9/15/2012 1,465,000 1,586,865 Telecom Italia Capital SA 4.875 10/1/2010 1,000,000 980,389 ------------ Total Yankee Bonds (Cost $21,619,307) 21,472,929 ------------ Pass Thru Securities--34.5% Non-Agency Pass Thru Securities--4.1% Banc of America Commercial Mortgage, Inc. 2005-2 A2 4.247 7/10/2043 1,900,000 1,873,292 Bayview Commercial Asset Trust 2005-3A B3 144A (a) 7.379 11/25/2035 296,745 296,745 Bayview Commercial Asset Trust 2005-4A B3 144A (a) 7.870 1/25/2036 250,000 250,000 Bear Stearns Commercial Mortgage Securities 2003-T12 A3 4.240 8/13/2039 1,890,000 1,823,055 Calwest Industrial Trust 2002-CALW A 144A 6.127 2/15/2017 2,120,000 2,231,250 Capco America Securitization Corp. 1998-D7 A1B 6.260 10/15/2030 1,155,000 1,189,764 Crown Castle Towers LLC, 2005-1A D 144A 5.612 6/15/2035 540,000 525,961 DLJ Commercial Mortgage Corp. 1998-CF2 B1 7.042 11/12/2031 2,350,000 2,469,079 First Chicago/Lennar Trust 1997-CHL1 D 144A (a) (f) 7.674 4/29/2039 3,995,001 4,017,473 JP Morgan Chase Commercial Mortgage Security Co. 2005-LDP5 A2 5.198 12/15/2044 1,585,000 1,591,514 Mach One Trust 2004-1A A1 144A 3.890 5/28/2040 1,081,851 1,057,042 Merrill Lynch Mortgage Trust, Inc. 2005-CIP1 A2 4.960 7/12/2038 1,065,000 1,058,918 Merrill Lynch Mortgage Trust, Inc. 2005-CKI1 A2 5.224 11/12/2037 375,000 378,107 ------------ 18,762,200 ------------ Agency Pass Thru Securities--30.4% FHLMC Gold 4.000 10/1/2009 564,495 550,344 FHLMC Gold 3.500 9/1/2010 449,447 427,767 FHLMC Gold 7.000 11/1/2031 176,299 183,675 FHLMC Gold 7.000 11/1/2031 161,676 168,440 FHLMC Gold 5.500 1/1/2034 911,884 904,407 FHLMC Gold 5.500 3/1/2034 327,592 324,905 FNMA 4.000 5/1/2010 2,081,431 2,012,946 FNMA 3.640 6/1/2010 2,665,000 2,506,709 FNMA 3.530 7/1/2010 1,177,634 1,109,872 FNMA 5.139 12/25/2011 928,575 937,075 FNMA 8.500 6/1/2012 27,999 29,011 FNMA 5.000 1/1/2019 434,835 430,411 FNMA 5.500 11/1/2024 1,692,062 1,689,816 FNMA (f) 5.500 1/1/2025 4,477,959 4,472,015 FNMA 7.500 11/1/2029 867 909
The accompanying notes are an integral part of the financial statements. 20 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - ----------------------------------------------------------------------------------------------------------------------------------- Agency Pass Thru Securities (continued) FNMA 5.500% 1/1/2034 $ 834,456 $ 828,337 FNMA 5.500 1/1/2034 2,047,628 2,032,612 FNMA (TBA) (d) 4.500 1/1/2021 33,850,000 32,929,686 FNMA (TBA) (d) 5.000 1/1/2021 17,800,000 17,605,304 FNMA (TBA) (d) 5.500 1/1/2021 3,725,000 3,747,119 FNMA (TBA) (d) 6.000 1/1/2021 6,785,000 6,929,181 FNMA (TBA) (d) 5.500 1/1/2036 15,730,000 15,572,700 FNMA (TBA) (d) 6.000 1/1/2036 2,250,000 2,270,390 FNMA (TBA) (d) 6.000 1/1/2036 42,625,000 41,292,969 GNMA 5.000 2/15/2021 19,538 21,339 ------------ 138,977,939 ------------ Total Pass Thru Securities (Cost $157,412,653) 157,740,139 ------------ U.S. Treasury Obligations--18.7% U.S. Treasury Bond (b) 5.250 11/15/2028 12,875,000 14,042,801 U.S. Treasury Bond (b) (f) 6.250 5/15/2030 1,840,000 2,285,194 U.S. Treasury Note (b) (f) 3.625 4/30/2007 36,190,000 35,811,127 U.S. Treasury Note (b) 4.750 5/15/2014 6,864,000 7,031,042 U.S. Treasury Note (b) 3.500 2/15/2010 27,245,000 26,353,151 ------------ Total U.S. Treasury Obligations (Cost $85,367,213) 85,523,315 ------------ Foreign Denominated--0.3% Mexico--0.3% Mexican Fixed Rate Bonds (Cost$ 1,123,529) 9.000 12/22/2011 MXN 12,200,000 1,197,315 ------------ TOTAL BONDS AND NOTES (COST $515,891,456) 515,373,742 ------------ CONVERTIBLE PREFERRED STOCKS--0.6% Shares ---------- Equity Office Properties Trust CVT Pfd REIT (Cost $2,513,200) USD 50,600 2,530,000 ------------ Contract PURCHASED OPTIONS--0.0% Size ---------- Dow Jones CDX.EM. Series 4, Exercise Rate 101.60%, 2/21/2006 8,710,000 41,337 U.S. Treasury Note 4.25% Put, Strike Price 97.171, 2/6/06 4,470,000 10,058 ------------ TOTAL PURCHASED OPTIONS (Cost $108,135) 51,395 ------------ SHORT TERM INVESTMENTS--8.9% Par Value ---------- U.S. Government Agency--7.9% FHLMC Discount Note (e) 3.980 1/13/2006 $ 3,300,000 3,295,251 FNMA Discount Note (e) 4.150 1/18/2006 24,345,000 24,294,481 FNMA Discount Note (b) (e) 4.150 1/12/2006 8,365,000 8,353,425 ------------ 35,943,157 ------------ U.S. Treasury Bill--1.0% U.S. Treasury Bill (b) (e) 3.800 3/9/2006 100,000 99,297 U.S. Treasury Bill (b) (e) 3.830 2/2/2006 4,800,000 4,784,582 U.S. Treasury Bill (e) (f) 3.730 1/26/2006 50,000 49,865 ------------ 4,933,744 ------------ TOTAL SHORT TERM INVESTMENTS (COST $40,875,430) 40,876,901 ------------
The accompanying notes are an integral part of the financial statements. 21 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - --------------------------------------------------------------------------------
Value Security Description Rate Shares (Note 1A) - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OF CASH COLLATERAL--16.5% BlackRock Cash Strategies L.L.C (g) (Cost $75,788,306) 4.130 75,788,306 75,788,306 ------------- TOTAL UNAFFILIATED INVESTMENTS (Cost $635,176,527) 634,620,344 ------------- AFFILIATED INVESTMENTS--3.1% Dreyfus Institutional Preferred Plus Money Market Fund (g)(h) (Cost $14,057,690) 4.030 14,057,690 14,057,690 ------------- TOTAL INVESTMENTS--141.7% (Cost $649,234,217) 648,678,034 ------------- LIABILITIES IN EXCESS OF OTHER ASSETS--(41.7%) (190,878,177) ------------- NET ASSETS--100% $ 457,799,857 =============
Notes to Schedule of Investments 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the year end, the value of these securities amounted to $39,262,018 or 8.6% of net assets. FHLMC--Federal Home Loan Mortgage Company FNMA--Federal National Mortgage Association GNMA--Government National Mortgage Association REIT--Real Estate Investment Trust TBA--To Be Announced MXN--Mexican Peso (a) Variable Rate Security; rate indicated as of 12/31/2005. (b) Security, or a portion of thereof, is on loan at December 31, 2005. (c) Zero coupon security. (d) Delayed delivery security. (e) Rate noted is yield to maturity (f) Denotes all or part of security pledged as collateral. (g) Stated rate is the seven-day yield for the fund at year end. (h) Affiliated institutional money market fund. At December 31, 2005 the Portfolio held the following futures contracts:
Underlying Face Unrealized Contract Position Expiration Date Amount at Value Gain/(Loss) - ------------------------------------------------------------------------------------------------------------------------------ U.S. 10 Year Treasury Note (80 Contracts) Short 3/18/2006 $ 8,693,750 $ (58,598) U.S. 2 Year Treasury Note (75 Contracts) Long 3/20/2006 15,377,344 11,576 U.S. 5 Year Treasury Note (287 Contracts) Long 3/31/2006 30,411,719 107,678 U.S. Long Bond CBT (45 Contracts) Short 3/31/2006 5,044,456 (93,885) ----------- $ (33,229) ===========
The accompanying notes are an integral part of the financial statements. 22 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Schedule of Investments--December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005, the Fund held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - ------------------------------------------------------------------------------------------------------------------------------------ Citigroup CenturyTel, Inc. 7.875% due 8/15/2012 Buy (1.160%) 9/20/2015 853,000 USD $ (2,234) Citigroup CenturyTel, Inc. 7.875% due 8/15/2012 Buy (1.190%) 9/20/2015 1,920,000 USD (9,258) Citigroup Dow Jones CDX.NA.IG.4 7% to 10% tranche Buy (0.705%) 6/20/2010 3,277,000 USD (57,351) Citigroup Dow Jones CDX.NA.IG.4 7% to 10% tranche Buy (0.685%) 6/20/2010 470,000 USD (7,848) Washington Mutual, Inc., 4.000% due Citigroup 1/15/2009 Sell 0.530% 3/20/2015 2,305,000 USD 11,850 Deutsche Bank Koninkijke KPN N.V., 8.00% due 10/01/2010 Buy (0.850%) 12/20/2010 2,310,000 USD 2,406 Goldman Sachs Consolidated Natural Gas Co., 6.000% due 10/15/2010 Sell 0.200% 3/20/2006 13,670,000 USD 4,579 Cooper Tire & Rubber Co., 7.750% due JPMorgan 12/15/2009 Buy (1.070%) 9/20/2010 1,120,000 USD 79,624 JPMorgan Koninklijke KPN N.V., 8.00% due 10/01/2010 Buy (0.86%) 12/20/2010 3,460,000 USD 2,105 JPMorgan Republic of Panama, 8.875% due 9/30/2027 Sell 1.500% 12/20/2010 1,413,000 USD 2,861 JPMorgan Republic of Peru, 8.75% due 11/21/2033 Buy (1.70%) 12/20/2010 1,413,000 USD 28,553 Morgan Stanley CenturyTel, Inc. 7.875% due 8/15/2012 Buy (1.150%) 9/20/2015 247,000 USD (466) Morgan Stanley Dow Jones CDX.NA.IG.4 7% to 10% tranche Buy (0.685%) 6/20/2010 470,000 USD (7,755) Morgan Stanley Wendy's International, Inc., 6.250% due 11/15/2011 Buy (0.97%) 12/20/2015 1,860,000 USD 24,918 -------- $ 71,984 ========
Unrealized Interest Rate Swaps Floating Rate Pay/Receive Expiration Notional Appreciation/ Counterparty Index Floating Rate Fixed Rate Date Amount (Depreciation) - ------------------------------------------------------------------------------------------------------------------------------------ Merrill Lynch USD--LIBOR--BBA Pay 4.1725% 5/13/2008 $ 9,140,000 $ (129,413) Merrill Lynch USD--LIBOR--BBA Receive 4.6425% 5/13/2015 9,140,000 169,903 ---------- 40,490 ==========
At December 31, 2005, the Fund held the following written options contracts:
Written Put Number of Option Security Strike Price Expiration Date Contracts Premiums Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Note 4.25% Put 95.609 2/6/06 1 $ 55,875 $ 5,364 =======
Written Call Option Security Counter Party Exercise Rate Expiration Date Notional Amount Premium Value - ----------------------------------------------------------------------------------------------------------------------------------- Dow Jones CDX.EM. Series 4 Bear Stearns 102.38% 2/21/06 17,420,000 $ 52,260 $ 34,413 ========
The accompanying notes are an integral part of the financial statements. 23 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities (including securities on loan, valued at $74,402,883) (Note 7) Unaffiliated issuers, at value (Note 1A) (cost $635,176,527) $ 634,620,344 Affiliated issuers, at value (Note 1A) (cost $14,057,690) (Note 1G) 14,057,690 Foreign currency, at value (identified cost, $789,818) 77 Receivable for investments sold 14,232,583 Interest and dividends receivable 3,752,927 Unrealized appreciation on swap contracts (Note 5) 326,799 Receivable for variation margin on open futures contracts (Note 5) 5,687 Prepaid expenses 2,298 ------------- Total assets 666,998,405 Liabilities Payable for investments purchased $ 133,073,758 Collateral for securities on loan (Note 6) 75,788,306 Due to custodian 845 Unrealized depreciation on swap contracts (Note 5) 214,325 Options written, at value (premiums received $108,135) (Note 5) 39,777 Accrued professional fees 24,946 Accrued accounting, administration and custody fees (Note 2) 12,915 Accrued trustees' fees and expenses (Note 2) 15,478 Other accrued expenses and liabilities 28,198 ------------- Total liabilities 209,198,548 ------------- Net Assets (applicable to investors' beneficial interest) $ 457,799,857 =============
The accompanying notes are an integral part of the financial statements. 24 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 20,670,108 Dividend income 132,825 Dividend income from affiliated investments (Note 1H) 224,128 Security lending income (Note 6) 81,973 ------------- Total investment Income 21,109,034 Expenses Investment advisory fee (Note 2) $ 1,741,829 Accounting, administration and custody fees (Note 2) 198,972 Professional fees 60,952 Trustees' fees and expenses (Note 2) 51,490 Insurance expense 16,750 Miscellaneous 6,865 ------------- Total expenses 2,076,858 ------------- Net investment income 19,032,176 ------------- Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 637,983 Financial futures transactions 140,603 Written options transactions 445,713 Foreign currency transactions and forward currency exchange transactions 1,413,087 Swap transactions 440,129 ------------- Net realized gain (loss) 3,077,515 Change in unrealized appreciation (depreciation) on: Investments (8,659,451) Financial futures contracts 346,498 Written options contracts 31,242 Foreign currency translations and forward currency exchange contracts 186,791 Swap contracts 64,410 ------------- Change in net unrealized appreciation (depreciation) (8,030,510) ------------- Net realized and unrealized gain (loss) (4,952,995) ------------- Net Increase in Net Assets from Operations $ 14,079,181 =============
The accompanying notes are an integral part of the financial statements. 25 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Investment Operations Net investment income $ 19,032,176 $ 19,721,641 Net realized gain (loss) 3,077,515 20,499,067 Change in net unrealized appreciation (depreciation) (8,030,510) (13,157,811) ------------- ------------- Net increase (decrease) in net assets from investment operations 14,079,181 27,062,897 ------------- ------------- Capital Transactions Contributions 67,138,420 65,727,299 Withdrawals (88,960,526) (238,255,854) ------------- ------------- Net increase (decrease) in net assets from capital transactions (21,822,106) (172,528,555) ------------- ------------- Total Increase (Decrease) in Net Assets (7,742,925) (145,465,658) Net Assets At beginning of year 465,542,782 611,008,440 ------------- ------------- At end of year $ 457,799,857 $ 465,542,782 ============= =============
The accompanying notes are an integral part of the financial statements. 26 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, ----------------------------------------------------------- 2005 2004 2003 2002 2001 --------- --------- --------- --------- ----------- Total Return (a) 3.00% 5.77% 5.25% 8.89% 7.18% Ratios/Supplemental Data: Expenses (to average daily net assets)* 0.45% 0.45% 0.41% 0.38% 0.36% Net Investment Income (to average daily net assets)* 4.12% 3.80% 3.78% 4.86% 6.37% Portfolio Turnover: (b) Inclusive 380% 301% 398% 384% 329% Exclusive 106% 98% -- -- -- Net Assets, End of Year (000's omitted) $ 457,800 $ 465,543 $ 611,008 $ 944,098 $ 1,495,389
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose all or a portion of its investment advisory fee and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Ratios (to average daily net assets): Expenses N/A N/A 0.42% 0.39% N/A Net investment income N/A N/A 3.77% 4.85% N/A
(a) Total return for the Portfolio has been calculated based on the total return for the invested Fund, assuming all distributions were reinvested, and adjusted for the difference in expenses as set out in the notes to the financial statements. Total return would have been lower in the absence of expense waivers. (b) Beginning in 2004, the portfolio turnover ratio is presented inclusive and exclusive of the effect of rolling forward purchase commitments. The accompanying notes are an integral part of the financial statements. 27 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was organized as a master trust fund under the laws of the State of New York on January 18, 1996 and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Fixed Income Portfolio (the "Portfolio") is a separate diversified investment series of the Portfolio Trust. The objective of the Portfolio is to achieve a high level of current income, consistent with conserving principal and liquidity, and secondarily to seek capital appreciation when changes in interest rates and economic conditions indicate that capital appreciation may be available without significant risk to principal by investing, under normal circumstances, at least 80% of net assets in fixed income securities issued by U.S. and foreign governments and companies. At December 31, 2005 there was one fund, Standish Mellon Fixed Income Fund (the "Fund"), invested in the Portfolio. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio. The Fund's proportionate interest at December 31, 2005 was 100%. The following is a summary of significant accounting policies followed by the Portfolio in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Portfolio acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. C. Income taxes The Portfolio is treated as a disregarded entity for federal tax purposes. No provision is made by the Portfolio for federal or state income taxes on any taxable income of the Portfolio because each investor in the Portfolio is ultimately responsible for the payment of any taxes. Since the Portfolio's investor is a regulated investment company that invests all or substantially all of its assets in the Portfolio, the Portfolio normally must satisfy the source of income and diversification requirements applicable to regulated investment companies (under the Internal Revenue Code) in order for its investors to satisfy them. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. 28 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. F. Commitments and contingencies In the normal course of business, the Portfolio may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Portfolio under these arrangements is unknown, as this would involve future claims that may be made against the Portfolio that have not yet occurred. However, based on experience, the Portfolio expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions with Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory administrative services, and general office facilities is paid monthly at the annual rate of 0.40% of the Portfolio's first $250,000,000 of average daily net assets, 0.35% of the next $250,000,000 of average daily net assets, and 0.30% of the average daily net assets in excess of $500,000,000. The Portfolio has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Portfolio. For these services the Portfolio pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Portfolio was charged $198,972 during the year ended December 31, 2005. The Portfolio entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Portfolio lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. Pursuant to this agreement, Mellon Bank received $35,585 for the year ended December 31, 2005. See Note 6 for further details. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Portfolio for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. 29 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows:
Purchases Sales --------------- -------------- U.S. Government Securities $ 1,781,343,469 $1,764,051,309 =============== ============== Investments (non-U.S. Government Securities) $ 239,934,866 $ 276,956,943 =============== ==============
(4) Federal Taxes: The cost and unrealized appreciation (depreciation) in value of the investment securities owned at December 31, 2005, as computed on a federal income tax basis, were as follows: Aggregate cost $ 649,943,320 =============== Gross unrealized appreciation 3,605,210 Gross unrealized depreciation (4,870,496) --------------- Net unrealized appreciation (depreciation) $ (1,265,286) =============== (5) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Portfolio may trade the following financial instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Portfolio may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Portfolio's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Portfolio's exposure to the underlying instrument, or hedge other Portfolio investments. Options, both held and written by the Portfolio, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Portfolio is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. 30 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- During the year ended December 31, 2005, the Portfolio entered into the following transactions: Number of Written Put Option Transactions Contracts Premiums --------- --------- Outstanding, beginning of year 1 $ (65,051) Options written 7 (81,091) Options expired (5) 275,139 Options closed (2) (73,122) --------- --------- Outstanding, end of year 1 $ 55,875 ========= ========= Number of Written Call Option Transactions Contracts Premiums --------- --------- Outstanding, beginning of year 1 $ (31,109) Options written 7 (61,377) Options expired (5) 209,145 Options closed (2) (64,399) --------- --------- Outstanding, end of year 1 $ 52,260 ========= ========= At December 31, 2005, the Portfolio held options. See the Schedule of Investments for further details. Forward currency exchange contracts The Portfolio may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Portfolio primarily to protect the value of the Portfolio's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts is included in the Statement of Assets and Liabilities. At December 31, 2005, the Portfolio did not hold forward currency exchange contracts. Futures contracts The Portfolio may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Portfolio deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Portfolio each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Portfolio. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Portfolio's exposure to the underlying instrument, while selling futures tends to decrease the Portfolio's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Portfolio may not be able to enter into a closing transaction because of an illiquid 31 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Portfolio enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December, 31, 2005, the Portfolio held open financial futures contracts. See the Schedule of Investments for further details. Swap Agreements The Portfolio may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Portfolio may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Portfolio may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Portfolio owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Portfolio earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Portfolio held open swap contracts. See the Schedule of Investments for further details. (6) Securities Lending: The Portfolio may lend its securities to financial institutions which the Portfolio deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Portfolio on the next business day. For the duration of a loan, the Portfolio receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Portfolio bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Portfolio. In the event of borrower default, the Portfolio generally has the right to use the collateral to offset losses incurred. The Portfolio may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Portfolio also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Portfolio's obligations due on the loans. The Portfolio loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $2,680,748 of which, $2,598,775 was rebated to borrowers or paid in fees. At December 31, 2005, the Portfolio had securities valued at $74,402,883 on loan. See the Schedule of Investments for further detail on the security positions on loan and collateral held. 32 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (7) Delayed Delivery Transactions: The Portfolio may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Portfolio instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Portfolio may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Portfolio holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Portfolio may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. At December 31, 2005, the Porfolio held delayed delivery securities. See the Schedule of Investments for further details. (8) Line of Credit: The Portfolio, and other subtrusts in the Portfolio Trust and funds in the Trust are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.060 of 1% on the committed amount, is allocated ratably among the participating portfolios/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $5,255 for the Portfolio. During the year ended December 31, 2005, the Portfolio had average borrowings of $28,000 for a total of three days and incurred $9 of interest. 33 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Master Portfolio and Investors of Standish Mellon Fixed Income Portfolio: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Fixed Income Portfolio, (the "Portfolio") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York February 24, 2006 34 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. The Fund is not a party to an investment advisory agreement directly with any investment adviser and does not invest directly in portfolio securities. Instead, the Fund invests all of its investable assets in the Standish Mellon Fixed Income Portfolio (the "Portfolio"), which is managed by Standish Mellon Asset Management Company LLC ("Standish Mellon"). The Fund's Board of Trustees determines annually whether the Fund should continue to invest in the Portfolio. The members of the Fund's Board of Trustees also serve as the Board of Trustees of the Portfolio. In that capacity, they consider annually whether to continue the investment advisory agreement between the Portfolio and Standish Mellon. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from Standish Mellon a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance (rather than the Portfolio alone) and any material portfolio manager and strategy changes that may have affected the Fund and Portfolio in the prior year, as well as "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Portfolio and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Portfolio and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Portfolio's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Portfolio by Standish Mellon. In their deliberations as to the continuation of the Portfolio's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Portfolio's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Portfolio effectively. 35 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund (rather than the Portfolio alone) against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund outperformed its peer group average return for the one-year period (6.16% vs. 5.21%) but underperformed its peer group average returns for the three-year period (5.84% vs. 5.93%) and for the five-year period (6.95% vs. 6.98%). Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Portfolio to Standish Mellon. The Lipper data presenting the Portfolio's "net advisory fees" included fees paid by the Portfolio, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Portfolio's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Portfolio's advisory fees to those peers that include administrative fees within a blended advisory fee. The Portfolio's contractual advisory fee was 0.378% (based on the following breakpoints: 0.40% of the first $250 million; 0.35% of the next $250 million; and 0.30% over $500 million), in the 1st quintile (best) of its peer group of funds, the median fee of which was 0.479%. The Portfolio's net advisory fee was 0.376% (which was lower than the Fund's 0.378% contractual advisory fee due to Lipper's rounding methodology), below the peer group median net advisory fee of 0.422%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Portfolio's advisory fee is reasonable. The Board also compared the fees payable by the Portfolio relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Portfolio relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable. The Board also considered the Fund's (rather than solely the Portfolio's) expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.483% was lower than the median net expense ratio of the peer group of 0.581% notwithstanding the fact that most of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Portfolio and Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Portfolio and Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had experienced profits in operating the Portfolio and Fund in both 2003 and 2004 and concluded these were not excessive. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Fund grows. They observed that the Fund, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size and that no different or additional breakpoints were appropriate at this time. 36 Mellon Institutional Funds Master Portfolio Standish Mellon Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 37 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Number of Trustee Principal Portfolios in Other Remuneration Name Term of Office Occupation(s) Fund Complex Directorships (period ended Address, and Position(s) and Length of During Past Overseen by Held by December 31, Date of Birth Held with Trust Time Served 5 Years Trustee Trustee 2005) - ------------------------------------------------------------------------------------------------------------------------------------ Samuel C. Fleming Trustee Trustee since Chairman 32 None Fund: $ 500 c/o Decision Resources, Inc. 11/3/1986 Emeritus, Portfolio: $6,949 260 Charles Street Decision Waltham, MA 02453 Resources, Inc. 9/30/40 ("DRI") (biotechnology research and consulting firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex 32 None Fund: $ 500 c/o Essex Street Associates 11/3/1986 Street Associates Portfolio: $8,062 P.O. Box 5600 (family Beverly, MA 01915 investment trust 11/14/43 office) Benjamin M. Friedman Trustee Trustee since William Joseph 32 None Fund: $ 500 c/o Harvard University 9/13/1989 Maier, Professor Portfolio: $6,949 Littaver Center 127 of Political Cambridge, MA 02138 Economy, 8/5/44 Harvard University John H. Hewitt Trustee Trustee since formerly Trustee, 32 None Fund: $ 500 P.O. Box 2333 11/3/1986 Mertens House, Portfolio: $6,949 New London, NH 03257 Inc. (hospice) 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, President Since 2003 President and 32 None $ 0 The Boston Company and Chief Chief Operating Asset Management, LLC Executive Officer Officer of The One Boston Place Boston Company Boston, MA 02108 Asset Management, 7/24/65 LLC; formerly Senior Vice President and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice Chief President and Financial Officer, MAM
38 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ------------------------------------------------------------------------------------------------------------------------------------ Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Mellon Asset Management and Secretary Asset Management ("MAM"); formerly First Vice One Boston Place President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Mellon Asset Management and Treasurer since 1999; Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Operations, Mellon Asset Management President Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager of One Boston Place Shareholder Services, MAM, Shareholder Boston, MA 02108 Representative, Standish Mellon Asset Management 1/19/71 Company LLC Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management and Mellon Asset Management Compliance Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
39 THIS PAGE INTENTIONALLY LEFT BLANK THIS PAGE INTENTIONALLY LEFT BLANK [LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6923AR1205 [LOGO] Mellon -------------------------- Mellon Institutional Funds Annual Report Standish Mellon Global Fixed Income Fund - -------------------------------------------------------------------------------- Year Ended December 31, 2005 This report and the financial statements contained herein are submitted for the general information of the shareholders of the Fund. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective prospectus. Any information in this shareholder report regarding market or economic trends or the factors influencing the Fund's historical or future performance are statements of the opinion of Fund management as of the date of this report. These statements should not be relied upon for any other purposes. Past performance is no guarantee of future results, and there is no guarantee that market forecasts discussed will be realized. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each fiscal year on Form N-Q. Forms N-Q are available on the SEC's web site at http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the SEC's Public Reference Room in Washington D.C. Information regarding the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330. For a complete list of the Fund's portfolio holdings, view the most recent quarterly holdings report, semi-annual report or annual report on the Fund's web site at http://melloninstitutionalfunds.com. To view the Fund's proxy voting guidelines and proxy voting record for the 12-month period ended June 30 visit http://melloninstitutionalfunds.com or the SEC's web site at http://www.sec.gov. You may also call 1-800-221-4795 to request a free copy of the proxy voting guidelines. [LOGO] Mellon -------------------------- Mellon Institutional Funds February 2006 Dear Mellon Institutional Fund Shareholder: Enclosed you will find your Fund's annual report for the fiscal year ended December 31, 2005. To put the 2005 environment in perspective, the economy showed resiliency, largely shrugging off the effects of Hurricanes Katrina and Rita. Real GDP advanced 4.1% in the third quarter, although some lagging impact of the storms is likely to reduce fourth quarter growth. While the storm damage and related oil shocks did not significantly derail economic growth, these events did help dampen investor enthusiasm, with mixed results for the broad equity markets. The S&P 500 advanced 3%, while the Dow Jones Industrial Average fell by 0.6%. Both developed and emerging foreign markets outperformed the U.S., as foreign companies' profitability continued to exceed expectations. For example, in local currency terms, the MSCI EAFE Index, a broad representation of international stocks, advanced 25.9%, while the MSCI Emerging Markets index advanced 24.5%. In the bond market, the U.S. Federal Reserve continued its course of "measured" tightenings, which steadily pushed up short-term rates. By year-end, however, the Fed started to signal that the cycle of tightenings was approaching conclusion. The yield curve ended the year virtually flat, as the long end changed very little in 2005, reflecting the market's conviction that inflation was relatively contained. This environment proved very good for long-term bond investors. The Lehman U.S. Treasury Long Bond Index, for example, had a total return of 6.5% in 2005. A major focus in 2006 will be on incoming Fed Chairman Ben Bernanke, and how he implements his inflation-targeting philosophy in his new role. Looking ahead, we believe the global expansion should become more balanced in 2006. Internal domestic demand abroad should expand, while the contribution by the U.S. to overseas economic growth - by virtue of its widening balance of trade - should slow. In the U.S., the key questions this year appear to be the extent to which a softening housing market will be a drag on the economy, and whether corporate spending will be enough to pick up the slack. GDP is anticipated by most economists to be above 3%, as the accommodative monetary policy of the past several years continues to support expansion. During the past several years, companies have been hoarding cash, reluctant to boost employment or spend on plant and equipment. That trend is beginning to reverse, and more support for the economy is likely to come from increased corporate spending, and from the rebuilding efforts in New Orleans and other damaged regions. Some of the concerns from last year carry over to 2006. Consumers are weighted with debt and potentially vulnerable in a rising rate environment. Higher energy prices act like a tax on economic growth. Fortunately, recent inflation indicators have been good, which gives consumers higher real income and the Fed some breathing room in its tightening policy. Thank you for your business and confidence in Mellon Institutional Funds. Please feel free to contact us with questions or comments. Sincerely, /s/ Patrick J. Sheppard Patrick J. Sheppard President and CEO Mellon Institutional Funds One Boston Place o Boston, MA 02108-4402 A Mellon Asset Management Company 1 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- Global bond markets hedged to the dollar produced some of the best bond returns of all the fixed income sectors in 2005. The Standish Mellon Global Fixed Income Fund returned 3.64% for 2005, after all expenses, compared to a return of 4.28% for the J.P. Morgan Non-U.S. Government Bond Index. Low single digit returns in most major bond markets represented a decent outcome in 2005 considering that central banks have started a global tightening cycle and headline inflation is up on the back of high oil prices. Not surprisingly, the U.S. bond market produced the lowest returns within the hedged index because the Federal Reserve was hiking interest rates at every meeting in 2005, raising interest rates by a total of 2% during the year. Even though the U.S. Federal Reserve raised interest rates by 2%, the benchmark ten-year Treasury bond yield rose only from 4.22% to 4.39% during the year. The European Central Bank also raised interest rates in the fourth quarter by 0.25% but that did not damage the positive return on bonds. European bonds were among the best performers in the hedged index for 2005 as economic growth disappointed in the first half of the year. European core inflation also dropped to 1.5% during 2005, and that provided a tail wind to bonds. Finally, the long end of European bond markets has performed very well as pension reform in various countries is providing a demand for long duration bonds. European yield curves also flattened considerably during the year, making long duration bonds the best performing bonds in 2005. Japan's economy surprised on the strong side in 2005. The Japanese stock market was one of the best performing global markets, which hurt the performance of Japanese bonds. Nevertheless, returns for Japanese bonds benefited from the carry associated with hedging back to the dollar and managed to outperform U.S. Treasury returns over the year. The star performer within the index was Canada where returns were driven by the fact that the Bank of Canada has lagged Fed rate increases, opening a sizeable gap in short rate spreads of 1% between these two countries. Also, the strong Canadian dollar has eased upward pressure on interest rates. The non-government sectors of the international bond markets were not a major source of positive or negative return in 2005. Security selection in high yield and corporate bonds certainly added value as some sectors, like autos, performed poorly. Emerging markets was the best performing sector once again among the non-government sectors as credit quality continued to improve and capital flowed freely into the sector. The Fund underperformed its benchmark during the year. Our positions in investment grade and high yield corporate bonds and emerging market securities were the largest positive contributor relative to our benchmark. The results of our country weightings were mixed. We were underweight in Japan and the U.S. but lost value by not overweighting the long end of the European yield curve. We had a long duration position in Australia that lagged the benchmark. The Australian housing market deteriorated significantly but this did not lead to the interest rate cuts from the Reserve Bank of Australia that we expected. The Bank of England did cut interest rates to offset weak consumer demand that was partially driven by weak housing, 2 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Management Discussion and Analysis - -------------------------------------------------------------------------------- and that helped U.K. bonds to solid performance in 2005. Duration positioning was another negative factor as long duration bonds outperformed despite strong economic growth and rising short-term yields. Our process emphasizes value in bond markets and, given the low level of real yields, we were surprised at the performance of long-duration bonds in 2005. Our outlook for international bonds in 2006 is favorable. We believe that the performance of global economies will be close to trend, yet the behavior of central banks around the world could be quite different. The Fed will probably pause in raising interest rates while Europe and Canada and perhaps also Japan continue to raise interest rates. We believe opportunities for added value can be found in the higher real yielding markets of Australia, the U.K., Sweden and even the U.S. if the housing market exerts a large drag on economic growth. In a global tightening cycle Japan may end up being a good diversifying position if economic growth peters out. Non-government sectors, such as corporate and emerging market bonds, have increased in value quite a bit over the past two years, and we believe that these sectors will not perform as well as in the past but that the sector still offers opportunities to add value through security selection. During the year we changed portfolio managers on the Global Fixed Income Fund. Charles Dolan and Thomas Fahey have assumed management responsibility of the fund while Chuck Cook pursues new responsibilities within the firm. We appreciate your continued support and look forward to working on your behalf over the next year. /s/ Thomas Fahey /s/ Charles Dolan Thomas Fahey Charles Dolan 3 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Comparison of Change in Value of $100,000 Investment in Standish Mellon Global Fixed Income Fund and the Lehman Brothers Global Aggregate Index - -------------------------------------------------------------------------------- [LINE GRAPH] [PLOT POINTS TO COME] Average Annual Total Returns (for period ended 12/31/2005) - -------------------------------------------------------------------------------- Since Inception 1 Year 3 Years 5 Years 10 Years 1/1/1994 - -------------------------------------------------------------------------------- 3.64% 4.99% 5.28% 6.66% 6.34% Average annual total returns reflect the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains. The $100,000 line graph and the fund's returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. During periods of reimbursement by the fund's investment adviser (if applicable), the fund's total return will be greater than it would be had the reimbursement not occurred. Past performance is not predictive of future performance. * Source: Lehman 4 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Shareholder Expense Example - -------------------------------------------------------------------------------- As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including redemption fees, and (2) ongoing costs, including management fees and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (July 1, 2005 to December 31, 2005). Actual Expenses The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000.00=8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expenses ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. Expenses Paid Beginning Ending During Period+ Account Value Account Value July 1, 2005 to July 1, 2005 December 31, 2005 December 31, 2005 - -------------------------------------------------------------------------------- Actual $1,000.00 $1,009.20 $3.29 Hypothetical (5% return per year before expenses) $1,000.00 $1,021.93 $3.31 - ---------- + Expenses are equal to the Fund's annualized expense ratio of 0.65%, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). 5 Mellon Institutional Funds Investment Portfolio Standish Mellon Global Fixed Income Fund Portfolio Information as of December 31, 2005 (Unaudited) - -------------------------------------------------------------------------------- Percentage of Economic Sector Allocation Investments - ----------------------------------------------------------- Government 53.3% Credit 35.3 Emerging markets 6.1 Mortgage pass thru 1.9 ABS/CMBS/CMO 0.5 Cash & equivalents 2.9 ----- 100.0% Percentage of Top Ten Holdings* Rate Maturity Investments - -------------------------------------------------------------------------------- U.S. Treasury Inflation-Indexed Bond 0.88 4/15/2010 9.8% Queensland Treasury Corp. 6.00 6/14/2011 7.2 Netherlands Government Bond 5.50 7/15/2010 6.6 Swedish Government 5.25 3/15/2011 6.2 U.S. Treasury Inflation-Indexed Bond 3.38 1/15/2007 3.7 Singapore Government Bond 5.63 7/1/2008 3.6 KFW International Finance 1.75 3/23/2010 2.4 United Kingdom Gilt 4.75 6/7/2010 2.1 FCE Bank PLC 2.39 6/28/2006 2.1 Kingdom of Denmark 3.13 10/15/2010 1.9 ---- 45.6% * Excluding short-term investments and investment of cash collateral. Summary of Combined Ratings - ----------------------------------------------------------- Percentage of Quality Breakdown Investments - ----------------------------------------------------------- AAA 60.2% AA 5.5 A 7.9 BBB 13.3 BB 6.7 B 2.9 CCC/NR 3.5 ----- Total 100.0% Based on ratings from Standard & Poor's and/or Moody's Investors Services. If a security receives split (different) ratings from multiple rating organizations, the Fund treats the security as being rated in the higer rating category. The Standish Mellon Global Fixed Income Fund invests all of its investable assets in an interest of the Standish Mellon Global Fixed Income Portfolio (See Note 1 of the Fund's Notes to Financial Statements). The Portfolio is actively managed. Current holdings may be different than those presented above. 6 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investment in Standish Mellon Global Fixed Income Portfolio (Portfolio), at value (Note 1A) $ 71,108,799 Receivable from advisor 66 Prepaid expenses 4,785 ------------ Total assets 71,113,650 Liabilities Distributions payable $ 866,964 Payable for Fund shares redeemed 46,451 Accrued shareholder services fee (Note 2) 307 Accrued chief compliance officer fees (Note 2) 404 Accrued professional fees 23,807 Accrued transfer agent fees (Note 2) 4,034 Accrued trustees' fees (Note 2) 500 Other accrued expenses and liabilities 3,391 ---------- Total liabilities 945,858 ------------ Net Assets $ 70,167,792 ============ Net Assets consist of: Paid-in capital $ 92,332,507 Accumulated net realized loss (21,684,758) Distributions in excess of net investment income (151,654) Net unrealized depreciation (328,303) ------------ Total Net Assets $ 70,167,792 ============ Shares of beneficial interest outstanding 3,839,096 ============ Net Asset Value, offering and redemption price per share (Net Assets/Shares outstanding) $ 18.28 ============
The accompanying notes are an integral part of the financial statements. 7 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income allocated from Portfolio $ 3,183,858 Dividend income allocated from Portfolio (net of foreign witholding taxes of $1,220) 3,169 Expenses allocated from Portfolio (470,999) ----------- Net investment income allocated from Portfolio 2,716,028 Expenses Transfer agent fees (Note 2) $ 8,140 Registration fees 26,149 Professional fees 32,517 Shareholder reports 4,833 Trustees' fees (Note 2) 2,001 Insurance expense 1,100 Miscellaneous 9,844 ----------- Total expenses 84,584 Deduct: Reimbursement of Fund operating expenses (Note 2) (83,984) ----------- Net expenses 600 ----------- Net investment income 2,715,428 Realized and Unrealized Gain (Loss) Net realized gain allocated from Portfolio on: Investments 1,773,781 Financial futures transactions 23,569 Foreign currency transactions and forward currency exchange transactions 4,292,162 Swap transactions 94,335 ----------- 6,183,847 Change in unrealized appreciation (depreciation) allocated from Portfolio on: Investments (7,595,580) Financial futures contracts (29,470) Written options contracts 42,400 Foreign currency translation and forward currency exchange contracts 1,264,204 Swap contracts (8,621) ----------- (6,327,067) ----------- Net realized and unrealized gain (loss) allocated from Portfolio (143,220) ----------- Net Increase in Net Assets from Operations $ 2,572,208 ===========
The accompanying notes are an integral part of the financial statements. 8 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets: From Operations Net investment income $ 2,715,428 $ 3,709,860 Net realized gain (loss) 6,183,847 8,814,993 Change in net unrealized appreciation (depreciation) (6,327,067) (7,922,754) ----------------- ----------------- Net increase (decrease) in net assets from investment operations 2,572,208 4,602,099 ----------------- ----------------- Distributions to Shareholders (Note 1C) From net investment income (7,240,447) (6,932,393) ----------------- ----------------- Total distributions to shareholders (7,240,447) (6,932,393) ----------------- ----------------- Fund Share Transactions (Note 4) Net proceeds from sale of shares 568,992 2,287,428 Value of shares issued to shareholders in reinvestment of distributions 6,373,483 6,021,997 Redemption fees credited to capital 10 - Cost of shares redeemed (4,347,568) (79,923,935) ----------------- ----------------- Net increase (decrease) in net assets from Fund share transactions 2,594,917 (71,614,510) ----------------- ----------------- Total Increase (Decrease) in Net Assets (2,073,322) (73,944,804) Net Assets At beginning of year 72,241,114 146,185,918 ----------------- ----------------- At end of year (including distributions in excess of net investment income of $151,654 and $1,048,644) $ 70,167,792 $ 72,241,114 ================= =================
The accompanying notes are an integral part of the financial statements. 9 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, -------------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- Net Asset Value, Beginning of the year $ 19.64 $ 20.67 $ 19.43 $ 18.45 $ 18.53 ----------- ----------- ----------- ----------- ----------- From Operations: Net investment income* (a) 0.75 0.83 0.75 0.82 0.84 Net realized and unrealized gain (loss) on investments (0.04) 0.20 0.49 0.44 (0.01)(b) ----------- ----------- ----------- ----------- ----------- Total from investment operations 0.71 1.03 1.24 1.26 0.83 ----------- ----------- ----------- ----------- ----------- Less Distributions to Shareholders: From net investment income (2.07) (2.06) -- (0.27) (0.91) From tax return of capital -- -- -- (0.01) -- ----------- ----------- ----------- ----------- ----------- Total distributions to shareholders (2.07) (2.06) -- (0.28) (0.91) ----------- ----------- ----------- ----------- ----------- Net Asset Value, End of Year $ 18.28 $ 19.64 $ 20.67 $ 19.43 $ 18.45 =========== =========== =========== =========== =========== Total Return (c) 3.64% 4.98% 6.38% 6.94% 4.51% Ratios/Supplemental Data: Expenses (to average daily net assets)*(d) 0.65% 0.65% 0.65% 0.60% 0.56% Net Investment Income (to average daily net assets)* 3.75% 3.86% 3.74% 4.43% 4.46% Net Assets, End of Year (000's omitted) $ 70,168 $ 72,241 $ 146,186 $ 164,582 $ 359,358
- ---------- * For the periods indicated, the investment adviser voluntarily agreed not to impose a portion of its investment advisory fee payable to the Portfolio and/ or reimbursed the Fund for a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Net investment income per share (a) $ 0.73 $ 0.83 $ 0.74 N/A N/A Ratios (to average daily net assets): Expenses (d) 0.77% 0.68% 0.70% N/A N/A Net investment income 3.63% 3.83% 3.69% N/A N/A
(a) Calculated based on average shares outstanding, (b) The amount shown for a share outstanding does not correspond with the aggregate net realized and unrealized gain/loss for the period due to the timing of purchases and redemptions of Fund shares in relation to the fluctuating market values for the Fund. (c) Total return would have been lower in the absence of expense waivers. (d) Includes the Fund's share of the Portfolio's allocated expenses. The accompanying notes are an integral part of the financial statements. 10 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Investment Trust (the "Trust") is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Global Fixed Income Fund (the "Fund") is a separate non-diversified investment series of the Trust. The Fund invests all its investable assets in an interest of Standish Mellon Global Fixed Income Portfolio (the "Portfolio"), a subtrust of the Mellon Institutional Funds Master Portfolio (the "Portfolio Trust"), which is organized as a New York trust and has the same investment objective as the Fund. The Portfolio seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets in U.S. and non-U.S. dollar denominated fixed income securities of U.S. and foreign governments and companies located in the U.S. and various countries, including emerging markets. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio (100% at December 31, 2005). The performance of the Fund is directly affected by the performance of the Portfolio. The financial statements of the Portfolio are included elsewhere in this report and should be read in conjunction with the Fund's financial statements. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations The Fund records its investment in the Portfolio at value. The Portfolio values its securities at value as discussed in Note 1A of the Portfolio's Notes to Financial Statements, which are included elsewhere in this report. B. Securities transactions and income Securities transactions in the Portfolio are recorded as of the trade date. Currently, the Fund's net investment income consists of the Fund's pro rata share of the net investment income of the Portfolio, less all expenses of the Fund determined in accordance with accounting principles generally accepted in the United States of America. All realized and unrealized gains and losses of the Fund are from the Portfolio. C. Distributions to shareholders Distributions to shareholders are recorded on the ex-dividend date. The Fund's distributions from capital gains, if any, after reduction of capital losses will be declared and distributed at least annually. In determining the amounts of its dividends, the Fund will take into account its share of the income, gains or losses, expenses, and any other tax items of the Portfolio. Dividends from net investment income and distributions from capital gains, if any, are reinvested in additional shares of the Fund unless the shareholder elects to receive them in cash. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences which may result in reclassifications, are primarily due to differing treatments for losses deferred due to wash sales, foreign currency gains and losses, post-October losses, amortization and/or accretion of premiums and discounts on certain securities and the timing of recognition of gains and losses on futures contracts. Permanent book and tax basis differences will result in reclassifications among accumulated net investment income, accumulated net realized gain (loss) and paid in capital. Undistributed net investment income (loss) and accumulated net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. D. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust and/or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. 11 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- E. Commitments and contingencies In the normal course of business, the Fund may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Fund under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risks of loss to be remote. (2) Investment Advisory Fee and Transactions With Affiliates: The Fund does not directly pay any investment advisory fees, but indirectly bears its pro rata share of the compensation paid by the Portfolio to Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, for such services. See Note 2 of the Portfolio's Notes to Financial Statements which are included elsewhere in this report. Standish Mellon voluntarily agreed to limit the total operating expenses of the Fund and its pro rata share of the Portfolio expenses (excluding brokerage commissions, taxes and extraordinary expenses) to 0.65% of the Fund's average daily net assets. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily reimbursed the Fund for $83,984 of its operating expenses. The Fund entered into an agreement with Dreyfus Transfer, Inc., a wholly owned subsidiary of The Dreyfus Corporation, a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide personnel and facilities to perform transfer agency and certain shareholder services for the Fund. For these services, the Fund pays Dreyfus Transfer, Inc. a fixed fee plus per account and transaction based fees, as well as, out-of-pocket expenses. Pursuant to this agreement the Fund was charged $ 8,140 during the year ended December 31, 2005. Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. For the year ended December 31, 2005, the Fund was charged $2,269. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Fund for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. The Fund pays administrative service fees. These fees are paid to affiliated or unaffiliated retirement plans, omnibus accounts and platform administrators and other entities ("Plan Administrators") that provide record keeping and/or other administrative support services to accounts, retirement plans and their participants. As compensation for such services, the Fund may pay each Plan Administrator an administrative service fee in an amount of up to 0.15% (on an annualized basis) of the Fund's average daily net assets attributable to fund shares that are held in accounts serviced by such Plan Administrator. For the year ended December 31, 2005, the Fund was charged $307 for fees payable to Mellon Private Wealth Management. The Fund's adviser or its affiliates may pay additional compensation from their own resources to Plan Administrators and other entities for administrative services, as well as in consideration of marketing or other distribution-related services. These payments may provide an incentive for these entities to actively promote the Fund or cooperate with the distributor's promotional efforts. (3) Investment Transactions: Increases and decreases in the Fund's investment in the Portfolio for the period ended December 31, 2005, aggregated $7,042,475 and $11,579,112, respectively. The Fund receives a proportionate share of the Portfolio's income, expenses, and realized and unrealized gains and losses based on applicable tax allocation rules. Book/tax differences arise when changes in proportionate interest for funds investing in the Portfolio occur. (4) Shares of Beneficial Interest: The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest having a par value of one cent per share. Transactions in Fund shares were as follows: For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Shares sold 28,662 123,648 Shares issued to shareholders for reinvestment of distributions 348,849 306,932 Shares redeemed (216,159) (3,825,212) -------- ---------- Net increase (decrease) 161,352 (3,394,632) ======== ========== 12 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Notes to Financial Statements - -------------------------------------------------------------------------------- At December 31, 2005, four shareholders of record held approximately 86% of the total outstanding shares of the Fund. Investment activity of these shareholders could have a material impact on the Fund. The Fund imposes a redemption fee of 2% of the net asset value of the shares, with certain exceptions, which are redeemed or exchanged less than 30 days from the day of their purchase. The redemption fee is paid directly to the Fund, and is designed to offset brokerage commissions, market impact, and their costs associated with short-term trading in the Fund. The fee does not apply to shares that were acquired through reinvestment of distributions. For the year ended December 31, 2005, the Fund received $10 in redemption fees. (5) Federal Taxes: As a regulated investment company qualified under Subchapter M of the Internal Revenue Code, the Fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. As of December 31, 2005, the components of distributable earnings on a tax basis were as follows: Amount ----------- Undistributed ordinary income $ 452,639 Accumulated losses $21,628,703 At December 31, 2005, the Fund, for federal income tax purposes, has capital loss carryovers of $21,628,703 which will reduce the Fund's taxable income arising from net realized gain on investment, if any, to the extent permitted by the Internal Revenue Code and thus will reduce the amount of distributions to shareholders which would otherwise be necessary to relieve the Fund of any liability for federal income tax. Such capital loss carryovers are a follows: Capital Loss Carry Over Expiration Date ------------ --------------- $ 2,498,111 12/31/2007 15,100,842 12/31/2008 408,689 12/31/2009 3,621,061 12/31/2010 ------------ $ 21,628,703 ============ The Fund elected to defer to its fiscal year ending December 31, 2006 $38,381 of capital losses recognized during the period November 1, 2005 to December 31, 2005. The Fund utilized $768,064 in capital loss carry forwards. It is uncertain whether the Fund will be able to realize the benefits of the losses before they expire. Tax character of distributions paid during the fiscal years ended December 31, 2005 and December 31, 2004 were as follows: 2005 2004 ---------- ---------- Ordinary income $7,240,447 $6,932,393 See corresponding master portfolio for tax basis unrealized appreciated/(depreciation) information. 13 Mellon Institutional Funds Investment Trust Standish Mellon Global Fixed Income Fund Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Investment Trust and Shareholders of Standish Mellon Global Fixed Income Fund: In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Global Fixed Income Fund (the "Fund") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included agreement of the amount of the investment in the Portfolio at December 31, 2005 to the Portfolio's records, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 1, 2006 14 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - -------------------------------------------------------------------------------------------------------------------- UNAFFILIATED INVESTMENTS--95.2% BONDS AND NOTES--93.6% Collateralized Mortgage Obligation--0.4% Crown Castle Towers LLC, 2005-1A D 144A (Cost $320,000) 5.612% 6/15/2035 USD 320,000 $ 311,681 ---------- Corporate--9.6% Basic Materials--0.3% Freeport-McMoRan Copper & Gold, Inc. 10.125 2/1/2010 130,000 142,838 Georgia-Pacific Corp. 8.000 1/15/2024 105,000 100,275 ---------- 243,113 ---------- Communications--1.7% COX Communications Inc. 7.125 10/1/2012 295,000 316,085 Dex Media West LLC/Dex Media Finance Co. 8.500 8/15/2010 70,000 73,325 Dex Media West LLC/Dex Media Finance Co. 9.875 8/15/2013 69,000 76,590 News America Holdings, Inc. 9.250 2/1/2013 180,000 218,615 Qwest Corp. 144A (a) 7.741 6/15/2013 175,000 188,781 Salem Communications Corp. 7.750 12/15/2010 90,000 93,263 Univision Communications, Inc. 7.850 7/15/2011 200,000 220,094 ---------- 1,186,753 ---------- Consumer Cyclical--0.3% Mohegan Tribal Gaming Authority 8.000 4/1/2012 100,000 105,250 Yum! Brands, Inc. 8.875 4/15/2011 75,000 85,869 ---------- 191,119 ---------- Energy--0.3% Halliburton Co. 5.500 10/15/2010 125,000 127,670 Southern Natural Gas Co. 8.875 3/15/2010 100,000 106,872 ---------- 234,542 ---------- Financial--4.1% ACE Capital Trust II 9.700 4/1/2030 195,000 271,329 Boston Properties, Inc. 6.250 1/15/2013 85,000 89,169 Chevy Chase Bank FSB 6.875 12/1/2013 295,000 303,850 Duke Realty Corp REIT 5.250 1/15/2010 175,000 175,324 Glencore Funding LLC 144A 6.000 4/15/2014 95,000 89,351 ILFC E-Capital Trust II 144A (a) 6.250 12/21/2065 135,000 137,034 International Lease Finance Corp. 5.000 4/15/2010 180,000 179,036 Jefferies Group, Inc. 5.500 3/15/2016 110,000 108,658 Lehman Brothers E-Capital Trust I 144A (a) 5.150 8/19/2065 100,000 100,250 Nisource Finance Corp. 6.150 3/1/2013 150,000 157,089 Nordea Bank 144A 7.500 1/30/2007 445,000 456,141 Residential Capital Corp. 6.375 6/30/2010 75,000 76,209 Residential Capital Corp. 6.875 6/30/2015 130,000 138,136 Residential Capital Corp. (a) 5.896 6/29/2007 70,000 70,173 Residential Capital Corp. (a) 5.670 11/21/2008 230,000 230,302 Washington Mutual, Inc. 4.625 4/1/2014 365,000 343,231 ---------- 2,925,282 ---------- Industrial--1.1% American Standard, Inc. 7.375 2/1/2008 145,000 151,059 Crown Americas, Inc. 144A 7.625 11/15/2013 130,000 134,875 Crown Americas, Inc. 144A 7.750 11/15/2015 75,000 77,625 Jefferson Smurfit Corp. US 8.250 10/1/2012 15,000 14,400
The accompanying notes are an integral part of the financial statements. 15 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - -------------------------------------------------------------------------------------------------------------------- Industrial (continued) Republic Services, Inc. 6.750% 8/15/2011 USD 150,000 $ 161,151 Waste Management, Inc. 6.875 5/15/2009 245,000 258,317 ---------- 797,427 ---------- Technology & Electronics--0.3% Freescale Semiconductor, Inc. (a) 6.900 7/15/2009 100,000 102,750 Quest Diagnostics, Inc. 144A 5.125 11/1/2010 90,000 89,974 ---------- 192,724 ---------- Utilities--1.5% AES Corp. 144A 8.750 5/15/2013 100,000 108,875 FirstEnergy Corp. 6.450 11/15/2011 260,000 275,599 Mirant North America LLC 144A 7.375 12/31/2013 190,000 192,138 Niagara Mohawk Power Corp. 7.750 10/1/2008 175,000 186,847 TXU Energy Co. 7.000 3/15/2013 270,000 287,729 ---------- 1,051,188 ---------- Total Corporate (Cost $6,691,725) 6,822,148 ---------- Sovereign Bonds--4.5% Argentina Bonos (a) 4.005 8/3/2012 400,000 313,200 Egyptian Treasury Bill 144A 7.500 3/23/2006 725,000 744,437 Egyptian Treasury Bill 144A 9.000 7/14/2006 175,000 181,549 Republic of Brazil 8.000 1/15/2018 165,000 178,035 Republic of Brazil (a) 5.250 4/15/2012 99,414 98,171 Republic of Panama 8.875 9/30/2027 155,000 184,450 Republic of Philippines 9.375 1/18/2017 165,000 188,925 Republic of South Africa 7.375 4/25/2012 120,000 133,200 Republic of South Africa 9.125 5/19/2009 60,000 67,275 Republic of Turkey 11.500 1/23/2012 230,000 291,813 Russian Federation 5.000 3/31/2030 485,000 546,838 Russian Ministry of Finance 3.000 5/14/2008 190,000 179,788 Salomon Brothers AF for Tyumen Oil Co. 11.000 11/6/2007 125,000 135,663 ---------- Total Sovereign Bonds (Cost $3,171,580) 3,243,344 ---------- Yankee Bonds--2.5% Amvescap PLC 5.375 2/27/2013 130,000 128,113 Amvescap PLC 5.375 12/15/2014 70,000 68,622 Carnival Corp. 3.750 11/15/2007 265,000 259,044 Chuo Mitsui Trust & Banking Co. Ltd. 144A (a) 5.506 2/15/2049 365,000 353,689 Falconbridge Ltd. 6.000 10/15/2015 155,000 156,512 ING Groep NV (a) 5.775 11/30/2049 230,000 233,105 Naftogaz Ukrainy 8.125 9/30/2009 100,000 103,500 Rogers Wireless, Inc. 7.500 3/15/2015 45,000 48,600 Royal KPN NV 8.375 10/1/2030 210,000 248,846 Telecom Italia Capital SA 4.875 10/1/2010 160,000 156,862 ---------- Total Yankee Bonds (Cost $1,765,293) 1,756,893 ---------- U.S. Government Agency--1.8% Pass Thru Securities--1.8% FNMA 5.500 1/1/2034 496,395 492,754 FNMA(TBA) (b) 6.500 1/1/2036 760,000 779,475 ---------- Total U.S. Government Agency (Cost $1,284,106) 1,272,229 ----------
The accompanying notes are an integral part of the financial statements. 16 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - -------------------------------------------------------------------------------------------------------------------- U.S. Treasury Obligations--13.8% U.S. Treasury Bond 5.250% 11/15/2028 USD 245,000 $ 267,222 U.S. Treasury Inflation-Indexed Bond(c) 3.375 1/15/2007 2,438,987 2,456,899 U.S. Treasury Inflation-Indexed Bond 0.875 4/15/2010 6,886,801 6,547,034 U.S. Treasury Note 6.625 5/15/2007 105,000 108,052 U.S. Treasury Note 3.250 8/15/2008 450,000 437,537 ---------- Total U.S. Treasury Obligations (Cost $9,960,351) 9,816,744 ---------- Foreign Denominated--61.0% Argentina--0.2% Republic of Argentina 0.698 9/30/2014 ARS 520,000 171,446 ---------- Australia--8.3% Australian Government Bond 6.000 2/15/2017 AUD 1,390,000 1,085,603 Queensland Treasury Corp. 6.000 6/14/2011 6,400,000 4,835,129 ---------- 5,920,732 ---------- Brazil--0.3% Republic of Brazil 12.500 1/5/2016 BRL 430,000 184,472 ---------- Canada--0.8% Canadian Pacific Railway Ltd. 144A 4.900 6/15/2010 CAD 620,000 544,686 ---------- Denmark--1.1% Realkredit Danmark A/S 4.000 1/1/2006 DKK 5,140,000 815,705 ---------- Euro--25.0% Allied Irish Bank UK (a) 4.781 12/10/2049 EUR 160,000 187,929 ASIF III 4.750 9/11/2013 270,000 345,156 Autostrade SpA (a) 2.902 6/9/2011 300,000 358,056 Barclays Bank PLC (a) 4.875 12/15/2014 150,000 180,351 Belgium Government Bond 4.250 9/28/2013 560,000 708,058 Bombardier, Inc. 5.750 2/22/2008 150,000 177,525 Bundesobligation 3.000 4/11/2008 270,000 320,281 Bundesobligation 4.500 8/17/2007 320,000 388,593 Bundesschatzanweisungen 2.750 6/23/2006 135,000 159,882 Citigroup, Inc. (a) 2.624 6/3/2011 370,000 438,102 Daimlerchrysler International Finance 7.000 3/21/2011 125,000 170,151 Deutsche Bundesrepublik 4.000 7/4/2009 175,000 213,959 Deutsche Republic 3.250 7/4/2015 685,000 807,577 Deutsche Republic 4.500 1/4/2013 170,000 217,490 Deutsche Republic 4.750 7/4/2034 350,000 498,993 Deutsche Telekom International Finance BV 6.625 7/11/2011 165,000 224,412 FCE Bank PLC (a) 2.895 6/28/2006 1,205,000 1,388,896 FCE Bank PLC EMTN (a) 3.492 9/30/2009 385,000 381,149 Finmeccanica SpA 4.875 3/24/2025 175,000 212,018 GE Capital European Funding (a) 2.389 5/4/2011 370,000 437,700 Glencore Finance Europe SA/Luxembourg 5.375 9/30/2011 280,000 340,228 GMAC International Finance BV (a) 4.014 8/4/2006 415,000 471,506 Hellenic Republic Government Bond 3.700 7/20/2015 800,000 961,707 Household Finance Corp. 6.500 5/5/2009 300,000 390,405 Kappa Beheer BV 10.625 7/15/2009 135,000 165,432 Kingdom of Denmark 3.125 10/15/2010 1,075,000 1,273,017 Linde Finance BV 6.000 7/29/2049 180,000 218,633 MPS Capital Trust I 7.990 2/7/2011 160,000 224,240
The accompanying notes are an integral part of the financial statements. 17 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - --------------------------------------------------------------------------------------------------------------------- Euro (continued) National Westminster Bank PLC 6.625% 10/5/2009 EUR 70,000 $ 92,100 Netherlands Government Bond 5.500 7/15/2010 3,355,000 4,375,739 Owens-Brockway Glass Containers 6.750 12/1/2014 95,000 111,308 Resona Bank Ltd. 144A 4.125 1/10/2049 110,000 129,264 Sogerim 7.000 4/20/2011 185,000 254,215 Sumitomo Mitsui Banking Corp. 144A (a) 4.375 7/15/2049 195,000 233,790 Telenet Communications NV 144A 9.000 12/15/2013 75,000 98,304 Veolia Environnement 4.875 5/28/2013 135,000 171,620 Volkswagen International Finance NV 4.875 5/22/2013 180,000 227,377 West LB Covered Bond Bank 144A 4.000 3/25/2014 150,000 185,425 ----------- 17,740,588 ----------- Japan--8.3% Depfa Acs Bank 1.650 12/20/2016 JPY 140,000,000 1,186,755 Development Bank of Japan 1.600 6/20/2014 100,000,000 868,218 European Investment Bank 1.400 6/20/2017 135,000,000 1,126,634 Japan Finance Corp. 1.550 2/21/2012 130,000,000 1,131,368 KFW International Finance 1.750 3/23/2010 178,000,000 1,575,649 ----------- 5,888,624 ----------- Mexico--0.3% Mexican Fixed Rate Bonds 8.000 12/19/2013 MXN 2,565,000 238,086 ----------- Singapore--3.4% Singapore Government Bond 5.625 7/1/2008 SGD 3,780,000 2,424,474 ----------- Sweden--7.5% Swedish Government 8.000 8/15/2007 SEK 8,715,000 1,190,479 Swedish Government 5.250 3/15/2011 29,940,000 4,144,500 ----------- 5,334,979 ----------- United Kingdom--5.8% Barclays Bank PLC 6.000 9/15/2026 GBP 130,000 233,480 Bat International Finance PLC 6.375 12/12/2019 90,000 168,933 British Telecom PLC 7.125 12/7/2006 185,000 325,586 Deutsche Telekom International Finance BV 7.125 9/26/2012 175,000 336,467 HBOS Capital Funding LP (d) 6.461 11/30/2048 85,000 164,860 Inco 15.750 7/15/2006 200,000 359,449 Transco Holdings PLC 7.000 12/16/2024 80,000 172,936 United Kingdom Gilt 4.250 6/7/2032 140,000 250,751 United Kingdom Gilt 4.750 6/7/2010 800,000 1,408,336 United Kingdom Gilt 8.000 9/27/2013 310,000 669,026 ----------- 4,089,824 ----------- Total Foreign Denominated (Cost $44,331,678) 43,353,616 ----------- TOTAL BONDS AND NOTES (Cost $67,524,733) 66,576,655 ----------- CONVERTIBLE PREFERRED STOCKS--0.1% Shares ----------- Fannie Mae 5.375% CVT Pfd (Cost $100,000) 1 91,891 ---------- PURCHASED OPTIONS--0.1% Contract Size ------------- EUR Put USD Call, Strike Price 1.20, 2/23/2006 1,450,000 30,595 EUR Put USD Call, Strike Price 1.20, 3/16/2006 1,450,000 31,900 EUR Put USD Call, Strike Price 1.18, 4/05/2006 1,420,000 20,830 iTRAXX Europe Series 4 Version 1, Strike Price 0.50, 6/20/2006 2,850,000 1,975 ---------- TOTAL PURCHASED OPTIONS (Cost $69,303) 85,300 ----------
The accompanying notes are an integral part of the financial statements. 18 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Par Value Security Description Rate Maturity Value (Note 1A) - -------------------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS--1.4% U.S. Government--0.3% U.S. Treasury Bill (c) (e) 3.900% 3/2/2006 $ 125,000 $ 124,221 U.S. Treasury Bill (c) (e) 3.938 3/9/2006 125,000 124,121 ----------- Total U.S. Government (Cost $248,251) 248,342 ----------- U.S. Government Agency--1.1% FHLMC Discount Note (e) (Cost $768,935) 4.128 1/12/2006 770,000 768,935 ----------- Total Short-Term Investments (Cost $1,017,186) 1,017,277 ----------- TOTAL UNAFFILIATED INVESTMENTS (Cost $68,711,222) 67,771,123 ----------- AFFILIATED INVESTMENTS--2.3% Shares ----------- Dreyfus Institutional Preferred Plus Money Market Fund (f) (g) Cost $1,658,189) 4.060 1,658,189 1,658,189 ----------- TOTAL INVESTMENTS--97.5% (Cost $70,369,411) 69,429,312 ----------- OTHER ASSETS, LESS LIABILITIES--2.5% 1,679,487 ----------- NET ASSETS--100% $71,108,799 ===========
Notes to Schedule of Investments: 144A--Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $4,357,869 or 6.1% of net assets. ARS--Argentina Peso AUD--Australian Dollar BRL--Brazilian Real CAD--Canadian Dollar CVT--Convertible DKK--Danish Krone EUR--Euro GBP--British Pound JPY--Japanese Yen MXN--Mexican New Peso SEK--Swedish Krona SGD--Singapore Dollar (a) Variable Rate Security; rate indicated is as of 12/31/2005. (b) Delayed delivery security. (c) Denotes all or part of security segregated as collateral. (d) Step up security; rate indicated is as of 12/31/2005. (e) Rate noted is yield to maturity. (f) Stated rate is seven-day yield for the fund at year end. (g) Affiliated money market fund. At December 31, 2005 the Portfolio held the following futures contracts:
Underlying Face Unrealized Contract Position Expiration Date Amount at Value Loss - --------------------------------------------------------------------------------------------- US 10 Year Treasury (40 Contracts) Short 3/22/2006 $ 4,346,875 $ (29,470) =========
The accompanying notes are an integral part of the financial statements. 19 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - -------------------------------------------------------------------------------- At December 31, 2005 the Portfolio held the following forward foreign currency exchange contracts:
Local Principal Contract Value at USD Amount Unrealized Contracts to Deliver Amount Value Date December 31, 2005 to Receive Gain/(Loss) - --------------------------------------------------------------------------------------------------------------------------------- Australian Dollar 7,460,000 3/15/2006 $ 5,457,982 $ 5,540,075 $ 82,093 Brazilian Real 525,000 2/10/2006 221,809 188,324 (33,485) Canadian Dollar 620,000 3/15/2006 534,379 535,947 1,568 Danish Krone 7,820,000 3/15/2006 1,246,265 1,266,294 20,029 Euro 15,328,000 3/15/2006 18,216,485 18,455,817 239,332 British Pound Sterling 2,080,000 3/15/2006 3,577,756 3,684,179 106,423 Japanese Yen 701,980,000 3/15/2006 6,007,616 6,115,268 107,652 Swedish Krona 43,440,000 3/15/2006 5,499,848 5,553,877 54,029 Singapore Dollar 4,320,000 3/15/2006 2,605,077 2,603,524 (1,553) ------------ ------------ ----------- Total $ 43,367,217 $ 43,943,305 $ 576,088 ============ ============ ===========
Local Principal Contract Value at USD Amount Unrealized Contracts to Receive Amount Value Date December 31, 2005 to Deliver Gain - --------------------------------------------------------------------------------------------------------------------------------- Brazilian Real 525,000 2/10/2006 $ 221,809 $ 175,000 $ 46,809 Brazilian Real 435,000 3/15/2006 182,138 179,529 2,609 ------------ ------------ ----------- Total $ 403,947 $ 354,529 $ 49,418 ============ ============ ===========
At December 31, 2005, the Portfolio held the following open swap contracts:
Unrealized Credit Default Swaps Reference Buy/Sell (Pay)/Receive Expiration Notional Appreciation/ Counterparty Entity Protection Fixed Rate Date Amount (Depreciation) - ----------------------------------------------------------------------------------------------------------------------------------- Bear Stearns Alcoa, Inc., 6.000% due 1/15/2012 Buy (0.415)% 6/20/2010 107,000 USD $ (985) Bear Stearns Alcoa, Inc., 6.500% due 6/1/2011 Buy (0.52) 6/20/2010 238,000 USD (3,200) Bear Stearns Conocophillips, 4.750% due 10/15/2012 Buy (0.31) 6/20/2010 345,000 USD (1,290) Bear Stearns Nucor Corp., 4.875% due 10/01/2012 Buy (0.40) 6/20/2010 162,000 USD (72) Bear Stearns Ukraine Government, 7.650% due 6/11/2013 Sell 2.840 12/20/2009 150,000 USD 7,929 Deutsche Bank Republic of Brazil, 12.25%, due 3/6/2030 Sell 1.450 10/20/2008 358,000 USD 1,965 JPMorgan British American Tobacco PLC, 4.875% due 2/25/2009 Sell 0.425 12/20/2010 350,000 EUR 1,521 JPMorgan Daimlerchrysler AG, 7.20% due 9/1/2009 Sell 0.700 12/20/2010 350,000 EUR (64) JPMorgan Degussa AG, 5.125% due 12/10/2013 Buy (1.75) 12/20/2010 550,000 EUR (13,199) JPMorgan Dow Jones CDX.EM.4 Sell 1.800 12/20/2010 1,350,000 USD (3,824) JPMorgan France Telecom, 7.25% due 1/28/2013 Sell 0.660 12/20/2015 175,000 EUR (3,403) JPMorgan Glencore International AG, 5.375%, due 9/30/2011 Sell 1.480 12/20/2010 350,000 EUR 3,925 JPMorgan ICI Wilmington, 5.625% due 12/1/2013 Sell 0.510 12/20/2010 350,000 EUR 28 JPMorgan iTraxx Europe HiVol Series 4 Version 1 Buy (0.70) 12/20/2010 1,725,000 EUR (1,941) JPMorgan Republic of Panama, 8.875% due 9/30/2027 Sell 1.500 12/20/2010 216,000 USD 437 JPMorgan Republic of Peru, 8.75% due 11/21/2033 Buy (1.70) 12/20/2010 216,000 USD 4,365 JPMorgan Telecom Italia SPA, 6.25% due 2/1/2012 Sell 0.520 12/20/2010 350,000 EUR (967) JPMorgan Volkswagen, 4.875% due 5/22/2013 Sell 0.450 12/20/2010 350,000 EUR 330 Morgan Stanley & Co. Koninklijke KPN N.V., 8.00% due 10/1/2010 Buy (0.77) 12/20/2010 785,000 USD 3,538 Morgan Stanley & Co. Wendy's International, Inc., 6.25% due 11/15/2011 Buy (0.62) 12/20/2010 550,000 USD 4,660 --------- $ (247) =========
The accompanying notes are an integral part of the financial statements. 20 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Schedule of Investments -- December 31, 2005 - --------------------------------------------------------------------------------
Interest Rate Swaps Floating Rate Pay/Receive Expiration Notional Unrealized Counterparty Index Floating Rate Fixed Rate Date Amount Depreciation - ------------------------------------------------------------------------------------------------------------- Bear Stearns USD-LIBOR-BBA Pay 3.907% 11/19/2009 $150,000 $(5,035) =======
The Fund held the following written option contracts at December 31, 2005:
Written Put Options Strike Price Expiration Date Contracts Premium Value - ----------------------------------------------------------------------------------------- USD Put/EUR Call 1.2800 2/23/2006 1 $ 14,791 $ 580 USD Put/EUR Call 1.2800 3/16/2006 1 16,946 1,305 USD Put/EUR Call 1.2600 4/05/2006 1 13,703 4,303 -- -------- ------- 3 $ 45,440 $ 6,188 == ======== =======
Written Call Options Strike Price Expiration Date Contracts Premium Value - ----------------------------------------------------------------------------------------- EUR Put/USD Call 1.1200 4/05/2006 1 $ 6,958 $ 3,810 === ======== =======
Percentage of Country Allocation Investments ----------------------------------------------------- United States 38.2% Euro 25.7 Japan 8.6 United Kingdom 5.9 Canada 0.8 South Korea 0.0 Denmark 0.0 Sweden 7.7 Australia 8.6 South Africa 0.0 Poland 0.0 Mexico 0.4 Singapore 3.5 Hungary 0.0 Thailand 0.0 Czech Republic 0.0 New Zealand 0.0 Argentina 0.3 Brazil 0.3 Taiwan 0.0 Malaysia 0.0 ----- 100.0% The Standish Mellon Global Fixed Income Fund invests all of its investable assets in an interest of the Standish Mellon Global Fixed Income Portfolio (See Note 1 of the Fund's Notes to Financial Statements). The Portfolio is actively managed. Current holdings may be different than those presented above. The accompanying notes are an integral part of the financial statements. 21 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Statement of Assets and Liabilities December 31, 2005 - -------------------------------------------------------------------------------- Assets Investments in securities Unaffiliated issuers, at value (Note 1A) (cost $68,711,222) $ 67,771,123 Affiliated issuers, at value (Note 1A) (cost $1,658,189) (Note 1H) 1,658,189 Cash 149 Foreign currency (cost $793,126) 787,450 Unrealized appreciation on forward foreign currency exchange contracts (Note 5) 660,544 Interest receivable 1,105,684 Receivable for variation margin 6,875 Swap premium paid 25,024 Unrealized depreciation on swap contracts (Note 5) 28,698 Prepaid expenses 1,772 ------------ Total assets 72,045,508 Liabilities Payable for securities purchased $ 777,473 Unrealized depreciation on forward foreign currency exchange contracts (Note 5) 35,038 Unrealized depreciation on swap contracts (Note 5) 33,980 Payable for swap premium 17,550 Options written, at value (premium received $52,398) (Note 5) 9,998 Accrued professional fees 23,500 Accrued accounting, administration, and custody fees (Note 2) 8,825 Accrued trustees' fees and expenses (Note 2) 3,511 Other accrued expenses and liabilities 26,834 ------------ Total liabilities 936,709 ------------ Net Assets (applicable to investors' beneficial interest) $ 71,108,799 ============
The accompanying notes are an integral part of the financial statements. 22 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Statement of Operations For the Year Ended December 31, 2005 - -------------------------------------------------------------------------------- Investment Income (Note 1B) Interest income $ 3,120,551 Dividend income from affiliated investments (Note 1H) 59,502 Security lending income 3,805 Dividend income (net of foreign withholding tax of $1,220) 3,169 ------------ 3,187,027 Expenses Investment advisory fee (Note 2) $ 290,028 Accounting, administration and custody fees (Note 2) 127,102 Professional fees 34,897 Trustees' fees and expenses (Note 2) 10,561 Insurance expense 9,600 Miscellaneous 1,800 ------------ Total expenses 473,988 Deduct: Waiver of investment advisory fee (Note 2) (2,989) ------------ Net expenses 470,999 ------------ Net investment income 2,716,028 ------------ Realized and Unrealized Gain (Loss) Net realized gain (loss) on: Investments 1,773,781 Financial futures transactions 23,569 Foreign currency transactions and forward currency exchange contracts 4,292,162 Swap transactions 94,335 ------------ Net realized gain (loss) 6,183,847 Change in unrealized appreciation (depreciation) Investments (7,595,580) Financial futures contracts (29,470) Written options contracts 42,400 Foreign currency translation and forward currency exchange contracts 1,264,204 Swap contracts (8,621) ------------ Change in net unrealized appreciation (depreciation) (6,327,067) ------------ Net realized and unrealized gain (143,220) ------------ Net Increase in Net Assets from Operations $ 2,572,808 ============
The accompanying notes are an integral part of the financial statements. 23 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Statements of Changes in Net Assets - --------------------------------------------------------------------------------
For the For the Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Increase (Decrease) in Net Assets From Operations Net investment income $ 2,716,028 $ 3,746,228 Net realized gain (loss) 6,183,847 8,814,993 Change in net unrealized appreciation (depreciation) (6,327,067) (7,922,754) ------------- ------------- Net increase (decrease) in net assets from investment operations 2,572,808 4,638,467 ------------- ------------- Capital Transactions Contributions 7,042,475 8,539,443 Withdrawals (11,579,112) (93,677,695) ------------- ------------- Net increase (decrease) in net assets from capital transactions (4,536,637) (85,138,252) ------------- ------------- Total Increase (Decrease) in Net Assets (1,963,829) (80,499,785) Net Assets At beginning of year 73,072,628 153,572,413 ------------- ------------- At end of year $ 71,108,799 $ 73,072,628 ============= =============
The accompanying notes are an integral part of the financial statements. 24 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Financial Highlights - --------------------------------------------------------------------------------
Year Ended December 31, ----------------------------------------------------------------------- 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- Total Return(a) 3.64% 5.00% 6.40% 6.98% 4.54% Ratios/Supplemental data: Expenses (to average daily net assets) 0.65% 0.63% 0.63% 0.56% 0.53% Net Investment Income (to average daily net assets) 3.75% 3.89% 3.75% 4.47% 4.49% Portfolio Turnover:(b) Inclusive 181% 166% 222% 205% 251% Exclusive 167% 130% -- -- -- Net Assets, End of Year (000's omitted) $ 71,109 $ 73,073 $ 153,572 $ 164,590 $ 364,068
- ---------- * For the periods indicated, the investment advisor voluntarily agreed not to impose a portion of its investment advisory fee and/or reimbursed the Fund for all or a portion of its operating expenses. If this voluntary action had not been taken, the investment income per share and the ratios would have been: Ratios (to average daily net assets): Expenses (to average daily net assets) 0.65% NA NA NA NA Net investment income 3.74% NA NA NA NA (a) Total return for the Portfolio has been calculated based on the total return for the invested Fund, assuming all distributions were reinvested, and adjusted for the difference in expenses as set out in the notes to the financial statements. (b) Beginning in 2004, the portfolio turnover ratio is presented inclusive and exclusive of the effect of rolling forward purchase commitments. The accompanying notes are an integral part of the financial statements. 25 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Significant Accounting Policies: Mellon Institutional Funds Master Portfolio (the "Portfolio Trust") was organized as a master trust fund under the laws of the state of New York on January 18, 1996 and is registered under the Investment Company Act of 1940, as amended, as an open-end, management investment company. Standish Mellon Global Fixed Income Portfolio (the "Portfolio") is a separate non-diversified investment series of the Portfolio Trust. The objective of the Portfolio is to maximize total return while realizing a market level of income consistent with preserving principal and liquidity. The Portfolio seeks to achieve its objective by investing, under normal circumstances, at least 80% of its net assets in U.S. and non-U.S. dollar denominated fixed income securities of U.S. and foreign governments and companies located in the U.S. and various countries, including emerging markets. At December 31, 2005 there was one fund, Standish Mellon Global Fixed Income Fund (the "Fund"), invested in the Portfolio. The value of the Fund's investment in the Portfolio reflects the Fund's proportionate interest in the net assets of the Portfolio. The Fund's proportionate interest at December 31, 2005 was 100%. The following is a summary of significant accounting policies followed by the Portfolio in the preparation of its financial statements. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. A. Investment security valuations Securities are valued at the last sale prices on the exchange or national securities market on which they are primarily traded. Securities not listed on an exchange or national securities market, or securities for which there were no reported transactions, are valued at the last quoted bid price. Securities that are fixed income securities, other than short-term instruments with less than sixty days remaining to maturity, for which accurate market prices are readily available, are valued at their current market value on the basis of quotations, which may be furnished by a pricing service or dealers in such securities. Securities (including illiquid securities) for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Trustees. Short-term instruments with less than sixty days remaining to maturity are valued at amortized cost, which approximates market value. If the Portfolio acquires a short-term instrument with more than sixty days remaining to its maturity, it is valued at current market value until the sixtieth day prior to maturity and will then be valued at amortized cost based upon the value on such date unless the Trustees determine during such sixty-day period that amortized cost does not represent fair value. B. Securities transactions and income Securities transactions are recorded as of the trade date. Interest income is determined on the basis of coupon interest earned, adjusted for accretion of discount or amortization of premium using the yield - to - maturity method. Realized gains and losses from securities sold are recorded on the identified cost basis. The Portfolio does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Net realized gains and losses on foreign currency transactions represent gains and losses on disposition of foreign currencies and forward foreign currency exchange contracts, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Portfolio's books and the U.S. dollar equivalent amounts actually received or paid. C. Income taxes The Portfolio is treated as a disregarded entity for federal tax purposes. No provision is made by the Portfolio for federal or state income taxes on any taxable income of the Portfolio because each investor in the Portfolio is ultimately responsible for the payment of any taxes. Since at least one of the Portfolio's investors is a regulated investment company that invests all or substantially all of its assets in the Portfolio, the Portfolio normally must satisfy the source of income and diversification requirements applicable to regulated investment companies (under the Internal Revenue Code) in order for its investors to satisfy them. Section 988 of the Internal Revenue Code provides that gains or losses on certain transactions attributable to fluctuations in foreign currency exchange rates must be treated as ordinary income or loss. For financial statement purposes, such amounts are included in net realized gains or losses. 26 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- D. Foreign currency transactions The Portfolio maintains its records in U.S. dollars. Investment security valuations, other assets, and liabilities initially expressed in foreign currencies are converted into U.S. dollars based upon current currency exchange rates. Purchases and sales of foreign investment securities and income and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. E. Investment risk There are certain additional risks involved in investing in foreign securities that are not inherent in investments in domestic securities. These risks may involve adverse political and economic developments, including the possible imposition of capital controls or other foreign governmental laws or restrictions. In addition, the securities of some foreign companies and securities markets are less liquid and at times may be more volatile than securities of comparable U.S. companies and U.S. securities markets. The risks described above apply to an even greater extent to investments in emerging markets. The securities markets of emerging countries are generally smaller, less developed, less liquid, and more volatile than the securities markets of the U.S. and developed foreign markets. F. Commitments and contingencies In the normal course of business, the Portfolio may enter into contracts and agreements that contain a variety of representations and warranties, which provide general indemnifications. The maximum exposure to the Portfolio under these arrangements is unknown, as this would involve future claims that may be made against the Portfolio that have not yet occurred. However, based on experience, the Portfolio expects the risks of loss to be remote. G. Expenses The majority of expenses of the Trust or Portfolio Trust are directly identifiable to an individual fund or portfolio. Expenses which are not readily identifiable to a specific fund or portfolio are allocated among funds of the Trust or portfolios of the Portfolio Trust taking into consideration, among other things, the nature and type of expense and the relative size of the funds or portfolios. H. Affiliated issuers Affiliated issuers are investment companies advised by Standish Mellon Asset Management Company LLC ("Standish Mellon"), a wholly-owned subsidiary of Mellon Financial Corporation, or its affiliates. (2) Investment Advisory Fee and Other Transactions with Affiliates: The investment advisory fee paid to Standish Mellon for overall investment advisory and administrative services, and general office facilities is paid monthly at the annual rate of 0.40% of the Portfolio's average daily net assets. Standish Mellon voluntarily agreed to limit the total operating expenses of the Fund and it's pro rata share of the Portfolio expenses (excluding commissions, taxes and extraordinary expenses) to 0.65% of the Fund's average daily net assets. Pursuant to this agreement, for the year ended December 31, 2005, Standish Mellon voluntarily waived a portion of its investment advisory fee in the amount of $2,989. This agreement is voluntary and temporary and may be discontinued or revised by Standish Mellon at any time. The Portfolio has contracted Mellon Bank, N.A. ("Mellon Bank"), a wholly owned subsidiary of Mellon Financial Corporation and an affiliate of Standish Mellon, to provide custody, fund administration and fund accounting services for the Portfolio. For these services the Portfolio pays Mellon Bank a fixed fee plus asset and transaction based fees, as well as out-of-pocket expenses. Pursuant to this agreement the Portfolio was charged $127,102 during the year ended December 31, 2005. The Portfolio entered into an agreement with Mellon Bank to perform certain securities lending activities and to act as the Portfolio lending agent. Mellon Bank receives an agreed upon percentage of the net lending revenues. This compensation is a standard form of compensation received by securities lending agents with respect to non-affiliated entities. Pursuant to this agreement, the Mellon Bank received $1,610 for the year ended December 31, 2005. See Note 6 for further details. 27 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- Effective July 1, 2005, the Trust reimburses Mellon Asset Management for a portion of the salary of the Trust's Chief Compliance Officer. No other director, officer or employee of Standish Mellon or its affiliates received any compensation from the Trust or the Portfolio for serving as an officer or Trustee of the Trust. The Trust pays each Trustee who is not a director, officer or employee of Standish Mellon or its affiliates an annual fee and a per meeting fee as well as reimbursement for travel and out of pocket expenses. In addition, the Portfolio Trust pays the legal fees for the independent counsel of the Trustees. (3) Purchases and Sales of Investments: Purchases and proceeds from sales of investments, other than short-term obligations, for the year ended December 31, 2005 were as follows: Purchases Sales ----------- ----------- U.S. Government Securities $31,848,205 $25,349,221 ----------- ----------- Investments (non-U.S. Government Securities) $93,599,497 $99,559,867 (4) Federal Taxes: The cost and unrealized appreciation (depreciation) in value of the investment securities owned at December 31, 2005, as computed on a federal income tax basis, were as follows: Aggregate Cost $70,431,503 =========== Gross unrealized appreciation 883,887 Gross unrealized depreciation (1,886,078) ----------- Net unrealized appreciation (depreciation) $(1,002,191) =========== (5) Financial Instruments: In general, the following instruments are used for hedging purposes as described below. However, these instruments may also be used to seek to enhance potential gain in circumstances where hedging is not involved. The Portfolio may trade the following financial instruments with off-balance sheet risk: Options Call and put options give the holder the right to purchase or sell a security or currency or enter into a swap arrangement on a future date at a specified price. The Portfolio may use options to seek to hedge against risks of market exposure and changes in security prices and foreign currencies, as well as to seek to enhance returns. Writing puts and buying calls tend to increase the Portfolio's exposure to the underlying instrument. Buying puts and writing calls tend to decrease the Portfolio's exposure to the underlying instrument, or hedge other Portfolio investments. Options, both held and written by the Portfolio, are reflected in the accompanying Statement of Assets and Liabilities at market value. The underlying face amount at value of any open purchased option is shown in the Schedule of Investments. This amount reflects each contract's exposure to the underlying instrument at year end. Losses may arise from changes in the value of the underlying instruments if there is an illiquid secondary market for the contract or if the counterparty does not perform under the contract's terms. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the realized gain or loss. Realized gains and losses on purchased options are included in realized gains and losses on investment securities, except purchased options on foreign currency which are included in realized gains and losses on foreign currency transactions. If a put option written by the Portfolio is exercised, the premium reduces the cost basis of the securities purchased by the Portfolio. The Portfolio, as a writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Exchange traded options are valued at the last sale price, or if no sales are reported, the last bid price for purchased options and the last ask price for written options. Options traded over-the-counter are valued using prices supplied by the dealers. 28 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- Transactions in written call and put options were as follows: Number of Written Put Option Transactions Contracts Premiums --------- -------- Outstanding, beginning of year 0 $ 0 Options written 3 45,440 Options expired 0 0 Options closed 0 0 --------- -------- Outstanding, end of year 3 $ 45,440 ========= ======== Number of Written Call Option Transactions Contracts Premiums --------- -------- Outstanding, beginning of year 0 $ 0 Options written 1 6,958 Options expired 0 0 Options closed 0 0 --------- -------- Outstanding, end of year 1 $ 6,958 ========= ======== At December 31, 2005, the Portfolio held options. See Schedule of Investments for further details. Forward currency exchange contracts The Portfolio may enter into forward foreign currency and cross currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar and other foreign currencies. The forward foreign currency and cross currency exchange contracts are marked to market using the forward foreign currency rate of the underlying currency and any gains or losses are recorded for financial statement purposes as unrealized until the contract settlement date or upon the closing of the contract. Forward currency exchange contracts are used by the Portfolio primarily to protect the value of the Portfolio's foreign securities from adverse currency movements. Unrealized appreciation and depreciation of forward currency exchange contracts is included in the Statement of Assets and Liabilities. At December 31, 2005, the Portfolio held open foreign currency exchange contracts. See the Schedule of Investments for further details. Futures contracts The Portfolio may enter into financial futures contracts for the sale or delivery of securities or contracts based on financial indices at a fixed price on a future date. Pursuant to margin requirements the Portfolio deposits either cash or securities in an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the Portfolio each day, depending on the daily fluctuations in the value of the underlying security, and are recorded for financial statement purposes as unrealized gains or losses by the Portfolio. There are several risks in connection with the use of futures contracts as a hedging device. The change in value of futures contracts primarily corresponds with the value of their underlying instruments or indices, which may not correlate with changes in the value of hedged investments. Buying futures tends to increase the Portfolio's exposure to the underlying instrument, while selling futures tends to decrease the Portfolio's exposure to the underlying instrument or hedge other investments. In addition, there is the risk that the Portfolio may not be able to enter into a closing transaction because of an illiquid secondary market. Losses may arise if there is an illiquid secondary market or if the counterparty does not perform under the contract's terms. The Portfolio enters into financial futures transactions primarily to seek to manage its exposure to certain markets and to changes in securities prices and foreign currencies. Gains and losses are realized upon the expiration or closing of the futures contracts. Futures contracts are valued at the quoted daily settlement prices established by the exchange on which they trade. At December, 31, 2005, the Portfolio held open financial futures contracts. See the Schedule of Investments for further details. 29 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- Swap Agreements The Portfolio may enter into swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Portfolio may enter into interest rate and credit default swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Portfolio with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party on its obligation. The Portfolio may use credit default swaps to provide a measure of protection against defaults of issuers (i.e., to reduce risk where the Portfolio owns or has exposure to the corporate or sovereign issuer) or to take an active long or short position with respect to the likelihood of a particular corporate or sovereign issuer's default. In connection with these agreements, cash or securities may be set aside as collateral in accordance with the terms of the swap agreement. The Portfolio earns interest on cash set aside as collateral. Swaps are marked to market daily based upon quotations from market makers and change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. These financial instruments are not actively traded on financial markets. The values assigned to these instruments are based upon the best available information and because of the uncertainty of the valuation, these values may differ significantly from the values that would have been realized had a ready market for these instruments existed, and differences could be material. Payments received or made at the beginning of the measurement period are reflected as such on the Statement of Assets and Liabilities. Payments received or made from credit default swaps at the end of the measurement period are recorded as realized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements, if any, are included as part of realized gain and loss. Entering into these agreements involves, to varying degrees, 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 contractual terms in the agreements, and that there may be unfavorable changes in interest rates. At December 31, 2005, the Portfolio held open swap contracts. See the Schedule of Investments for further details. (6) Security Lending: The Portfolio may lend its securities to financial institutions which the Portfolio deems to be creditworthy. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. The market value of securities loaned is determined daily and any additional required collateral is allocated to the Portfolio on the next business day. For the duration of a loan, the Portfolio receives the equivalent of the interest or dividends paid by the issuer on the securities loaned and also receives compensation from the investment of the collateral. As with other extensions of credit, the Portfolio bears the risk of delay in recovery or even loss of rights in its securities on loan should the borrower of the securities fail financially or default on its obligations to the Portfolio. In the event of borrower default, the Portfolio generally has the right to use the collateral to offset losses incurred. The Portfolio may incur a loss in the event it was delayed or prevented from exercising its rights to dispose of the collateral. The Portfolio also bears the risk in the event that the interest and/or dividends received on invested collateral is not sufficient to meet the Portfolio's obligations due on the loans. The Portfolio loaned securities during the year ended December 31, 2005 and earned interest on the invested collateral of $59,612 of which, $55,807 was rebated to borrowers or paid in fees. See the Schedule of Investments for further detail on the security positions on loan and collateral held. (7) Delayed Delivery Transactions: The Portfolio may purchase securities on a when-issued, delayed delivery or forward commitment basis. Payment and delivery may take place a month or more after the date of the transactions. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. Income on the securities will not be earned until settlement date. The Portfolio instructs its custodian to segregate securities having value at least equal to the amount of the purchase commitment. The Portfolio may enter into to be announced ("TBA") purchase commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price has been established, the principal value has not been finalized. However, the amount of the commitments will not fluctuate more than 0.01% from the principal amount. The Portfolio holds, and maintains until settlement date, cash or high-grade debt obligations in an amount sufficient to meet the purchase price, or the Portfolio may enter into offsetting contracts for the forward sale of other securities it owns. Income on the securities will not be earned until settlement date. TBA purchase commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date. Unsettled TBA purchase commitments are valued at the current market value of the underlying securities, according to the procedures described under "Investment security valuations" above. At December 31, 2005, the Portfolio held delayed delivery securities. See the Schedule of Investments for further details. 30 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Notes to Financial Statements - -------------------------------------------------------------------------------- (8) Line of Credit: The Portfolio, and other subtrusts in the Portfolio Trust and funds in the Trust are parties to a committed line of credit facility, which enables each portfolio/fund to borrow, in the aggregate, up to $35 million. Interest is charged to each participating portfolio/fund based on its borrowings at a rate equal to the Federal Funds effective rate plus 1/2 of 1%. In addition, a facility fee, computed at an annual rate of 0.06 of 1% on the committed amount, is allocated ratably among the participating portfolios/funds at the end of each quarter. For the year ended December 31, 2005, the facility fee was $748 for the Portfolio. During the year ended December 31, 2005, the Portfolio did not borrow under the credit facility. 31 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Report of Independent Registered Public Accounting Firm - -------------------------------------------------------------------------------- To the Trustees of Mellon Institutional Funds Master Portfolio and Investors of Standish Mellon Global Fixed Income Portfolio: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Standish Mellon Global Fixed Income Portfolio ( the "Portfolio") at December 31, 2005, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Portfolio's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 1, 2006 32 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- The Investment Company Act of 1940 requires that the Board of Trustees, including a majority of its Trustees who are not affiliated with the fund's investment adviser or underwriter (the "Independent Trustees") voting separately, approve the Fund's advisory agreement and the related fees on an annual basis. The Fund is not a party to an investment advisory agreement directly with any investment adviser and does not invest directly in portfolio securities. Instead, the Fund invests all of its investable assets in the Standish Mellon Global Fixed Income Portfolio (the "Portfolio"), which is managed by Standish Mellon Asset Management Company LLC ("Standish Mellon"). The Fund's Board of Trustees determines annually whether the Fund should continue to invest in the Portfolio. The members of the Fund's Board of Trustees also serve as the Board of Trustees of the Portfolio. In that capacity, they consider annually whether to continue the investment advisory agreement between the Portfolio and Standish Mellon. In their most recent deliberations concerning their decision to approve the continuation of the investment advisory agreement, the Board of Trustees conducted the review and made the determinations that are described below. In conducting this review and in making such determinations, the Independent Trustees received from Standish Mellon a broad range of information in response to a written request prepared on their behalf by their own legal counsel. The Independent Trustees met alone in a private session with their legal counsel on September 22, 2005 to review these materials and to discuss the proposed continuation of the Fund's advisory agreement. Representatives of Standish Mellon attended a portion of the September meeting to provide an overview of its organization, personnel, resources and strategic plans, and to respond to questions and comments arising from the Independent Trustees' review of the materials and their deliberations. The entire Board then met on October 18, 2005. The information requested by the Independent Trustees and reviewed by the entire Board included: (i) Financial and Economic Data: Standish Mellon's income statements, as well as a profitability analysis of Standish Mellon, including a separate presentation of Standish Mellon's profitability relative to that of several publicly traded investment advisers; (ii) Management Teams and Operations: Standish Mellon's Form ADV, as well as information concerning Standish Mellon's executive management, investment management, client service personnel and overall organizational structure, insurance coverage, brokerage and soft dollar policies and practices; (iii) Comparative Performance and Fees: Analyses prepared by Lipper Analytical Services ("Lipper") regarding the Fund's historical performance, management fee and expense ratio compared to other funds, and Standish Mellon's separate account advisory fee schedules; (iv) Specific Facts Relating to the Fund: Standish Mellon's commentary on the Fund's performance (rather than the Portfolio alone) and any material portfolio manager and strategy changes that may have affected the Fund and Portfolio in the prior year, as well as "fact sheets" prepared by Standish Mellon providing salient data about the Fund and Portfolio and Standish Mellon's views concerning the issues of breakpoints in the management fee schedule of the Portfolio and potential economies of scale; and (v) Other Benefits: The benefits flowing to Mellon Financial Corporation ("Mellon") and its affiliates in the form of fees for transfer agency, custody, administration and securities lending services provided to the Funds by affiliates of Mellon. In considering the continuation of the Portfolio's advisory agreement, the Board of Trustees, including the Independent Trustees, did not identify any single factor as all-important or controlling, and individual Trustees did not necessarily attribute the same weight or importance to each factor. The Trustees determined that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein were fair and reasonable in light of the services performed, expenses incurred and such other matters as the Trustees considered relevant in the exercise of their reasonable judgment. The following summary does not detail all the matters that were considered. Some of the factors that figured prominently in the Trustees' determination are described below. Nature, Extent and Quality of Services The Board considered the nature, scope and quality of the overall services provided to the Portfolio by Standish Mellon. In their deliberations as to the continuation of the Portfolio's advisory agreement, the Trustees were also mindful of the fact that, by choosing to invest in the Fund, the Fund's shareholders have chosen to entrust Standish Mellon, under the supervision of the Board, to manage the portion of their assets invested in the Fund. Among the specific factors the Board reviewed were the investment management, administrative, compliance and related services provided by Standish Mellon. The Board determined that the services provided were of high quality and at least commensurate with industry standards. The Trustees reviewed the background and experience of the Portfolio's two portfolio managers and also met with senior management of Standish Mellon to receive an overview of its organization, personnel, resources and strategic plans. Among other things, the Trustees considered the size, education and experience of Standish Mellon's investment staff, technological infrastructure and overall responsiveness to changes in market conditions. The Board determined that Standish Mellon had the expertise and resources to manage the Portfolio effectively. 33 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Investment Performance The Board considered the investment performance of the Fund (rather than the Portfolio alone) against a peer group of investment companies selected by Standish Mellon with input from the Trustees. The Board also compared the Fund's investment performance against the average performance of a larger universe of funds regarded by Lipper as having similar investment objectives and considered the Fund's performance rankings against that universe. In addition to the information received by the Board at the September 22, 2005 Board meeting, the Trustees received similar detailed comparative performance information for the Fund at each regular Board meeting during the year. The Board considered the Fund's performance for the one-, three- and five-year periods ended July 31, 2005 based on the Lipper materials provided to the Board at the September 22, 2005 meeting. The Board found that the Fund underperformed its peer group average returns for the one-year period (6.31% vs. 7.24%), three-year period (6.08% vs. 8.39%) and five-year period (6.12% vs. 7.63%). The Trustees requested that Standish Mellon arrange for a presentation to the Board, as part of the usual fund reporting cycle, to explain the reasons for the Fund's underperformance and efforts by Standish Mellon to improve the Fund's performance. Advisory Fee and Other Expenses The Board considered the advisory fee rate paid by the Portfolio to Standish Mellon. The Lipper data presenting the Portfolio's "net advisory fees" included fees paid by the Portfolio, as calculated by Lipper, for administrative services provided by Mellon Bank, N.A., the Portfolio's custodian. Such reporting was necessary, according to Lipper, to allow the Board to compare the Portfolio's advisory fees to those peers that include administrative fees within a blended advisory fee. The Portfolio's contractual advisory fee was 0.40%, in the 2nd quintile (1st being the best) of its peer group of funds, the median fee of which was 0.57%. The Portfolio's net advisory fee, after giving effect to expense limitations, was 0.386%, below the peer group median net advisory fee of 0.537%. Based on the Lipper data, as well as other factors discussed at the September 22, 2005 meeting, the Board determined that the Portfolio's advisory fee is reasonable relative to its peer group averages, both with and without giving effect to expense limitations. The Board also compared the fees payable by the Portfolio relative to those payable by separate account clients of Standish Mellon. Based on the additional scope and complexity of the services provided and responsibilities assumed by Standish Mellon with respect to the Portfolio relative to these other types of clients, the Board concluded that the fees payable under the advisory agreement were reasonable relative to overall industry averages and to the nature and quality of the services provided. The Board also considered the Fund's (rather than solely the Portfolio's) expense ratio and compared it to that of its peer group of similar funds. The Board found that the actual net expense ratio of 0.65% (after giving effect to expense limitations) was lower than the median net expense ratio of the peer group of 0.95% notwithstanding the fact that most of the other funds in the peer group were larger than the Fund. Standish Mellon's Profitability The Board considered Standish Mellon's profitability in managing the Portfolio and Fund and the Mellon Institutional Funds as a group, as well as the methodology used to compute such profitability, and the various direct and indirect expenses incurred by Standish Mellon or its affiliated investment adviser, The Boston Company Asset Management, LLC ("TBCAM") in managing the Portfolio and Fund and other funds in the Mellon Institutional Funds family of funds. The Independent Trustees had observed that, based on the profitability information submitted to them by Standish Mellon, Standish Mellon incurred losses in managing many of the investment companies in the Mellon Institutional Funds family of funds, including the Portfolio and Fund, and that among those funds that were profitable to Standish Mellon, several generated only marginal profitability for the firm. The Trustees observed that Standish Mellon had incurred losses in operating the Portfolio and Fund in both 2003 and 2004. Economies of Scale The Board also considered the extent to which economies of scale might be realized as the Portfolio and Fund grow. They observed that the Standish Mellon Fixed Income Portfolio, the largest fund in the complex, already had breakpoints in its fee arrangement that reflected economies resulting from its size. The Board concluded that, at existing asset levels and considering current assets growth projections, the implementation of additional fee breakpoints or other fee reductions was not necessary at this time. They requested, however, that management consider the issue of future breakpoints and respond to the Independent Trustees and to present a proposal for such breakpoints or, in each case as applicable, management's rationale as to why such future breakpoints are not necessary or appropriate for a particular Fund. 34 Mellon Institutional Funds Master Portfolio Standish Mellon Global Fixed Income Portfolio Factors Considered by Board of Trustees in Approving Advisory Agreement - -------------------------------------------------------------------------------- Other Benefits The Board also considered the additional benefits flowing to Mellon as a result of its relationship with the Mellon Institutional Funds as a group, including revenues received by Mellon affiliates in consideration of custodial, administrative, transfer agency and securities lending services provided by such affiliates to the Funds. In each case, such affiliates were selected by the Board on the basis of a comparative analysis of their capabilities and fees relative to those of unaffiliated competitors. In addition, the Board, including a majority of the Independent Trustees, conduct an examination annually of each such arrangement as to whether (i) the terms of the relevant service agreement are in the best interests of Fund shareholders; (ii) the services to be performed by the affiliate pursuant to the agreement are required by and appropriate for the Funds; (iii) the nature and quality of the services provided by the affiliate pursuant to the agreement are at least equal to those provided by other, unaffiliated firms offering the same or similar services for similar compensation; and (iv) the fees payable by the Funds to the affiliate for its services are fair and reasonable in light of the usual and customary charges imposed by other, unaffiliated firms for services of the same nature and quality. The Board considered the fact that Mellon operates businesses other than the Mellon Institutional Funds, some of which businesses share personnel, office space and other resources and that these were a component of the profitability analysis provided. The Board also considered the intangible benefits that accrue to Mellon and its affiliates by virtue of its relationship with the Funds and the Mellon Institutional Funds as a group. * * * The foregoing factors were among those weighed by the Trustees in determining that the terms and conditions of the Portfolio's advisory agreement and the compensation to Standish Mellon provided therein are fair and reasonable and, thus, in approving the continuation of the agreement for a one-year period. 35 Trustees and Officers The following table lists the Trust's trustees and officers; their address and date of birth; their position with the Trust; the length of time holding that position with the Trust; their principal occupation(s) during the past five years; the number of portfolios in the fund complex they oversee; other directorships they hold in companies subject to registration or reporting requirements of the Securities Exchange Act of 1934 (generally called "public companies") or in registered investment companies; and total remuneration paid as of the period ended December 31, 2005. The Trust's Statement of Additional Information includes additional information about the Trust's trustees and is available, without charge, upon request by writing The Mellon Institutional Funds at P.O. Box 8585, Boston, MA 02266-8585 or calling toll free 1-800-221-4795. Independent Trustees
Principal Name Term of Office Occupation(s) Address, and Position(s) and Length of During Past Date of Birth Held with Trust Time Served 5 Years - -------------------------------------------------------------------------------------------------- Samuel C. Fleming Trustee Trustee since Chairman Emeritus, c/o Decision Resources, Inc. 11/3/1986 Decision Resources, Inc. 260 Charles Street ("DRI") (biotechnology Waltham, MA 02453 research and consulting 9/30/40 firm); formerly Chairman of the Board and Chief Executive Officer, DRI Caleb Loring III Trustee Trustee since Trustee, Essex Street c/o Essex Street Associates 11/3/1986 Associates (family P.O. Box 5600 investment trust office) Beverly, MA 01915 11/14/43 Benjamin M. Friedman Trustee Trustee since William Joseph Maier, c/o Harvard University 9/13/1989 Professor of Political Littaver Center 127 Economy, Harvard Cambridge, MA 02138 University 8/5/44 John H. Hewitt Trustee Trustee since formerly Trustee, Mertens P.O. Box 2333 11/3/1986 House, Inc. (hospice) New London, NH 03257 4/11/35 Interested Trustees Patrick J. Sheppard Trustee, President Since 2003 President and Chief The Boston Company and Chief Operating Officer of Asset Management, LLC Executive Officer The Boston Company One Boston Place Asset Management, LLC; Boston, MA 02108 formerly Senior Vice President 7/24/65 and Chief Operating Officer, Mellon Asset Management ("MAM") and Vice President and Chief Financial Officer, MAM Number of Trustee Portfolios in Other Remuneration Name Fund Complex Directorships (period ended Address, and Overseen by Held by December 31, Date of Birth Trustee Trustee 2005) - -------------------------------------------------------------------------------- Samuel C. Fleming 32 None Fund: $500 c/o Decision Resources, Inc. Portfolio: $1,692 260 Charles Street Waltham, MA 02453 9/30/40 Caleb Loring III 32 None Fund: $500 c/o Essex Street Associates Portfolio: $1,865 P.O. Box 5600 Beverly, MA 01915 11/14/43 Benjamin M. Friedman 32 None Fund: $500 c/o Harvard University Portfolio: $1,692 Littaver Center 127 Cambridge, MA 02138 8/5/44 John H. Hewitt 32 None Fund: $500 P.O. Box 2333 Portfolio: $1,692 New London, NH 03257 4/11/35 Interested Trustees Patrick J. Sheppard 32 None $0 The Boston Company Asset Management, LLC One Boston Place Boston, MA 02108 7/24/65
36 Principal Officers who are Not Trustees
Name Term of Office Address, and Position(s) and Length of Principal Occupation(s) Date of Birth Held with Trust Time Served During Past 5 Years - ----------------------------------------------------------------------------------------------------------------------- Barbara A. McCann Vice President Since 2003 Senior Vice President and Head of Operations, Mellon Asset Management and Secretary Mellon Asset Management ("MAM"); formerly First One Boston Place Vice President, MAM and Mellon Global Investments Boston, MA 02108 2/20/61 Steven M. Anderson Vice President Vice President Vice President and Mutual Funds Controller, Mellon Asset Management and Treasurer since 1999; Mellon Asset Management One Boston Place Treasurer Boston, MA 02108 since 2002 7/14/65 Denise B. Kneeland Assistant Vice Since 1996 Vice President and Manager, Mutual Funds Mellon Asset Management President Operations, Mellon Asset Management One Boston Place Boston, MA 02108 8/19/51 Cara E. Hultgren Assistant Vice Since 2001 Assistant Vice President and Manager of Compliance, Mellon Asset Management President Mellon Asset Management ("MAM"); formerly Manager One Boston Place of Shareholder Services, MAM, Shareholder Representative, Boston, MA 02108 Standish Mellon Asset Management Company LLC 1/19/71 Mary T. Lomasney Chief Since 2005 First Vice President, Mellon Asset Management Mellon Asset Management Compliance and Chief Compliance Officer, Mellon Funds Distributor One Boston Place Officer and Mellon Optima L/S Strategy Fund, LLC; formerly Boston, MA 02108 Director, Blackrock, Inc., Senior Vice President, 4/8/57 State Street Research & Management Company ("SSRM"), Vice President, SSRM
37 [LOGO] Mellon -------------------------- Mellon Institutional Funds One Boston Place Boston, MA 02108-4408 800.221.4795 www.melloninstitutionalfunds.com 6934AR1205 Item 2. Code of Ethics. As of December 31, 2005, the Registrant has adopted a Code of Ethics, as defined in Item 2(b) of Form N-CSR, that applies to the Principal Executive Officer and Principal Financial Officer. For the fiscal year ended December 31, 2005, there were no amendments to a provision of the Code of Ethics nor were there any waivers granted from a provision of the Code of Ethics. A copy of the Registrant's Code of Ethics that applies to the Principal Executive Officer and Principal Financial Officer is filed as an exhibit to this Form N-CSR under Item 12(a)(1). Item 3. Audit Committee Financial Expert. The Registrant's Board of Trustees has determined that the Registrant has more than one audit committee financial expert, as defined in Item 3 of Form N-CSR, serving on its audit committee. The audit committee financial experts serving on the Registrant's audit committee are John H. Hewitt and Caleb Loring III, both of whom are "independent" pursuant to paragraph (a)(2) of Item 3 of Form N-CSR. Mr. Hewitt served at Morgan Stanley as a securities analyst and also in a supervisory role regarding analysis. He has held a chartered financial analyst designation, as well as a master's degree in business administration from Harvard University. He has been a member of the Registrant's audit committee since its inception. Mr. Loring served as an executive in the commercial lending division of the Bank of Boston, N.A., performing and supervising credit analyses and reviewing financial statements of potential and existing borrowers. Also, Mr. Loring has served as a private trustee in the Ayer Family Office, where his duties involve financial statement analysis. He has been a member of the Registrant's audit committee since its inception, and has served on the audit committees of several privately held companies. Item 4. Principal Accountant Fees and Services. (a) AUDIT FEES: The aggregate fees billed for professional services rendered by the principal accountant, PricewaterhouseCoopers LLP, for the audit of the Registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings for the fiscal years ended December 31, 2005 and 2004 were $214,000 and $193,322, respectively. (b) AUDIT RELATED FEES: The aggregate fees billed for the fiscal years ended December 31, 2005 and 2004 for assurance and related services by PricewaterhouseCoopers LLP 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 $57,000 and $57,000, respectively. The nature of the services comprising the fees disclosed under this Item for both years included: the examination of compliance with requirements of Rule 17f-2 of the Investment Company Act of 1940. (c) TAX FEES: The aggregate fees billed for the fiscal years ended December 31, 2005 and 2004 for professional services rendered by PricewaterhouseCoopers LLP for tax compliance, tax advice, and tax planning were $44,258 and $96,205, respectively. Services rendered in both years included asset diversification testing, the preparation of tax returns and extensions, the review of periodic distributions. (d) ALL OTHER FEES: No such fees were billed to the Registrant by PricewaterhouseCoopers LLP for 2005 or 2004. (e) (1) AUDIT COMMITTEE PRE-APPROVAL POLICY: The Registrant's audit committee pre-approves all audit and non-audit services to be performed by the Registrant's accountant before the accountant is engaged by the Registrant to perform such services. (e) (2) 100% of the services described in each of paragraphs (b) through (d) of this Item 4 were pre-approved by the Registrant's audit committee before the accountant was engaged by the Registrant to perform such services. (f) Not applicable. (g) The aggregate non-audit fees billed by PricewaterhouseCoopers LLP for services rendered to the Registrant and the Registrant's investment advisers, and any entity controlling, controlled by or under common control with the advisers that provides ongoing services to the Registrant for the fiscal years ended December 31, 2005 and 2004 were $0 and $31,000, respectively. Services provided in 2004 included the review and documentation of the Registrant's change in custodian and fund accounting agent and the review and issuance of consent related to the registration and filing of a new fund on Form N-1A. The aggregate non-audit fees billed by the Registrant's accountant for services rendered to the Registrant's transfer agent by PricewaterhouseCoopers LLP for the fiscal years ended December 31, 2005 and 2004 were $75,000 and $43,708, respectively. Services provided in both years included a review of the transfer agency function and to issue a report under Rule 17Ad-13(a)(3) of the Securities and Exchange Act of 1934. (h) Because all of the non-audit services rendered to the Registrant's investment adviser or any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were pre-approved by the Registrant's Audit Committee of the Board of Directors and no such non-audit services were not pre-approved, the Audit Committee was not asked to consider whether the provision of non-audit services rendered to the Registrant's investment adviser or any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant which were not pre-approved by the Registrant's Audit Committee is compatible with maintaining the principal accountant's independence. Item 5. Audit Committee of Listed Registrants. Not applicable to the Registrant. Item 6. Schedule of Investments Included as part of the report to shareholders filed under Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable to the Registrant. Item 8. Portfolio Managers of Closed-End Management Investment Companies Not applicable to the Registrant. Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable to the Registrant. Item 10. Submission of Matters to a Vote of Security Holders. There have been no material changes. Item 11. Controls and Procedures. (a) The Registrant's Principal Executive Officer and Principal Financial Officer concluded that the Registrant's disclosure controls and procedures are effective based on their evaluation of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date" as defined in Rule 30a-3(c) under the Investment Company Act of 1940). (b) Not applicable to the Registrant. Item 12. Exhibits. (a)(1) Code of Ethics required by Item 2 is attached hereto as an exhibit. (a)(2) Certifications of the Principal Executive Officer and Principal Financial Officer of the Registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 are attached hereto as Exhibit 99CERT.302 (b) Certifications as required by Rule 30a-2(b) under the Investment Company Act of 1940 and pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit 99CERT.906. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Mellon Institutional Funds Investment Trust By (Signature and Title): /s/ BARBARA A. MCCANN --------------------- Barbara A. McCann, Vice President and Secretary Date: March 10, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities, and on the dates indicated. By (Signature and Title): /s/ PATRICK J. SHEPPARD ----------------------- Patrick J. Sheppard, President and Chief Executive Officer Date: March 10, 2006 By (Signature and Title): /s/ STEVEN M. ANDERSON ---------------------- Steven M. Anderson, Vice President and Treasurer Date: March 10, 2006 EX-99.CODE ETH 2 ex-12a1.txt MELLON INSTITUTIONAL FUNDS INVESTMENT TRUST AND MELLON INSTITUTIONAL FUNDS MASTER PORTFOLIO (MELLON INSTITUTIONAL FUNDS ("MIF") COMPLIANCE POLICIES AND PROCEDURES CODE OF BUSINESS CONDUCT AND ETHICS Effective Date November 26, 2003 Table of Contents
Page Number I. Overview.....................................................................4 II. Purposes of the Code.........................................................5 III. Responsibilities of Covered Officers.........................................6 A. Honest and Ethical Conduct..........................................6 B. Conflicts of Interest...............................................6 C. Use of Personal Fund Shareholder Information.......................10 D. Public Communications..............................................10 E. Compliance with Applicable Laws, Rules and Regulations.............11 IV. Violation Reporting.........................................................12 A. Overview...........................................................12 B. How to Report......................................................13 C. Process for Violation Reporting to the Board.......................13 D. Sanctions for Code Violations......................................13 V. Waivers from the Code.......................................................13 VI. Amendments to the Code......................................................15 VII. Acknowledgement and Certification of Adherence to the Code..................15 VIII. Recordkeeping...............................................................15 IX. Confidentiality.............................................................15 Appendices ....... Appendix A: Covered Officers and Definitions....................................8 Appendix B: Form of Certification...............................................9
I.Overview This Code of Business Conduct and Ethics (the "Code") sets forth the legal and ethical standards of conduct for the principal executive officer and principal financial officer (the "Covered Officers"), of Mellon Institutional Funds Investment Trust and Mellon Institutional Funds Master Portfolio (collectively, the "Trust"). The Trust's Covered Officers are identified on Appendix A to this Code. Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002 and the Securities and Exchange Commission's (the "SEC") rules thereunder, the Board of Trustees of each Trust (collectively, the "Board") has implemented the Code to promote and demonstrate honest and ethical conduct in its Covered Officers. The Covered Officers are also employees of Standish Mellon Asset Management Company LLC and/or The Boston Company Asset Management, LLC. (collectively, the "Adviser"). In addition to adhering to the Code, these individuals must comply with other Trust and Adviser policies and procedures, such as the Trust's code of ethics governing personal trading activities, as adopted pursuant to Rule 17j-1 under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Trust's ethics compliance officer (the "Ethics Compliance Officer"), in consultation with counsel to the Trust, is primarily responsible for implementing and enforcing this Code. The Ethics Compliance Officer, in consultation with counsel to the Trust, has the authority to interpret the Code and its applicability to particular circumstances. Any questions about the Code should be directed to the Ethics Compliance Officer and counsel to the Trust. The Ethics Compliance Officer is not a Covered Officer under this Code. The Ethics Compliance Officer is identified on Appendix A to this Code. II. Purposes of the Code The purposes of the Code are to deter wrongdoing and to: o promote honest and ethical conduct among Covered Officers, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o promote full, fair, accurate, timely and understandable disclosures in reports and documents that the Trust files with or submits to the SEC (and in other public communications from the Trust or any series of the Trust (a "Fund")) and that are within the Covered Officers' responsibilities; o promote compliance with applicable laws, rules and regulations; o encourage the prompt internal reporting of violations of the Code to the Ethics Compliance Officer; and o establish accountability for adherence to the Code. 2 III. Responsibilities of Covered Officers A. Honest and Ethical Conduct It is the duty of every Covered Officer to encourage and demonstrate honest and ethical conduct, as well as adhere to and require adherence to the Code and any other applicable policies and procedures designed to promote this behavior. Covered Officers must at all times conduct themselves with integrity, putting first the interests of the shareholders of the Trust they serve. Covered Officers also must, at all times, act in good faith, responsibly and with due care, competence and diligence, without misrepresenting material facts or allowing their independent judgment to be subordinated. Covered Officers also should responsibly use and control all Trust assets and resources entrusted to them. Covered Officers may not discourage the reporting of, actual or apparent violations of the Code or applicable laws or regulations. Individuals that report in good faith suspected violations of the Code or applicable laws or regulations should not be adversely affected in employment or other matters for making such reports. Covered Officers should create an environment that encourages the exchange of information, including concerns of the type that this Code is designed to address. B. Conflicts of Interest A "conflict of interest" occurs when a Covered Officer's personal interests interfere with the interests of the Trust for which he or she serves as an officer. Covered Officers may not improperly use their position with the Trust for personal or private gain to themselves, their family, or any other person. Certain conflicts of interest covered by this Code arise out of the relationships between Covered Officers and the Trust that already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act of 1940, as amended. For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trust because of their status as "affiliated persons" of the Trust. Covered Officers must comply with applicable laws and regulations. Therefore, any violations of existing statutory and regulatory prohibitions on individual behavior will also be deemed a violation of this Code. As to conflicts arising from, or as a result of the advisory relationship between the Trust and the Adviser, of which the Covered Officers are also officers or employees, it is recognized by the Board that, subject to the Adviser's fiduciary duties to the Trust, the Covered Officers will in the normal course of their duties (whether formally for the Trust or for the Adviser, or for both) be involved in establishing policies and implementing decisions which may have different effects on the Adviser and the Trust. The Board recognizes that the participation of the Covered Officers in such activities is inherent in the contract relationship between the Trust and the Adviser and is consistent with the expectation of the Board of the performance by the Covered Officers of their duties as officers of the Trust. 3 Covered Officers should avoid actual conflicts of interest, and appearances of conflicts of interest, between the Covered Officer's duties to the Trust and his or her personal interests. If a Covered Officer suspects or knows of a conflict or an appearance of one, the Covered Officer must immediately report the matter to the Ethics Compliance Officer and counsel for the Trust. When actual, apparent or suspected conflicts of interest arise that have not been addressed or reported in connection with a Covered Officer, the Adviser's personnel aware of the matter should promptly contact the Ethics Compliance Officer and counsel for the Trust. There will be no reprisal against any person reporting in good faith an actual, apparent or suspected conflict of interest. Upon receipt of a report of a possible conflict, the Ethics Compliance Officer and counsel to the Trust will take steps to determine whether a conflict exists. In so doing, the Ethics Compliance Officer and counsel to the Trust may take any actions they determine to be appropriate in their discretion and may use all reasonable resources, including retaining or engaging independent legal counsel, accounting firms or other consultants, subject to applicable law.(1) After full review of a report of a possible conflict of interest, the Ethics Compliance Officer and counsel to the Trust may determine that no conflict or reasonable appearance of a conflict exists. If, however, the Ethics Compliance Officer and counsel to the Trust determine that an actual conflict or appearance of a conflict exists, the Ethics Compliance Officer and counsel to the Trust will promptly inform the Chairman of the Independent Trustees of the conflict or appearance of a conflict and its proposed resolution in the best interests of the shareholders of the Trust. Absent any objection from the Independent Trustees, the Ethics Compliance Officer and counsel to the Trust will implement the proposed resolution. In lieu of determining whether a conflict exists, the Ethics Compliance Officer and counsel to the Trust may refer the matter to the Independent Trustees. After receiving a report of a possible conflict of interest, the Ethics Compliance Officer and counsel to the Trust will discuss the matter with the person who reported it (and with the Covered Officer at issue, if different) for purposes of educating those involved on conflicts of interests (including how to detect and avoid them, if appropriate). Appropriate resolution of conflicts may restrict the personal activities of the Covered Officer and/or his family, friends or other persons. Neither (a) the determination that no conflict or reasonable appearance of a conflict exists nor (b) the disclosure and resolution of a conflict or appearance of a conflict as described above is considered to be a waiver of the Code's requirements. Any questions about conflicts of interests, including whether a particular situation might be a conflict or an appearance of one, should be directed to the Ethics Compliance Officer and counsel to the Trust. (1) For example, retaining a Trust's independent accounting firm may require pre-approval by the Trust's audit committee. 4 C. Use of Personal Fund Shareholder Information A Covered Officer may not use or disclose personal information about Fund shareholders, except in the performance of his or her duties for a Fund. Each Covered Officer also must abide by the Trust's and the Adviser's privacy policies under SEC Regulation S-P. D. Public Communications In connection with his or her responsibilities for or involvement with the Trust's public communications and disclosure documents (e.g., Fund shareholder reports, registration statements, press releases), each Covered Officer must provide information to Trust service providers (within the Adviser's organization or otherwise) and to government regulators and self-regulatory organizations that is accurate, complete, relevant and timely. Further, within the scope of their duties, Covered Officers will endeavor to ensure full, timely, and accurate disclosure in Trust disclosure documents. Covered Officers involved in or responsible for the Trust's public disclosure documents will oversee, or appoint others to oversee, processes for the timely creation and review of the accuracy of public reports and regulatory filings. Each Covered Officer also will familiarize himself or herself with the disclosure requirements applicable to the Trust, to the extent necessary to fulfill his or her responsibilities as a Covered Officer, and will adhere to, and will promote adherence to, Trust and Adviser disclosure controls, processes and procedures, including the Adviser's disclosure controls and procedures, which govern the process by which Trust disclosure documents are created and reviewed. To the extent that Covered Officers participate in the creation of a Fund's books and records, they must do so in a way that promotes the accuracy, fairness and timeliness of those records. E. Compliance with Applicable Laws, Rules and Regulations In connection with his or her duties and within the scope of his or her responsibilities as a Covered Officer, each Covered Officer must comply with governmental laws, rules and regulations that apply to his or her role, responsibilities and duties with respect to the Trust ("Applicable Laws"). These requirements do not impose on Covered Officers any additional substantive duties. Additionally, Covered Officers should promote compliance with Applicable Laws. If a Covered Officer knows of any material violations of Applicable Laws or suspects that such a violation may have occurred, the Covered Officer is expected to promptly report the matter to the Ethics Compliance Officer. IV. Violation Reporting A. Overview Each Covered Officer must promptly report, and promote the reporting of, any known or suspected violations of the Code to the Ethics Compliance Officer and the counsel to the Trust. 5 Examples of violations of the Code include, but are not limited to, the following: o Unethical or dishonest behavior o Obvious lack of adherence to policies surrounding review and approval of public communications and regulatory filings o Failure to report violations of the Code o Material violations of Applicable Laws o Failure to acknowledge and certify adherence to the Code The Ethics Compliance Officer and counsel to the Trust have the authority to take any and all action he or she considers appropriate in his or her sole discretion to investigate known or suspected Code violations, including consulting with the Trust's Board, the independent Board members, a Board committee, independent legal counsel and/or counsel to the independent Board members. The Ethics Compliance Officer and counsel to the Trust also has the authority to use all reasonable resources to investigate violations, including retaining or engaging legal counsel, accounting firms or other consultants, subject to applicable law. B. How to Report Any known or suspected violations of the Code must be promptly reported to the Ethics Compliance Officer and counsel to the Trust. C. Process for Violation Reporting to the Board The Ethics Compliance Officer and counsel to the Trust will report any violations of the Code promptly to the Chairman of the Independent Trustees. D. Sanctions for Code Violations Violations of the Code will be taken seriously. In response to reported or otherwise known violations, the Adviser and the Trust's Board may impose sanctions which they deem appropriate within the scope of their respective authority over the Covered Officer at issue. Sanctions imposed by the Adviser could include termination of employment. Sanctions imposed by the Trust's Board could include termination of association with the Trust. V. Waivers from the Code A Covered Officer may request a waiver from the Code by transmitting a written request for a waiver to the Ethics Compliance Officer and counsel to the Trust.(2) The request must include the rationale for the request and must explain how the waiver would be in furtherance of the standards of conduct described in and underlying purposes of the Code. The Ethics Compliance Officer and counsel to the Trust may grant waivers from the Code, as (2) There would not be a waiver of the Code if the Ethics Compliance Officer and counsel to the Trust determines that a matter is not a deviation from the Code's requirements or is otherwise not covered by the Code. 6 appropriate, subject to and in furtherance of, the standards of conduct described in the Code. The Ethics Compliance Officer and counsel to the Trust must fully document their consideration of any waiver request, including the rationale for granting or denying the waiver and promptly report the grant of any waiver (including the identification of any implicit waiver) to the Chairman of the Independent Trustees. In connection with the report of an implicit waiver, the Ethics Compliance Officer and Trust will propose (a) a resolution of the underlying departure from the Code, and (b) if appropriate under the circumstances, measures to ensure prompt discovery of such a departure in the future. The Ethics Compliance Officer and counsel to the Trust will monitor the activities subject to the waiver, as appropriate, and for compliance with any terms of the waiver and any violation of the terms of a waiver shall be treated as a violation of this Code. In lieu of determining whether to grant a waiver, the Ethics Compliance Officer and counsel to the Trust may refer the matter to the Independent Trustees. The Ethics Compliance Officer and counsel to the Trust will coordinate and facilitate any required public disclosures of any waivers granted or any implicit waivers. VI. Amendments to the Code The Ethics Compliance Officer and counsel to the Trust may amend the Code as appropriate subject to the approval of the Independent Trustees. The Ethics Compliance Officer and counsel to the Trust will coordinate and facilitate any required public disclosures of Code amendments. VII. Acknowledgement and Certification of Adherence to the Code Each Covered Officer must sign a statement annually acknowledging that he or she has received a copy of the Code, as amended or updated, and confirming that he or she has complied with it (see Appendix B: Code Acknowledgement and Certification Form). VIII. Recordkeeping The Ethics Compliance Officer will create and maintain appropriate records regarding the implementation and operation of the Code, including records relating to conflicts of interest determinations and investigations of possible Code violations. IX. Confidentiality All reports and records prepared or maintained pursuant to this Code shall 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 Ethics Compliance Officer, the Covered Officer, the Trust's Board and legal counsel. 7 Appendix A ---------- Covered Officers and Definitions Principal Executive Officer Individual holding the office of President of the Trust, or a person performing a similar function. Patrick J. Sheppard serves as the President of the Trust and is a Covered Officer. Principal Financial Officer Individual holding the office of Treasurer of the Trust, or a person performing a similar function. Steven M. Anderson serves as the Treasurer of the Trust and is a Covered Officer. Ethics Compliance Officer Barbara A. McCann serves as the Ethics Compliance Officer of the Trust. Registered Management Investment Company Registered investment companies other than a face-amount certificate company or a unit investment trust. Waiver A waiver is an approval of an exemption from a Code requirement. Implicit Waiver An implicit waiver is the failure to take action within a reasonable period of time regarding a material departure from a requirement or provision of the Code that has been made known to the Ethics Compliance Officer and counsel to the Trust. Independent Trustees Those Trustees of the Trust who are not "interested persons" of the Trust or the Adviser as that term is defined in Section 2(a)(19) of the Investment Company Act. 8 Appendix B ---------- CERTIFICATION Annual Acknowledgement and Certification of Obligations Under the Code of Business Conduct and Ethics 1. I acknowledge and certify that I am a Covered Officer under the Mellon Institutional Funds Code of Business Conduct and Ethics (the "Code") and therefore subject to all of its requirements and provisions. 2. I have read and understand the requirements and provisions set forth in the Code. 3. I have adhered to the Code and will continue to adhere to the Code. ------------------------------------------------------ Signature Date ------------------------------------------------------ Print Name Title EX-99.CERT 3 ex-99cer302.txt Exhibit 99CERT.302 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002: I, Patrick J. Sheppard, certify that: 1. I have reviewed this report on Form N-CSR of Mellon Institutional Funds Investment Trust (the "Registrant"); 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(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ PATRICK J. SHEPPARD ----------------------- Patrick J. Sheppard President and Chief Executive Officer Exhibit 99CERT.302 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002: I, Steven M. Anderson, certify that: 1. I have reviewed this report on Form N-CSR of Mellon Institutional Funds Investment Trust (the "Registrant"); 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(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ STEVEN M. ANDERSON ---------------------- Steven M. Anderson Vice President and Treasurer EX-99.906CERT 4 ex-99cert906.txt Exhibit 99CERT.906 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Patrick J. Sheppard, President and Chief Executive Officer and Steven M. Anderson, Vice President and Treasurer of Mellon Institutional Funds Investment Trust (the "Registrant"), each certify to the best of their knowledge that: 1. The Registrant's periodic report on Form N-CSR for the period ended December 31, 2005 (the "Form N-CSR") fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. /s/ PATRICK J. SHEPPARD - ----------------------- Patrick J. Sheppard President and Chief Executive Officer Date: March 10, 2006 /s/ STEVEN M. ANDERSON - ----------------------- Steven M. Anderson Vice President and Treasurer Date: March 10, 2006 A signed original of this written statement required by Rule 30a-216, under the Investment Company Act of 1940 and 18 U.S.C. ss. 1350 will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. This certification is being furnished to the Securities and Exchange Commission solely pursuant to Rule 30a-2(b) under the Investment Company Act of 1940, as amended, and 18 U.S.C. ss. 1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----