329915 - 22739 - MAINSTAY FUNDS - 3-7-1997 - 811-04550 - Note 1--Organization and Business - 329915-311963-331430.pdf

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Note 1--Organization and Business: The MainStay Funds were organized on January 9, 1986 as a Massachusetts Business Trust. The Trust is registered under the Investment Company Act of 1940, as amended, (the "Act") as an open-end management investment company and is comprised of thirteen portfolios. These financial statements and notes relate only to MainStay Convertible Fund (the "Fund"). The Fund currently offers two classes of shares. Class A shares, whose distribution commenced on January 3, 1995, are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent deferred sales charge may be imposed on redemptions made within six years of purchase. Class A shares and Class B shares bear the same voting (except for issues that relate solely to one class), dividend, liquidation and other rights and conditions except that the Class B shares are subject to higher distribution fee rates. Each class of shares bears distribution and/or service fee payments under a distribution plan pursuant to Rule 12b-1 under the Investment Company Act of 1940. The Fund's investment objective is to seek capital appreciation together with current income. Note 2--Significant Accounting Policies: The following is a summary of significant accounting policies followed by the Fund: Valuation of Fund Shares. The net asset value per share of each class of shares is calculated on each day the New York Stock Exchange (the "Exchange") is open for trading as of the close of regular trading on the Exchange. The net asset value per share of each class of shares is determined by taking the assets attributable to a class of shares, subtracting the liabilities attributable to that class, and dividing the result by the outstanding shares of that class. Securities Valuation. Portfolio securities of the Fund are stated at value determined (a) by appraising common and preferred stocks which are traded on the New York Stock Exchange at the last sale price on that day or, if no sale occurs, at the mean between the closing bid and asked prices, (b) by appraising common and preferred stocks traded on other United States national securities exchanges or foreign securities exchanges as nearly as possible in the manner described in (a) by reference to their principal exchange, including the National Association of Securities Dealers National Market System, (c) by appraising over-the-counter securities quoted on the National Association of Securities Dealers NASDAQ system (but not listed on the National Market System) at the bid price supplied through such system, (d) by appraising over-the-counter securities not quoted on the NASDAQ system at prices supplied by the pricing agent or brokers selected by the Adviser, if these prices are deemed to be representative of market values at the regular close of business of the New York Stock Exchange, (e) by appraising debt securities at prices supplied by a pricing agent selected by the Adviser, whose prices reflect broker/dealer supplied valuations and electronic data processing techniques if those prices are deemed by the Adviser to be representative of market values at the regular close of business of the New York Stock Exchange, (f) by appraising options and futures contracts at the last sale price 25 MainStay Convertible Fund on the market where such options or futures are principally traded, and (g) by appraising all other securities and other assets, including debt securities for which prices are supplied by a pricing agent but are not deemed by the Adviser to be representative of market values, but excluding money market instruments with a remaining maturity of sixty days or less and including restricted securities and securities for which no market quotations are available, at fair value in accordance with procedures approved by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost if their term to maturity at purchase was 60 days or less, or by amortizing the difference between market value on the 61st day prior to maturity and value at maturity date if their original term to maturity at purchase exceeded 60 days. Events affecting the values of certain portfolio securities that occur between the close of trading on the principal market for such securities (foreign markets and over-the-counter markets) and the regular close of the New York Stock Exchange will not be reflected in the Fund's calculation of net asset value unless the Adviser believes that the particular event would materially affect net asset value, in which case an adjustment would be made. Forward Currency Contracts. A forward currency contract is an agreement to buy or sell currencies of different countries on a specified future date at a specified rate. During the period the forward currency contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking to market" such contract on a daily basis to reflect the market value of the contract at the end of each day's trading. When the forward currency contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract. The Fund enters into forward currency contracts in order to hedge its foreign currency denominated investments, receivables and payables against adverse movements in future foreign currency exchange rates. The use of forward currency contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the statement of assets and liabilities. The contract or notional amounts reflect the extent of the Fund's involvement in these financial instruments. Risks arise from the possible movements in the foreign exchange rates underlying these instruments. The unrealized appreciation/depreciation on forward contracts reflects the Fund's exposure at year end to credit loss in the event of a counterparty's failure to perform its obligations. Forward foreign currency contracts open at December 31, 1996: (Y) Japanese Yen. 26 Contracts In Delivery Gross Unrealized to Deliver Exchange for Date Appreciation ---------- ------------ -------- ---------------- (Y)318,960,000 $3,000,000 3/20/97 $216,389 (Y)551,450,000 $5,000,000 6/6/97 133,370 (Y)219,600,000 $2,000,000 6/6/97 61,997 -------- Net Appreciation $411,756 ======== Notes to Financial Statements continued Securities Sold Short. The Fund may engage in short sales as a method of hedging declines in the value of securities owned. When the Fund enters into a short sale, it must segregate the security sold short, or securities equivalent in kind and amount to the securities sold, as collateral for its obligation to deliver the security upon conclusion of the sale. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited as to dollar amount, will be recognized upon termination of a short sale if the market price on the date the short position is closed out is less or greater, respectively, than the proceeds originally received. Any such gain or loss may be offset, completely or in part, by the change in the value of the hedged investments. Restricted Securities. A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult. The Fund may not invest more than 10% of its net assets in illiquid securities. At December 31, 1996 the Fund held no restricted securities. Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits. Therefore, no Federal income tax provision is required.Permanent book-tax differences of $85,101 and $94,034 have been reclassified from accumulated distribution in excess of net investment income and accumulated net realized gain on investments, respectively, to additional paid in capital. In addition, $581,217 has been reclassified from accumulated net realized gain on foreign currency transactions to accumulated distribution in excess of net investment income. Investment income received by a Fund from foreign sources may be subject to foreign income taxes withheld at the source. Dividends and Distributions to Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare and pay dividends quarterly. Income dividends and capital gain distributions are determined in accordance with Federal income tax regulations which may differ from generally accepted accounting principles. Security Transactions and Investment Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Dividend income is recognized on the ex-dividend date and interest income is accrued daily except when collection is not expected. Discounts on securities purchased for the Fund are accreted on the constant yield method over the life of the respective securities or, if applicable, over the period to the first call date. Income from payment-in-kind securities is recorded daily based on the effective interest method of accrual. Expenses. Expenses of the Trust are allocated to the individual Funds in proportion to the net assets of the respective Funds when the expenses are incurred except when allocations of direct expenses can otherwise fairly be made. The investment income and expenses (other than expense incurred under the Distribution Plan) and realized and unrealized gains and losses on investments of the Fund are allocated to separate classes of shares based upon their relative net asset value on the date the income is earned or expenses and realized 27 MainStay Convertible Fund and unrealized gains and losses are incurred. Dividends on short positions are recorded as expenses of the Fund on ex-dividend date. Use of Estimates. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. Note 3--Fees and Related Party Policies: Investment Advisory and Administration Fees. MacKay-Shields Financial Corporation ("MacKay-Shields") acts as investment adviser to the Fund under an Investment Advisory Agreement. MacKay-Shields is a registered investment adviser and an indirect wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). NYLIFE Distributors Inc. ("NYLIFE Distributors"), an indirect wholly-owned subsidiary of New York Life, is the Administrator for the Fund. The Trust, on behalf of the Fund, pays the Adviser and Administrator each a monthly fee for the services performed and the facilities furnished at an annual rate of 0.36% of the average daily net assets of the Fund. The Investment Advisory and Administration Agreements for the Fund also provide that in the event the expenses of the Fund (including the fees for the Adviser and Administrator, but excluding interest, taxes, organization expenses, litigation and indemnification expenses, distribution fees and other extraordinary expenses) for any fiscal year exceed the most restrictive limitation of certain state securities commissions, the Adviser and the Administrator each will reduce their fee payable by the Fund by 50% of the amount of such excess up to the extent of their fees. The expenses of the Fund did not exceed the most restrictive expense limitation for the year ended December 31, 1996. Distribution and Service Fees. The Trust, on behalf of the Fund, has a Distribution Agreement with NYLIFE Distributors Inc. (the "Distributor"). The Fund, with respect to each class of shares, has adopted a Distribution Plan (the "Plan") in accordance with the provisions of Rule 12b-1 under the 1940 Act. Pursuant to the Class A Plan, the Distributor receives payments from the Fund at an annual rate of 0.25% of the average daily net assets of the Fund's Class A shares, which is an expense of the Class A shares of the Fund for distribution or service activities as designated by the Distributor. Pursuant to the Class B Plan, the Fund's Class B shares are subject to the payment of a monthly distribution fee, which is an expense of the Class B shares of the Fund, at the annual rate of 0.75% of the lesser of: (a) the aggregate gross sales of the Fund's Class B shares since the inception of the Fund (not including reinvestment of dividends or capital gains distributions), less the aggregate net asset value of the Fund's Class B shares exchanged or redeemed since the Fund's inception upon which a contingent deferred sales charge has been imposed or upon which such charge has been waived; or (b) the average daily net assets of the Fund's Class B shares. 28 Notes to Financial Statements continued The Distribution Plan provides that the Class B shares of the Fund also incur a service fee at the annual rate of 0.25% of the average daily net asset value of the Class B shares of the Fund. Service fee as shown on the statement of operations represents the fees for both Class A shares and Class B shares. The Plan provides that the distribution fee is payable to NYLIFE Distributors regardless of the amounts actually expended by NYLIFE Distributors for distribution of the Fund's shares and service activities. NYLIFE Distributors anticipates that its actual distribution expenditures will substantially exceed the distribution fee received by it during the initial years of the operation of the Plan and that in later years its expenditures may be less than the distribution fee. Sales Charges. The Fund was advised that the amount of sales charge on sales of Class A Fund shares retained by NYLIFE Distributors was $903,782 for the year ended December 31, 1996. The Fund was also advised that NYLIFE Distributors retained contingent deferred sales charges on redemptions of Class B shares of $852,359 for the year ended December 31, 1996. Trustee Fees. Trustees, other than those affiliated with New York Life, MacKay-Shields, NYLIFE Distributors or NYLIFE Securities, are paid an annual fee of $40,000 and $1,000 for each Board and Audit Committee meeting attended plus reimbursement for travel and out-of-pocket expenses. The Trust allocates this expense in proportion to the net assets of the respective Funds. Other. The Trust has an agreement with NYLIFE Distributors to provide certain transfer agency services for the Fund. Fees for these services for the year ended December 31, 1996 were $74,793. Fees for the cost of legal services provided to the Fund by the Office of General Counsel of New York Life amounted to $15,636 for the year ended December 31, 1996. Fees for recordkeeping services provided to the Fund by NYLIFE Distributors are charged to the Fund. The fee for the year ended December 31, 1996 amounted to $81,568. Note 4--Deposit with Broker: Cash deposited with broker in the amount of $122,377,088 is partially restricted as collateral for securities sold short. Note 5--Purchases and Sales of Securities (in 000's): During the year ended December 31, 1996 purchases and sales of U.S. Government securities were $271,953 and $270,794, respectively. Purchases and sales of securities, other than U.S. Government securities, securities subject to repurchase transactions and short-term securities, were $1,394,393 and $1,058,801, respectively. 29 MainStay Convertible Fund Note 6--Capital Share Transactions (in 000's): 30 Year ende 1996 --------------------- Class A Class B ------- ------- Shares sold ................................................................ 2,602 27,714 Shares issued in reinvestment of dividends and distributions ............... 297 3,935 ----- ------ 2,899 31,649 Shares redeemed ............................................................ 793 5,658 ----- ------ Net increase ............................................................... 2,106 25,991 ===== ====== Report of Independent Accountants To the Board of Trustees and Shareholders of The MainStay Funds In our opinion, the accompanying statement of assets and liabilities, including the portfolio 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 MainStay Convertible Fund (one of the thirteen funds constituting The MainStay Funds, hereafter referred to as the "Fund") at December 31, 1996, 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 periods indicated, in conformity with generally accepted accounting principles. 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 generally accepted auditing standards which 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, 1996 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP 1177 Avenue of the Americas New York, New York February 19, 1997 31 The MainStay Funds THE MAINSTAY FUNDS * The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + The original investment is guaranteed provided it is held for 10 years with all dividend and capital gain distributions reinvested. If shares are redeemed prior to or after the guarantee date, the investor loses the benefit of the guarantee with respect to those shares. ++ Investments in foreign securities may be subject to greater risks than domestic investments. These risks include currency fluctuations, changes in U.S. or foreign tax or currency laws, and changes in monetary policies and economic and political conditions in foreign countries. (ss.) While individual securities owned by the Government Fund are guaranteed by the U.S. government and its agencies, the share price of the Fund is not guaranteed and will fluctuate with market conditions. || Certain of the Fund's investments may be speculative. # Investments in the Money Market Fund are neither insured nor guaranteed by the U.S. government and there is no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share; investment returns will vary with market conditions. ** A small portion of the Fund's income may be subject to state and local taxes and the Alternative Minimum Tax. Capital gains, if any, may also be taxed. 32 GROWTH FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests primarily in common stocks You want your i Capital Appreciation Fund graph indicating of companies in expanding markets and are willing risk/reward of Fund] with strong growth potential level of risk f - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in a portfolio that tracks You seek a cons Equity Index Fund graph indicating the makeup and returns of the participate in risk/reward of Fund] S&P 500* of stocks+ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Offers broad diversification into You prefer the International Equity Fund graph indicating international stock markets with of internationa risk/reward of Fund] an emphasis on risk control add diversifica investments++ - ------------------------------------------------------------------------------------------------------- GROWTH & INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Balances current income with growth You seek a comb Total Return Fund graph indicating opportunities by investing in stocks, growth potentia risk/reward of Fund] bonds, and money market instruments risk through di - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks undervalued stocks with You seek to max Value Fund graph indicating attractive dividends and a stimulus securities whic risk/reward of Fund] for positive change tial than the m - ------------------------------------------------------------------------------------------------------- [Horizontal bar Invests in convertible securities for You want income CONVERTIBLE FUND graph indicating a special blend of long-term growth may offer growt risk/reward of Fund] potential and dividend income into common sto - ------------------------------------------------------------------------------------------------------- A word about risk and reward The "thermometers" in the tables above show how much risk the investor must assume and the related return potential. Generally speaking, investments with higher return potential also carry higher risks. So, the longer the indicator bar, the higher the risk and reward potential of the Fund. The prospectus contains information on advisory fees, other expenses, and share classes. Please read it carefully before you invest or send any money. Shares must be offered in the investor's state of residence. 33 INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- Seeks a high level of current income You are seeking Government Fund [Horizontal bar consistent with safety of principal current income graph indicating primarily from U.S. government risk/reward of Fund] securities.(ss.) - ------------------------------------------------------------------------------------------------------- High Yield [Horizontal bar An aggressive high yield bond You want to max Corporate Bond Fund graph indicating fund that is actively managed for and can accept risk/reward of Fund] maximum current income|| securities with - ------------------------------------------------------------------------------------------------------- Seeks high current yields and You prefer the International Bond Fund [Horizontal bar competitive total return from non- of internationa graph indicating U.S. bonds with an emphasis on diversification risk/reward of Fund] risk control investments++ - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks to provide current income, You are averse Money Market Fund graph indicating stability of principal, and liquidity, competitive yie risk/reward of Fund] with free checkwriting# ning to spend o - ------------------------------------------------------------------------------------------------------- TAX-FREE INCOME FUNDS - ------------------------------------------------------------------------------------------------------- FUND RISK/REWARD HOW IT INVESTS CHOOSE THIS FUN - ------------------------------------------------------------------------------------------------------- [Horizontal bar Seeks high current income that's You're in a hig Tax Free Bond Fund graph indicating exempt from regular federal bracket or want risk/reward of Fund] income tax** investment inco - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a Califo California Tax Free Fund [Horizontal bar from both federal and California keep more of wh graph indicating income taxes consistent with ing for income risk/reward of Fund] preservation of capital** - ------------------------------------------------------------------------------------------------------- Seeks high current income exempt You're a New Yo New York Tax Free Fund [Horizontal bar from federal, New York State, and and want to kee graph indicating New York City income taxes consis- with income tha risk/reward of Fund] tent with preservation of capital** free** - ------------------------------------------------------------------------------------------------------- MAINSTAY Convertible Fund 1996 Annual Report December 31, 1996 [LOGO] MainStay(R) Funds Dechert Price & Rhoads Legal Counsel [LOGO] MainStay(R) Funds NYLIFE Distributors Inc. 260 Cherry Hill Road Parsippany, New Jersey 07054 Administrator & Distributor of The MainStay Funds http://www.mainstayfunds.com NYLIFE Distributors Inc., member NASD, is an indirect wholly owned subsidiary of New York Life Insurance Company. [LOGO] NEW YORK LIFE This report is provided for the information of shareholders of the MainStay Convertible Fund. It may be given to others only when preceded or accompanied by an effective MainStay Funds prospectus. This report does not offer to sell any securities or solicit orders to buy them. (C)1997. All rights reserved. [GRAPHIC] MSAN06 (297) Officers & Trustees Alice T. Kane Chairperson and Trustee Walter W. Ubl President, Chief Executive Officer, and Trustee Edward J. Hogan Trustee Harry G. Hohn Trustee Nancy Maginnes Kissinger Trustee Terry L. Lierman Trustee Donald E. Nickelson Trustee Donald K. Ross Trustee Richard S. Trutanic Trustee Jefferson C. Boyce Senior Vice President Anthony W. Polis Chief Financial Officer Richard W. Zuccaro Tax Vice President A. Thomas Smith III Secretary Table of Contents Chairperson's Letter 2 MainStay Equity Index Fund Highlights 3 $10,000 Invested in the MainStay Equity Index Fund versus S&P 500 and Inflation 4 Portfolio Management Discussion and Analysis 5 Year-by-Year Performance 6 Diversification by Industry--Top 5 7 Portfolio Composition 7 Returns & Lipper Rankings 8 Top 10 Equity Holdings 9 Portfolio of Investments 10 Financial Statements 20 Notes to Financial Statements 24 Report of Independent Accountants 29 The MainStay Funds 30 Chairperson's Letter The undisputed story of 1996 was the remarkable momentum of the equity market. The bond market took a back seat while the financial community and investors watched the U.S. stock market soar by 23%.* The Dow Jones Industrial Average broke 6,600. Exciting new companies entered the markets and received overwhelming public support. New trends--the Internet, for one--gave rise to new waves of optimism. Assets in mutual funds have surpassed all the gold in both Fort Knox and the New York Federal Reserve combined. Good, strong performance is important, but we shouldn't lose sight of what must be consistent in any climate: the philosophy, the strategies, the education, and the communication between the mutual fund company, the Registered Representatives, and the investors. It shouldn't be assumed that the market will continue at this pace. It is important to remember that mutual fund investing isn't about timing markets, it's about setting realistic goals and plotting a long-term course to help get there. That's where MainStay(R) comes in. It's a name that stands for staying the course. We know you depend on us to remain steadfast in our vigilance, to do the research, make prudent choices, and provide timely, accurate, and useful information. However, staying steady doesn't mean standing pat. So we continue to work at creating materials that go beyond providing information, to providing understanding. For example, our simplified prospectus is unlike any other in the industry, and we've been complimented in the press for our series of educational brochures, such as Navigating through the Star Ratings and What is the S&P 500 and what can it tell me about my investments? We at MainStay have a responsibility to help you, our investors, stay informed and in a position to make intelligent decisions at the right times. With all the high-tech changes, your Registered Representative is still one of the most valuable resources in the industry. Take advantage of yours. Seek his or her perspective and assistance this year, not just on the markets, but on your individual situation. Keep sight of your core requirements and risk tolerances, and be aware of how your lifestyle and goals may change. No one can promise 1997 will be a repeat of 1996 because the market is ever changing. But we at MainStay can promise to continue managing Funds to seek downside protection as well as upside performance. We'll be with you, from the home office to your Registered Representative, to help you stay the course toward your investment horizons. Wishing you all the best, * As measured by the S&P 500, an unmanaged index considered to be generally representative of the U.S. stock market. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. 2 - -------------------------------------------------------------------------------- [GRAPHIC] /s/ Alice T. Kane Alice T. Kane January 1997 [GRAPHIC] MainStay Equity Index Fund Highlights 1996 MARKET HIGHLIGHTS o The year was an outstanding one for stocks, particularly large capitalization issues o The Dow Jones Industrial Average+ recorded a 28.91% gain for the year o Top performing sectors included oil & gas drilling, shoes, and electronic semiconductors o Worst performing sectors included truckers, broadcast/media, and machines 1996 FUND HIGHLIGHTS o One-year total return of 22.04% for Class A shares, excluding all sales charges, as of 12/31/96 o Best one-year performance of all MainStay Funds as of 12/31/96 o Fund returns closely tracked the S&P 500 Index++ + A price weighted average of 30 actively traded large capitalization stocks, mainly industrials but including some service oriented firms. ++ See footnote on page 4 for more information on the S&P 500. 3 $10,000 Invested in the MainStay Equity Index Fund versus S&P 500 and Inflation Class A Shares CLASS A SHARES [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL] [GRAPHIC] MainStay Equity Index Fund [GRAPHIC] S&P 500* [GRAPHIC] Inflation+ This graph assumes an initial investment of $10,000 made on 12/20/90 reflecting the effect of the current maximum sales charge of 3.0%, thereby reducing the amount of the investment to $9,700. All results include reinvestment of distributions at net asset value and the change in share price for the stated period. Past performance is no guarantee of future results. * "Standard & Poor's 500 Composite Stock Price Index" and "S&P 500" are registered trademarks of Standard & Poor's. The S&P 500 is an unmanaged index and is considered to be generally representative of the U.S. stock market. Results assume the reinvestment of all income and capital gain distributions. The MainStay Funds are neither sponsored by nor affiliated with Standard & Poor's. + Inflation is represented by the Consumer Price Index (CPI), which is a commonly used measure of the rate of inflation and shows the changes in the cost of selected goods. It does not represent an investment return. 4 MainStay Equity Date Index Fund S&P 500 Inflation - -------------------------------------------------------------------------------- 12/20/90 $ 9,000.00 $10,000 $10,000 12/91 $12,430.40 $13,040 $10,298 12/92 $13,200.20 $14,032 $10,603 12/93 $14,390.90 $15,441 $10,893 12/94 $14,462.80 $15,645 $11,177 12/95 $19,656.60 $21,518 $11,467 12/96 $23,988.20 $26,454 $11,847 Portfolio Management Discussion and Analysis [GRAPHIC] Photo Equity Index Fund Team EQUITY INDEX FUND TEAM Holly V. Cox, CFA and James A. Mehling, CFA To the surprise and delight of equity investors, 1996 was another stellar year for stocks. While this year's results didn't match the 37.53% returns earned in 1995, it would be hard to be disappointed with the S&P 500 Index's* return of 22.94% for the 12 months ended 12/31/96, which was more than twice the average annual total return of the Index over the previous 70 years.++ Large capitalization stocks led the way, with the Dow Jones Industrial Average(ss.) increasing 28.91% for the year. The average Lipper|| S&P 500 Index fund returned 22.30%, for the year ended 12/31/96. Given this context, how did the MainStay Equity Index Fund do in 1996? For the 12 months ended 12/31/96, the MainStay Equity Index Fund returned 22.04%. The Fund underperformed the average Lipper S&P 500 Index Fund for the same period, but outperformed the average Lipper diversified U.S. stock fund, which returned 17.72% for the year. Which stocks did best in 1996? The S&P 500 Index is composed primarily of large capitalization stocks, many of which did exceedingly well in 1996. Among the strongest performing stocks were Rowan Cos., up 135%#, Nike, up 74%, and Intel, up 131% in their respective industry sectors: oil and gas drilling, up 104%, shoes, up 65%, and electronic semiconductors, up 57%. Were these sectors equally weighted in the portfolio? No. Each sector is individually weighted in the S&P 500 by its perceived importance in Total return The performance of an investment with all income and capital gains reinvested. Capitalization The amount of outstanding equity a company has issued. Companies may vary greatly in the amount of equity capital they have raised, and their capitalization may change with new issues or stock repurchases. ++ Source: Ibbotson Associates, Chicago. ss. See footnote on page 3 for more information on the Dow Jones Industrial Average. || See footnote and table on page 8 for more information on Lipper Analytical Services, Inc. # Returns reflect performance during the period securities were held in the Fund. 5 Bull market/bear market A bull market is a prolonged period of rising prices, and a bear market is a prolonged period of falling prices. [GRAPHIC] YEAR-BY-YEAR PERFORMANCE [THE FOLLOWING TABLE WAS PRESENTED AS A BAR CHART IN THE PRINTED MATERIAL] See footnote * on page 8 for more information on performance. the economy. Because of this, oil and gas drilling, shoes, and electronic semi- conductors represented 0.06%, 0.36%, and 3.27%, respectively, of the Index. So each made a different level of contribution to the overall performance of the Index and the Fund. Which sectors were the worst performers? Truckers were the weakest sector in 1996, but represented only 0.01% of the Index. Broadcast/media and machine tools were also laggards, representing 0.47% and 0.02% of the Index, respectively. Why didn't the Fund outperform the Index? Unlike an index, the returns of which are based on hypothetical investments, the Fund is a real-world investment and incurs trading expenses and management fees. As a result, the Fund cannot fully replicate the performance of the Index and will usually trail it by at least a small margin. Investors should take this into account in evaluating the performance of any indexed fund. How does the Fund seek to track the Index? The Fund seeks to remain as fully invested as possible at all times. Doing so allows the Fund to participate in bull markets, like the one we had this year, as well as participate in declines during bear markets. Does indexing offer any advantages over other forms of investing? While past performance is no guarantee of future results, over the five years ended 6 Year-End Total Return % - ------------------------------------------------ 12/91 28.01 12/92 6.23 12/93 9.01 12/94 0.47 12/95 35.91 12/96 22.04 [GRAPHIC] 12/31/96, the average annual total return of the average Lipper U.S. diversified stock fund was 13.65%, compared to 14.71% for the average Lipper S&P 500 Index Fund. For the 10-year period ended 12/31/96, the numbers are 13.29% and 14.43%, respectively. While the Equity Index Fund's returns may be higher or lower than the S&P 500 and the Lipper averages over any given period, these figures suggest that indexing may be an appropriate strategy for inflation-conscious investors seeking higher equity returns over the long term. James A. Mehling, CFA Portfolio Manager DIVERSIFICATION BY INDUSTRY--TOP 5 AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] PORTFOLIO COMPOSITION AS OF 12/31/96 [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Note: Actual percentages will vary over time. Inflation An increase in the supply of money relative to available goods and services, resulting in higher prices or a rising "cost of living." 7 Sector Percentage - -------------------------------------------------------- Oil - Integrated International 6.5% Major Regional Banks 4.8% Telephone 4.1% Drugs 4.1% Health Care - Diversified 3.9% All Other 76.6% Sector Percentage - -------------------------------------------------------- Common Stocks 98.4% Cash & Equivalents 1.6 [GRAPHIC] Returns & Lipper Rankings as of 12/31/96 * Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that upon redemption, shares may be worth more or less than their original cost. Total returns shown are based on NAV and assume no deduction for applicable sales charge. In compliance with SEC guidelines, SEC returns include the maximum sales charge and show the percentage change for each of the required periods. All returns assume capital gain and dividend distributions are reinvested. The administrator and adviser have agreed to assume a portion of the expenses. The total return for this Fund would have been lower without this voluntary limitation. This voluntary expense limitation may be terminated or revised at any time. The MainStay Equity Index Fund, first offered to the public on 12/20/90, is offered as Class A shares only. As of 1/3/95 shares were subject to an initial sales charge of up to 3% and an annual 12b-1 fee of .25%. + Lipper Analytical Services, Inc. is an independent monitor of mutual fund performance. Its rankings are based on total returns with capital gains and dividends reinvested. Results do not reflect any deduction of sales charges. Life of Fund return is from the period 12/20/90 through 12/31/96. For the 12-month period ended 12/31/96, the Lipper equity category included 3,912 funds and the MainStay Equity Index Fund was ranked 911 out of 3,912; 447 out of 1,249; and 449 out of 1,056 funds for the 1-year, 5-year, and since-inception periods, respectively. 8 - -------------------------------------------------------------------------------- Fund average annual total returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 22.04% 14.05% 16.19% ================================================================================ - -------------------------------------------------------------------------------- Fund SEC returns* ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Class A 18.38% 13.36% 15.60% ================================================================================ - -------------------------------------------------------------------------------- Fund Lipper+ rankings & Lipper category returns as of 12/31/96 ================================================================================ 1 year 5 years Life of Fund through 12/31/96 Equity Index Fund 41 out of 16 out of 11 out of 48 funds 16 funds 13 funds Average Lipper S&P 500 Index objective fund 22.30% 14.71% 17.11% ================================================================================ - -------------------------------------------------------------------------------- Fund per share net asset value & distributions for the 12 months ended 12/31/96 ================================================================================ NAV 12/31/96 Income Capital Gains Class A $23.37 $0.5390 $0.8155 ================================================================================ [GRAPHIC] Top 10 Equity Holdings as of 12/31/96 Note: This breakdown is provided for informational purposes only. The Fund's holdings may change daily. A shareholder owns shares of the Fund but does not own a direct interest in any of the specific securities listed above. Short-term securities are excluded. See Portfolio of Investments for specific type of security held. 9 HOLDING AMOUNT - -------------------------------------------------------------------------------- General Electric Co. $ 6,432,412 Coca-Cola Co. 5,160,092 Exxon Corp. 4,792,690 Intel Corp. 4,243,423 Microsoft Corp. 3,894,199 Merck & Co., Inc. 3,771,032 Philip Morris Cos., Inc. 3,630,580 Royal Dutch Petroleum Co. 3,605,215 International Business Machines Corp. 3,081,759 Procter & Gamble Co. 2,902,607 MainStay Equity Index Fund Shares Value ============================= COMMON STOCKS (98.4%)+ AEROSPACE/DEFENSE (2.1%) Boeing Co. .................................. 14,127 $ 1,502,760 General Dynamics Corp. ...................... 2,493 175,757 Lockheed Martin Corp. ....................... 7,823 715,804 McDonnell Douglas Corp. ..................... 8,420 538,880 Northrop Grumman Corp. ...................... 2,277 188,422 Raytheon Co. ................................ 9,407 452,712 Rockwell International Corp. ................ 8,540 519,872 United Technologies Corp. ................... 9,648 636,768 ----------- 4,730,975 ----------- AIRLINES (0.3%) AMR Corp. (a) ............................... 3,543 312,227 Delta Air Lines, Inc. ....................... 2,986 211,633 Southwest Airlines Co. ...................... 5,632 124,608 USAir Group, Inc. (a) ......

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