-----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, Q9qgri+oRv9+LlLQC8YSWWWFg9+Mm13oEwW4WfLgKTZvtLkwWXqBRhF68bUKQQdQ Rq8HHw59FobY16e/yKOiVw== 0000893220-07-000658.txt : 20070309 0000893220-07-000658.hdr.sgml : 20070309 20070309122301 ACCESSION NUMBER: 0000893220-07-000658 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070309 DATE AS OF CHANGE: 20070309 EFFECTIVENESS DATE: 20070309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCMORGAN FUNDS CENTRAL INDEX KEY: 0000919556 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-08370 FILM NUMBER: 07683352 BUSINESS ADDRESS: STREET 1: ONE BUSH STREET STREET 2: STE 800 CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 8007889485 MAIL ADDRESS: STREET 1: ONE BUSH ST STREET 2: STE 800 CITY: SAN FRNCISCO STATE: CA ZIP: 94104 FORMER COMPANY: FORMER CONFORMED NAME: MCM FUNDS DATE OF NAME CHANGE: 19940228 0000919556 S000005299 McMorgan Principal Preservation Fund C000014475 McMorgan Class MCPXX 0000919556 S000005307 McMorgan Intermediate Fixed Income Fund C000014491 McMorgan Class MCMNX C000014492 Class Z MCIZX 0000919556 S000005308 McMorgan Fixed Income Fund C000014493 McMorgan Class MCMFX C000014494 Class Z MCFZX C000014495 Class R1 MCMRX C000014496 Class R2 MCMWX 0000919556 S000005309 McMorgan High Yield Fund C000014497 McMorgan Class MCMHX C000014498 Class Z MCHZX 0000919556 S000005310 McMorgan Balanced Fund C000014499 McMorgan Class MCMBX C000014500 Class Z MCBZX 0000919556 S000005311 McMorgan Equity Investment Fund C000014501 McMorgan Class MCMEX C000014502 Class Z MCEZX N-CSRS 1 w29869nvcsrs.txt FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-8370 MCMORGAN FUNDS (Exact name of Registrant as specified in charter) One Bush Street, Suite 800 San Francisco, CA 94104 (Address of principal executive offices) (Zip code) Teresa Matzelle Vice President and Secretary McMorgan & Company LLC One Bush Street, Suite 800 San Francisco, CA 94104 (Name and address of agent for service) Copies to: Bibb L. Strench, Esq. Jeffrey A. Engelsman, Esq. Sutherland Asbill & Brennan LLP New York Life Investment 1275 Pennsylvania Avenue, N.W. Management LLC Washington, DC 20004-2415 169 Lackawanna Avenue Parsippany, NJ 07054
Registrant's telephone number, including area code: (800) 831-1994 Date of fiscal year end: June 30 Date of reporting period: December 31, 2006 FORM N-CSRS ITEM 1. REPORTS TO STOCKHOLDERS. [MCMORGAN FUNDS LOGO] SEMI-ANNUAL REPORT [PICTURE] December 31, 2006 Principal Preservation Fund Intermediate Fixed Income Fund Fixed Income Fund High Yield Fund Balanced Fund Equity Investment Fund The McMorgan Funds are offered by NYLIFE Distributors LLC 169 Lackawanna Avenue, Parsippany, NJ 07054. [PICTURE] LETTER FROM THE PRESIDENT ------------------------- Dear Shareholder, The U.S. economy continued a pattern of moderate growth in 2006, but at a slower pace as the year wore on. The real gross domestic product slowed to a 2.2% annual pace during 2006's third quarter from a 4.1% average annualized pace in the year's first six months. Expectations are that the final quarter of the year will show growth of 2.0%, and that 2007 will average 2.5%. As growth moderated into year-end 2006, so has inflation by virtually all measures. U.S. consumer prices were up 0.1% in October and unchanged in November after seeing monthly increases of 0.2% to 0.3% during the second and third quarters of 2006. Although inflation was above the Federal Reserve's comfort zone early in the year, most inflation measures have seen recent improvement. The equity market rally that began in June continued through December, as the S&P 500 hit five-year highs. The rally began when the Federal Reserve ceased increasing the Federal Funds rate. The price of oil moved from over $80 a barrel to around $60, providing a positive lift to the market. Third quarter earnings were also much stronger than anticipated, while continued strength in mergers and acquisitions provided further positive momentum for stocks. The S&P 500 has now increased each of the past four years, and ended the year about 7% away from its all-time high set in March of 2000. The bond market rallied as yields on 10-year Treasury notes fell from 5.20% in July to a low of 4.40% at the beginning of December. The drop in yields coincided with a slowing of domestic conditions to below-trend economic growth. Inflation expectations eased, giving the Federal Reserve Board latitude to hold its target Fed Funds rate at 5.25%, while evaluating the lagged effects of 17 consecutive 0.25% increases. Personal consumption supported economic growth for much of the period and capped the year with robust retail sales in December. By year-end, evidence emerged to suggest that some of the supply imbalances in residential real estate had corrected. With commodity and energy inflationary pressures abating, investors began to anticipate more trend-like economic growth in future periods. The 10-year Treasury note ended 2006 at a yield of 4.70%, near the middle of its 6-month trading range. Our semi-annual report for the six months ended December 31, 2006 that follows, provides additional information about the market forces, investment decisions, and securities that influenced each of the McMorgan Funds during the reporting period. We hope you find this information helpful in monitoring your investment. The McMorgan Funds seek to achieve superior performance through a consistent application of a disciplined investment approach. Past performance does not guarantee future results. Although economic, industry, and geopolitical variables are constantly in flux, we strive to provide competitive performance for our shareholders over full market cycles. Thank you for placing your trust and confidence in the McMorgan Funds. Sincerely, - -s- Mark R. Taylor Mark R. Taylor President 1 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 PRINCIPAL PRESERVATION FUND NASDAQ SYMBOL: MCPXX | DECEMBER 31, 2006 The Principal Preservation Fund's investment objective is to maximize current income consistent with maintaining liquidity and preserving capital. The Fund invests in short-term, high-quality, U.S. dollar-denominated securities with remaining maturities of thirteen months or less. The Fund maintains a dollar-weighted average portfolio maturity of 90 days or less and seeks to maintain a stable $1 share price. Q: What factors affected the short-term bond market during the six months ended December 31, 2006? A: During the second half of the year, money markets focused on two main drivers of Federal Reserve Board policy, namely slowing economic growth and lingering concern over inflation. Economic activity, while generally healthy, slowed from the rapid pace witnessed in the first half of the year. The decline in residential real estate markets reduced overall growth despite continued strength in consumer spending, exports, and business investment. Core inflation appears to have peaked in September, though tight labor markets have the potential to sustain inflation pressures. The Federal Reserve halted its 17 successive 0.25% rate increases at 5.25% in June 2006, as the Fed viewed decelerating economic growth as a natural means to keep inflation in check. Still, inflation metrics remain at the upper range of the Fed's comfort level and currently dominate the Federal Reserve's policy decisions over slowing economic growth. Q: How did the economic environment affect the results of the portfolio? A: Short terms rates plateaued with the Federal Reserve on hold and market expectations for further economic slowing and/or receding inflationary pressures. This has supported a higher overall yield in the portfolio, while reducing the term premium on longer-maturity money market instruments. The annualized 7-day current yield and 30-day SEC yield as of December 31, 2006 were 5.09% and 5.06%, respectively. Q: How did the Principal Preservation Fund invest during the reporting period? A: The Fund modestly extended the average maturity to a more neutral level as the flat term structure of short-dated money market rates reflected the Fed's steady stance. The Fund continued to seek maximum current income and returns consistent with the preservation of capital. Q: Did the Fund change its asset class weightings? A: The Fund generally invests in government securities, high quality short-dated commercial paper, and second tier commercial paper. Allocation to commercial paper increased slightly to enhance the portfolio's yield while maintaining a relatively short maturity profile. Q: What do you anticipate going forward? A: The Federal Reserve appears to be at or near the end of the current monetary tightening cycle, though, as always, we expect policy makers to remain vigilant for signs of inflationary pressure. The economy should expand at a moderate pace over the next six months. Commodity and energy inflationary pressures have abated, though tight labor markets remain a concern. Consequently, the Fed is likely to remain on hold and the flat term structure of money market rates appears consistent with the likely path of monetary policy. 2 MCMORGAN PRINCIPAL PRESERVATION FUND AS OF DECEMBER 31, 2006 DIVERSIFICATION [PIE CHART] Cash 1% Commercial Paper 58% Corporate 29% Gov't 9% Certificate of Deposit 3%
CREDIT QUALITY++ [PIE CHART] Bank C.D. 3% Gov't 9% Aaa 3% Aa 8% A 15% Baa 1% A-1/P-1 57% A-2/P-2 4%
MATURITY [PIE CHART] 1-15 days 24% 16-30 days 26% 31-90 days 17% 90+ days 33%
AVERAGE ANNUAL TOTAL RETURNS FOR PERIOD ENDED DECEMBER 31 (%)
INCEPTION ONE THREE FIVE TEN DATE YEAR YEARS YEARS YEARS --------- ---- ----- ----- ----- McMorgan Principal Preservation Fund 7/13/94 4.87 2.98 2.30 3.73
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. PRINCIPAL PRESERVATION FUND--SEVEN-DAY CURRENT YIELD (%) [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THE CURRENT YIELD MORE CLOSELY REFLECTS THE CURRENT EARNINGS OF THE FUND THAN THE TOTAL RETURN QUOTATION. AN INVESTMENT IN THE FUND IS NOT INSURED ORGUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. ++ Ratings such as "P-1" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. 3 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 INTERMEDIATE FIXED INCOME FUND NASDAQ SYMBOL: MCMNX | DECEMBER 31, 2006 The Intermediate Fixed Income Fund's investment objective is above average total return consistent with maintaining liquidity and preserving capital. The Fund invests in high quality, short- to intermediate-term bonds and other debt securities with no limit on the average remaining maturities. The average weighted portfolio maturity is generally between three and ten years. Q: What factors affected the bond market during the reporting period ended December 31, 2006? A: The second half of 2006 witnessed a strong bond rally as yields on 10-year Treasury notes fell from 5.20% in July to a low of 4.40% at the beginning of December. The drop in yields was precipitated by a decline in residential real estate investment that resulted in below-trend economic growth. Concurrently, inflation expectations eased, giving the Federal Reserve latitude to hold its target Fed Funds rate at 5.25% while evaluating the lagged effects of 17 consecutive 0.25% increases. Nevertheless, labor market conditions remained healthy as evidenced by stable job creation and wage gains. Personal consumption supported economic growth for the period, and capped the year with robust retail sales in December. Additionally, by year-end, preliminary evidence emerged to suggest that some supply imbalances in residential real estate had corrected. Finally, with commodity and energy inflationary pressures abating, investors began to anticipate more trend-like economic growth in future periods. The 10-year Treasury note ended 2006 at 4.70%, near the middle of its 6-month trading range. Q: How did the Fund perform compared to its benchmark during the reporting period? A: The Fund outperformed its benchmark during the six months ending December 31, 2006. The Fund's return was 4.92% vs. the Lehman Bros. Intermediate U.S. Government Credit Index of 4.26%. Overall interest rate exposure, or duration, had no impact on performance relative to the benchmark, as the Fund's duration was the same as the index. Q: Were there any particular holdings or sectors that enhanced or detracted from performance? A: The Fund's overweight allocation to spread sectors, particularly corporate bonds, residential and commercial mortgage-backed securities contributed positively to performance. Security selection within corporate bonds and mortgage-backed securities was also favorable. Following strong relative performance in the third and fourth quarters, holdings in Ford Motor Credit Corp. were eliminated. In December, the Fund received a settlement distribution as part of the WorldCom, Inc. class action litigation, recorded as income during the quarter. No aspect of the investment strategy during the period created a notable detraction from performance. Q: How is the Fund positioned going forward? A: The Fund's interest rate strategy remains neutral to the benchmark, with a focus on intermediate maturities in the 5 to 10 year part of the yield curve. Overall portfolio exposure to spread sectors remains notably above benchmark levels, reflecting our expectations for continued low volatility and low risk premiums. The Fund has a substantial commitment to commercial mortgage-backed and U.S. agency single family mortgage-backed securities. Currently, the Fund has no position in U.S. Treasury Inflation Protection Securities and is modestly underweighted in other Treasury securities versus the benchmark. Funds that invest in bonds are subject to credit, interest rate and inflation risk and can lose principal value when interest rates rise. 4 MCMORGAN INTERMEDIATE FIXED INCOME FUND AS OF DECEMBER 31, 2006 DIVERSIFICATION [PIE CHART] Cash (11)%++++ Gov't 51% Corporate 31% Mortgage 16% Short-Term 13%
BOND QUALITY++ [PIE CHART] Gov't 54% Aaa 13% Aa 6% A 9% Baa 16% Ba 2%
MATURITY [PIE CHART] Short Term 7% 1-5 years 47% 5-10 years 38% 10+ years 8%
AVERAGE ANNUAL TOTAL RETURNS* FOR PERIOD ENDED DECEMBER 31 (%)
TEN YEARS OR INCEPTION ONE THREE FIVE LIFE OF DATE YEAR YEARS YEARS CLASS SECTION --------- ---- ----- ----- ------------- McMorgan Int. Fixed Income Fund 7/14/94 4.82 3.02 4.12 5.35 McMorgan Int. Fixed Income Fund (Class Z) 9/4/01 4.56 2.76 3.84 3.82 Section Lehman Bros Int. US Gov't/Credit Index** N/A 4.08 2.90 4.53 5.81
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. INTERMEDIATE FIXED INCOME FUND--GROWTH OF $10,000 [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THIS CHART REFLECTS A HYPOTHETICAL INVESTMENT OF $10,000 WITH REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. ++ Ratings such as "Aaa" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. ++++ Cash equals liabilities in excess of cash and other assets. * Before taxes on distributions or redemption of Fund shares. ** The Lehman Brothers Intermediate U.S. Government/Credit Index is an index of all publicly issued bonds of the U.S. government and agencies, as well as investment grade corporate bonds, with less than 10 years of maturity, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. 5 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 FIXED INCOME FUND NASDAQ SYMBOL: MCMFX | DECEMBER 31, 2006 The Fixed Income Fund's investment objective is to seek above average total return consistent with maintaining liquidity and preserving capital. The Fund invests in high quality, short- to intermediate-term bonds and other debt securities with no limit on the average remaining maturities. The average weighted portfolio maturity is generally between three and fifteen years. Q: What factors affected the bond market during the reporting period ended December 31, 2006? A: The second half of 2006 witnessed a strong bond rally as yields on 10-year Treasury notes fell from 5.20% in July to a low of 4.40% at the beginning of December. The drop in yields was precipitated by a decline in residential real estate investment that resulted in below-trend economic growth. Concurrently, inflation expectations eased, giving the Federal Reserve latitude to hold its target Fed Funds rate at 5.25% while evaluating the lagged effects of 17 consecutive 0.25% increases. Nevertheless, labor market conditions remained healthy as evidenced by stable job creation and wage gains. Personal consumption supported economic growth for the period, and capped the year with robust retail sales in December. Additionally, by year-end, preliminary evidence emerged to suggest that some supply imbalances in residential real estate had corrected. Finally, with commodity and energy inflationary pressures abating, investors began to anticipate more trend-like economic growth in future periods. The 10-year Treasury note ended 2006 at 4.70%, near the middle of its 6-month trading range. Q: How did the Fund perform compared to its benchmark during the reporting period? A: The Fund outperformed its benchmark during the six months ending December 31, 2006. The Fund's return was 5.34% vs. the Lehman Bros. U.S. Government Credit Index of 4.99%. Overall interest rate exposure, or duration, had no impact on performance relative to the benchmark as the Fund's duration was the same as the index. Q: Were there any particular holdings or sectors that enhanced or detracted from performance? A: The Fund's overweight allocation to spread sectors, particularly corporate bonds, residential and commercial mortgage-backed securities contributed positively to performance. An emphasis on intermediate maturity securities bolstered performance, while security selection within corporate bonds and mortgage-backed securities was also favorable. Following strong relative performance in the third and fourth quarters, holdings in Ford Motor Credit Corp. were eliminated. In December, the Fund received a settlement distribution as part of the WorldCom, Inc. class action litigation, recorded as income during the quarter. No aspect of the investment strategy during the period created a notable detraction from performance. Q: How is the Fund positioned going forward? A: The Fund's interest rate strategy remains neutral to the benchmark, with a focus on intermediate maturities in the 5 to 10 year part of the yield curve. Overall portfolio exposure to spread sectors remains notably above benchmark levels, reflecting our expectations for continued low volatility and low risk premiums. The Fund has a substantial commitment to commercial mortgage-backed and U.S. agency single family mortgage-backed securities. Currently, the Fund has no position in U.S. Treasury Inflation Protection Securities and is modestly underweighted in other Treasury securities versus the benchmark. Funds that invest in bonds are subject to credit, interest rate and inflation risk and can lose principal value when interest rates rise. 6 MCMORGAN FIXED INCOME FUND AS OF DECEMBER 31, 2006 DIVERSIFICTION [PIE CHART] Cash (22%)++++ Corporate 44% Gov't 42% Short-Term 24% Mortgage 12%
BOND QUALITY++ [PIE CHART] NR 3% Gov't 44% Aaa 9% Aa 7% A 17% Baa 20%
MATURITY [PIE CHART] Short Term 0% 1-5 years 41% 5-10 years 37% 10+ years 22%
AVERAGE ANNUAL TOTAL RETURNS* FOR PERIOD ENDED DECEMBER 31 (%)
TEN YEARS OR INCEPTION ONE THREE FIVE LIFE OF DATE YEAR YEARS YEARS CLASS SECTION --------- ---- ----- ----- --------------- McMorgan Fixed Income Fund 7/14/94 4.01 3.41 5.02 5.89 McMorgan Fixed Income Fund (Class Z) 2/1/01 3.84 3.19 4.77 4.81 Section McMorgan Fixed Income Fund (Class R1) 1/2/04 4.00 3.34 N/A 3.34 Section McMorgan Fixed Income Fund (Class R2) 1/2/04 3.75 3.05 N/A 3.05 Section Lehman Brothers U.S. Gov't/Credit Index** N/A 3.78 3.44 5.17 6.26
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. FIXED INCOME FUND--GROWTH OF $10,000 [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THIS CHART REFLECTS A HYPOTHETICAL INVESTMENT OF $10,000 WITH REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. ++ Ratings such as "Aaa" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. ++++ Cash equals liabilities in excess of cash and other assets. * Before taxes on distributions or redemption of Fund shares. ** The Lehman Brothers U.S. Government/Credit Index is an index of all publicly issued bonds of the U.S. Government and agencies, as well as investment grade corporate bonds, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. 7 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 HIGH YIELD FUND NASDAQ SYMBOL: MCMHX | DECEMBER 31, 2006 The High Yield Fund's investment objective is to maximize income in a manner consistent with above average total return. Under normal circumstances, the Fund invests at least 80% of its net assets in high yield debt securities. These securities are rated below investment grade by Moody's and/or S&P, or are unrated but are considered to be of comparable quality by the Fund's Sub-adviser. The Fund will invest in securities with no limit on the average remaining maturities. The average weighted portfolio maturity will generally be between four and ten years. Q: How did the high yield bond market perform in the reporting period ending December 31, 2006? A: Investor sentiment turned strongly positive in the second half of 2006, helping drive the high yield market to a string of six consecutive months of positive returns. The Citigroup High Yield Market Capped Index gained 7.88% for the second half, bringing its full-year return to 10.21%. Q: What factors affected the market during the reporting period? A: Abundant liquidity, healthy economic growth, strong corporate profit trends, the equity rally and a pause in Fed policy all contributed to provide strong support for the high yield market's move toward historically tight spreads. Default rates for domestic high yield issuers declined below 1% at year-end and distressed debt, a good indicator for near-term defaults, continued to account for a very small portion of the market. This combination of factors, along with growing market sentiment supporting a soft landing scenario, could help the market maintain its lofty valuations near historical highs for a sustained period of time. Q: How has the Fund performed during these market conditions? A: In the second half of 2006, the Fund generated a gross return of 7.00% and a net return of 6.61%, underperforming the Citigroup High Yield Market Capped index return of 7.88%. For the full calendar year of 2006, the Fund posted a gross return of 9.84% and a net return of 9.04%. On a gross basis, the Fund modestly underperformed the 2006 benchmark return of 10.21%. In November, the Fund experienced an unexpected decline in the value of its Le-Nature's Inc. bond holdings. Le-Nature's, a privately-held beverage producer, filed for bankruptcy after a severe case of financial fraud came to light. After reviewing the facts of the situation, the Fund sold its position, negatively impacting 2006 returns by approximately 33 basis points. Adjusting for this extraordinary event, the Fund's gross returns would have been in line with its benchmark return. Q: What sectors affected the Fund's performance? A: Excluding the negative impact of Le-Nature's on the Food & Beverage sector, our underweight to Telecom and overweight to Building Products were the biggest detractors of Fund performance. In addition, security selection within the Retail sector also hindered performance. These were offset by the benefit from strong credit performance in the Cable Television and Chemical industries. Q: How is the Fund positioned going forward? A: The Fund enters 2007 with an overweight position in single-B rated securities and an underweight position in double-B rated securities, consistent with the portfolio's risk profile at mid-year. This portfolio positioning reflects our favorable credit outlook and the strong underlying macro environment. High yield securities have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. Funds that invest in bonds are subject to credit, interest rate and inflation risk and can lose principal value when interest rates rise. 8 MCMORGAN HIGH YIELD FUND AS OF DECEMBER 31, 2006 DIVERSIFICATION [PIE CHART] Preferred Stocks 1% Corporate 95% Common Stock 0%(a) Warrants 0%(a) Cash (5%)++++ Short-Term 9%
(a) Less than one tenth of a percent BOND QUALITY++ [PIE CHART] Investment Grade 2% B 63% Ba 22% Caa 13%
MATURITY [PIE CHART] 0-3 years 4% 3-5 years 16% 5-10 years 75% 10+ years 5%
AVERAGE ANNUAL TOTAL RETURNS* FOR PERIOD ENDED DECEMBER 31 (%)
INCEPTION ONE THREE FIVE SINCE DATE YEAR YEAR YEAR INCEPTION --------- ----- ----- ----- --------- McMorgan High Yield Fund 11/3/03 9.04 7.08 N/A 8.01 Citigroup High Yield Market Capped** N/A 10.21 7.77 N/A 8.58
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. HIGH YIELD FUND--GROWTH OF $10,000 [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THIS CHART REFLECTS A HYPOTHETICAL INVESTMENT OF $10,000 WITH REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. ++ Ratings such as "B" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. ++++ Cash equals liabilities in excess of cash and other assets. * Before taxes on distributions or redemption of Fund shares. ** The Citigroup High Yield Market Capped Index covers the universe of fixed rate, non-investment grade debt, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. 9 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 BALANCED FUND NASDAQ SYMBOL: MCMBX | DECEMBER 31, 2006 The Balanced Fund's investment objective is to seek a balance of capital appreciation, income and preservation of capital. The Fund invests in a diversified portfolio of equity and debt securities. The Fund's target asset allocation is 60% in equity securities and 40% in debt securities over the long term. The mix of securities will change based on existing and anticipated market conditions. The Fund's asset allocation is generally between 50% and 70% in common stocks and at least 25% in debt securities under normal market conditions. Q: Were there any significant changes in asset allocation? A: Asset allocation targets between stocks and bonds remain unchanged, with a slightly higher than average weighting toward equities due to their continued favorable valuation when compared to fixed income assets. Q: What were the most significant factors affecting the Balanced Fund's performance during the reporting period? A: Mid-year, the Federal Reserve ceased increasing interest rates, and investors began to anticipate that the next move by the Fed would be to lower rates. This had a positive effect on both stock and bond prices. Equities also rallied on stronger earnings, lower oil prices, and increased merger and acquisition activity. The Fund maintained a higher than average allocation to equities, which were up 12.74% during the second half of the year (for the S&P 500). Q: How is the Balanced Fund positioned going forward? A: The allocation to equities remains above neutral due to our favorable outlook for the equity market. The economy continues on a moderate growth, low inflationary path. Corporate profits continue to exceed expectations on the upside, with S&P 500 earnings exceeding double-digits for 13 consecutive quarters. Anticipated lower rates from the Federal Reserve would be positive for the economy. The interest rate strategy within the fixed income portion of the Fund remains neutral, with a focus on intermediate maturities in the 5 to 10 year part of the curve. Overall portfolio exposure to spread sectors remains notably above benchmark levels, reflecting our expectations for continued low volatility and low risk premiums. The Fund has a substantial commitment to commercial mortgage-backed securities and U.S. agency single family mortgage-backed securities. The Fund is underweighted Treasury securities versus the benchmark. Within the equity portfolio, the overall characteristics remain similar to the characteristics of the S&P 500, with the beta (risk) now equal to that of the market. The Fund maintained a slight tilt toward value, and the weighted average market capitalization remains marginally lower than the index. Both of these tilts have helped performance. Sector weightings have changed since mid-year. Telecom Services, which had been neutral to the benchmark, are now the second largest overweight due to very positive earnings and price momentum. Significant funds were also added to Consumer Cyclicals. Utilities and Transportation were reduced, with both positions now underweight versus the benchmark. Consumer Staples and Health Care, which experienced relatively slow earnings growth last year, are also underweight. Funds that invest in bonds are subject to credit, interest rate and inflation risk and can lose principal value when interest rates rise. 10 MCMORGAN BALANCED FUND AS OF DECEMBER 31, 2006 ASSET ALLOCATION (PIE CHART) Cash (8%)++++ Stocks 64% Bonds 33% Short-Term 11%
Gov't 49% Aaa 11% Aa 7% A 15% Baa 18%
BOND QUALITY++ (PIE CHART) TEN LARGEST EQUITY HOLDINGS(%) ExxonMobil Corp. 4.3 Citigroup, Inc. 2.9 Microsoft Corp. 2.7 BellSouth Corp. 2.6 General Electric Co. 2.4 Pfizer, Inc. 2.1 Cisco Systems, Inc. 2.0 Chevron Corp. 2.0 IBM Corp. 1.8 Procter & Gamble Co. 1.7 Total 24.5 (data subject to change)
AVERAGE ANNUAL TOTAL RETURNS* FOR PERIOD ENDED DECEMBER 31 (%)
TEN YEARS OR INCEPTION ONE THREE FIVE LINE OF DATE YEAR YEARS YEARS CLASS SECTION --------- ----- ----- ----- ---------------- McMorgan Balanced Fund 7/14/94 12.45 7.82 5.13 7.18 McMorgan Balanced Fund (Class Z) 1/25/01 12.24 7.56 4.88 3.08 Section Lehman Brothers U.S. Gov't/Credit Index** N/A 3.78 3.44 5.17 6.26 S&P 500 Index*** N/A 15.79 10.44 6.19 8.42
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. BALANCED FUND--GROWTH OF $10,000 [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THIS CHART REFLECTS A HYPOTHETICAL INVESTMENT OF $10,000 WITH REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. ++ Ratings such as "Aaa" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. ++++ Cash equals liabilities in excess of cash and other assets. * Before taxes on distributions or redemption of Fund shares. ** The Lehman Brothers U.S. Government/Credit Index is an index of all publicly issued bonds of the U.S. government and agencies, as well as investment grade corporate bonds, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. *** The S&P 500 Index is a market capitalization-weighted index of common stocks, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. 11 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 EQUITY INVESTMENT FUND NASDAQ SYMBOL: MCMEX | DECEMBER 31, 2006 The Equity Investment Fund's investment objective is to seek above-average total return consistent with reasonable risk. The Fund seeks to identify companies that are considered to have a high probability of outperforming the S&P 500 Index over the following six to twelve months. The Fund invests at least 80% of its net assets in equity securities. The underlying process for selecting stocks is based on a quantitative process that ranks stocks based on traditional value measures, earnings quality and technical factors. Q: What factors affected the stock market during the reporting period ending December 31,2006? A: The equity rally that began June 13th continued through December, as the S&P 500 hit five-year highs. The index reached levels not seen since October, 2000. Stocks were in negative territory mid-year, before a powerful rally pushed the S&P 500 up 15.79% on a total return basis for 2006. The rally began when the Federal Reserve ceased increasing the Fed Funds rate. The market is anticipating the next move by the Fed to be a cut in rates, which tends to be positive for stocks. The price of oil moved from over $80 a barrel to around $60, providing a lift to consumers and the market. Third quarter earnings were much better than anticipated, while ongoing strength in merger and acquisition activity provided additional positive momentum for stocks. Q: How did the Fund perform during the reporting period ending December 31, 2006? A: The Fund outperformed the index for the six month and twelve month time horizons. The Fund returned 16.13% during the year, (versus 15.79% for the S&P 500) and 12.93% over the past six months (versus 12.74% for the index). Q: How did market conditions and investment strategies affect the Fund's performance? A: The market's performance was significantly above average during the second half of 2006 as investors gravitated toward riskier assets in a low volatility environment. The Fund maintained a slight emphasis on both value and smaller size, which helped performance. Value had a particularly strong year with the Russell 1000 Value Index outperforming the Russell 1000 Growth Index by over 12%. Various value factors are used to select stocks for the portfolio. Thus, stock selection was a positive contributor for the year. Stocks exhibiting positive price momentum, which had been a strong contributor to performance over recent years, lagged the market. Q: Were there any significant shifts in sector allocation during the reporting period? A: There were a few significant changes to sector allocations since June 30, 2006. Telecom Services, which had been neutral to the benchmark, are now the second largest overweight (due to very positive earnings and price momentum). Significant funds were also added to Consumer Cyclicals. Utilities and Transportation were reduced, with both positions now underweight versus the benchmark. Q: How is the Equity Investment Fund positioned at the end of the reporting period? A: The overall characteristics and risk level of the Fund remain relatively constant. The Fund maintained a tilt toward value and positive price momentum. The average capitalization remains slightly lower than the S&P 500. Commercial Services, Telecom, Financials, and Technology are the most overweight sectors vs, the benchmark. Transportation, Consumer Staples, and Utilities are all underweight on a relative basis. 12 MCMORGAN EQUITY INVESTMENT FUND AS OF DECEMBER 31, 2006 TEN LARGEST HOLDINGS (%) ExxonMobil Corp. 4.3 Citigroup, Inc. 2.9 BellSouth Corp. 2.7 Microsoft Corp. 2.5 General Electric Co. 2.4 Pfizer, Inc. 2.1 Cisco Systems, Inc. 2.0 Chevron Corp. 2.0 Procter & Gamble Co. 1.9 IBM Corp. 1.8 Total 24.6 (data subject to change)
SECTOR WEIGHTINGS (%) Financial 23.4 Information Technology 17.4 Consumer Discretionary 12.3 Health Care 10.7 Energy 10.6 Industrials 8.5 Consumer Staples 6.9 Telecommunication Services 5.2 Materials 2.5 Utilities 2.5 Total 100.0 (data subject to change
PORTFOLIO CHARACTERISTICS P/E Ratio (Trailing) 15.31 Historical Beta 0.98 Market Weighted Capitalization $96.39 bil Number of Issues 401
AVERAGE ANNUAL TOTAL RETURNS* FOR PERIOD ENDED DECEMBER 31 (%)
TEN YEARS OR INCEPTION ONE THREE FIVE LINE OF DATE YEAR YEARS YEARS CLASS SECTION --------- ----- ----- ----- ------------- McMorgan Equity Investment Fund 7/14/94 16.13 9.84 3.95 6.84 McMorgan Equity Invest. Fund (Class Z) 2/1/01 15.86 9.57 3.69 0.29 Section S&P 500 Index** N/A 15.79 10.44 6.19 8.42
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. DUE TO MARKET VOLATILITY, CURRENT PERFORMANCE MAY BE LESS OR HIGHER THAN THE FIGURES SHOWN. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO THAT UPON REDEMPTION, SHARES MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. FOR THE MOST RECENT MONTH-END PERFORMANCE INFORMATION, PLEASE VISIT WWW.MCMORGANFUNDS.COM. EQUITY INVESTMENT FUND--GROWTH OF $10,000 [PERFORMANCE GRAPH] [PLOT POINTS TO COME] THIS CHART REFLECTS A HYPOTHETICAL INVESTMENT OF $10,000 WITH REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS. * Before taxes on distributions or redemption of Fund shares. ** The S&P 500 Index is a market capitalization-weighted index of common stocks, and reflects no deduction for fees, expenses or taxes. It is not possible to invest in an index. 13 MCMORGAN FUNDS SEMI-ANNUAL REPORT 2006 COST IN DOLLARS OF A $1,000 INVESTMENT IN MCMORGAN FUNDS The example to the right is intended to describe the fees and expenses borne by shareholders during the reporting period and the impact of those costs on your investment. Example As a shareholder of a fund, you incur two types of costs: (1) transaction costs, including redemption fees, if applicable, exchange fees, and sales charges (loads) on purchase payments, and (2) ongoing costs, including management fees, distribution and/or service (12b-1) 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 in vesting in other mutual funds. The example is based on an investment of $1,000 made at the beginning of the period and held for the entire six month period from July 1,2006, to December 31, 2006. The example illustrates your Fund's ongoing costs in two ways: Actual Expenses The third and fourth data columns in the table to the right provide information about actual account values and actual expenses. You may use the information in these columns, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6,) then multiply the result by the number located in the fourth data column (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 fifth and sixth data columns in the table to the right provide information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees, if applicable, exchange fees, or sales charges (loads). Therefore, the fifth and sixth data columns of the table are useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. 14
BASED ON ACTUAL RETURNS AND BASED ON HYPOTHETICAL 5 % RETURN EXPENSES AND EXPENSES ANNUALIZED++++ BEGINNING ------------------------------ --------------------------------- EXPENSE ACCOUNT ENDING ACCOUNT EXPENSES PAID ENDING ACCOUNT EXPENSES PAID SHARE CLASS++ RATIO VALUE 7/1/06 VALUE 12/31/06 DURING PERIOD VALUE 12/31/06 DURING PERIOD - --------------------------- -------------- ------------ -------------- ------------- -------------- ------------- PRINCIPAL PRESERVATION FUND McMorgan Class Shares 0.30% $ 1,000 $ 1,026.00 $ 1.53 $ 1,023.50 $ 1.53 INTERMEDIATE FIXED INCOME FUND McMorgan Class Shares 0.50% $ 1,000 $ 1,049.30 $ 2.58 $ 1,022.50 $ 2.55 Z Class Shares 0.75% $ 1,000 $ 1,049.15 $ 3.87 $ 1,021.25 $ 3.82 FIXED INCOME FUND McMorgan Class Shares 0.50% $ 1,000 $ 1,053.50 $ 2.59 $ 1,022.50 $ 2.55 Z Class Shares 0.75% $ 1,000 $ 1,053.25 $ 3.88 $ 1,021.25 $ 3.82 R1 Class Shares 0.60% $ 1,000 $ 1,054.00 $ 3.11 $ 1,022.00 $ 3.06 R2 Class Shares 0.85% $ 1,000 $ 1,052.75 $ 4.40 $ 1,020.75 $ 4.33 HIGH YIELD FUND McMorgan Class Shares 0.72% $ 1,000 $ 1,066.40 $ 3.75 $ 1,021.40 $ 3.67 BALANCED FUND McMorgan Class Shares 0.60% $ 1,000 $ 1,107.30 $ 3.19 $ 1,022.00 $ 3.06 Z Class Shares 0.85% $ 1,000 $ 1,106.65 $ 4.51 $ 1,020.75 $ 4.33 EQUITY INVESTMENT FUND McMorgan Class Shares 0.75% $ 1,000 $ 1,129.85 $ 4.03 $ 1,021.25 $ 3.82 Z Class Shares 1.00% $ 1,000 $ 1,128.70 $ 5.37 $ 1,020.00 $ 5.09
++ Expenses are equal to the Fund's annualized expense ratio multiplied by the average account value over the period, divided by 365 and multiplied by 184 (to reflect the one-half year period). ++++ Ratio of expenses to average net assets after reimbursement of expenses by McMorgan & Company LLC, the adviser to the Funds. 15 PRINCIPAL PRESERVATION FUND PORTFOLIO OF INVESTMENTS DECEMBER 31, 2006 (Unaudited) FIXED INCOME SECURITIES 99.4% U.S. GOVERNMENT AGENCY NOTES 8.9%
PRINCIPAL AMORTIZED AMOUNT COST ------------------------- Federal Home Loan Bank (Discount Notes) - 4.5% 5.16%, due 1/30/07 $5,000,000 $ 4,979,216 5.181%, due 1/30/07 2,715,000 2,703,669 ------------ 7,682,885 ------------ Federal Home Loan Mortgage Corp. - 1.8% 4.125%, due 4/2/07 3,000,000 2,991,404 ------------ Federal National Mortgage Association (Discount Notes) - 2.6% 5.149%, due 2/21/07 1,550,000 1,538,694 5.166%, due 2/21/07 3,000,000 2,978,044 ------------ 4,516,738 ------------ Total U.S. Government Agency Notes (Cost $15,191,027) 15,191,027 ------------ CERTIFICATES OF DEPOSIT 3.2% HBOS Treasury Services PLC 5.28%, due 1/31/07 4,000,000 3,999,341 Societe Generale 4.765%, due 1/17/07 1,390,000 1,389,417 ------------ Total Certificates of Deposit (Cost $5,388,758) 5,388,758 ------------ COMMERCIAL PAPER 58.4% Alcoa, Inc. 5.26%, due 2/22/07 3,000,000 2,977,207 5.29%, due 1/3/07 1,000,000 999,706 Apache Corp. 5.37%, due 1/16/07 (a) 1,035,000 1,032,684 5.40%, due 1/4/07 (a) 3,000,000 2,998,650 BASF AG 5.25%, due 1/12/07 (a) 3,500,000 3,494,386 CIT Group, Inc. 5.25%, due 2/12/07 (a) 7,000,000 6,957,125 Cooperative Association Tractor Dealers 5.25%, due 4/12/07 1,640,000 1,615,844 5.30%, due 3/19/07 2,344,000 2,317,428 5.32%, due 1/5/07 4,000,000 3,997,636 Countrywide Financial Corp. 5.30%, due 1/12/07 1,000,000 998,380 DaimlerChrysler North America Holding Corp. 5.34%, due 1/9/07 1,500,000 1,498,220 DaimlerChrysler Revolving Auto Conduit LLC 5.30%, due 1/10/07 2,885,000 2,881,177 Deer Valley Funding LLC 5.27%, due 1/30/07 (a) 1,085,000 1,080,394 5.28%, due 1/24/07 (a) 4,165,000 4,150,950 5.29%, due 1/23/07 (a) 2,000,000 1,993,534 FCAR Owner Trust I 5.27%, due 2/23/07 3,350,000 3,324,009 FPL Group Capital, Inc. 5.29%, due 1/4/07 (a) 1,810,000 1,809,202 Hewlett-Packard Co. 5.28%, due 1/4/07 (a) 2,999,000 2,997,680 John Deere Capital Co. 5.31%, due 1/18/07 (a) 1,000,000 997,493 Motorola, Inc. 5.29%, due 1/22/07 2,000,000 1,993,828 5.29%, due 1/25/07 3,000,000 2,989,420 National Cooperative Services Corp. 5.26%, due 3/1/07 (a) 3,000,000 2,974,138 5.29%, due 1/2/07 (a) 4,000,000 3,999,412 New Center Asset Trust 5.27%, due 2/1/07 1,450,000 1,443,420 PB Finance, Inc. (Delaware) 5.27%, due 1/26/07 4,220,000 4,204,556 5.27%, due 1/31/07 3,345,000 3,330,310 Prudential Financial Corp. 5.26%, due 1/19/07 6,775,000 6,757,182 Rockwell International 5.30%, due 1/8/07 (a) 2,000,000 1,997,939 Societe Generale North America, Inc. 5.25%, due 1/8/07 5,200,000 5,194,692 Sprint Nextel Corp. 5.42%, due 1/29/07 1,500,000 1,493,677 Telstra Corp., Ltd. 5.29%, due 1/30/07 (a) 1,725,000 1,717,649 5.29%, due 2/9/07 (a) 5,000,000 4,971,346 Thames Asset Global Securitization No. 1, Inc. 5.27%, due 1/11/07 (a) 2,295,000 2,291,640 5.32%, due 1/4/07 (a) 1,690,000 1,689,251 Torchmark Corp. 5.30%, due 1/12/07 (a) 4,245,000 4,238,125 ------------ Total Commercial Paper (Cost $99,408,290) 99,408,290 ------------ CORPORATE BONDS 28.9% BellSouth Corp. 5.499%, due 11/15/07 (b) 6,000,000 6,004,331 Caterpillar Financial Services Corp. 3.10%, due 5/15/07 250,000 247,915 Countrywide Home Loans, Inc. 5.50%, due 2/1/07 3,026,000 3,025,739 Dominion Resources, Inc. 5.663%, due 9/28/07 (b) 1,400,000 1,400,420 General Electric Capital Corp. 8.75%, due 5/21/07 500,000 506,283 Goldman Sachs Group, Inc. 5.51%, due 1/9/07 (b) 550,000 550,018 Hewlett-Packard Co. 5.50%, due 7/1/07 4,500,000 4,501,113 HSBC Finance Corp. 5.525%, due 2/9/07 (b) 3,000,000 3,000,439 7.875%, due 3/1/07 415,000 416,579 International Lease Finance Corp. 5.75%, due 2/15/07 5,000,000 5,001,302 John Deere Capital Corp. 4.50%, due 8/22/07 373,000 370,881 Kimberly-Clark Corp. 7.10%, due 8/1/07 360,000 363,466 Metropolitan Life Global Funding I 5.431%, due 3/16/07 (a)(b) 3,000,000 3,000,571 Morgan Stanley 5.91%, due 1/17/07 (b) 6,000,000 6,001,488
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 16 CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST ------------------------- National Rural Utilities Cooperative Finance Corp. 6.50%, due 3/1/07 $ 363,000 $ 363,547 Prudential Insurance Co. of America 7.65%, due 7/1/07 (a) 600,000 606,321 Security Capital Group, Inc. 7.15%, due 6/15/07 5,000,000 5,039,778 Time Warner, Inc. 6.15%, due 5/1/07 1,500,000 1,502,826 Verizon Global Funding Corp. 6.125%, due 6/15/07 7,000,000 7,022,052 Wells Fargo & Co. 5.125%, due 2/15/07 248,000 247,876 ------------ Total Corporate Bonds (Cost $49,172,945) 49,172,945 ------------ Total Fixed Income Securities (Cost $169,161,020) (c) 99.4% 169,161,020 Cash and Other Assets, Less Liabilities 0.6 1,007,418 ---------- ------------ Net Assets 100.0% $170,168,438 ========== ============
(a) May be sold to institutional investors only under Rule 144a or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. The total market value of these securities at December 31, 2006 is $54,998,490 which represents 32.3% of the Fund's net assets. (b) Floating/variable rate. Rate shown is the rate in effect at December 31, 2006. (c) At December 31, 2006, cost is identical for book and federal income tax purposes. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 17 PRINCIPAL PRESERVATION FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $169,161,020) $169,161,020 Cash-interest bearing accounts 56,738 Receivable for fund shares sold 1,132,741 Interest receivable 769,391 Other assets 15,341 ------------ Total assets 171,135,231 ------------ LIABILITIES: Distributions payable 727,317 Payable for fund shares redeemed 198,836 Payable to Advisor, net (See Note F) 16,125 Transfer agent fees payable (See Note F) 8,477 Administration fees payable (See Note F) 6,329 Report to shareholder payable 3,924 Accounting fees payable (See Note F) 3,763 Trustees fees payable 708 Accrued expenses 1,314 ------------ Total liabilities 966,793 ------------ Net Assets $170,168,438 ============ NET ASSETS CONSIST OF: Capital paid-in $170,167,752 Distributions in excess of net investment income (8,441) Accumulated net realized gain on investments 9,127 ------------ $170,168,438 ============ Net Assets: Class McMorgan $170,168,438 ============ Shares Outstanding: Class McMorgan 170,185,288 ============ Net asset value and redemption price per share: Class McMorgan $ 1.00 ============
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Interest $4,290,042 ---------- Expenses: Investment advisory fees (See Note F) 199,478 Administration fees (See Note F) 38,668 Accounting fees (See Note F) 23,671 Legal fees 22,438 Insurance fees 18,182 Transfer agent fees (See Note F) 16,839 Trustees fees 13,877 Registration expenses 9,720 Report to shareholder expense 8,226 Auditing fees 6,981 Custodian fees 5,948 Miscellaneous expenses 2,331 ---------- Total expenses 366,359 Expenses reimbursed (See Note F) (126,975) ---------- Net expenses 239,384 ---------- Net investment income 4,050,658 ---------- REALIZED GAIN ON INVESTMENTS: Net realized gain on investments 1,614 ---------- Net increase from the disposal of investments in violation of restrictions (See Note F) 8,543 ---------- Increase in net assets from operations $4,060,815 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 18 PRINCIPAL PRESERVATION FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 4,050,658 $ 5,829,860 Net realized gain (loss) on investments 1,614 (1,030) Net increase from the disposal of investments in violation of restrictions (See Note F) 8,543 -- ------------ ------------- Increase in net assets 4,060,815 5,828,830 ------------ ------------- Dividends to shareholders: From net investment income (4,059,099) (5,829,860) ------------ ------------- Capital share transactions: Net proceeds from sale of shares 86,243,712 130,643,105 Net asset value of shares issued to shareholders in reinvestment of dividends 3,232,461 5,595,835 ------------ ------------- 89,476,173 136,238,940 Cost of shares redeemed (66,075,669) (136,686,654) ------------ ------------- Increase (decrease) in net assets derived from capital share transactions 23,400,504 (447,714) ------------ ------------- Total increase (decrease) in net assets 23,402,220 (448,744) Net Assets: Beginning of period 146,766,218 147,214,962 ------------ ------------- End of period (including distributions in excess of net investment income of $8,441 and $0, respectively) $170,168,438 $ 146,766,218 ============ =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 PRINCIPAL PRESERVATION FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The table below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ---------------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ---------------------------------------------------------------- 12/31 2006++ 2006 2005 2004 2003 2002 ------------ -------- -------- -------- -------- -------- Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.03 0.04 0.02 0.01 0.01 0.02 Net realized and unrealized gain (loss) on investments (0.00)(a) (0.00)(a) -- 0.00(a) 0.00(a) -- -------- -------- -------- -------- -------- -------- Total from investment operations 0.03 0.04 0.02 0.01 0.01 0.02 -------- -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.03) (0.04) (0.02) (0.01) (0.01) (0.02) From capital gains -- -- (0.00)(a) (0.00)(a) (0.00)(a) -- -------- -------- -------- -------- -------- -------- Total dividends and distributions (0.03) (0.04) (0.02) (0.01) (0.01) (0.02) -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== ======== Total return 2.59%(b)(c) 4.01% 1.92% 0.87% 1.30% 2.41% Ratios/Supplemental Data: Net assets, end of period (in 000's) $170,168 $146,766 $147,215 $133,382 $160,150 $141,127 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.46%+ 0.50% 0.49% 0.46% 0.43% 0.47% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.30%+ 0.30% 0.30% 0.30% 0.30% 0.30% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.92%+ 3.73% 1.71% 0.70% 1.15% 2.16% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 5.08%+ 3.93% 1.90% 0.86% 1.28% 2.33%
- -------------- (a) Less than one cent per share. (b) Total return is not annualized. (c) The gains resulting from compliance violations did not have an effect on total return. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 20 INTERMEDIATE FIXED INCOME FUND MCMORGAN FUNDS PORTFOLIO OF INVESTMENTS +++ DECEMBER 31, 2006 (Unaudited) FIXED INCOME SECURITIES 98.1% CORPORATE ASSET-BACKED SECURITIES 1.4%
PRINCIPAL AMOUNT VALUE -------------------------- Financials - 1.4% Newcastle Mortgage Securities Trust Series 2006-1 Class A1 5.42%, due 3/25/36(a) $ 2,407,402 $ 2,407,832 ------------ Total Corporate Asset- Backed Securities (Cost $2,407,402) 2,407,832 ------------ CORPORATE BONDS 30.6% Consumer Discretionary - 4.5% Cox Communications, Inc. 6.75%, due 3/15/11 300,000 313,625 7.125%, due 10/1/12 1,595,000 1,700,377 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 735,000 780,222 Johnson Controls, Inc. 5.25%, due 1/15/11 895,000 887,945 Starwood Hotels & Resorts Worldwide, Inc. 7.875%, due 5/1/12 1,620,000 1,710,913 Tele-Communications, Inc. 9.80%, due 2/1/12 1,325,000 1,562,436 Time Warner, Inc. 6.50%, due 11/15/36 420,000 418,036 9.125%, due 1/15/13 325,000 378,622 ------------ 7,752,176 ------------ Consumer Staples - 0.7% Diageo Finance B.V. 5.50%, due 4/1/13 330,000 329,360 Kraft Foods, Inc. 4.00%, due 10/1/08 930,000 909,569 ------------ 1,238,929 ------------ Energy - 2.8% Anadarko Finance Corp. 6.75%, due 5/1/11 165,000 172,956 Anadarko Petroleum Corp. 5.95%, due 9/15/16 495,000 496,036 Devon Financing Corp. 6.875%, due 9/30/11 405,000 428,254 Devon OEI Operating, Inc. 7.25%, due 10/1/11 410,000 437,431 Dominion Resources, Inc. 8.125%, due 6/15/10 1,135,000 1,230,828 EnCana Holdings Finance Corp. 5.80%, due 5/1/14 630,000 633,745 Pacific Gas & Electric Co. 4.20%, due 3/1/11 895,000 856,919 XTO Energy, Inc. 4.90%, due 2/1/14 675,000 643,475 ------------ 4,899,644 ------------ Financials - 17.0% Archstone-Smith Trust 5.75%, due 3/15/16 485,000 491,247 Assurant, Inc. 5.625%, due 2/15/14 355,000 354,039 Bank of America Corp. 4.875%, due 9/15/12 730,000 715,411 5.42%, due 3/15/17 (b) 400,000 394,124 Bank One Corp. 5.90%, due 11/15/11 2,200,000 2,244,568 Capital One Financial Corp. 6.15%, due 9/1/16 1,265,000 1,308,278 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 760,000 743,712 CIT Group, Inc. 5.60%, due 4/27/11 1,055,000 1,065,260 6.875%, due 11/1/09 250,000 260,083 Citigroup, Inc. 5.00%, due 9/15/14 2,115,000 2,065,080 EOP Operating L.P. 8.10%, due 8/1/10 895,000 986,167 ERP Operating L.P. 6.625%, due 3/15/12 505,000 532,473 Goldman Sachs Group, Inc. (The) 4.50%, due 6/15/10 370,000 362,133 6.875%, due 1/15/11 1,055,000 1,116,792 HSBC Finance Corp. 5.875%, due 2/1/09 420,000 426,025 6.375%, due 10/15/11 1,205,000 1,260,049 6.75%, due 5/15/11 930,000 984,256 International Lease Finance Corp. 5.625%, due 9/20/13 595,000 599,346 Jefferies Group, Inc. 7.75%, due 3/15/12 740,000 805,441 John Deere Capital Corp. 5.65%, due 7/25/11 430,000 434,723 MBNA America Bank N.A. 7.125%, due 11/15/12 665,000 724,521 MetLife, Inc. 6.125%, due 12/1/11 1,145,000 1,183,644 Morgan Stanley 4.75%, due 4/1/14 745,000 712,315 ProLogis 5.50%, due 4/1/12 800,000 798,540 Prudential Financial, Inc. 4.50%, due 7/15/13 570,000 543,153 Residential Capital Corp. 6.375%, due 6/30/10 1,985,000 2,008,101 Simon Property Group L.P. 4.60%, due 6/15/10 430,000 419,388 6.35%, due 8/28/12 520,000 541,260 SLM Corp. 5.375%, due 5/15/14 745,000 739,087 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 680,000 713,971 US Bank N.A. 6.375%, due 8/1/11 960,000 1,002,135
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 21 CORPORATE BONDS (CONTINUED) INTERMEDIATE FIXED INCOME FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Financials (continued) Wachovia Bank N.A. 4.80%, due 11/1/14 $ 1,135,000 $ 1,088,060 Wells Fargo & Co. 4.75%, due 2/9/15 765,000 732,415 Western Union Co. (The) 5.93%, due 10/1/16 (b) 1,295,000 1,282,600 ------------ 29,638,397 ------------ Industrials - 0.8% International Lease Finance Corp. 5.75%, due 6/15/11 1,320,000 1,343,571 ------------ Materials - 0.4% BHP Billiton Finance USA, Ltd. 5.25%, due 12/15/15 710,000 698,702 ------------ Telecommunication Services - 2.1% Deutsche Telekom International Finance B.V. 5.75%, due 3/23/16 850,000 837,511 Embarq Corp. 7.082%, due 6/1/16 1,345,000 1,369,237 Sprint Nextel Corp. 6.00%, due 12/1/16 1,560,000 1,520,418 ------------ 3,727,166 ------------ Utilities - 2.3% Exelon Corp. 4.90%, due 6/15/15 655,000 617,808 FirstEnergy Corp. 6.45%, due 11/15/11 880,000 917,674 MidAmerican Energy Holdings 5.875%, due 10/1/12 955,000 972,139 Progress Energy, Inc. 7.75%, due 3/1/31 300,000 360,589 PSEG Power LLC 7.75%, due 4/15/11 980,000 1,058,889 ------------ 3,927,099 ------------ Total Corporate Bonds (Cost $53,208,350) 53,225,684 ------------ U.S. GOVERNMENT SECURITIES 51.5% U.S. GOVERNMENT AGENCY OBLIGATIONS 46.4% Federal Home Loan Bank - 3.5% * 4.50%, due 5/21/07 5,395,000 5,381,798 4.75%, due 12/16/16 800,000 783,260 ------------ 6,165,058 ------------ Federal Home Loan Mortgage Corporation (Mortgage Pass-Through Security) - 0.0%++ 6.00%, due 2/1/11 14,745 14,917 ------------ Federal National Mortgage Association - 22.5% 2.375%, due 2/15/07 1,890,000 1,883,737 * 3.25%, due 2/15/09 4,580,000 4,419,040 * 4.25%, due 9/15/07 5,120,000 5,084,780 * 4.375%, due 3/15/13 13,200,000 12,777,455 * 4.75%, due 12/15/10 10,400,000 10,333,534 4.875%, due 4/10/08 3,045,000 3,034,534 4.875%, due 12/15/16 1,510,000 1,493,102 ------------ 39,026,182 ------------ Federal National Mortgage Association (Mortgage Pass-Through Securities) - 20.4% 6.113%, due 10/1/36 (a) 1,952,787 1,975,509 6.124%, due 10/1/36 (a) 996,795 1,008,923 6.216%, due 9/1/36 (a) 2,666,611 2,708,819 6.50%, due 9/1/33 4,241,674 4,342,443 * 6.50%, due 1/1/37 TBA (c) 24,975,000 25,443,281 ------------ 35,478,975 ------------ Total U.S. Government Agency Obligations (Cost $80,639,122) 80,685,132 ------------ U.S. TREASURY OBLIGATIONS 5.1% United States Treasury Bond - 1.4% 8.125%, due 8/15/19 (d) 1,825,000 2,384,333 ------------ United States Treasury Note - 1.9% * 4.375%, due 1/31/08 3,290,000 3,268,279 ------------ United States Treasury Strip - 1.8% (zero coupon), due 8/15/19 5,830,000 3,160,565 ------------ Total U.S. Treasury Obligations (Cost $8,789,756) 8,813,177 ------------ Total U.S. Government Securities (Cost $89,428,878) 89,498,309 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS 14.6% Federal National Mortgage Association - 0.0%++ Series D Class 1 6.00%, due 4/1/09 468 466 ------------ Financials - 14.6% *Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 (a) 1,475,000 1,501,857 Commercial Mortgage Pass Through Certificates Series 2006-C8 Class A2B 5.248%, due 12/10/46 3,200,000 3,196,360 *Countrywide Alternative Loan Trust Series 2005-76 Class 2A1 5.827%, due 2/25/36 (a) 6,340,243 6,360,552 Greenwich Capital Commercial Funding Corp. Series 2005-GG5 Class A5 5.224%, due 4/10/37 1,615,000 1,603,454 Series 2004-GG1 Class A7 5.317%, due 6/10/36 2,300,000 2,297,708
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 22 COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Financials (continued) GS Mortgage Securities Corp. Series 2005-GG4 Class A4 4.761%, due 7/10/39 $ 2,578,125 $ 2,479,977 Series 2004-GG2 Class A6 5.396%, due 8/10/38 1,675,000 1,681,370 *Merrill Lynch Mortgage Investors, Inc. Series 2006-A3 Class 3A1 5.837%, due 5/25/36 (a) 3,693,400 3,717,883 Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 5.991%, due 1/25/36 (a) 2,546,426 2,564,178 ------------ 25,403,339 ------------ Total Collateralized Mortgage Obligations (Cost $25,470,791) 25,403,805 ------------ Total Fixed Income Securities (Cost $170,515,421) 170,535,630 ------------ SHARES ----------- SHORT-TERM INVESTMENTS 13.2% Investment Company - 0.0%++ BGI Institutional Money Market Fund (e) 17,758 17,758 ------------ Total Investment Company (Cost $17,758) 17,758 ------------ PRINCIPAL AMOUNT ----------- Repurchase Agreement - 0.1% Morgan Stanley & Co. 5.42%, dated 12/29/06 due 1/2/07 Proceeds at Maturity $41,630 (Collateralized by various Corporate Bonds and a U.S. Treasury Note, with rates between 5.00% - 8.96% and maturity dates between 8/15/09 - 12/29/49, with a Principal Amount of $41,209 and a Market Value of $43,077) (e) $ 41,605 41,605 ------------ Total Repurchase Agreement (Cost $41,605) 41,605 ------------ Time Deposits - 0.0%++ Barclays 5.32%, due 1/18/07 (e) 4,623 4,623 Credit Suisse First Boston Corp. 5.30%, due 1/12/07 (e) 4,623 4,623 Lloyds TSB Bank PLC 5.29%, due 2/21/07 (e) $ 6,934 $ 6,934 ------------ Total Time Deposits (Cost $16,180) 16,180 ------------ U.S. Government Agencies - 13.1% Federal Home Loan Mortgage Corporation (Discount Note) 3.162%, due 1/11/07 4,055,000 4,050,370 Federal National Mortgage Association (Discount Notes) 4.504%, due 2/8/07 790,000 785,948 4.744%, due 3/7/07 18,080,000 17,918,003 ------------ Total U.S. Government Agencies (Cost $22,742,766) 22,754,321 ------------ Total Short-Term Investments (Cost $22,818,309) 22,829,864 ------------ Total Investments (Cost $193,333,730) (f) 111.3% 193,365,494 Liabilities in Excess of Cash and Other Assets (11.3) (19,559,976) ----------- ------------ Net Assets 100.0% $173,805,518 =========== ============
* Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. ++ Less than one tenth of a percent. +++ Fifty percent of the Fund's assets are maintained to cover "senior securities transactions" which may include, but are not limited to, forwards, TBA's, options and futures. This percentage is marked-to- market daily against the value of the Fund's "senior securities" holdings to ensure proper coverage for these transactions. (a) Floating/variable rate. Rate shown is the rate in effect at December 31, 2006. (b) May be sold to institutional investors only under Rule 144a or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. The total market value of these securities at December 31, 2006 is $1,676,724 which represents 1.0% of the Fund's net assets. (c) TBA: Securities purchased on a forward commitment basis with an approximate principal amount and maturity date. The actual principal amount and maturity date will be determined upon settlement. The market value of these securities at December 31, 2006 is $25,443,281. (d) Represents a security, or a portion thereof, which is out on loan. (e) Represents a security, or a portion thereof, purchased with cash collateral received for securities on loan. (f) Aggregate cost for federal income tax purposes is $193,651,815 and net unrealized depreciation is as follows: Gross unrealized appreciation $ 709,766 Gross unrealized depreciation (996,087) --------- Net unrealized depreciation $(286,321) =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 INTERMEDIATE FIXED INCOME FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $193,333,730) including $72,620 market value of securities loaned $193,365,494 Cash-interest bearing accounts 4,569,700 Interest receivable 1,542,110 Receivable for fund shares sold 6,816 Other assets 19,537 ------------ Total assets 199,503,657 ------------ LIABILITIES: Payable for securities purchased 25,550,813 Securities lending collateral 75,543 Payable to Advisor, net (See Note F) 36,927 Transfer agent fees payable (See Note F) 10,819 Administration fees payable (See Note F) 7,922 Accounting fees payable (See Note F) 5,099 Report to shareholder payable 4,381 Trustees fees payable 2,147 12B-1 fees payable (See Note F) 7 Accrued expenses 4,481 ------------ Total liabilities 25,698,139 ------------ Net Assets $173,805,518 ============ NET ASSETS CONSIST OF: Capital paid-in $176,367,068 Accumulated undistributed net investment income 384,831 Accumulated net realized loss on investments (2,978,145) Net unrealized appreciation on investments 31,764 ------------ $173,805,518 ============ Net Assets: Class McMorgan $173,772,646 Class Z 32,872 ------------ $173,805,518 ============ Shares Outstanding: Class McMorgan 17,113,773 ============ Class Z 3,242 ============ Net asset value and redemption price per share: Class McMorgan $ 10.15 ============ Class Z $ 10.14 ============
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Interest $4,244,495 Income from securities loaned - net 3,869 ---------- Total investment income 4,248,364 ---------- Expenses: Investment advisory fees (See Note F) 289,447 Administration fees (See Note F) 46,161 Accounting fees (See Note F) 30,143 Legal fees 26,765 Insurance fees 21,474 Transfer agent fees (See Note F) 20,675 Trustees fees 16,345 Registration expenses 15,087 Custodian fees 9,353 Report to shareholder expense 9,114 Auditing fees 8,318 12B-1 distribution fees (Class Z) (See Note F) 39 Miscellaneous expenses 2,599 ---------- Total expenses 495,520 Expenses reimbursed (See Note F) (81,949) ---------- Net expenses 413,571 ---------- Net investment income 3,834,793 ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments 745,930 Net change in unrealized depreciation on investments 3,363,356 ---------- Net realized and unrealized gain on investments 4,109,286 ---------- Increase in net assets from operations $7,944,079 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 INTERMEDIATE FIXED INCOME FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 3,834,793 $ 6,530,643 Net realized gain (loss) on investments 745,930 (3,567,887) Net change in unrealized appreciation (depreciation) on investments 3,363,356 (3,732,163) ------------ ------------ Increase (decrease) in net assets from operations 7,944,079 (769,407) ------------ ------------ Dividends and distributions to shareholders: From net investment income: Class McMorgan shares (3,964,063) (6,172,965) Class Z shares (702) (906) From capital gains: Class McMorgan shares -- (364,830) Class Z shares -- (56) ------------ ------------ Total dividends and distributions to shareholders: (3,964,765) (6,538,757) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares 22,716,919 40,592,670 Class Z shares 3,941 5,947 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class McMorgan shares 3,873,125 6,384,114 Class Z shares 702 962 ------------ ------------ 26,594,687 46,983,693 Cost of shares redeemed: Class McMorgan shares (7,151,280) (52,936,529) Class Z shares (643) (2,418) ------------ ------------ Increase (decrease) in net assets derived from capital share transactions 19,442,764 (5,955,254) ------------ ------------ Total increase (decrease) in net assets 23,422,078 (13,263,418) Net Assets: Beginning of period 150,383,440 163,646,858 ------------ ------------ End of period (including accumulated undistributed net investment income of $384,831 and $514,803, respectively) $173,805,518 $150,383,440 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25 INTERMEDIATE FIXED INCOME FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ----------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ------------------------------------------------------------ 12/31/2006++ 2006 2005 2004 2003 2002 ------------ -------- -------- -------- -------- -------- Net asset value, beginning of period $ 9.91 $ 10.36 $ 10.22 $ 10.93 $ 10.46 $ 10.50 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.24(a) 0.40(a) 0.34(a) 0.36 0.49 0.56 Net realized and unrealized gain (loss) on investments 0.24 (0.45) 0.16 (0.43) 0.51 0.06 -------- -------- -------- -------- -------- -------- Total from investment operations 0.48 (0.05) 0.50 (0.07) 1.00 0.62 -------- -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.24) (0.38) (0.34) (0.36) (0.50) (0.57) From capital gains -- (0.02) (0.02) (0.28) (0.03) (0.09) -------- -------- -------- -------- -------- -------- Total dividends and distributions (0.24) (0.40) (0.36) (0.64) (0.53) (0.66) -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 10.15 $ 9.91 $ 10.36 $ 10.22 $ 10.93 $ 10.46 ======== ======== ======== ======== ======== ======== Total return 4.92%(b) (0.43)% 4.93% (0.64)% 9.79% 5.98% Ratios/Supplemental Data: Net assets, end of period (in 000's) $173,773 $150,355 $163,622 $172,331 $191,682 $164,068 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.60%+ 0.62% 0.60% 0.57% 0.57% 0.53% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.50%+ 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.64%+ 3.88% 3.14% 3.32% 4.55% 5.19% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.74%+ 4.00% 3.24% 3.39% 4.62% 5.22% Portfolio turnover 146%(c) 262%(c) 286%(c) 225.59% 204.18% 76.07%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 26 INTERMEDIATE FIXED INCOME FUND MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z -------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED -------------------------------------------------------- 12/31/2006++ 2006 2005 2004 2003 2002* ------------ ------ ------ ------- ------- ------ Net asset value, beginning of period $ 9.89 $10.35 $10.21 $ 10.92 $ 10.45 $10.65 ------ ------ ------ ------- ------- ------ Income from investment operations: Net investment income 0.22(a) 0.38(a) 0.34(a) 0.35 0.47 0.44 Net realized and unrealized gain (loss) on investments 0.26 (0.46) 0.13 (0.45) 0.50 (0.10) ------ ------ ------ ------- ------- ------ Total from investment operations 0.48 (0.08) 0.47 (0.10) 0.97 0.34 ------ ------ ------ ------- ------- ------ Less dividends and distributions: From net investment income (0.23) (0.36) (0.31) (0.33) (0.47) (0.45) From capital gains -- (0.02) (0.02) (0.28) (0.03) (0.09) ------ ------ ------ ------- ------- ------ Total dividends and distributions (0.23) (0.38) (0.33) (0.61) (0.50) (0.54) ------ ------ ------ ------- ------- ------ Net asset value, end of period $10.14 $ 9.89 $10.35 $ 10.21 $ 10.92 $10.45 ====== ====== ====== ======= ======= ====== Total return 4.89%(b) (0.78)% 4.67% (0.91)% 9.53% 3.25%(b) Ratios/Supplemental Data: Net assets, end of period (in 000's) $ 33 $ 28 $ 25 $ 1,690 $ 3,682 $1,987 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.85%+ 0.87% 0.85% 0.82% 0.82% 0.78%+ Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.75%+ 0.75% 0.75% 0.75% 0.75% 0.75%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.39%+ 3.63% 2.89% 3.07% 4.30% 4.94%+ Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.49%+ 3.75% 2.99% 3.14% 4.37% 4.97%+ Portfolio turnover 146%(c) 262%(c) 286%(c) 225.59% 204.18% 76.07%
- -------------- * Class Z commenced operations on September 4, 2001. (a) Per share data based on average shares outstanding during the period. (b) Total Return is not annualized. (c) The portfolio turnover not including mortgage dollar rolls for the six months ended December 31, 2006 and for the years ended June 30, 2006 and 2005 is 59%, 92% and 199%, respectively. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 27 FIXED INCOME FUND PORTFOLIO OF INVESTMENTS +++ DECEMBER 31, 2006 (Unaudited) FIXED INCOME SECURITIES 98.1% CORPORATE BONDS 43.9%
PRINCIPAL AMOUNT VALUE -------------------------- Consumer Discretionary - 5.9% AT&T Broadband Corp. 9.455%, due 11/15/22 $ $150,000 $ $194,240 Cox Communications, Inc. 7.125%, due 10/1/12 910,000 970,121 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 460,000 488,302 Johnson Controls, Inc. 5.25%, due 1/15/11 445,000 441,492 News America, Inc. 5.30%, due 12/15/14 210,000 206,442 Starwood Hotels & Resorts Worldwide, Inc. 7.875%, due 5/1/12 670,000 707,600 Target Corp. 5.875%, due 3/1/12 220,000 226,125 Tele-Communications, Inc. 9.80%, due 2/1/12 340,000 400,927 Time Warner, Inc. 6.50%, due 11/15/36 70,000 69,673 7.625%, due 4/15/31 250,000 279,290 ------------ 3,984,212 ------------ Consumer Staples - 2.2% Diageo Finance B.V. 5.30%, due 10/28/15 385,000 377,195 Kraft Foods, Inc. 4.00%, due 10/1/08 810,000 792,205 Safeway, Inc. 6.50%, due 3/1/11 295,000 305,196 ------------ 1,474,596 ------------ Energy - 4.9% Anadarko Finance Corp. 6.75%, due 5/1/11 565,000 592,242 ConocoPhillips 8.75%, due 5/25/10 460,000 509,716 Devon Financing Corp. 6.875%, due 9/30/11 225,000 237,919 Devon OEI Operating, Inc. 7.25%, due 10/1/11 225,000 240,053 Dominion Resources, Inc. 5.15%, due 7/15/15 370,000 358,387 EnCana Holdings Finance Corp. 5.80%, due 5/1/14 315,000 316,872 Halliburton Co. 5.50%, due 10/15/10 370,000 369,342 Valero Energy Corp. 6.875%, due 4/15/12 360,000 380,632 XTO Energy, Inc. 4.90%, due 2/1/14 295,000 281,222 ------------ 3,286,385 ------------ Financials - 20.7% Archstone-Smith Trust 5.75%, due 3/15/16 210,000 212,705 Assurant, Inc. 5.625%, due 2/15/14 260,000 259,296 Bank of America Corp. 4.875%, due 9/15/12 170,000 166,603 5.42%, due 3/15/17 200,000 197,062 Capital One Financial Corp. (a) 6.15%, due 9/1/16 525,000 542,961 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 335,000 327,821 CIT Group, Inc. 5.60%, due 4/27/11 420,000 424,084 6.875%, due 11/1/09 120,000 124,840 Citigroup, Inc. 5.625%, due 8/27/12 955,000 968,818 EOP Operating L.P. 7.00%, due 7/15/11 395,000 427,461 ERP Operating L.P. 6.625%, due 3/15/12 345,000 363,769 Goldman Sachs Group, Inc. (The) 5.25%, due 4/1/13 595,000 591,117 HSBC Finance Corp. 6.75%, due 5/15/11 890,000 941,923 7.00%, due 5/15/12 225,000 242,592 International Lease Finance Corp. 5.625%, due 9/20/13 235,000 236,717 Jefferies Group, Inc. 5.50%, due 3/15/16 155,000 150,931 7.75%, due 3/15/12 100,000 108,843 John Deere Capital Corp. 5.65%, due 7/25/11 540,000 545,931 JPMorgan Chase & Co. 5.125%, due 9/15/14 425,000 417,910 5.75%, due 1/2/13 225,000 228,984 7.125%, due 6/15/09 225,000 234,682 MBNA America Bank N.A. 7.125%, due 11/15/12 275,000 299,614 MBNA Corp. 7.50%, due 3/15/12 240,000 262,895 MetLife, Inc. 5.50%, due 6/15/14 125,000 125,321 6.125%, due 12/1/11 415,000 429,006 Morgan Stanley 4.75%, due 4/1/14 370,000 353,767 National Rural Utilities Cooperative Finance Corp. 7.25%, due 3/1/12 385,000 418,372 ProLogis 5.50%, due 4/1/12 325,000 324,407 Prudential Financial, Inc. 4.50%, due 7/15/13 440,000 419,276 Residential Capital Corp. 6.00%, due 2/22/11 160,000 159,697 6.375%, due 6/30/10 600,000 606,983 Simon Property Group, L.P. 4.60%, due 6/15/10 185,000 180,435 6.35%, due 8/28/12 260,000 270,630
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 28 CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Financials (continued) SLM Corp. 5.45%, due 4/25/11 $ 435,000 $ 436,690 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 315,000 330,737 US Bank N.A. 6.375%, due 8/1/11 160,000 167,023 Wachovia Bank N.A. 4.80%, due 11/1/14 530,000 508,081 Wells Fargo & Co. 4.75%, due 2/9/15 565,000 540,934 Western Union Co. (The) 5.93%, due 10/1/16 (a) 505,000 500,165 ------------ 14,049,083 ------------ Health Care - 0.7% Abbott Laboratories 5.875%, due 5/15/16 185,000 190,556 Wyeth 6.95%, due 3/15/11 275,000 292,059 ------------ 482,615 ------------ Industrials - 1.0% International Lease Finance Corp. 5.75%, due 6/15/11 160,000 162,857 5.875%, due 5/1/13 295,000 301,218 Northrop Grumman Corp. 7.125%, due 2/15/11 180,000 191,998 ------------ 656,073 ------------ Information Technology - 0.4% Cisco Systems, Inc. 5.25%, due 2/22/11 275,000 275,690 ------------ Materials - 1.0% BHP Billiton Finance USA, Ltd. 5.25%, due 12/15/15 215,000 211,579 Weyerhaeuser Co. 6.75%, due 3/15/12 420,000 440,480 ------------ 652,059 ------------ Telecommunication Services - 4.3% Deutsche Telekom International Finance B.V. 5.75%, due 3/23/16 460,000 453,241 Embarq Corp. 7.082%, due 6/1/16 580,000 590,452 Sprint Capital Corp. 8.75%, due 3/15/32 365,000 439,318 Telefonica Europe B.V. 7.75%, due 9/15/10 655,000 703,498 Vodafone Group PLC 5.50%, due 6/15/11 730,000 731,853 ------------ 2,918,362 ------------ Utilities - 2.8% Duke Energy Corp. 6.25%, due 1/15/12 505,000 525,832 Exelon Corp. 4.90%, due 6/15/15 300,000 282,966 FirstEnergy Corp. Series C 7.375%, due 11/15/31 140,000 159,437 MidAmerican Energy Holdings Co. 6.125%, due 4/1/36 190,000 191,530 Pacific Gas & Electric Co. 6.05%, due 3/1/34 150,000 151,286 Progress Energy, Inc. 7.75%, due 3/1/31 130,000 156,255 PSEG Power LLC 8.625%, due 4/15/31 110,000 140,507 Southern California Edison Co. 5.00%, due 1/15/14 330,000 321,457 ------------ 1,929,270 ------------ Total Corporate Bonds (Cost $29,779,688) 29,708,345 ------------ U.S. GOVERNMENT SECURITIES 42.6% U.S. GOVERNMENT AGENCY OBLIGATIONS 27.7% Federal National Mortgage Association - 5.6% * 4.875%, due 12/15/16 2,970,000 2,936,763 6.375%, due 6/15/09 860,000 887,274 ------------ 3,824,037 ------------ Federal National Mortgage Association (Mortgage Pass-Through Securities) - 22.1% 6.113%, due 10/1/36 (b) 843,797 853,615 6.124%, due 10/1/36 (b) 448,558 454,015 * 6.216%, due 9/1/36 (b) 1,115,128 1,132,779 6.50%, due 9/1/33 723,232 740,413 * 6.50%, due 1/1/37 TBA (c) 11,575,000 11,792,031 ------------ 14,972,853 ------------ Total U.S. Government Agency Obligations (Cost $18,836,892) 18,796,890 ------------ U.S. TREASURY OBLIGATIONS 14.9% United States Treasury Bonds - 12.4% * 4.50%, due 2/15/36(d) 3,080,000 2,928,889 * 8.125%, due 8/15/19(d) 4,170,000 5,448,038 ------------ 8,376,927 ------------ United States Treasury Strip - 2.5% * (zero coupon), due 8/15/19 3,145,000 1,704,971 ------------ Total U.S. Treasury Obligations (Cost $10,001,397) 10,081,898 ------------ Total U.S. Government Securities (Cost $28,838,289) 28,878,788 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS 11.6% Federal Home Loan Mortgage Corporation - 0.1% Series 2113 Class QE 6.00%, due 11/15/27 64,465 64,541 ------------ Financials - 11.5% Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 575,000 585,470
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 29 COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) FIXED INCOME FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Financials (continued) *Commercial Mortgage Pass Through Certificates Series 2006-C8 Class A2B 5.248%, due 12/10/46 $ 1,575,000 $ 1,573,208 Greenwich Capital Commercial Funding Corp. * Series 2005-GG5 Class A5 5.224%, due 4/10/37 1,345,000 1,335,385 Series 2004-GG1 Class A7 5.317%, due 6/10/36 950,000 949,053 GS Mortgage Securities Corp. Series 2004-GG2 Class A6 5.396%, due 8/10/38 700,000 702,662 *Merrill Lynch Mortgage Investors, Inc. Series 2006-A3 Class 3A1 5.837%, due 5/25/36 (b) 1,540,805 1,551,019 *Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 5.991%, due 1/25/36 (b) 1,103,451 1,111,144 ------------ 7,807,941 ------------ Total Collateralized Mortgage Obligations (Cost $7,923,839) 7,872,482 ------------ Total Fixed Income Securities (Cost $66,541,816) 66,459,615 ------------ SHARES ----------- SHORT-TERM INVESTMENTS 23.8% Investment Company - 1.5% BGI Institutional Money Market Fund (e) 984,716 984,716 ------------ Total Investment Company (Cost $984,716) 984,716 ------------ PRINCIPAL AMOUNT ----------- Repurchase Agreement - 3.4% Morgan Stanley & Co. 5.42%, dated 12/29/06 due 1/2/07 Proceeds at Maturity $2,308,324 (Collateralized by various Corporate Bonds and a U.S. Treasury Note, with rates between 5.00% - 8.96% and maturity dates between 8/15/09 - 12/29/49, with a Principal Amount of $2,284,973 and a Market Value of $2,388,601) (e) $ 2,306,935 2,306,935 ------------ Total Repurchase Agreement (Cost $2,306,935) 2,306,935 ------------ Time Deposits - 1.3% Barclays 5.32%, due 1/18/07 (e) 256,326 256,326 Credit Suisse First Boston Corp. 5.30%, due 1/12/07 (e) 256,326 256,326 Lloyds TSB Bank PLC 5.29%, due 2/21/07 (e) 384,489 384,489 ------------ Total Time Deposits (Cost $897,141) 897,141 ------------ U.S. Government Agencies - 17.6% Federal Home Loan Mortgage Corporation (Discount Note) 5.12%, due 1/11/07 3,705,000 3,700,769 Federal National Mortgage Association (Discount Notes) 5.03%, due 2/8/07 860,000 855,588 5.07%, due 3/7/07 7,245,000 7,180,085 5.13%, due 2/8/07 190,000 189,025 ------------ Total U.S. Government Agencies (Cost $11,919,247) 11,925,467 ------------ Total Short-Term Investments (Cost $16,108,039) 16,114,259 ------------ Total Investments (Cost $82,649,855) (f) 121.9% 82,573,874 Liabilities in Excess of Cash and Other Assets (21.9) (14,843,572) ----------- ------------ Net Assets 100.0% $ 67,730,302 =========== ============
* Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. +++ Fifty percent of the Fund's assets are maintained to cover "senior securities transactions" which may include, but are not limited to, forwards, TBA's, options and futures. This percentage is marked-to- market daily against the value of the Fund's "senior securities" holdings to ensure proper coverage for these transactions. (a) May be sold to institutional investors only under Rule 144a or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. The total market value of these securities at December 31, 2006 is $697,227 which represents 1.0% of the Fund's net assets. (b) Floating/variable rate. Rate shown is the rate in effect at December 31, 2006. (c) TBA: Securities purchased on a forward commitment basis with an approximate principal amount and maturity date. The actual principal amount and maturity date will be determined upon settlement. The market value of these securities at December 31, 2006 is $11,792,031. (d) Represents a security, or a portion thereof, which is out on loan. (e) Represents a security, or a portion thereof, purchased with cash collateral received for securities on loan. (f) Aggregate cost for federal income tax purposes is $82,782,669 and net unrealized depreciation is as follows: Gross unrealized appreciation $ 329,366 Gross unrealized depreciation (538,161) --------- Net unrealized depreciation $(208,795) =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 30 FIXED INCOME FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $82,649,855) including $4,082,924 market value of securities loaned $82,573,874 Cash-interest bearing accounts 547,763 Interest receivable 730,316 Receivable for fund shares sold 34,979 Other assets 29,344 ----------- Total assets 83,916,276 ----------- LIABILITIES: Payable for securities purchased 11,841,868 Securities lending collateral 4,188,792 Payable for fund shares redeemed 128,124 Transfer agent fees payable (See Note F) 10,092 12B-1 fees payable (See Note F) 6,491 Accounting fees payable (See Note F) 3,845 Administration fees payable (See Note F) 3,785 Trustees fees payable 893 Payable to Advisor, net (See Note F) 68 Accrued expenses 2,016 ----------- Total liabilities 16,185,974 ----------- Net Assets $67,730,302 =========== NET ASSETS CONSIST OF: Capital paid-in $69,249,578 Accumulated undistributed net investment income 137,874 Accumulated net realized loss on investments (1,581,169) Net unrealized depreciation on investments (75,981) ----------- $67,730,302 =========== Net Assets: Class McMorgan $37,264,599 Class Z 30,463,506 Class R1 1,103 Class R2 1,094 ----------- $67,730,302 =========== Shares Outstanding: Class McMorgan 3,458,147 =========== Class Z 2,826,329 =========== Class R1 102 =========== Class R2 102 =========== Net asset value and redemption price per share: Class McMorgan $ 10.78 =========== Class Z $ 10.78 =========== Class R1 $ 10.78* =========== Class R2 $ 10.77* ===========
* Difference in the NAV recalculation and NAV stated is caused by rounding differences. STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Interest $1,814,598 Income from securities loaned - net 3,618 ---------- Total investment income 1,818,216 ---------- Expenses: Investment advisory fees (See Note F) 120,588 12B-1 distribution fees (Class Z) (See Note F) 38,163 12B-1 distribution fees (Class R2) (See Note F) 1 Registration expenses 25,913 Accounting fees (See Note F) 23,060 Administration fees (See Note F) 22,735 Transfer agent fees (See Note F) 18,869 Legal fees 11,110 Insurance fees 9,147 Auditing fees 7,814 Custodian fees 7,644 Trustees fees 6,787 Report to shareholder expense 4,565 Miscellaneous expenses 2,604 ---------- Total expenses 299,000 Expenses reimbursed (See Note F) (88,554) ---------- Net expenses 210,446 ---------- Net investment income 1,607,770 ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investments (285,122) Net change in unrealized depreciation on investments 2,210,037 ---------- Net realized and unrealized gain on investments 1,924,915 ---------- Increase in net assets from operations $3,532,685 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 31 FIXED INCOME FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------ INCREASE IN NET ASSETS: Operations: Net investment income $ 1,607,770 $ 2,776,760 Net realized loss on investments (285,122) (1,254,533) Net change in unrealized depreciation on investments 2,210,037 (2,886,123) ----------- ------------ Increase (decrease) in net assets from operations 3,532,685 (1,363,896) ----------- ------------ Dividends and distributions to shareholders: From net investment income: Class McMorgan shares (979,447) (1,503,022) Class Z shares (738,871) (1,111,638) Class R1 shares (27) (42) Class R2 shares (26) (39) From capital gains: Class McMorgan shares -- (180,169) Class Z shares -- (143,849) Class R1 shares -- (5) Class R2 shares -- (5) ----------- ------------ Total dividends and distributions to shareholders (1,718,371) (2,938,769) ----------- ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares 3,328,020 19,483,520 Class Z shares 1,850,082 6,260,344 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class McMorgan shares 977,636 1,675,943 Class Z shares 738,871 1,255,445 Class R1 shares 27 47 Class R2 shares 26 44 ----------- ------------ 6,894,662 28,675,343 Cost of shares redeemed: Class McMorgan shares (5,203,022) (15,803,182) Class Z shares (2,432,418) (5,278,292) Class R1 shares -- (75) Class R2 shares -- (75) ----------- ------------ Increase (decrease) in net assets derived from capital share transactions (740,778) 7,593,719 ----------- ------------ Total increase in net assets 1,073,536 3,291,054 Net Assets: Beginning of period 66,656,766 63,365,712 ----------- ------------ End of period (including accumulated undistributed net investment income of $137,874 and $248,475, respectively) $67,730,302 $ 66,656,766 =========== ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 32 FIXED INCOME FUND MCMORGAN FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ----------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED -------------------------------------------------- 12/31/2006++ 2006 2005 2004 2003 2002 ------------ ------- ------- ------- ------- ------- Net asset value, beginning of period $ 10.49 $ 11.19 $ 10.88 $ 11.71 $ 10.86 $ 10.74 ------- ------- ------- ------- ------- ------- Income from investment operations: Net investment income 0.26 0.46 0.40 0.46 0.53 0.60 Net realized and unrealized gain (loss) on investments 0.31 (0.67) 0.40 (0.61) 0.86 0.12 ------- ------- ------- ------- ------- ------- Total from investment operations 0.57 (0.21) 0.80 (0.15) 1.39 0.72 ------- ------- ------- ------- ------- ------- Less dividends and distributions: From net investment income (0.28) (0.44) (0.39) (0.46) (0.54) (0.60) From capital gains -- (0.05) (0.10) (0.22) -- -- ------- ------- ------- ------- ------- ------- Total dividends and distributions (0.28) (0.49) (0.49) (0.68) (0.54) (0.60) ------- ------- ------- ------- ------- ------- Net asset value, end of period $ 10.78 $ 10.49 $ 11.19 $ 10.88 $ 11.71 $ 10.86 ======= ======= ======= ======= ======= ======= Total return 5.34%(a) (1.90)% 7.42% (1.29)% 13.06% 6.81% Ratios/Supplemental Data: Net assets, end of period (in 000's) $37,265 $37,156 $34,203 $38,484 $39,753 $29,292 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.76%+ 0.80% 0.79% 0.77% 0.83% 0.89% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.50%+ 0.50% 0.50% 0.50% 0.50% 0.50% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.52%+ 3.97% 3.18% 3.82% 4.41% 4.87% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.78%+ 4.27% 3.47% 4.09% 4.74% 5.27% Portfolio turnover 162%(b) 287%(b) 347%(b) 231.21% 142.48% 94.80%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 33 FIXED INCOME FUND FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z ----------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED -------------------------------------------------- 12/31/2006++ 2006 2005 2004 2003 2002 ------------ ------- ------- ------- ------- ------ Net asset value, beginning of period $ 10.49 $ 11.20 $ 10.88 $ 11.71 $ 10.86 $10.74 ------- ------- ------- ------- ------- ------ Income from investment operations: Net investment income 0.24 0.43 0.35 0.42 0.52 0.55 Net realized and unrealized gain (loss) on investments 0.31 (0.68) 0.43 (0.60) 0.84 0.14 ------- ------- ------- ------- ------- ------ Total from investment operations 0.55 (0.25) 0.78 (0.18) 1.36 0.69 ------- ------- ------- ------- ------- ------ Less dividends and distributions: From net investment income (0.26) (0.41) (0.36) (0.43) (0.51) (0.57) From capital gains -- (0.05) (0.10) (0.22) -- -- ------- ------- ------- ------- ------- ------ Total dividends and distributions (0.26) (0.46) (0.46) (0.65) (0.51) (0.57) ------- ------- ------- ------- ------- ------ Net asset value, end of period $ 10.78 $ 10.49 $ 11.20 $ 10.88 $ 11.71 $10.86 ======= ======= ======= ======= ======= ====== Total return 5.30%(a) (2.24)% 7.26% (1.53)% 12.80% 6.55% Ratios/Supplemental Data: Net assets, end of period (in 000's) $30,464 $29,499 $29,161 $25,690 $15,646 $3,114 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 1.01%+ 1.05% 1.04% 1.02% 1.08% 1.14% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.75%+ 0.75% 0.75% 0.75% 0.75% 0.75% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.27%+ 3.72% 2.93% 3.57% 4.16% 4.62% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.53%+ 4.02% 3.22% 3.84% 4.49% 5.02% Portfolio turnover 162%(b) 287%(b) 347%(b) 231.21% 142.48% 94.80%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 34 MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS R1 ---------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ----------------------------- 12/31/2006++ 2006 2005 2004* ------------ ------ ------ ------- Net asset value, beginning of period $10.49 $11.20 $10.88 $ 11.11 ------ ------ ------ ------- Income from investment operations: Net investment income 0.26 0.45 0.39 0.20 Net realized and unrealized gain (loss) on investments 0.30 (0.68) 0.41 (0.24) ------ ------ ------ ------- Total from investment operations 0.56 (0.23) 0.80 (0.04) ------ ------ ------ ------- Less dividends and distributions: From net investment income (0.27) (0.43) (0.38) (0.19) From capital gains -- (0.05) (0.10) -- ------ ------ ------ ------- Total dividends and distributions (0.27) (0.48) (0.48) (0.19) ------ ------ ------ ------- Net asset value, end of period $10.78 $10.49 $11.20 $ 10.88 ====== ====== ====== ======= Total return 5.38%(a) (2.08)% 7.42% (0.42)%(a) Ratios/Supplemental Data: Net assets, end of period (in 000's) $ 1 $ 1 $ 1 $ 1 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.86%+ 0.90% 0.81% 0.87%+ Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.60%+ 0.60% 0.50% 0.60%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.42%+ 3.87% 3.06% 3.72%+ Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.68%+ 4.17% 3.36% 3.99%+ Portfolio turnover 162%(b) 287%(b) 347%(b) 231.21%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 35 FIXED INCOME FUND FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS R2 --------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ------------------------------ 12/31/2006++ 2006 2005 2004* ------------ ------ ------ ------- Net asset value, beginning of period $10.48 $11.18 $10.88 $ 11.11 ------ ------ ------ ------- Income from investment operations: Net investment income 0.24 0.42 0.34 0.18 Net realized and unrealized gain (loss) on investments 0.31 (0.67) 0.41 (0.24) ------ ------ ------ ------- Total from investment operations 0.55 (0.25) 0.75 (0.06) ------ ------ ------ ------- Less dividends and distributions: From net investment income (0.26) (0.40) (0.35) (0.17) From capital gains -- (0.05) (0.10) -- ------ ------ ------ ------- Total dividends and distributions (0.26) (0.45) (0.45) (0.17) ------ ------ ------ ------- Net asset value, end of period $10.77 $10.48 $11.18 $ 10.88 ====== ====== ====== ======= Total return 5.25%(a) (2.24)% 6.97% (0.58)%(a) Ratios/Supplemental Data: Net assets, end of period (in 000's) $ 1 $ 1 $ 1 $ 1 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 1.11%+ 1.15% 1.06% 1.12%+ Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.85%+ 0.85% 0.75% 0.85%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 4.17%+ 3.62% 2.73% 3.47%+ Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 4.43%+ 3.92% 3.03% 3.74%+ Portfolio turnover 162%(b) 287%(b) 347%(b) 231.21%
- -------------- * Class R1 and R2 commenced operations on January 2, 2004. (a) Total return is not annualized. (b) The portfolio turnover not including mortgage dollar rolls for the six months ended December 31, 2006 and for the years ended June 30, 2006 and June 30, 2005 is 56%, 96% and 216%, respectively. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 36 HIGH YIELD FUND MCMORGAN FUNDS PORTFOLIO OF INVESTMENTS DECEMBER 31, 2006 (Unaudited) LONG-TERM BONDS 95.0% CORPORATE BONDS 89.2%
PRINCIPAL AMOUNT VALUE ------------------------- Advertising - 0.4% R.H. Donnelley Corp. 8.875%, due 1/15/16 $ 635,000 $ 666,750 ------------ Aerospace & Defense - 1.3% BE Aerospace, Inc. Series B 8.875%, due 5/1/11 (a) 635,000 657,225 DRS Technologies, Inc. 7.625%, due 2/1/18 629,000 647,870 Moog, Inc. 6.25%, due 1/15/15 330,000 320,100 Transdigm, Inc. 7.75%, due 7/15/14 450,000 463,500 ------------ 2,088,695 ------------ Airlines - 0.2% American Airlines, Inc. Class A 7.25%, due 2/5/09 350,000 357,875 ------------ Auto Components - 1.2% Accuride Corp. 8.50%, due 2/1/15 396,000 381,150 Commercial Vehicle Group, Inc. 8.00%, due 7/1/13 385,000 376,337 Cooper Standard Automotive, Inc. 8.375%, due 12/15/14 (a) 495,000 389,812 Lear Corp. 8.50%, due 12/1/13 (b) 547,000 530,590 Titan International, Inc. 8.00%, due 1/15/12 (b) 320,000 322,000 ------------ 1,999,889 ------------ Auto Manufacturers - 0.1% General Motors Corp. 8.375%, due 7/15/33 (a) 230,000 212,750 ------------ Building Materials & Components - 0.6% Ahern Rentals, Inc. 9.25%, due 8/15/13 475,000 495,187 Goodman Global Holding Co., Inc. Series B 8.36%, due 6/15/12 (c) 495,000 502,425 ------------ 997,612 ------------ Building Products - 2.3% Building Materials Corp. of America Series B 8.00%, due 10/15/07 200,000 203,260 8.00%, due 12/1/08 425,000 444,125 Compression Polymers Corp. 10.50%, due 7/1/13 413,000 420,744 Covalence Specialty Materials Corp. 10.25%, due 3/1/16 (b) 540,000 494,100 Da-Lite Screen Co., Inc. 9.50%, due 5/15/11 545,000 566,800 KI Holdings, Inc. 9.875%, beginning 11/15/09 (zero coupon), due 11/15/14 375,000 300,000 Nortek, Inc. 8.50%, due 9/1/14 615,000 602,700 NTK Holdings, Inc. (zero coupon), due 3/1/14 (a) 415,000 290,500 Ply Gem Industries, Inc. 9.00%, due 2/15/12 620,000 527,000 ------------ 3,849,229 ------------ Capital Markets - 3.6% *TRAINS HY-2006-1 7.548%, due 5/1/16 (a)(b)(d) 5,760,000 5,877,965 ------------ Chemicals - 3.3% Huntsman International LLC 7.375%, due 1/1/15 (a)(b) 530,000 526,025 9.875%, due 3/1/09 262,000 269,860 Innophos, Inc. 8.875%, due 8/15/14 275,000 279,125 Invista 9.25%, due 5/1/12 (b) 760,000 815,100 Lyondell Chemical Co. 8.25%, due 9/15/16 775,000 813,750 MacDermid, Inc. 9.125%, due 7/15/11 425,000 442,000 Mosaic Global Holdings, Inc. 7.375%, due 12/1/14 (b) 195,000 200,119 7.625%, due 12/1/16 (b) 180,000 186,525 PQ Corp. 7.50%, due 2/15/13 715,000 704,275 Rockwood Specialties Group, Inc. 7.50%, due 11/15/14 265,000 266,987 10.625%, due 5/15/11 259,000 275,835 Westlake Chemical Corp. 6.625%, due 1/15/16 650,000 628,875 ------------ 5,408,476 ------------ Coal - 0.2% International Coal Group 10.25%, due 7/15/14 380,000 380,000 ------------ Commercial Banks - 0.9% UGS Capital Corp. II 10.354%, due 6/1/11 (b)(c)(e) 840,368 861,377 UGS Corp. 10.00%, due 6/1/12 635,000 692,150 ------------ 1,553,527 ------------ Commercial Services & Supplies - 6.4% *Allied Waste North America 7.875%, due 4/15/13 1,760,000 1,815,000
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 37 CORPORATE BONDS (CONTINUED) HIGH YIELD FUND (continued)
PRINCIPAL AMOUNT VALUE ------------------------- Commercial Services & Supplies (continued) Ashtead Capital, Inc. 9.00%, due 8/15/16 (b) 145,000 155,150 Cardtronics, Inc. 9.25%, due 8/15/13 (a) 810,000 852,525 Geo Group, Inc. (The) 8.25%, due 7/15/13 590,000 607,700 H&E Equipment Services 8.375%, due 7/15/16 625,000 654,687 Hertz Corp. 8.875%, due 1/1/14 (b) 725,000 759,437 Insurance Auto Auctions, Inc. 11.00%, due 4/1/13 575,000 649,750 Mac-Gray Corp. 7.625%, due 8/15/15 622,000 631,330 Mobile Mini, Inc. 9.50%, due 7/1/13 403,000 430,202 Mobile Services Group, Inc. 9.75%, due 8/1/14 (b) 725,000 757,625 Rent-A-Center Series B 7.50%, due 5/1/10 625,000 626,562 Rental Services Corp. 9.50%, due 12/1/14 (b) 330,000 340,725 Service Corp. International 7.00%, due 6/15/17 865,000 875,812 United Rentals North America, Inc. 6.50%, due 2/15/12 580,000 572,750 Waste Services, Inc. 9.50%, due 4/15/14 710,000 740,175 ------------ 10,469,430 ------------ Construction Materials - 0.4% Texas Industries, Inc. 7.25%, due 7/15/13 120,000 121,800 U.S. Concrete, Inc. 8.375%, due 4/1/14 500,000 488,750 ------------ 610,550 ------------ Containers & Packaging - 1.8% AEP Industries, Inc. 7.875%, due 3/15/13 175,000 176,749 Berry Plastics Holding Corp. 8.875%, due 9/15/14 (b) 590,000 598,850 Graham Packaging Co., Inc. 8.50%, due 10/15/12 195,000 196,950 9.875%, due 10/15/14 (a) 265,000 267,650 Owens-Brockway Glass Container, Inc. 7.75%, due 5/15/11 847,000 870,292 Plastipak Holdings, Inc. 8.50%, due 12/15/15 (b) 360,000 374,400 Pregis Corp. 12.375%, due 10/15/13 (b) 365,000 395,112 ------------ 2,880,003 ------------ Diversified Financial Services - 6.4% Altra Industrial Motion, Inc. 9.00%, due 12/1/11 500,000 510,000 BCP Crystal U.S. Holdings Corp. 9.625%, due 6/15/14 80,000 88,400 CCM Merger, Inc. 8.00%, due 8/1/13 (b) 591,000 577,702 Couche-Tard U.S. L.P. 7.50%, due 12/15/13 530,000 541,925 Ford Motor Credit Co. 8.00%, due 12/15/16 995,000 983,209 * 9.875%, due 8/10/11 1,915,000 2,048,142 General Motors Acceptance Corp. 6.125%, due 8/28/07 475,000 475,093 * 6.875%, due 9/15/11 1,270,000 1,302,636 Global Cash Access LLC 8.75%, due 3/15/12 296,000 310,800 Idearc, Inc. 8.00%, due 11/15/16 (b) 775,000 786,625 Innophos Investments Holdings, Inc. 13.38%, due 2/15/15 (c) (e) 139,332 145,602 JOSTENS IH Corp. 7.625%, due 10/1/12 725,000 734,062 KRATON Polymers LLC/KRATON Polymers Capital Corp. 8.125%, due 1/15/14 550,000 550,000 Nalco Finance Holdings, Inc. 9.00%, beginning 2/1/09 (zero coupon), due 2/1/14 (a) 406,000 328,860 Rainbow National Services LLC 8.75%, due 9/1/12 (b) 195,000 204,994 10.375%, due 9/1/14 (b) 310,000 344,487 Southern Star Central Corp. 6.75%, due 3/1/16 220,000 219,450 Standard Aero Holdings, Inc. 8.25%, due 9/1/14 377,000 380,770 ------------ 10,532,757 ------------ Diversified Telecommunication Services - 1.7% Cincinnati Bell, Inc. 8.375%, due 1/15/14 580,000 595,950 GCI, Inc. 7.25%, due 2/15/14 650,000 645,125 Qwest Capital Funding, Inc. 6.875%, due 7/15/28 925,000 845,219 Time Warner Telecommunications Holdings, Inc. 9.25%, due 2/15/14 635,000 678,656 ------------ 2,764,950 ------------ Electric Utilities - 3.3% CMS Energy Corp. 8.50%, due 4/15/11 1,040,000 1,131,000 Edison Mission Energy 7.50%, due 6/15/13 1,150,000 1,201,750 Inergy, L.P./Inergy Finance Corp. 6.875%, due 12/15/14 525,000 515,812 Mirant North America LLC 7.375%, due 12/31/13 662,000 671,930
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 38 CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMOUNT VALUE ------------------------- Electric Utilities (continued) *Sierra Pacific Power Co. 6.25%, due 4/15/12 1,185,000 1,203,230 Sierra Pacific Resources 6.75%, due 8/15/17 700,000 686,567 ------------ 5,410,289 ------------ Electronic Equipment & Instruments - 0.4% Itron, Inc. 7.75%, due 5/15/12 705,000 720,862 ------------ Energy Equipment & Services - 0.3% Pride International, Inc. 7.375%, due 7/15/14 430,000 443,975 ------------ Engineering & Construction - 0.2% Esco Corp. 8.625%, due 12/15/13 (b) 310,000 318,525 ------------ Environmental Control - 0.7% Aleris International, Inc. 9.00%, due 12/15/14 (b) 230,000 231,150 WCA Waste Corp. 9.25%, due 6/15/14 810,000 846,450 ------------ 1,077,600 ------------ Food & Staples Retailing - 0.2% Stater Brothers Holdings 8.125%, due 6/15/12 (a) 370,000 375,550 ------------ Food Products - 1.1% Del Monte Corp. 8.625%, due 12/15/12 380,000 400,900 Pinnacle Foods Holding Corp. 8.25%, due 12/1/13 625,000 639,844 Reddy Ice Holdings, Inc. 10.50%, beginning 11/1/08 (zero coupon), due 11/1/12 865,000 778,500 ------------ 1,819,244 ------------ Health Care Equipment & Supplies - 1.0% Fisher Scientific International, Inc. 6.125%, due 7/1/15 375,000 370,728 Fresenius Medical Capital Trust IV 7.875%, due 6/15/11 325,000 340,437 Hanger Orthopedic Group, Inc. 10.25%, due 6/1/14 295,000 304,587 Norcross Safety Products LLC Series B 9.875%, due 8/15/11 400,000 426,000 Safety Products Holdings, Inc. Series B 11.75%, due 1/1/12 (e) 153,972 165,520 ------------ 1,607,272 ------------ Health Care Providers & Services - 3.4% Concentra Operating Corp. 9.125%, due 6/1/12 450,000 472,500 9.50%, due 8/15/10 275,000 288,750 DaVita, Inc. 7.25%, due 3/15/15 350,000 357,000 HCA, Inc. 5.75%, due 3/15/14 535,000 444,050 6.25%, due 2/15/13 60,000 53,100 9.25%, due 11/15/16 (b) 745,000 798,081 IASIS Healthcare LLC 8.75%, due 6/15/14 400,000 405,000 Res-Care, Inc. 7.75%, due 10/15/13 585,000 599,625 Tenet Healthcare Corp. 6.50%, due 6/1/12 150,000 135,750 7.375%, due 2/1/13 59,000 54,206 9.25%, due 2/1/15 600,000 600,000 9.875%, due 7/1/14 150,000 152,625 Triad Hospitals, Inc. 7.00%, due 11/15/13 200,000 201,250 Vanguard Health Holding Co. II 9.00%, due 10/1/14 325,000 329,062 VWR International, Inc. 6.875%, due 4/15/12 240,000 241,500 8.00%, due 4/15/14 370,000 381,100 ------------ 5,513,599 ------------ Hotels, Restaurants & Leisure - 7.5% American Casino & Entertainment Properties LLC 7.85%, due 2/1/12 540,000 551,475 Herbst Gaming, Inc. 8.125%, due 6/1/12 620,000 632,400 Inn of the Mountain Gods Resort & Casino 12.00%, due 11/15/10 434,000 468,720 Isle of Capri Casinos, Inc. 7.00%, due 3/1/14 225,000 223,875 9.00%, due 3/15/12 400,000 418,000 Majestic Star Casino LLC/ Majestic Star Casino Capital Corp. II 9.75%, due 1/15/11 786,000 778,140 Mandalay Resort Group 6.375%, due 12/15/11 775,000 771,125 MGM Mirage 5.875%, due 2/27/14 500,000 462,500 Mohegan Tribal Gaming Authority 6.125%, due 2/15/13 440,000 436,700 7.125%, due 8/15/14 300,000 304,125 Pinnacle Entertainment, Inc. 8.75%, due 10/1/13 (a) 460,000 487,600 Pokagon Gaming Authority 10.375%, due 6/15/14 (b) 440,000 481,800 San Pasqual Casino 8.00%, due 9/15/13 (b) 525,000 539,437 Scientific Games Corp. 6.25%, due 12/15/12 575,000 562,063 Seneca Gaming Corp. 7.25%, due 5/1/12 450,000 457,875
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 39 CORPORATE BONDS (CONTINUED) HIGH YIELD FUND (continued)
PRINCIPAL AMOUNT VALUE ------------------------- Hotels, Restaurants & Leisure (continued) Six Flags, Inc. 8.875%, due 2/1/10 140,000 135,450 9.75%, due 4/15/13 (a) 160,000 150,200 Station Casinos, Inc. 6.50%, due 2/1/14 495,000 439,931 7.75%, due 8/15/16 550,000 554,125 TDS Investor Corp. 9.994%, due 9/1/14 (b)(c) 767,000 747,825 Town Sports International, Inc. 9.625%, due 4/15/11 257,000 271,456 Tropicana Entertainment 9.625%, due 12/15/14 (b) 390,000 386,100 Tunica-Biloxi Gaming Authority 9.00%, due 11/15/15 (b) 393,000 406,755 Turning Stone Resort Casino Enterprise 9.125%, due 12/15/10 (b) 245,000 251,125 9.125%, due 9/15/14 (b) 365,000 373,213 Vail Resorts, Inc. 6.75%, due 2/15/14 370,000 370,000 Wynn Las Vegas LLC 6.625%, due 12/1/14 575,000 571,406 ------------ 12,233,421 ------------ Household Durables - 4.0% ALH Finance LLC 8.50%, due 1/15/13 (a) 750,000 736,875 American Greetings Corp. 7.375%, due 6/1/16 660,000 678,150 Beazer Homes USA, Inc. 6.50%, due 11/15/13 390,000 380,250 K. Hovnanian Enterprises, Inc. 8.875%, due 4/1/12 (a) 425,000 431,375 KB Home 5.75%, due 2/1/14 925,000 851,231 Meritage Homes Corp. 6.25%, due 3/15/15 827,000 785,650 Norcraft Cos., L.P./Norcraft Finance Corp. 9.00%, due 11/1/11 175,000 181,125 Norcraft Holdings L.P. 9.75%, beginning 9/1/08 (zero coupon), due 9/1/12 490,000 414,050 Sealy Mattress Co. 8.25%, due 6/15/14 (a) 575,000 600,875 Simmons Co. 7.875%, due 1/15/14 (a) 410,000 415,125 10.00%, beginning 12/15/09 (zero coupon), due 12/15/14 580,000 455,300 Stanley-Martin Communities LLC 9.75%, due 8/15/15 741,000 585,390 ------------ 6,515,396 ------------ Household Products - 1.0% Johnsondiversey Holdings, Inc. 10.67%, beginning 5/15/07 (zero coupon), due 5/15/13 571,000 551,015 Johnsondiversey, Inc. Series B 9.625%, due 5/15/12 479,000 501,753 Spectrum Brands, Inc. 7.375%, due 2/1/15 (a) 726,000 627,990 ------------ 1,680,758 ------------ IT Services - 1.2% Activant Solutions, Inc. 9.50%, due 5/1/16 (b) 385,000 358,050 Iron Mountain, Inc. 8.625%, due 4/1/13 530,000 547,225 8.75%, due 7/15/18 (a) 480,000 508,800 Sungard Data Systems, Inc. 9.125%, due 8/15/13 574,000 602,700 ------------ 2,016,775 ------------ Leisure Equipment & Products - 0.8% Leslie's Poolmart 7.75%, due 2/1/13 655,000 651,725 True Temper Sports, Inc. 8.375%, due 9/15/11 750,000 652,500 ------------ 1,304,225 ------------ Machinery - 1.1% Columbus McKinnon Corp. 8.875%, due 11/1/13 927,000 977,985 Gardner Denver, Inc. 8.00%, due 5/1/13 445,000 462,800 Mueller Group, Inc. 10.00%, due 5/1/12 88,000 95,700 Mueller Holdings, Inc. 14.75%, beginning 4/15/09 (zero coupon), due 4/15/14 277,000 249,300 ------------ 1,785,785 ------------ Machinery & Engineering - 0.3% Douglas Dynamics LLC 7.75%, due 1/15/12 (b) 500,000 470,000 ------------ Media - 8.5% Adelphia Communications Corp. 10.875%, due 10/1/10 (f) 635,000 582,613 Affinity Group, Inc. 9.00%, due 2/15/12 450,000 445,500 AMC Entertainment, Inc. 8.00%, due 3/1/14 350,000 347,375 9.624%, due 8/15/10 (c) 223,000 230,526 CBD Media Holdings 9.25%, due 7/15/12 675,000 702,844 *CCH I LLC 11.00%, due 10/1/15 1,311,000 1,345,414 CCH II LLC/CCH II Capital Corp. 10.25%, due 9/15/10 500,000 523,125 Charter Communications Operation LLC 8.00%, due 4/30/12 (b) 200,000 207,750
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 40 CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMOUNT VALUE ------------------------- Media (continued) CSC Holdings, Inc. 6.75%, due 4/15/12 (a)(b) 825,000 804,375 7.625%, due 7/15/18 635,000 618,331 Dex Media, Inc. 8.00%, due 11/15/13 395,000 406,850 9.00%, beginning 11/15/08 (zero coupon), due 11/15/13 560,000 499,800 DirectTV Holdings, Inc. 8.375%, due 3/15/13 525,000 546,000 Echostar DBS Corp. 5.75%, due 10/1/08 630,000 627,638 Mediacom Broadband LLC 8.50%, due 10/15/15 (b) 150,000 151,875 8.50%, due 10/15/15 400,000 405,000 Medianews Group, Inc. 6.375%, due 4/1/14 705,000 606,300 Nexstar Finance Holdings LLC 11.375%, beginning 4/1/08 (zero coupon), due 4/1/13 465,000 416,756 Nexstar Finance, Inc. 7.00%, due 1/15/14 400,000 376,000 PanAmSat Corp. 9.00%, due 8/15/14 349,000 368,631 River Rock Entertainment Authority 9.75%, due 11/1/11 300,000 318,000 Salem Communications Corp. 7.75%, due 12/15/10 760,000 771,400 Sinclair Broadcast Group, Inc. 8.00%, due 3/15/12 750,000 774,375 Vertis, Inc. Series B 10.875%, due 6/15/09 (a) 200,000 201,000 13.50%, due 12/7/09 (a) (b) 200,000 182,000 Warner Music Group 7.375%, due 4/15/14 450,000 445,500 WMG Holdings Corp. 9.50%, beginning 12/15/09 (zero coupon), due 12/15/14 605,000 484,000 Young Broadcasting, Inc. 8.75%, due 1/15/14 100,000 86,625 10.00%, due 3/1/11 (a) 475,000 451,250 ------------ 13,926,853 ------------ Metals & Mining - 1.4% AK Steel Corp. 7.875%, due 2/15/09 (a) 600,000 600,000 Century Aluminum Co. 7.50%, due 8/15/14 475,000 481,531 Chaparral Steel Co. 10.00%, due 7/15/13 378,000 421,943 International Steel Group, Inc. 6.50%, due 4/15/14 350,000 359,625 PNA Group, Inc. 10.75%, due 9/1/16 (b) 365,000 377,319 ------------ 2,240,418 ------------ Multiline Retail - 0.4% Neiman-Marcus Group, Inc. 9.00%, due 10/15/15 (e) 625,000 682,031 ------------ Multi-Utilities & Unregulated Power - 4.1% AES Corp. (The) 8.75%, due 5/15/13 (b) 780,000 835,575 Aquila, Inc. 7.625%, due 11/15/09 485,000 503,569 NorthWestern Corp. 5.875%, due 11/1/14 305,000 299,674 NRG Energy, Inc. 7.25%, due 2/1/14 370,000 372,775 7.375%, due 2/1/16 855,000 859,275 Reliant Energy, Inc. 6.75%, due 12/15/14 425,000 415,438 9.50%, due 7/15/13 275,000 294,938 *Sonat, Inc. 7.625%, due 7/15/11 1,500,000 1,590,000 *Williams Cos, Inc. 7.625%, due 7/15/19 1,400,000 1,498,000 ------------ 6,669,244 ------------ Oil & Gas - 7.4% Allis-Chalmers Energy, Inc. 9.00%, due 1/15/14 (b) 500,000 502,500 ANR Pipeline Co. 8.875%, due 3/15/10 620,000 650,436 Chaparral Energy, Inc. 8.50%, due 12/1/15 725,000 721,375 Chesapeake Energy Corp. 6.50%, due 8/15/17 500,000 488,750 6.625%, due 1/15/16 485,000 481,969 6.875%, due 1/15/16 400,000 403,500 Complete Production Services, Inc. 8.00%, due 12/15/16 (b) 626,000 641,650 Comstock Resources, Inc. 6.875%, due 3/1/12 385,000 373,450 Denbury Resources, Inc. 7.50%, due 12/15/15 552,000 563,040 *Dynegy Holdings, Inc. 8.375%, due 5/1/16 1,165,000 1,223,250 Encore Acquisition Co. 7.25%, due 12/1/17 575,000 556,313 Ferrellgas Partners L.P. 6.75%, due 5/1/14 475,000 461,938 Hilcorp Energy I L.P. 9.00%, due 6/1/16 (b) 395,000 417,713 MarkWest Energy Partners, L.P. Series B 6.875%, due 11/1/14 800,000 772,000 SESI LLC 6.875%, due 6/1/14 655,000 651,725 Stone Energy Corp. 8.113%, due 7/15/10 (b)(c) 860,000 851,400 Swift Energy Co. 7.625%, due 7/15/11 275,000 279,813 9.375%, due 5/1/12 300,000 316,500
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 41 CORPORATE BONDS (CONTINUED) HIGH YIELD FUND (continued)
PRINCIPAL AMOUNT VALUE ------------------------- Oil & Gas (continued) Targa Resources, Inc. 8.50%, due 11/1/13 (b) 725,000 730,438 Transcontinental Gas Pipeline Corp. 6.40%, due 4/15/16 760,000 767,600 Whiting Petroleum Corp. 7.00%, due 2/1/14 295,000 294,263 ------------ 12,149,623 ------------ Packaging & Containers - 0.3% Crown Americas LLC/Crown Americas Capital Corp. 7.625%, due 11/15/13 515,000 530,450 ------------ Paper & Forest Products - 1.7% Appleton Papers, Inc. 8.125%, due 6/15/11 475,000 484,500 Buckeye Technologies, Inc. 8.00%, due 10/15/10 550,000 550,000 *Georgia-Pacific Corp. 8.125%, due 5/15/11 1,625,000 1,706,250 ------------ 2,740,750 ------------ Pharmaceuticals - 0.6% NBTY, Inc. 7.125%, due 10/1/15 650,000 637,000 Omnicare, Inc. 6.875%, due 12/15/15 367,000 362,413 ------------ 999,413 ------------ Real Estate - 1.3% American Real Estate Partners, L.P. 7.125%, due 2/15/13 770,000 773,850 Ashton Woods USA LLC 9.50%, due 10/1/15 968,000 880,880 Host Marriott L.P. 7.125%, due 11/1/13 530,000 541,925 ------------ 2,196,655 ------------ Semiconductors & Semiconductor Equipment - 0.4% Amkor Technologies, Inc. 9.25%, due 6/1/16 (a) 250,000 245,000 Freescale Semiconductor, Inc. 8.875%, due 12/15/14 (b) 180,000 179,325 9.125%, due 12/15/14 (b) 195,000 193,781 ------------ 618,106 ------------ Specialized Services - 0.4% Crystal U.S. Holdings 3 LLC Series B (zero coupon), due 10/1/14 330,000 283,800 K & F Acquisition, Inc. 7.75%, due 11/15/14 380,000 391,400 ------------ 675,200 ------------ Specialty Retail - 1.2% Asbury Automotive Group, Inc. 9.00%, due 6/15/12 430,000 449,350 AutoNation, Inc. 7.374%, due 4/15/13 (c) 580,000 582,900 Lazydays RV Center, Inc. 11.75%, due 5/15/12 515,000 491,825 Nebraska Book Co., Inc. 8.625%, due 3/15/12 250,000 240,000 United Auto Group, Inc. 7.75%, due 12/15/16 (b) 195,000 195,975 ------------ 1,960,050 ------------ Telecommunications - 1.1% American Cellular Corp. Series B 10.00%, due 8/1/11 335,000 354,263 CCO Holdings LLC 8.75%, due 11/15/13 200,000 207,750 MetroPCS Wireless, Inc. 9.25%, due 11/1/14 (b) 350,000 365,750 Qwest Communications International, Inc. 7.50%, due 2/15/14 895,000 921,850 ------------ 1,849,613 ------------ Textiles, Apparel & Luxury Goods - 0.3% Collins & Aikman Floor Cover Series B 9.75%, due 2/15/10 480,000 490,800 ------------ Transportation Infrastructure - 0.7% Bristow Group, Inc. 6.125%, due 6/15/13 652,000 616,140 Great Lakes Dredge & Dock Corp. 7.75%, due 12/15/13 (a) 200,000 195,000 Hornbeck Offshore Services, Inc. Series B 6.125%, due 12/1/14 425,000 405,344 ------------ 1,216,484 ------------ Wireless Telecommunication Services - 2.1% American Tower Corp. 7.125%, due 10/15/12 1,135,000 1,166,213 Dobson Cellular Systems 9.875%, due 11/1/12 71,000 77,390 Dobson Communications Corp. 8.875%, due 10/1/13 (a) 249,000 253,669 Nextel Partners, Inc. 8.125%, due 7/1/11 400,000 416,500 Rural Cellular Corp. 8.25%, due 3/15/12 135,000 140,569 9.75%, due 1/15/10 (a) 625,000 642,188 Syniverse Technologies, Inc. Series B 7.75%, due 8/15/13 697,000 695,258 ------------ 3,391,787 ------------ Total Corporate Bonds (Cost $145,514,156) 146,281,211 ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 42 FOREIGN CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMOUNT VALUE ------------------------- FOREIGN CORPORATE BONDS 5.8% Chemicals - 0.7% Ineos Group Holdings PLC 8.50%, due 2/15/16 (b) 580,000 553,900 Nova Chemicals Corp. 6.50%, due 1/15/12 580,000 549,550 ------------ 1,103,450 ------------ Diversified Financial Services - 0.8% JSG Funding PLC 9.625%, due 10/1/12 895,000 948,700 Nell AF SARL 8.375%, due 8/15/15 (a)(b) 370,000 380,175 ------------ 1,328,875 ------------ Electronic Equipment & Instruments - 0.4% Flextronics International, Ltd. 6.50%, due 5/15/13 625,000 617,188 ------------ Hotels, Restaurants & Leisure - 0.4% Royal Caribbean Cruises, Ltd. 6.875%, due 12/1/13 700,000 709,552 ------------ IT Services - 0.3% Seagate Technology HDD Holdings 6.80%, due 10/1/16 (a) 430,000 432,150 ------------ Metals & Mining - 0.7% Novelis, Inc. 8.25%, due 2/15/15 (b) 630,000 609,525 Russel Metals, Inc. 6.375%, due 3/1/14 525,000 500,719 ------------ 1,110,244 ------------ Oil & Gas - 0.7% Compton Petroleum Finance Corp. 7.625%, due 12/1/13 515,000 496,975 OPTI Canada, Inc. 8.25%, due 12/15/14 (b) 655,000 673,013 ------------ 1,169,988 ------------ Paper & Forest Products - 0.3% Bowater Canada Finance 7.95%, due 11/15/11 445,000 436,100 ------------ Semiconductors & Semiconductor Equipment - 0.6% Magnachip Semiconductor S.A. 8.61%, due 12/15/11 (c) 585,000 503,100 Sensata Technologies B.V. 8.25%, due 5/1/14 (b) 470,000 451,200 ------------ 954,300 ------------ Specialty Retail - 0.3% Dollarama Group, L.P. 8.875%, due 8/15/12 555,000 574,425 ------------ Wireless Telecommunication Services - 0.6% Inmarsat Finance PLC 7.625%, due 6/30/12 293,000 302,523 10.375%, beginning 11/15/08 (zero coupon), due 11/15/12 500,000 460,625 Intelsat Bermuda, Ltd. 9.25%, due 6/15/16 (b) 300,000 322,500 ------------ 1,085,648 ------------ Total Foreign Corporate Bonds (Cost $9,719,583) 9,521,920 ------------ Total Long-Term Bonds (Cost $155,233,739) 155,803,131 ------------ SHARES ---------- PREFERRED STOCKS 1.2% Media - 1.2% Haights Cross Communications, Inc. 16.00% Class B (g)(h) 6,286 257,726 ION Media Networks, Inc. 14.25% (e) 91 673,400 Spanish Broadcasting System, Inc. 10.75% Series B (e) 995 $ 1,096,493 ------------ Total Preferred Stocks (Cost $2,028,306) 2,027,619 ------------ NUMBER OF WARRANTS ---------- WARRANTS 0.0% ++ Media - 0.0% ++ Haights Cross Communications, Inc. Strike Price $0.001 Expire 12/10/11 (g)(h)(i)(j) 7 0(k) Preferred Class A Strike Price $0.001 Expire 12/10/11 (g)(h)(i)(j) 6,225 62 ------------ Total Warrants (Cost $62) 62 ------------ SHARES ---------- COMMON STOCK 0.1% Chemicals - 0.1% Huntsman Corp. (i) 5,871 111,373 ------------ Total Common Stock (Cost $43,951) 111,373 ------------ SHORT-TERM INVESTMENTS 8.7% Investment Company - 1.9% BGI Institutional Money Market Fund (l) 3,040,794 3,040,794 ------------ Total Investment Company (Cost $3,040,794) 3,040,794 ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 43 SHORT-TERM INVESTMENTS (CONTINUED) HIGH YIELD FUND (continued)
PRINCIPAL AMOUNT VALUE ------------------------- Repurchase Agreement - 4.3% Morgan Stanley & Co. 5.42%, dated 12/29/06 due 1/2/07 Proceeds at Maturity $7,128,087 (Collateralized by various Corporate Bonds and a U.S. Treasury Note, with rates between 5.00% - 8.96% and maturity dates between 8/15/09 - 12/29/49, with a Principal Amount of $7,055,979 and a Market Value of $7,375,983) (l) $7,123,797 $ 7,123,797 ------------ Total Repurchase Agreement (Cost $7,123,797) 7,123,797 ------------ Time Deposits - 1.7% Barclays 5.32%, due 1/18/07 (l) 791,533 791,533 Credit Suisse First Boston Corp. 5.30%, due 1/12/07 (l) 791,533 791,533 Lloyds TSB Bank PLC 5.29%, due 2/21/07 (l) 1,187,300 1,187,300 ------------ Total Time Deposits (Cost $2,770,366) 2,770,366 ------------ U.S. Government Security - 0.8% Federal National Mortgage Association (Discount Note) 5.15%, due 1/8/07 1,270,000 1,268,728 ------------ Total U.S. Government Security (Cost $1,268,728) 1,268,728 ------------ Total Short-Term Investments (Cost $14,203,685) 14,203,685 ------------ Total Investments (Cost $171,509,743) (m) 105.0% 172,145,870 Liabilities in Excess of Cash and Other Assets (5.0) (8,151,995) ---------- ------------ Net Assets 100.0% $163,993,875 ========== ============
* Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. ++ Less than one tenth of a percent. (a) Represents a security, or a portion thereof, which is out on loan. (b) May be sold to institutional investors only under Rule 144a or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. The total market value of these securities at December 31, 2006 is $30,098,708 which represents 18.4% of the Fund's net assets. (c) Floating/variable rate. Rate shown is the rate in effect at December 31, 2006. (d) Target Return Index Securities Trust. Static portfolio comprised of 100 High Yield bonds selected from the Lehman Brothers High Yield Index. (e) PIK ("Payment in Kind") - Interest or dividend payment is made with additional securities. (f) Issue in default. (g) Illiquid security. The total market value of these securities at December 31, 2006 is $257,788 which represents 0.2% of the Fund's net assets. (h) Restricted security. The total market value of these securities at December 31, 2006 is $257,788 which represents 0.2% of the Fund's net assets. (i) Non-income producing security. (j) Fair valued securities. The total market value of these securities at December 31, 2006 is $62, which represents less than 0.1% of the Fund's net assets. (k) Less than one dollar. (l) Represents a security, or a portion thereof, purchased with cash collateral received for securities on loan. (m) At December 31, 2006, cost is identical for book and federal income tax purposes and net unrealized appreciation is as follows: Gross unrealized appreciation $ 2,955,631 Gross unrealized depreciation (2,319,504) ----------- Net unrealized appreciation $ 636,127 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 44 HIGH YIELD FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $171,509,743) including $12,609,982 market value of securities loaned $172,145,870 Cash-interest bearing accounts 888,359 Dividends and interest receivable 3,233,356 Receivable for securities sold 753,504 Other assets 15,815 ------------ Total assets 177,036,904 ------------ LIABILITIES: Securities lending collateral 12,934,957 Payable to Advisor, net (See Note F) 69,255 Administration fees payable (See Note F) 6,537 Transfer agent fees payable (See Note F) 4,307 Accounting fees payable (See Note F) 3,982 Trustees fees payable 1,122 Accrued expenses 22,869 ------------ Total liabilities 13,043,029 ------------ Net Assets $163,993,875 ============ NET ASSETS CONSIST OF: Capital paid-in $165,524,351 Accumulated undistributed net investment income 290,018 Accumulated net realized loss on investments (2,456,621) Net unrealized appreciation on investments 636,127 ------------ $163,993,875 ============ Net Assets: Class McMorgan $163,993,875 ============ Shares Outstanding: Class McMorgan 16,241,145 ============ Net asset value and redemption price per share: Class McMorgan $ 10.10 ============
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Interest $ 6,065,014 Income from securities loaned - net 65,983 Dividends 53,457 ----------- Total investment income 6,184,454 ----------- Expenses: Investment advisory fees (See Note F) 399,517 Administration fees (See Note F) 38,806 Legal fees 23,948 Accounting fees (See Note F) 23,733 Custodian fees 19,223 Insurance fees 19,088 Trustees fees 14,740 Registration expenses 11,070 Transfer agent fees (See Note F) 8,313 Auditing fees 8,048 Report to shareholder expense 6,946 Miscellaneous expenses 2,105 ----------- Total expenses 575,537 ----------- Net investment income 5,608,917 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized loss on investments (635,170) Net change in unrealized depreciation on investments 5,086,674 ----------- Net realized and unrealized gain on investments 4,451,504 ----------- Increase in net assets from operations $10,060,421 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 45 HIGH YIELD FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------ INCREASE IN NET ASSETS: Operations: Net investment income $ 5,608,917 $ 10,926,950 Net realized loss on investments (635,170) (1,637,052) Net change in unrealized depreciation on investments 5,086,674 (3,291,918) ------------ ------------ Increase in net assets 10,060,421 5,997,980 ------------ ------------ Dividends and distributions to shareholders: From net investment income (6,003,406) (10,470,194) From capital gains -- (185,264) ------------ ------------ Total dividends and distributions to shareholders (6,003,406) (10,655,458) ------------ ------------ Capital share transactions: Net proceeds from sale of shares 55,831 31,515,539 Net asset value of shares issued to shareholders in reinvestment of dividends 6,003,406 10,288,697 ------------ ------------ 6,059,237 41,804,236 Cost of shares redeemed (5,000) (8,249,945) ------------ ------------ Increase in net assets derived from capital share transactions 6,054,237 33,554,291 ------------ ------------ Total increase in net assets 10,111,252 28,896,813 Net Assets: Beginning of period 153,882,623 124,985,810 ------------ ------------ End of period (including accumulated undistributed net investment income of $290,018 and $684,507, respectively) $163,993,875 $153,882,623 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 46 HIGH YIELD FUND MCMORGAN FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The table below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ---------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, FOR THE MONTHS ENDED ------------------- PERIOD ENDED 12/31/2006 ++ 2006 2005 6/30/2004* ------------- -------- -------- ------------ Net asset value, beginning of period $ 9.84 $ 10.14 $ 9.94 $ 10.00 -------- -------- -------- ------- Income from investment operations: Net investment income 0.35 0.75 0.72 0.48 Net realized and unrealized gain (loss) on investments 0.29 (0.31) 0.25 (0.06) -------- -------- -------- ------- Total from investment operations 0.64 0.44 0.97 0.42 -------- -------- -------- ------- Less dividends and distributions: From net investment income (0.38) (0.73) (0.72) (0.48) From capital gains -- (0.01) (0.05) -- -------- -------- -------- ------- Total dividends and distributions (0.38) (0.74) (0.77) (0.48) -------- -------- -------- ------- Net asset value, end of period $ 10.10 $ 9.84 $ 10.14 $ 9.94 ======== ======== ======== ======= Total return 6.61%(a) 4.45% 9.94% 4.23%(a) Ratios/Supplemental Data: Net assets, end of period (in 000's) $163,994 $153,883 $124,986 $55,890 Ratio of expenses to average net assets before reimbursement and recovery of expenses by Advisor 0.72%+ 0.72% 0.75% 0.81%+ Ratio of expenses to average net assets after reimbursement and recovery of expenses by Advisor 0.72%+ 0.74% 0.75% 0.75%+ Ratio of net investment income to average net assets before reimbursement and recovery of expenses by Advisor 7.02%+ 7.56% 7.24% 7.62%+ Ratio of net investment income to average net assets after reimbursement and recovery of expenses by Advisor 7.02%+ 7.54% 7.24% 7.68%+ Portfolio turnover 17% 38% 86% 40.00%
- -------------- * The Fund commenced operations on November 3, 2003. (a) Total return is not annualized. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 47 BALANCED FUND PORTFOLIO OF INVESTMENTS+++ DECEMBER 31, 2006 (Unaudited) COMMON STOCKS 63.9%
SHARES VALUE -------------------------- Consumer Discretionary - 7.9% Abercrombie & Fitch Co. Class A 423 $ $29,454 Aeropostale, Inc. (a) 474 14,632 American Eagle Outfitters, Inc. 1,914 59,736 American Greetings Corp. Class A 594 14,179 AnnTaylor Stores Corp. (a) 707 23,218 Apollo Group, Inc. Class A (a)(b) 1,358 52,921 ArvinMeritor, Inc. 685 12,488 AutoNation, Inc. (a) 1,351 28,803 AutoZone, Inc. (a) 250 28,890 Barnes & Noble, Inc. 517 20,530 Belo Corp. Class A 824 15,145 Best Buy Co., Inc. 1,550 76,245 Big Lots, Inc. (a) 1,082 24,799 Black & Decker Corp. (The) 683 54,620 Blyth, Inc. 205 4,254 Bob Evans Farms, Inc. 280 9,582 BorgWarner, Inc. 261 15,404 Brinker International, Inc. 1,191 35,921 Brunswick Corp. 817 26,062 Career Education Corp. (a) 973 24,111 CBS Corp. Class B 7,322 228,300 Charming Shoppes, Inc. (a) 1,065 14,409 Claire's Stores, Inc. 710 23,529 Clear Channel Communications, Inc. 1,593 56,615 Comcast Corp. Class A (a) 6,548 277,177 Corinthian Colleges, Inc. (a) 834 11,367 Darden Restaurants, Inc. 1,294 51,980 DeVry, Inc. 293 8,204 Dillards, Inc. Class A 443 15,492 DIRECTV Group, Inc. (The) (a) 1,820 45,391 Dollar Tree Stores, Inc. (a) 996 29,980 Eastman Kodak Co. (b) 2,710 69,918 Entercom Communications Corp. 258 7,270 Federated Department Stores, Inc. 5,081 193,739 Ford Motor Co. (b) 17,747 133,280 Furniture Brands International, Inc. (b) 139 2,256 Gannett Co., Inc. 553 33,434 Gap, Inc. (The) 5,066 98,787 General Motors Corp. (b) 3,530 108,442 Goodyear Tire & Rubber Co. (The) (a)(b) 421 8,837 Hanesbrands, Inc. (a) 212 5,007 Harley-Davidson, Inc. 2,462 173,497 Harrah's Entertainment, Inc. 289 23,906 Harte-Hanks, Inc. 344 9,532 Hasbro, Inc. 1,518 41,366 IAC/InterActiveCorp. (a) 528 19,620 ITT Educational Services, Inc. (a) 319 21,172 J.C. Penney Co., Inc. 2,119 163,926 John Wiley & Sons, Inc. Class A 212 8,156 Jones Apparel Group, Inc. 1,069 35,737 Kohl's Corp. (a) 3,083 210,970 Lear Corp. (b) 485 14,322 Lee Enterprises, Inc. 222 6,895 Lennar Corp. Class A 992 52,040 Liz Claiborne, Inc. 585 25,424 Mattel, Inc. 3,600 81,576 McDonald's Corp. 4,089 181,265 McGraw-Hill Cos., Inc. (The) 3,322 225,962 Meredith Corp. 90 5,072 Modine Manufacturing Co. 153 3,830 Mohawk Industries, Inc. (a)(b) 259 19,389 Newell Rubbermaid, Inc. 625 18,094 NIKE, Inc. Class B 937 92,791 Nordstrom, Inc. 2,153 106,229 Office Depot, Inc. (a) 2,686 102,525 OfficeMax, Inc. 685 34,010 Omnicom Group, Inc. 1,617 169,041 Payless ShoeSource, Inc. (a) 686 22,515 Polo Ralph Lauren Corp. 299 23,220 RadioShack Corp. (b) 1,294 21,713 Regis Corp. 408 16,132 Rent-A-Center, Inc. (a) 532 15,699 Ross Stores, Inc. 680 19,924 Saks, Inc. 672 11,975 Scholastic Corp. (a) 176 6,308 Sears Holdings Corp. (a)(b) 816 137,031 Sherwin-Williams Co. (The) 1,051 66,823 Snap-On, Inc. 558 26,583 Sotheby's Holdings, Inc. Class A 139 4,312 Stanley Works (The) 192 9,656 Thor Industries, Inc. (b) 163 7,170 Timberland Co. Class A (a) 230 7,263 Time Warner, Inc. 110 2,396 TJX Cos., Inc. (The) 4,226 120,356 Tupperware Corp. 538 12,164 Univision Communications, Inc. Class A (a) 739 26,175 Valassis Communications, Inc. (a) 337 4,887 VF Corp. 612 50,233 Walt Disney Co. (The) 8,859 303,598 Wendy's International, Inc. 463 15,321 ----------- 4,772,209 ----------- Consumer Staples - 4.5% Alberto-Culver Co. 388 8,323 Altria Group, Inc. 6,478 555,942 Archer-Daniels-Midland Co. 2,976 95,113 Avon Products, Inc. 4,203 138,867 Campbell Soup Co. (b) 2,070 80,502 Coca-Cola Co. (The) 932 44,969 Coca-Cola Enterprises, Inc. 654 13,355 ConAgra Foods, Inc. 4,844 130,788 Energizer Holdings, Inc. (a) 541 38,406 Estee Lauder Cos., Inc. (The) Class A (b) 1,194 48,739 General Mills, Inc. 3,305 190,368 H.J. Heinz Co. 2,309 103,928 J.M. Smucker Co. (The) 539 26,125 Kroger Co. (The) 1,720 39,680 McCormick & Co., Inc. 296 11,414 Molson Coors Brewing Co. Class B 429 32,793 Pepsi Bottling Group, Inc. (The) 1,295 40,028 PepsiAmericas, Inc. 336 7,049 PepsiCo, Inc. 1,133 70,869
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 48 COMMON STOCKS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Consumer Staples (continued) Procter & Gamble Co. (The) 10,191 $ 654,976 Reynolds American, Inc. 774 50,674 Safeway, Inc. 2,103 72,680 Sara Lee Corp. 1,674 28,508 SUPERVALU, Inc. 473 16,910 Universal Corp. 242 11,860 UST, Inc. 1,511 87,940 Wal-Mart Stores, Inc. 2,389 110,324 ----------- 2,711,130 ----------- Energy - 6.8% Anadarko Petroleum Corp. 3,189 138,785 Chevron Corp. 10,286 756,330 ConocoPhillips 1,165 83,822 *ExxonMobil Corp. 21,446 1,643,407 Halliburton Co. 9,662 300,005 Kinder Morgan, Inc. 324 34,263 Marathon Oil Corp. 3,390 313,575 Noble Energy, Inc. 1,655 81,211 Occidental Petroleum Corp. 6,343 309,729 Overseas Shipholding Group, Inc. 296 16,665 Patterson-UTI Energy, Inc. 377 8,758 Pioneer Natural Resources Co. 569 22,584 Plains Exploration & Production Co. (a) 727 34,554 Sunoco, Inc. 1,208 75,331 Tidewater, Inc. 544 26,308 Valero Energy Corp. 5,757 294,528 ----------- 4,139,855 ----------- Financials - 15.0% A.G. Edwards, Inc. 527 33,354 ACE, Ltd. 3,078 186,434 AFLAC, Inc. (b) 4,699 216,154 Allstate Corp. (The) 5,790 376,987 Ambac Financial Group, Inc. 352 31,353 American Express Co. 1,706 103,503 American Financial Group, Inc. 679 24,383 American International Group, Inc. 4,346 311,434 AmeriCredit Corp. (a)(b) 1,183 29,776 Ameriprise Financial, Inc. 2,287 124,642 AON Corp. 2,974 105,101 Apartment Investment & Management Co. Class A (REIT) (c) 919 51,482 Associated Banc-Corp. 933 32,543 Bank of America Corp. 9,165 489,319 Bank of Hawaii Corp. 113 6,096 Bank of New York Co., Inc. (The) 8,213 323,346 BB&T Corp. 1,186 52,101 Brown & Brown, Inc. 554 15,628 Capital One Financial Corp. 3,119 239,602 CBOT Holdings, Inc. Class A (a)(b) 293 44,381 Charles Schwab Corp. (The) 9,753 188,623 Chubb Corp. (The) 3,888 205,714 *Citigroup, Inc. 19,802 1,102,971 City National Corp. 284 20,221 Comerica, Inc. 1,507 88,431 Commerce Bancorp, Inc. (b) 433 15,272 Cullen/Frost Bankers, Inc. 280 15,630 Equity Office Properties Trust (REIT) (c) 2,176 104,818 Everest Re Group, Ltd. 154 15,109 Fannie Mae 2,349 139,507 Federated Investors, Inc. Class B 211 7,128 Fifth Third Bancorp (b) 2,550 104,372 First American Corp. 903 36,734 First Horizon National Corp. 566 23,647 FirstMerit Corp. 239 5,769 Franklin Resources, Inc. 1,124 123,831 Genworth Financial, Inc. Class A 4,261 145,769 Goldman Sachs Group, Inc. (The) 1,324 263,939 Hartford Financial Services Group, Inc. (The) 2,811 262,294 HCC Insurance Holdings, Inc. 1,014 32,539 Highwood Properties, Inc. (REIT) (c) 137 5,584 Horace Mann Educators Corp. 389 7,858 Huntington Bancshares, Inc. 1,085 25,769 Janus Capital Group, Inc. 470 10,147 Jefferies Group, Inc. 225 6,035 JPMorgan Chase & Co. 10,801 521,688 Lehman Brothers Holdings, Inc. 702 54,840 Lincoln National Corp. 674 44,754 Loews Corp. 4,217 174,879 Mercury General Corp. 334 17,612 Merrill Lynch & Co., Inc. 1,839 171,211 MetLife, Inc. (b) 6,521 384,804 MGIC Investment Corp. (b) 126 7,880 Morgan Stanley 3,313 269,778 National City Corp. 4,272 156,184 New Plan Excel Realty Trust (REIT) (b)(c) 477 13,108 Northern Trust Corp. 1,756 106,572 Old Republic International Corp. 2,169 50,494 Plum Creek Timber Co., Inc. (REIT) (c) 446 17,773 PMI Group, Inc. (The) 245 11,557 PNC Financial Services Group, Inc. (The) 962 71,226 Potlatch Corp. (REIT) (c) 188 8,238 Principal Financial Group, Inc. (b) 2,561 150,331 Protective Life Corp. 680 32,300 Radian Group, Inc. 786 42,373 Raymond James Financial, Inc. 629 19,065 Rayonier, Inc. (REIT) (c) 171 7,020 Regions Financial Corp. 3,323 124,280 SAFECO Corp. 1,044 65,302 SEI Investments Co. 297 17,689 StanCorp Financial Group, Inc. 514 23,156 SVB Financial Group (a) 157 7,319 Synovus Financial Corp. 753 23,215 T. Rowe Price Group, Inc. 1,196 52,349 TCF Financial Corp. 362 9,926 Torchmark Corp. 700 44,632 UnumProvident Corp. 3,233 67,182 W.R. Berkley Corp. 1,595 55,043 Wachovia Corp. 1,155 65,777 Waddell & Reed Financial, Inc. Class A 383 10,479 Washington Mutual, Inc. 4,123 187,555 Wells Fargo & Co. 3,420 121,615
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 49 COMMON STOCKS (CONTINUED) BALANCED FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Consumer Staples (continued) Westamerica Bancorp. 142 $ 7,189 XL Capital, Ltd. Class A 1,701 122,506 ----------- 9,094,231 ----------- Health Care - 6.7% Advanced Medical Optics, Inc. (a) 288 10,138 Aetna, Inc. 5,103 220,348 AmerisourceBergen Corp. 1,925 86,548 Amgen, Inc. (a) 166 11,339 Applera Corp.- Applied Biosystems Group 1,272 46,670 Apria Healthcare Group, Inc. (a) 398 10,607 Barr Pharmaceuticals, Inc. (a) 515 25,812 Biomet, Inc. 186 7,676 Cardinal Health, Inc. 3,829 246,702 Cigna Corp. 498 65,522 Coventry Health Care, Inc. (a) 1,509 75,525 DENTSPLY International, Inc. 96 2,866 Edwards Lifesciences Corp. (a) 416 19,569 Forest Laboratories, Inc. (a) 2,987 151,142 Humana, Inc. (a) 1,555 86,007 Johnson & Johnson 5,161 340,729 King Pharmaceuticals, Inc. (a)(b) 2,264 36,043 Laboratory Corp. of America Holdings (a) 1,184 86,988 Lincare Holdings, Inc. (a)(b) 496 19,761 Manor Care, Inc. 335 15,718 McKesson Corp. 2,840 143,988 Merck & Co., Inc. 12,229 533,184 Mylan Laboratories, Inc. 2,028 40,479 Pfizer, Inc. 31,200 808,080 Quest Diagnostics, Inc. 1,122 59,466 Thermo Fisher Scientific Inc. (a)(b) 1,410 63,859 UnitedHealth Group, Inc. 8,612 462,723 Waters Corp. (a) 475 23,261 Watson Pharmaceuticals, Inc. (a) 979 25,483 Wellpoint, Inc. (a) 4,277 336,557 Zimmer Holdings, Inc. (a) 298 23,357 ----------- 4,086,147 ----------- Industrials - 5.5% AGCO Corp. (a) 868 26,856 American Power Conversion Corp. 266 8,137 Avis Budget Group, Inc. 239 5,184 Banta Corp. 61 2,220 Boeing Co. (The) 5,342 474,583 ChoicePoint, Inc. (a) 57 2,245 Cooper Industries, Ltd. Class A 567 51,274 Cummins, Inc. 496 58,617 Deluxe Corp. 484 12,197 Dun & Bradstreet Corp. (a) 459 38,001 Eaton Corp. 1,410 105,947 Equifax, Inc. 186 7,552 *General Electric Co. 24,536 912,985 Granite Construction, Inc. 331 16,656 ITT Corp. 461 26,194 Joy Global, Inc. 272 13,148 Korn/Ferry International (a)(b) 404 9,276 Lockheed Martin Corp. (b) 3,353 308,711 Manpower, Inc. 31 2,323 Masco Corp. (b) 3,765 112,461 Nordson Corp. 82 4,086 Northrop Grumman Corp. 860 58,222 Oshkosh Truck Corp. 336 16,269 Paccar, Inc. 1,797 116,625 Parker Hannifin Corp. (b) 269 20,681 Quanta Services, Inc. (a) 1,060 20,850 R.R. Donnelley & Sons Co. 1,052 37,388 Raytheon Co. 4,227 223,186 Ryder System, Inc. 45 2,298 Southwest Airlines Co. 1,762 26,994 Teleflex, Inc. 395 25,501 Terex Corp. (a) 241 15,564 Thomas & Betts Corp. (a) 385 18,203 Tyco International, Ltd. 14,475 440,040 United Parcel Service, Inc. Class B 35 2,624 Waste Management, Inc. 2,100 77,217 YRC Worldwide, Inc. (a)(b) 281 10,602 ----------- 3,310,917 ----------- Information Technology - 11.1% Acxiom Corp. 637 16,339 Altera Corp. (a) 3,388 66,676 Analog Devices, Inc. 559 18,374 Applied Materials, Inc. 12,678 233,909 Atmel Corp. (a) 4,108 24,853 Automatic Data Processing, Inc. 4,324 212,957 Avaya, Inc. (a) 4,298 60,086 BISYS Group, Inc. (a) 844 10,896 BMC Software, Inc. (a) 1,975 63,595 CA, Inc. 2,899 65,662 Cadence Design Systems, Inc. (a)(b) 1,356 24,286 Cisco Systems, Inc. (a) 28,290 773,166 Computer Sciences Corp. (a) 1,616 86,246 Compuware Corp. (a) 3,617 30,130 Convergys Corp. (a) 1,316 31,294 CSG Systems International, Inc. (a) 525 14,033 Dell, Inc. (a) 16,993 426,354 Dycom Industries, Inc. (a) 314 6,632 Electronic Data Systems Corp. 4,893 134,802 Fair Isaac Corp. 440 17,886 Fidelity National Information Services, Inc. 1,010 40,491 First Data Corp. 7,195 183,616 Fiserv, Inc. (a) 404 21,178 Google, Inc. Class A (a) 115 52,955 Hewlett-Packard Co. 14,700 605,493 Imation Corp. 104 4,829 Intel Corp. 7,483 151,531 International Business Machines Corp. (IBM) 7,334 712,498 Intuit, Inc. (a) 2,418 73,773 Jack Henry & Associates, Inc. 176 3,766 Lam Research Corp. (a) 659 33,359 Lexmark International, Inc. (a) 940 68,808 LSI Logic Corp. (a) 945 8,505 McAfee, Inc. (a) 1,164 33,034
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 50 COMMON STOCKS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Consumer Staples (continued) McDATA Corp. Class A (a) 1,115 $ 6,188 Mentor Graphics Corp. (a) 390 7,032 Micron Technology, Inc. (a) 5,154 71,950 *Microsoft Corp. 34,604 1,033,275 MoneyGram International, Inc. 383 12,011 Motorola, Inc. 18,286 375,960 National Semiconductor Corp. 2,896 65,739 Novellus Systems, Inc. (a) 1,182 40,684 Oracle Corp. (a) 20,605 353,170 Palm, Inc. (a)(b) 216 3,043 Plexus Corp. (a) 114 2,722 Polycom, Inc. (a) 844 26,088 Sabre Holdings Corp. Class A 756 24,109 SRA International, Inc. Class A (a) 200 5,348 Sybase, Inc. (a) 871 21,514 Symantec Corp. (a)(b) 9,199 191,799 Symbol Technologies, Inc. 642 9,591 Tech Data Corp. (a) 555 21,018 Tektronix, Inc. 142 4,142 Teradyne, Inc. (a)(b) 1,841 27,541 UTStarcom, Inc. (a)(b) 1,002 8,768 VeriSign, Inc. (a) 2,355 56,638 Vishay Intertechnology, Inc. (a) 457 6,188 Western Digital Corp. (a) 94 1,923 Xilinx, Inc. 2,072 49,334 ----------- 6,737,787 ----------- Materials - 1.5% Albemarle Corp. 372 26,710 Ashland, Inc. 292 20,201 Eastman Chemical Co. 448 26,571 FMC Corp. 188 14,391 Freeport-McMoran Copper & Gold, Inc. Class B (b) 1,841 102,599 Hercules, Inc. (a) 522 10,080 International Flavors & Fragrances, Inc. 56 2,753 Louisiana-Pacific Corp. 1,000 21,530 Lyondell Chemical Co. 1,943 49,683 Martin Marietta Materials, Inc. 100 10,391 Monsanto Co. 1,262 66,293 Nucor Corp. 2,916 159,389 Pactiv Corp. (a) 1,312 46,825 Phelps Dodge Corp. 1,269 151,925 PPG Industries, Inc. 370 23,758 Sensient Technologies Corp. 518 12,743 Sonoco Products Co. 712 27,099 Steel Dynamics, Inc. 596 19,340 United States Steel Corp. 1,148 83,965 Valspar Corp. (The) 322 8,900 Worthington Industries, Inc. 334 5,918 ----------- 891,064 ----------- Telecommunication Services - 3.3% Alltel Corp. 1,852 112,009 *BellSouth Corp. 21,264 1,001,747 CenturyTel, Inc. 1,118 48,812 Cincinnati Bell, Inc. (a) 618 2,824 Citizens Communications Co. 3,027 43,498 Embarq Corp. 1,407 73,952 Qwest Communications International, Inc. (a) 11,255 94,204 Verizon Communications, Inc. 15,524 578,114 Windstream Corp. 2,287 32,521 ----------- 1,987,681 ----------- Utilities - 1.6% AES Corp. (The) (a) 6,230 137,309 Allegheny Energy, Inc. (a) 787 36,131 Alliant Energy Corp. 264 9,971 Duke Energy Corp. 1,420 47,158 Edison International 1,581 71,904 Entergy Corp. 1,964 181,317 Equitable Resources, Inc. 864 36,072 Great Plains Energy, Inc. (b) 745 23,691 IDACORP, Inc. 196 7,575 KeySpan Corp. 548 22,567 National Fuel Gas Co. 380 14,645 Nicor, Inc. 415 19,422 OGE Energy Corp. 857 34,280 ONEOK, Inc. 532 22,940 Peoples Energy Corp. 116 5,170 Pepco Holdings, Inc. 918 23,877 Progress Energy Inc. 813 39,902 TXU Corp. 4,348 235,705 ----------- 969,636 ----------- Total Common Stocks (Cost $33,930,548) 38,700,657 ----------- PRINCIPAL AMOUNT ----------- FIXED INCOME SECURITIES 33.4% CORPORATE BONDS 13.4% Consumer Discretionary - 1.8% AT&T Broadband Corp. 9.455%, due 11/15/22 45,000 58,272 Cox Communications, Inc. 7.125%, due 10/1/12 220,000 234,535 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 115,000 122,076 Johnson Controls, Inc. 5.25%, due 1/15/11 115,000 114,093 News America, Inc. 5.30%, due 12/15/14 60,000 58,984 Starwood Hotels & Resorts Worldwide, Inc. 7.875%, due 5/1/12 215,000 227,066 Target Corp. 5.875%, due 3/1/12 60,000 61,671 Tele-Communications, Inc. 9.80%, due 2/1/12 90,000 106,128 Time Warner, Inc. 7.625%, due 4/15/31 75,000 83,787 ----------- 1,066,612 -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 51 CORPORATE BONDS (CONTINUED) BALANCED FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Consumer Staples - 0.6% Diageo Finance B.V. 5.30%, due 10/28/15 90,000 $ 88,175 Kraft Foods, Inc. 4.00%, due 10/1/08 195,000 190,716 Safeway, Inc. 6.50%, due 3/1/11 80,000 82,765 ----------- 361,656 ----------- Energy - 1.4% Anadarko Finance Corp. 6.75%, due 5/1/11 90,000 94,339 Anadarko Petroleum Corp. 5.95%, due 9/15/16 40,000 40,084 ConocoPhillips 8.75%, due 5/25/10 130,000 144,050 Devon Financing Corp. 6.875%, due 9/30/11 65,000 68,732 Devon OEI Operating, Inc. 7.25%, due 10/1/11 65,000 69,349 Dominion Resources, Inc. 5.15%, due 7/15/15 95,000 92,018 EnCana Holdings Finance Corp. 5.80%, due 5/1/14 90,000 90,535 Halliburton Co. 5.50%, due 10/15/10 90,000 89,840 Valero Energy Corp. 6.875%, due 4/15/12 100,000 105,731 XTO Energy, Inc. 4.90%, due 2/1/14 80,000 76,264 ----------- 870,942 ----------- Financials - 6.4% Archstone-Smith Trust 5.75%, due 3/15/16 55,000 55,708 Assurant, Inc. 5.625%, due 2/15/14 75,000 74,797 Bank of America Corp. 4.875%, due 9/15/12 55,000 53,901 Capital One Financial Corp. 6.15%, due 9/1/16 150,000 155,132 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 70,000 68,500 CIT Group, Inc. 5.60%, due 4/27/11 110,000 111,070 6.875%, due 11/1/09 60,000 62,420 Citigroup, Inc. 5.625%, due 8/27/12 265,000 268,834 EOP Operating L.P. 7.00%, due 7/15/11 110,000 119,040 ERP Operating L.P. 6.625%, due 3/15/12 100,000 105,440 Goldman Sachs Group, Inc. (The) 4.50%, due 6/15/10 55,000 53,831 5.25%, due 4/1/13 125,000 124,184 HSBC Finance Corp. 6.75%, due 5/15/11 340,000 359,836 International Lease Finance Corp. 5.625%, due 9/20/13 80,000 80,584 Jefferies Group, Inc. 7.75%, due 3/15/12 65,000 70,748 John Deere Capital Corp. 5.65%, due 7/25/11 155,000 156,702 JPMorgan Chase & Co. 5.125%, due 9/15/14 170,000 167,164 7.125%, due 6/15/09 100,000 104,303 MBNA America Bank N.A. 7.125%, due 11/15/12 130,000 141,636 MetLife, Inc. 5.50%, due 6/15/14 130,000 130,334 Morgan Stanley 4.75%, due 4/1/14 85,000 81,271 National Rural Utilities Cooperative Finance Corp. 7.25%, due 3/1/12 110,000 119,535 ProLogis 5.50%, due 4/1/12 90,000 89,836 Prudential Financial, Inc. 4.50%, due 7/15/13 120,000 114,348 Residential Capital Corp. 6.375%, due 6/30/10 225,000 227,619 Simon Property Group L.P. 4.60%, due 6/15/10 50,000 48,766 6.35%, due 8/28/12 65,000 67,657 SLM Corp. 5.375%, due 5/15/14 40,000 39,683 5.45%, due 4/25/11 60,000 60,233 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 85,000 89,246 US Bank N.A. 6.375%, due 8/1/11 45,000 46,975 Wachovia Bank N.A. 4.80%, due 11/1/14 150,000 143,796 Wells Fargo & Co. 4.75%, due 2/9/15 155,000 148,398 Western Union Co. (The) 5.93%, due 10/1/16 (d) 145,000 143,612 ----------- 3,885,139 ----------- Health Care - 0.2% Abbott Laboratories 5.875%, due 5/15/16 55,000 56,652 Wyeth 6.95%, due 3/15/11 75,000 79,652 ----------- 136,304 ----------- Industrials - 0.3% International Lease Finance Corp. 5.75%, due 6/15/11 110,000 111,964 5.875%, due 5/1/13 30,000 30,632 Northrop Grumman Corp. 7.125%, due 2/15/11 50,000 53,333 ----------- 195,929 ----------- Information Technology - 0.1% Cisco Systems, Inc. 5.25%, due 2/22/11 75,000 75,188 -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 52 CORPORATE BONDS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Materials - 0.3% BHP Billiton Finance USA, Ltd. 5.25%, due 12/15/15 60,000 $ 59,045 Weyerhaeuser Co. 6.75%, due 3/15/12 115,000 120,608 ----------- 179,653 ----------- Telecommunication Services - 1.4% Deutsche Telekom International Finance B.V. 5.75%, due 3/23/16 115,000 113,310 Embarq Corp. 7.082%, due 6/1/16 155,000 157,793 Sprint Capital Corp. 8.75%, due 3/15/32 90,000 108,325 Sprint Nextel Corp. 6.00%, due 12/1/16 40,000 38,985 Telefonica Europe B.V. 7.75%, due 9/15/10 185,000 198,698 Vodafone Group PLC 5.50%, due 6/15/11 210,000 210,533 ----------- 827,644 ----------- Utilities - 0.9% Duke Energy Corp. 6.25%, due 1/15/12 130,000 135,363 Exelon Corp. 4.90%, due 6/15/15 85,000 80,174 FirstEnergy Corp. Series C 7.375%, due 11/15/31 40,000 45,553 MidAmerican Energy Holdings Co. 6.125%, due 4/1/36 55,000 55,443 Pacific Gas & Electric Co. 6.05%, due 3/1/34 40,000 40,343 Progress Energy, Inc. 7.75%, due 3/1/31 35,000 42,069 PSEG Power LLC 8.625%, due 4/15/31 35,000 44,707 Southern California Edison Co. 5.00%, due 1/15/14 85,000 82,800 ----------- 526,452 ----------- Total Corporate Bonds (Cost $8,137,343) 8,125,519 ----------- U.S. GOVERNMENT SECURITIES 16.2% U.S. GOVERNMENT AGENCY OBLIGATIONS 10.4% Federal National Mortgage Association - 3.2% * 4.375%, due 3/15/13 1,310,000 1,268,066 4.875%, due 12/15/16 645,000 637,782 ----------- 1,905,848 ----------- Federal National Mortgage Association (Mortgage Pass-Through Securities) - 7.2% 6.113%, due 10/1/36 (e) 289,302 292,668 6.124%, due 10/1/36 (e) 149,519 151,338 6.216%, due 9/1/36 (e) 363,629 369,384 6.50%, due 9/1/33 482,153 493,607 * 6.50%, due 1/1/37 TBA (f) 3,000,000 3,056,250 ----------- 4,363,247 ----------- Total U.S. Government Agency Obligations (Cost $6,274,797) 6,269,095 ----------- U.S. TREASURY OBLIGATIONS 5.8% United States Treasury Bonds - 2.5% * 4.50%, due 2/15/36 (b) 885,000 841,580 8.125%, due 12/1/05 515,000 672,839 ----------- 1,514,419 ----------- United States Treasury Note - 1.3% * 4.375%, due 1/31/08 830,000 824,520 ----------- United States Treasury Strip - 2.0% * (zero coupon), due 8/15/19 2,220,000 1,203,509 ----------- Total U.S. Treasury Obligations (Cost $3,509,797) 3,542,448 ----------- Total U.S. Government Securities (Cost $9,784,593) 9,811,543 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS 3.8% Federal Home Loan Mortgage Corporation - 0.1% Series 2113 Class QE 6.00%, due 11/15/27 25,786 25,817 Financials - 3.7% Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 (e) 175,000 178,186 Commercial Mortgage Pass Through Certificates Series 2006-C8 Class A2B 5.248%, due 12/10/46 275,000 274,687 Greenwich Capital Commercial Funding Corp. Series 2005-GG5 Class A5 5.224%, due 4/10/37 420,000 416,998 Series 2004-GG1 Class A7 5.317%, due 6/10/36 350,000 349,651 GS Mortgage Securities Corp. Series 2004-GG2 Class A6 5.396%, due 8/10/38 250,000 250,951 Merrill Lynch Mortgage Investors, Inc. Series 2006-A3 Class 3A1 5.837%, due 5/25/36 (e) 430,519 433,373 Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 5.991%, due 1/25/36 (e) 353,281 355,744 ----------- 2,259,590 ----------- Total Collateralized Mortgage Obligations (Cost $2,302,938) 2,285,407 ----------- Total Fixed Income Securities (Cost $20,224,874) 20,222,469 -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 53 COMMON STOCKS (CONTINUED) SHORT-TERM INVESTMENTS 10.5% BALANCED FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST -------------------------- Consumer Staples (continued) Investment Company - 1.3% BGI Institutional Money Market Fund (g) 772,667 $ 772,667 ----------- Total Investment Company (Cost $772,667) 772,667 ----------- PRINCIPAL AMOUNT ----------- Repurchase Agreement - 3.0% Morgan Stanley & Co. 5.42%, dated 12/29/06 due 1/2/07 Proceeds at Maturity $1,811,248 (Collateralized by various Corporate Bonds and a U.S. Treasury Note, with rates between 5.00% - 8.96% and maturity dates between 8/15/09 - 12/29/49, with a Principal Amount of $1,792,926 and a Market Value of $1,874,239) (g) $ 1,810,159 1,810,159 ----------- Total Repurchase Agreement (Cost $1,810,159) 1,810,159 ----------- Time Deposits - 1.2% Barclays 5.32%, due 1/18/07 (g) 201,128 201,128 Credit Suisse First Boston Corp. 5.30%, due 1/12/07 (g) 201,128 201,128 Lloyds TSB Bank PLC 5.29%, due 2/21/07 (g) 301,694 301,694 ----------- Total Time Deposits (Cost $703,950) 703,950 ----------- U.S. Government Agencies - 5.0% Federal Home Loan Mortgage Corporation (Discount Note) 5.12%, due 1/11/07 885,000 883,742 Federal National Mortgage Association (Discount Notes) 5.03%, due 3/7/07 1,790,000 1,773,743 5.13%, due 2/8/07 380,000 377,942 ----------- Total U.S. Government Agencies (Cost $3,035,427) 3,035,427 ----------- Total Short-Term Investments (Cost $6,322,203) 6,322,203 ----------- Total Investments (Cost $60,477,625) (h) 107.8% 65,245,329 Liabilities in Excess of Cash and Other Assets (7.8) (4,710,344) ----------- ----------- Net Assets 100.0% $60,534,985 =========== ===========
* Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. +++ Fifty percent of the Fund's assets are maintained to cover "senior securities transactions" which may include, but are not limited to, forwards, TBA's, options and futures. This percentage is marked-to- market daily against the value of the Fund's "senior securities" holdings to ensure proper coverage for these transactions. (a) Non-income producing security. (b) Represents a security, or a portion thereof, which is out on loan. (c) REIT - Real Estate Investment Trust. (d) May be sold to institutional investors only under Rule 144a or securities offered pursuant to Section 4(2) of the Securities Act of 1933, as amended. The total market value of these securities at December 31, 2006 is $143,612 which represents 0.2% of the Fund's net assets. (e) Floating/variable rate. Rate shown is the rate in effect at December 31, 2006. (f) TBA: Securities purchased on a forward commitment basis with an approximate principal amount and maturity date. The actual principal amount and maturity date will be determined upon settlement. The market value of these securities at December 31, 2006 is $3,056,250. (g) Represents a security, or a portion thereof, purchased with cash collateral received for securities on loan. (h) Aggregate cost for federal income tax purposes is $60,662,970 and net unrealized appreciation is as follows: Gross unrealized appreciation $5,268,521 Gross unrealized depreciation (686,162) ---------- Net unrealized appreciation $4,582,359 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 54 BALANCED FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $60,477,625) including $3,194,188 market value of securities loaned $65,245,329 Cash-interest bearing accounts 1,517,942 Receivable for securities sold 1,800,699 Dividends and interest receivable 274,570 Receivable for fund shares sold 1,934 Other assets 12,868 ----------- Total assets 68,853,342 ----------- LIABILITIES: Payable for securities purchased 5,001,238 Securities lending collateral 3,286,776 Transfer Agent fees payable (See Note F) 12,664 Accounting fees payable (See Note F) 3,728 Administration fees payable (See Note F) 3,402 Report to shareholder payable 3,007 12b-1 fees payable (See Note F) 1,709 Trustees fees payable 1,357 Payable to Advisor, net (See Note F) 877 Payable for fund shares redeemed 666 Accrued expenses 2,933 ----------- Total liabilities 8,318,357 ----------- Net Assets $60,534,985 =========== NET ASSETS CONSIST OF: Capital paid-in $59,448,109 Accumulated undistributed net investment income 43,868 Accumulated net realized loss on investments (3,724,696) Net unrealized appreciation on investments 4,767,704 ----------- $60,534,985 =========== Net Assets: Class McMorgan $52,496,210 Class Z 8,038,775 ----------- $60,534,985 =========== Shares Outstanding: Class McMorgan 2,679,134 =========== Class Z 410,431 =========== Net asset value and redemption price per share: Class McMorgan $ 19.59 =========== Class Z $ 19.59 ===========
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Interest $ 539,176 Dividends 362,329 Income from securities loaned - net 4,182 ---------- Total investment income 905,687 ---------- Expenses: Investment advisory fees (See Note F) 132,929 Custodian fees 30,297 Transfer agent fees (See Note F) 24,296 Accounting fees (See Note F) 22,338 Administration fees (See Note F) 20,349 Registration expenses 14,599 Auditing fees 12,854 Legal fees 10,455 12B-1 distribution fees (Class Z) (See Note F) 9,647 Insurance fees 8,487 Trustees fees 6,204 Report to shareholder expense 4,986 Miscellaneous expenses 2,346 ---------- Total expenses 299,787 Expenses reimbursed (See Note F) (112,911) ---------- Net expenses 186,876 ---------- Net investment income 718,811 ---------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments 1,399,459 Net change in unrealized appreciation on investments 3,824,751 ---------- Net realized and unrealized gain on investments 5,224,210 ---------- Increase in net assets from operations $5,943,021 ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 55 BALANCED FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income $ 718,811 $ 1,488,285 Net realized gain on investments 1,399,459 3,588,233 Net change in unrealized appreciation on investments 3,824,751 (1,149,554) ----------- ------------ Increase in net assets from operations 5,943,021 3,926,964 ----------- ------------ Dividends to shareholders: From net investment income: Class McMorgan shares (649,225) (1,320,497) Class Z shares (87,802) (150,633) ----------- ------------ Total dividends to shareholders: (737,027) (1,471,130) ----------- ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares 3,001,947 7,391,368 Class Z shares 535,905 892,751 Net asset value of shares issued to shareholders in reinvestment of dividends: Class McMorgan shares 643,531 1,307,062 Class Z shares 87,802 150,633 ----------- ------------ 4,269,185 9,741,814 Cost of shares redeemed: Class McMorgan shares (6,162,725) (24,313,706) Class Z shares (584,943) (1,157,865) ----------- ------------ Decrease in net assets derived from capital share transactions (2,478,483) (15,729,757) ----------- ------------ Total increase (decrease) in net assets 2,727,511 (13,273,923) Net Assets: Beginning of period 57,807,474 71,081,397 ----------- ------------ End of period (including accumulated undistributed net investment income of $43,868 and $62,084, respectively) $60,534,985 $ 57,807,474 =========== ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 56 BALANCED FUND MCMORGAN FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ----------------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ------------------------------------------------------------------ 12/31/2006++ 2006 2005 2004 2003 2002 ------------ ------- ------- -------- -------- -------- Net asset value, at beginning of period $ 17.92 $ 17.36 $ 16.64 $ 15.52 $ 15.51 $ 18.15 ------- ------- ------- -------- -------- -------- Income from investment operations: Net investment income 0.24 0.42 0.38(b)(c) 0.34 0.44 0.48 Net realized and unrealized gain (loss) on investments 1.53 0.55 0.72 1.12 0.02 (2.16) ------- ------- ------- -------- -------- -------- Total from investment operations 1.77 0.97 1.10 1.46 0.46 (1.68) ------- ------- ------- -------- -------- -------- Less dividends and distributions: From net investment income (0.24) (0.41) (0.38) (0.34) (0.45) (0.48) From capital gains -- -- -- -- (0.00)(a) (0.48) ------- ------- ------- -------- -------- -------- Total dividends and distributions (0.24) (0.41) (0.38) (0.34) (0.45) (0.96) ------- ------- ------- -------- -------- -------- Net asset value, at end of period $ 19.59 $ 17.92 $ 17.36 $ 16.64 $ 15.52 $ 15.51 ======= ======= ======= ======== ======== ======== Total return 10.70%(e) 5.62% 6.65% 9.50% 3.16% (9.65)% Ratios/Supplemental Data: Net assets, at end of period (in 000's) $52,496 $50,491 $63,886 $120,325 $125,658 $161,436 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.98%+ 0.97% 0.84% 0.72% 0.70% 0.67% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.60%+ 0.60% 0.60% 0.60% 0.60% 0.60% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 2.09%+ 1.91% 1.75%(b) 1.98% 2.79% 2.70% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 2.47%+ 2.28% 1.99%(b) 2.10% 2.89% 2.77% Portfolio turnover 81%(d) 153%(d) 177%(d) 101.99% 56.23% 45.80%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 57 BALANCED FUND FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z ----------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ----------------------------------------------------------- 12/31/2006++ 2006 2005 2004 2003 2002 ------------ ------ ------ ------- ------ ------ Net asset value, at beginning of period $17.91 $17.35 $16.63 $ 15.52 $15.51 $18.15 ------ ------ ------ ------- ------ ------ Income from investment operations: Net investment income 0.21 0.37 0.28(b)(c) 0.30 0.40 0.43 Net realized and unrealized gain (loss) on investments 1.57 0.56 0.78 1.11 0.03 (2.16) ------ ------ ------ ------- ------ ------ Total from investment operations 1.78 0.93 1.06 1.41 0.43 (1.73) ------ ------ ------ ------- ------ ------ Less dividends and distributions: From net investment income (0.21) (0.37) (0.34) (0.30) (0.42) (0.43) From capital gains -- -- -- -- (0.00)(a) (0.48) ------ ------ ------ ------- ------ ------ Total dividends and distributions (0.21) (0.37) (0.34) (0.30) (0.42) (0.91) ------ ------ ------ ------- ------ ------ Net asset value, at end of period $19.59 $17.91 $17.35 $ 16.63 $15.52 $15.51 ====== ====== ====== ======= ====== ====== Total return 10.62%(e) 5.36% 6.40% 9.17% 2.90% (9.87)% Ratios/Supplemental Data: Net assets, at end of period (in 000's) $8,039 $7,316 $7,195 $ 7,478 $6,892 $6,842 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 1.23%+ 1.22% 1.09% 0.97% 0.95% 0.92% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.85%+ 0.85% 0.85% 0.85% 0.85% 0.85% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 1.84%+ 1.66% 1.50%(b) 1.73% 2.54% 2.45% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 2.22%+ 2.03% 1.74%(b) 1.85% 2.64% 2.52% Portfolio turnover 81%(d) 153%(d) 177%(d) 101.99% 56.23% 45.80%
- -------------- (a) Less than one cent per share. (b) Included in net investment income per share and the ratio of net investment income to average net assets are $0.06 per share and 0.20%, respectively, resulting from a special one-time dividend from Microsoft Corp. that paid $3.00 per share. (c) Per share data based on average shares outstanding during the year. (d) The portfolio turnover not including mortgage dollar rolls for the six months ended December 31, 2006 and for the years ended June 30, 2006 and 2005 is 49%, 93%, and 133%, respectively. (e) Total return is not annualized. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 58 EQUITY INVESTMENT FUND MCMORGAN FUNDS PORTFOLIO OF INVESTMENTS DECEMBER 31, 2006 (Unaudited) COMMON STOCKS 99.7%
SHARES VALUE ------------------------- Consumer Discretionary - 12.2% Abercrombie & Fitch Co. Class A 2,678 $ 186,469 Aeropostale, Inc. (a) 2,292 70,754 American Eagle Outfitters, Inc. 9,451 294,966 American Greetings Corp. Class A 2,735 65,284 AnnTaylor Stores Corp. (a) 3,430 112,641 Apollo Group, Inc. Class A (a)(b) 6,567 255,916 ArvinMeritor, Inc. 3,324 60,597 AutoNation, Inc. (a) 7,237 154,293 AutoZone, Inc. (a) 1,187 137,170 Barnes & Noble, Inc. 2,454 97,448 Belo Corp. Class A 4,158 76,424 Best Buy Co., Inc. 5,148 253,230 Big Lots, Inc. (a) 5,255 120,445 Black & Decker Corp. (The) 3,448 275,737 Blyth, Inc. 1,228 25,481 Bob Evans Farms, Inc. 1,593 54,512 BorgWarner, Inc. 1,418 83,690 Brinker International, Inc. 5,895 177,793 Brunswick Corp. 4,031 128,589 Career Education Corp. (a) 4,538 112,452 CBRL Group, Inc. 216 9,668 CBS Corp. Class B 36,980 1,153,036 Charming Shoppes, Inc. (a) 5,352 72,413 Claire's Stores, Inc. 3,413 113,107 Clear Channel Communications, Inc. 6,904 245,368 Comcast Corp. Class A (a) 40,608 1,718,937 Corinthian Colleges, Inc. (a) 4,023 54,833 Darden Restaurants, Inc. 6,377 256,164 DeVry, Inc. 1,891 52,948 Dillards, Inc. Class A 1,907 66,688 DIRECTV Group, Inc. (The) (a) 7,518 187,499 Dollar Tree Stores, Inc. (a) 4,843 145,774 Eastman Kodak Co. (b) 13,586 350,519 Entercom Communications Corp. 1,306 36,803 Federated Department Stores, Inc. 25,666 978,645 Ford Motor Co. (b) 89,200 669,892 Furniture Brands International, Inc. (b) 585 9,495 Gannett Co., Inc. 1,117 67,534 Gap, Inc. (The) (b) 25,452 496,314 General Motors Corp. (b) 18,860 579,379 Goodyear Tire & Rubber Co. (The) (a)(b) 2,127 44,646 Hanesbrands, Inc. (a) 1,156 27,305 Harley-Davidson, Inc. 12,400 873,828 Harrah's Entertainment, Inc. 1,526 126,231 Harte-Hanks, Inc. 1,806 50,044 Hasbro, Inc. 7,747 211,106 IAC/InterActiveCorp. (a))(b) 2,178 80,934 ITT Educational Services, Inc. (a) 1,426 94,644 J.C. Penney Co., Inc. 10,615 821,176 John Wiley & Sons, Inc. Class A 708 27,237 Jones Apparel Group, Inc. 5,321 177,881 Kohl's Corp. (a) 15,511 1,061,418 Lear Corp. (b) 2,367 69,898 Lee Enterprises, Inc. 1,035 32,147 Lennar Corp. Class A 4,879 255,952 Liz Claiborne, Inc. 3,029 131,640 Mattel, Inc. 17,921 406,090 McDonald's Corp. 19,067 845,240 McGraw-Hill Cos., Inc. (The) 16,677 1,134,370 Meredith Corp. 682 38,431 Modine Manufacturing Co. 720 18,022 Mohawk Industries, Inc. (a)(b) 1,211 90,655 Newell Rubbermaid, Inc. 3,270 94,666 NIKE, Inc. Class B 5,015 496,635 Nordstrom, Inc. 10,825 534,105 Office Depot, Inc. (a) 13,415 512,051 OfficeMax, Inc. 3,516 174,569 Omnicom Group, Inc. 8,135 850,433 Payless ShoeSource, Inc. (a) 3,105 101,906 Polo Ralph Lauren Corp. 993 77,116 RadioShack Corp. (b) 6,349 106,536 Regis Corp. 2,127 84,102 Rent-A-Center, Inc. (a) 2,565 75,693 Ross Stores, Inc. 2,271 66,540 Saks, Inc. (b) 3,098 55,206 Scholastic Corp. (a) 1,076 38,564 Sears Holdings Corp. (a)(b) 3,999 671,552 Sherwin-Williams Co. (The) 5,330 338,881 Snap-On, Inc. 2,722 129,676 Sotheby's Holdings, Inc. Class A 356 11,043 Stanley Works (The) 1,321 66,433 Thor Industries, Inc. (b) 341 15,001 Timberland Co. Class A (a) 1,278 40,359 Time Warner, Inc. 557 12,131 TJX Cos., Inc. (The) 21,275 605,912 Tupperware Corp. 2,830 63,986 Univision Communications, Inc. Class A (a)(b) 3,833 135,765 Valassis Communications, Inc. (a) 1,343 19,473 VF Corp. 3,634 298,279 Walt Disney Co. (The) 43,052 1,475,392 Wendy's International, Inc. 1,539 50,926 ------------ 23,830,733 ------------ Consumer Staples - 6.9% Alberto-Culver Co. 1,287 27,606 Altria Group, Inc. 28,454 2,441,922 Archer-Daniels-Midland Co. 16,073 513,693 Avon Products, Inc. 21,094 696,946 Campbell Soup Co. 9,562 371,866 Coca-Cola Co. (The) 4,696 226,582 Coca-Cola Enterprises, Inc. 2,694 55,011 ConAgra Foods, Inc. 24,229 654,183 Energizer Holdings, Inc. (a) 2,342 166,259 Estee Lauder Cos., Inc. (The) Class A (b) 6,116 249,655 General Mills, Inc. 16,681 960,826 H.J. Heinz Co. 11,370 511,764 J.M. Smucker Co. (The) 2,721 131,887 Kroger Co. (The) 3,419 78,876 McCormick & Co., Inc. 1,612 62,159
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 59 COMMON STOCKS (CONTINUED) EQUITY INVESTMENT FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST ------------------------- Consumer Staples (continued) Molson Coors Brewing Co. Class B 2,167 165,645 Pepsi Bottling Group, Inc. (The) 5,466 168,954 PepsiAmericas, Inc. 1,380 28,952 PepsiCo, Inc. 5,780 361,539 *Procter & Gamble Co. (The) 55,948 3,595,778 Reynolds American, Inc. 5,354 350,526 Safeway, Inc. 11,892 410,988 Sara Lee Corp. 9,037 153,900 SUPERVALU, Inc. 1,722 61,562 Universal Corp. 1,220 59,792 UST, Inc. 7,607 442,727 Wal-Mart Stores, Inc. 12,090 558,316 ------------ 13,507,914 ------------ Energy - 10.6% Anadarko Petroleum Corp. 13,507 587,825 *Chevron Corp. 51,763 3,806,133 ConocoPhillips 4,439 319,386 *ExxonMobil Corp. 107,992 8,275,427 Halliburton Co. 48,744 1,513,501 Kinder Morgan, Inc. 1,639 173,324 Marathon Oil Corp. 16,969 1,569,633 Noble Energy, Inc. 8,347 409,587 Occidental Petroleum Corp. 31,759 1,550,792 Overseas Shipholding Group, Inc. 1,387 78,088 Patterson-UTI Energy, Inc. (b) 1,585 36,820 Pioneer Natural Resources Co. 3,084 122,404 Plains Exploration & Production Co. (a) 3,642 173,104 Sunoco, Inc. 5,246 327,141 Tidewater, Inc. 2,771 134,006 Valero Energy Corp. 28,998 1,483,538 ------------ 20,560,709 ------------ Financials - 23.3% A.G. Edwards, Inc. 3,107 196,642 ACE, Ltd. 15,398 932,657 AFLAC, Inc. 23,492 1,080,632 Allstate Corp. (The) 29,083 1,893,594 Ambac Financial Group, Inc. 2,069 184,286 American Express Co. 9,220 559,377 American Financial Group, Inc. 3,231 116,025 American International Group, Inc. 21,771 1,560,110 AmeriCredit Corp. (a)(b) 5,878 147,949 Ameriprise Financial, Inc. 11,527 628,222 AON Corp. (b) 14,879 525,824 Apartment Investment & Management Co. Class A (REIT) (c) 4,608 258,140 Associated Banc-Corp. 4,112 143,427 Bank of America Corp. 46,187 2,465,924 Bank of Hawaii Corp. 615 33,179 Bank of New York Co., Inc. (The) 40,416 1,591,178 BB&T Corp. 6,406 281,416 Brown & Brown, Inc. 2,024 57,097 Capital One Financial Corp. 15,551 1,194,628 CB Richard Ellis Group, Inc. Class A (a) 1,209 40,139 CBOT Holdings, Inc. Class A (a)(b) 2,106 318,996 Charles Schwab Corp. (The) 48,934 946,384 Chubb Corp. (The) 19,462 1,029,734 *Citigroup, Inc. 99,690 5,552,733 City National Corp. 1,255 89,356 Comerica, Inc. 7,632 447,846 Commerce Bancorp, Inc. (b) 3,568 125,843 Countrywide Financial Corp. 2,287 97,083 Cullen/Frost Bankers, Inc. 642 35,836 Equity Office Properties Trust (REIT) (c) 12,868 619,852 Everest Re Group, Ltd. 307 30,120 Fannie Mae 13,524 803,190 Federated Investors, Inc. Class B 1,137 38,408 Fifth Third Bancorp 14,431 590,661 First American Corp. 4,534 184,443 First Horizon National Corp. 3,060 127,847 FirstMerit Corp. 1,295 31,261 Franklin Resources, Inc. 5,935 653,859 Genworth Financial, Inc. Class A 21,509 735,823 Goldman Sachs Group, Inc. (The) 4,425 882,124 Hartford Financial Services Group, Inc. (The) 14,299 1,334,240 HCC Insurance Holdings, Inc. 5,272 169,178 Highwood Properties, Inc. (REIT) (c) 709 28,899 Horace Mann Educators Corp. 2,015 40,703 Hospitality Properties Trust (REIT) (c) 490 23,290 Huntington Bancshares, Inc. 5,878 139,603 Janus Capital Group, Inc. 3,863 83,402 Jefferies Group, Inc. 1,205 32,318 JPMorgan Chase & Co. 45,164 2,181,421 Lehman Brothers Holdings, Inc. 1,469 114,758 Lincoln National Corp. 1,538 102,123 Loews Corp. 21,483 890,900 Mercury General Corp. 1,675 88,323 Merrill Lynch & Co., Inc. 7,450 693,595 MetLife, Inc. (b) 32,728 1,931,279 MGIC Investment Corp. 695 43,465 Morgan Stanley 11,122 905,664 National City Corp. (b) 22,764 832,252 New Plan Excel Realty Trust (REIT) (b)(c) 2,584 71,008 Northern Trust Corp. 8,864 537,956 Nuveen Investments Class A 515 26,718 Old Republic International Corp. 10,866 252,960 Plum Creek Timber Co., Inc. (REIT) (c) 1,142 45,509 PMI Group, Inc. (The) 1,341 63,255 PNC Financial Services Group, Inc. (The) 5,793 428,914 Potlatch Corp. (REIT) (c) 685 30,017 Principal Financial Group, Inc. 12,762 749,129 Progressive Corp. (The) 865 20,950 Protective Life Corp. 3,268 155,230 Radian Group, Inc. 3,311 178,496 Raymond James Financial, Inc. 3,840 116,390 Rayonier, Inc. (REIT) (c) 929 38,135 Regions Financial Corp. 17,951 671,367 SAFECO Corp. 5,333 333,579 SEI Investments Co. 1,961 116,797 StanCorp Financial Group, Inc. 2,571 115,824 SVB Financial Group (a) 855 39,860 Synovus Financial Corp. 4,060 125,170 T. Rowe Price Group, Inc. 8,164 357,338
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 60 COMMON STOCKS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMORTIZED AMOUNT COST ------------------------- Consumer Staples (continued) TCF Financial Corp. 2,201 60,351 Torchmark Corp. 2,308 147,158 UnumProvident Corp. 16,208 336,802 W.R. Berkley Corp. 7,957 274,596 Wachovia Corp. 5,821 331,506 Waddell & Reed Financial, Inc. Class A 2,624 71,793 Washington Mutual, Inc. 28,303 1,287,503 Wells Fargo & Co. 26,739 950,839 Westamerica Bancorp. 774 39,188 XL Capital, Ltd. Class A 8,536 614,763 ------------ 45,456,359 ------------ Health Care - 10.7% Advanced Medical Optics, Inc. (a) 957 33,686 Aetna, Inc. 26,445 1,141,895 AmerisourceBergen Corp. 9,566 430,087 Amgen, Inc. (a) 958 65,441 Applera Corp. - Applied Biosystems Group 5,623 206,308 Apria Healthcare Group, Inc. (a) 1,995 53,167 Barr Pharmaceuticals, Inc. (a) 1,716 86,006 Biomet, Inc. 376 15,518 Cardinal Health, Inc. 19,305 1,243,821 Caremark Rx, Inc. 6,045 345,230 Cigna Corp. 1,653 217,485 Coventry Health Care, Inc. (a) 7,531 376,927 DENTSPLY International, Inc. 634 18,925 Edwards Lifesciences Corp. (a) 2,058 96,808 Forest Laboratories, Inc. (a) 12,965 656,029 Humana, Inc. (a) 7,817 432,358 Johnson & Johnson 26,075 1,721,472 King Pharmaceuticals, Inc. (a) 11,454 182,348 Laboratory Corp. of America Holdings (a)(b) 5,531 406,363 Lincare Holdings, Inc. (a) 2,567 102,269 Manor Care, Inc. 1,820 85,394 McKesson Corp. 14,161 717,963 Merck & Co., Inc. 61,341 2,674,468 Mylan Laboratories, Inc. 10,022 200,039 *Pfizer, Inc. 157,008 4,066,507 Quest Diagnostics, Inc. 4,801 254,453 Thermo Fisher Scientific Inc. (a)(b) 8,969 406,206 UnitedHealth Group, Inc. 45,664 2,453,527 Waters Corp. (a) 1,736 85,012 Watson Pharmaceuticals, Inc. (a) 4,782 124,475 Wellpoint, Inc. (a) 23,567 1,854,487 Zimmer Holdings, Inc. (a) 1,388 108,791 ------------ 20,863,465 ------------ Industrials - 8.5% AGCO Corp. (a) 4,243 131,278 American Power Conversion Corp. 1,241 37,962 Avis Budget Group, Inc. 985 21,365 Banta Corp. 157 5,715 Boeing Co. (The) 26,975 2,396,459 ChoicePoint, Inc. (a) 524 20,635 Cooper Industries, Ltd. Class A 3,012 272,375 Cummins, Inc. 2,485 293,677 Deluxe Corp. 2,434 61,337 Dover Corp. 1,337 65,540 Dun & Bradstreet Corp. (a) 2,038 168,726 Eaton Corp. 6,355 477,515 Equifax, Inc. 1,027 41,696 General Dynamics Corp. 76 5,651 *General Electric Co. 123,079 4,579,770 Granite Construction, Inc. 1,575 79,254 Illinois Tool Works, Inc. 1,978 91,364 ITT Corp. 3,317 188,472 Korn/Ferry International (a)(b) 2,021 46,402 Lockheed Martin Corp. (b) 16,851 1,551,472 Manpower, Inc. 172 12,888 Masco Corp. (b) 18,815 562,004 Nordson Corp. 403 20,081 Northrop Grumman Corp. 4,468 302,484 Oshkosh Truck Corp. 1,826 88,415 Paccar, Inc. 7,541 489,411 Parker Hannifin Corp. (b) 1,460 112,245 Quanta Services, Inc. (a) 4,299 84,561 R.R. Donnelley & Sons Co. 3,834 136,260 Raytheon Co. 21,237 1,121,314 Ryder System, Inc. 256 13,071 Southwest Airlines Co. 9,533 146,046 Teleflex, Inc. 1,847 119,242 Terex Corp. (a) 486 31,386 Thomas & Betts Corp. (a) 2,228 105,340 Tyco International, Ltd. 73,117 2,222,757 United Parcel Service, Inc. Class B 122 9,148 Waste Management, Inc. 8,613 316,700 YRC Worldwide, Inc. (a)(b) 1,292 48,747 ------------ 16,478,765 ------------ Information Technology - 17.3% Acxiom Corp. 3,239 83,080 Agere Systems, Inc. (a) 50 959 Altera Corp. (a) 16,926 333,104 Analog Devices, Inc. 3,012 99,004 Applied Materials, Inc. 67,954 1,253,751 Atmel Corp. (a) 20,094 121,569 Automatic Data Processing, Inc. 21,861 1,076,654 Avaya, Inc. (a) 21,610 302,108 BISYS Group, Inc. (a) 5,123 66,138 BMC Software, Inc. (a) 9,704 312,469 CA, Inc. 15,443 349,784 Cadence Design Systems, Inc. (a)(b) 4,984 89,263 *Cisco Systems, Inc. (a) 142,126 3,884,304 Computer Sciences Corp. (a) 8,127 433,738 Compuware Corp. (a) 17,484 145,642 Convergys Corp. (a) 6,572 156,282 CSG Systems International, Inc. (a) 2,255 60,276 Dell, Inc. (a) 85,981 2,157,263 Dycom Industries, Inc. (a) 1,742 36,791 Electronic Data Systems Corp. 24,483 674,507 Fair Isaac Corp. 1,839 74,755 Fidelity National Information Services, Inc. 4,448 178,320 First Data Corp. 36,057 920,175
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 61 COMMON STOCKS (CONTINUED) EQUITY INVESTMENT FUND (continued)
PRINCIPAL AMORTIZED AMOUNT COST ------------------------- Consumer Staples (continued) Fiserv, Inc. (a) 2,513 131,731 Google, Inc. Class A (a) 581 267,539 Hewlett-Packard Co. 73,726 3,036,774 Imation Corp. 227 10,540 Intel Corp. 38,161 772,760 *International Business Machines Corp. (IBM) 36,963 3,590,955 Intuit, Inc. (a) 14,159 431,991 Jack Henry & Associates, Inc. 957 20,480 Lam Research Corp. (a) 3,538 179,094 Lexmark International, Inc. (a) 4,748 347,554 LSI Logic Corp. (a) 3,780 34,020 McAfee, Inc. (a) 5,556 157,679 McDATA Corp. Class A (a) 5,964 33,100 Mentor Graphics Corp. (a) 1,799 32,436 Micron Technology, Inc. (a) 31,059 433,584 *Microsoft Corp. 162,839 4,862,373 MoneyGram International, Inc. 2,636 82,665 Motorola, Inc. 91,676 1,884,859 National Semiconductor Corp. 14,269 323,906 Novellus Systems, Inc. (a) 5,041 173,511 Oracle Corp. (a) 110,617 1,895,975 Palm, Inc. (a)(b) 1,612 22,713 Plexus Corp. (a) 540 12,895 Polycom, Inc. (a) 4,113 127,133 Sabre Holdings Corp. Class A 4,244 135,341 SRA International, Inc. Class A (a) 927 24,788 Sybase, Inc. (a) 4,199 103,715 Symantec Corp. (a)(b) 46,357 966,543 Symbol Technologies, Inc. 3,234 48,316 Tech Data Corp. (a) 2,623 99,333 Tektronix, Inc. 691 20,156 Teradyne, Inc. (a)(b) 9,330 139,577 UTStarcom, Inc. (a)(b) 4,993 43,689 VeriSign, Inc. (a) 11,593 278,812 Vishay Intertechnology, Inc. (a) 1,169 15,828 Western Digital Corp. (a) 1,711 35,007 Xilinx, Inc. 9,351 222,647 ------------ 33,809,955 ------------ Materials - 2.5% Albemarle Corp. 1,851 132,902 Ashland, Inc. 1,379 95,399 Eastman Chemical Co. 2,403 142,522 FMC Corp. 884 67,670 Freeport-McMoran Copper & Gold, Inc. Class B (b) 9,302 518,400 Hercules, Inc. (a) 2,456 47,425 International Flavors & Fragrances, Inc. 1,031 50,684 Louisiana-Pacific Corp. 4,894 105,368 Lyondell Chemical Co. 9,985 255,316 Monsanto Co. 10,373 544,894 Nucor Corp. 14,615 798,856 Pactiv Corp. (a) 6,485 231,450 Phelps Dodge Corp. 7,751 927,950 PPG Industries, Inc. 2,005 128,741 Sensient Technologies Corp. 2,158 53,087 Sonoco Products Co. 3,494 132,982 Steel Dynamics, Inc. 3,855 125,095 United States Steel Corp. 5,818 425,529 Valspar Corp. (The) 1,666 46,048 Worthington Industries, Inc. 1,235 21,884 ------------ 4,852,202 ------------ Telecommunication Services - 5.2% Alltel Corp. 8,748 529,079 *BellSouth Corp. 111,136 5,235,617 CenturyTel, Inc. 5,497 239,999 Cincinnati Bell, Inc. (a) 4,184 19,121 Citizens Communications Co. 15,072 216,585 Embarq Corp. 7,052 370,653 Qwest Communications International, Inc. (a) 67,457 564,615 Verizon Communications, Inc. 75,221 2,801,230 Windstream Corp. 8,967 127,511 ------------ 10,104,410 ------------ Utilities - 2.5% AES Corp. (The) (a) 31,345 690,844 Allegheny Energy, Inc. (a) 3,689 169,362 Alliant Energy Corp. 1,430 54,011 Duke Energy Corp. 9,709 322,436 Edison International 7,397 336,416 Entergy Corp. 9,858 910,091 Equitable Resources, Inc. 2,739 114,353 Great Plains Energy, Inc. (b) 3,766 119,759 IDACORP, Inc. 1,067 41,240 KeySpan Corp. 2,643 108,839 National Fuel Gas Co. 1,821 70,181 Nicor, Inc. 2,077 97,204 OGE Energy Corp. 4,296 171,840 ONEOK, Inc. 2,492 107,455 Peoples Energy Corp. 635 28,302 Pepco Holdings, Inc. 4,703 122,325 Progress Energy Inc. 3,277 160,835 TXU Corp. 21,835 1,183,675 ------------ 4,809,168 ------------ Total Common Stocks (Cost $170,716,393) 194,273,680 ------------ INVESTMENT COMPANY 0.2% Capital Markets - 0.2% S&P 500 Index-SPDR Trust, Series 1 (b)(d) 2,315 328,082 ------------ Total Investment Company (Cost $327,986) 328,082 ------------ SHORT-TERM INVESTMENTS 6.2% Investment Company - 1.5% BGI Institutional Money Market Fund (e) 2,867,368 2,867,368 ------------ Total Investment Company (Cost $2,867,368) 2,867,368 ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 62 SHORT-TERM INVESTMENTS (CONTINUED) MCMORGAN FUNDS
PRINCIPAL AMOUNT VALUE ------------------------- Repurchase Agreement - 3.4% Morgan Stanley & Co. 5.42%, dated 12/29/06 due 1/2/07 Proceeds at Maturity $6,721,548 (Collateralized by various Corporate Bonds and a U.S. Treasury Note, with rates between 5.00% - 8.96% and maturity dates between 8/15/09 - 12/29/49, with a Principal Amount of $6,653,554 and a Market Value of $6,955,307) (e) $6,717,504 $ 6,717,504 ------------ Total Repurchase Agreement (Cost $6,717,504) 6,717,504 ------------ Time Deposits - 1.3% Barclays 5.32%, due 1/18/07 (e) 746,390 746,390 Credit Suisse First Boston Corp. 5.30%, due 1/12/07 (e) 746,389 746,389 Lloyds TSB Bank PLC 5.29%, due 2/21/07 (e) 1,119,584 1,119,584 ------------ Total Time Deposits (Cost $2,612,363) 2,612,363 ------------ Total Short-Term Investments (Cost $12,197,235) 12,197,235 ------------ Total Investments (Cost $183,241,614) (f) 106.1% 206,798,997 Liabilities in Excess of Cash and Other Assets (6.1) (11,953,863) ---------- ------------ Net Assets 100.0% $194,845,134 ========== ============
* Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. (a) Non-income producing security. (b) Represents a security, or a portion thereof, which is out on loan. (c) REIT - Real Estate Investment Trust. (d) Exchange Traded Fund - represents a basket of securities that are traded on an exchange. (e) Represents a security, or a portion thereof, purchased with cash collateral received for securities on loan. (f) Aggregate cost for federal income tax purposes is $184,667,973 and net unrealized appreciation is as follows: Gross unrealized appreciation $25,461,284 Gross unrealized depreciation (3,330,260) ----------- Net unrealized appreciation $22,131,024 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 63 EQUITY INVESTMENT FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2006 (Unaudited) ASSETS: Investment in securities at value (cost $183,241,614) including $11,784,335 market value of securities loaned $206,798,997 Cash-interest bearing accounts 328,064 Receivable for securities sold 3,765,938 Dividends and interest receivable 297,777 Receivable for fund shares sold 42,204 Other assets 21,877 ------------ Total assets 211,254,857 ------------ LIABILITIES: Securities lending collateral 12,197,235 Payable for securities purchased 3,986,444 Payable for fund shares redeemed 101,934 Payable to Advisor, net (See Note F) 81,564 Transfer agent fees payable (See Note F) 14,007 Administration fees payable (See Note F) 8,796 Accounting fees payable (See Note F) 5,364 12B-1 fees payable (See Note F) 2,931 Trustees fees payable 2,243 Accrued expenses 9,205 ------------ Total liabilities 16,409,723 ------------ Net Assets $194,845,134 ============ NET ASSETS CONSIST OF: Capital paid-in $183,769,535 Accumulated undistributed net investment income 81,136 Accumulated net realized loss on investments (12,562,920) Net unrealized appreciation on investments 23,557,383 ------------ $194,845,134 ============ Net Assets: Class McMorgan $181,018,864 Class Z 13,826,270 ------------ $194,845,134 ============ Shares Outstanding: Class McMorgan 6,876,224 ============ Class Z 525,582 ============ Net asset value and redemption price per share: Class McMorgan $ 26.33 ============ Class Z $ 26.31 ============
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) INVESTMENT INCOME: Dividends $ 1,752,396 Income from securities loaned - net 10,701 Interest 6,331 ----------- Total investment income 1,769,428 ----------- Expenses: Investment advisory fees (See Note F) 462,690 Administration fees (See Note F) 50,921 Accounting fees (See Note F) 31,583 Legal fees 29,469 Transfer agent fees (See Note F) 26,669 Custodian fees 24,343 Insurance fees 23,138 Trustees fees 17,734 12B-1 distribution fees (Class Z) (See Note F) 16,566 Registration expenses 15,684 Auditing fees 13,358 Report to shareholder expense 10,640 Miscellaneous expenses 2,637 ----------- Total expenses 725,432 Expenses reimbursed (See Note F) (14,877) ----------- Net expenses 710,555 ----------- Net investment income 1,058,873 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments 4,439,116 Net change in unrealized appreciation on investments 16,934,300 ----------- Net realized and unrealized gain on investments 21,373,416 ----------- Increase in net assets from operations $22,432,289 ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 64 EQUITY INVESTMENT FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 (Unaudited) AND THE YEAR ENDED JUNE 30, 2006
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED 12/31/2006 6/30/2006 ---------------- ------------ INCREASE IN NET ASSETS: Operations: Net investment income $ 1,058,873 $ 1,952,381 Net realized gain on investments 4,439,116 13,070,807 Net change in unrealized appreciation on investments 16,934,300 420,575 ------------ ------------ Increase in net assets from operations 22,432,289 15,443,763 ------------ ------------ Dividends to shareholders: From net investment income: Class McMorgan shares (1,017,980) (1,810,940) Class Z shares (60,644) (105,378) ------------ ------------ Total dividends to shareholders: (1,078,624) (1,916,318) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares 5,516,007 25,150,893 Class Z shares 738,366 7,512,188 Net asset value of shares issued to shareholders in reinvestment of dividends: Class McMorgan shares 1,006,950 1,789,480 Class Z shares 60,644 105,378 ------------ ------------ 7,321,967 34,557,939 Cost of shares redeemed: Class McMorgan shares (5,324,549) (39,023,978) Class Z shares (1,241,785) (2,361,980) ------------ ------------ Increase (decrease) in net assets derived from capital share transactions 755,633 (6,828,019) ------------ ------------ Total increase in net assets 22,109,298 6,699,426 Net Assets: Beginning of period 172,735,836 166,036,410 ------------ ------------ End of period (including accumulated undistributed net investment income of $81,136 and $100,887, respectively) $194,845,134 $172,735,836 ============ ============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 65 EQUITY INVESTMENT FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ----------------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ------------------------------------------------------------ 12/31/2006++ 2006 2005 2004 2003 2002 ------------ -------- -------- -------- -------- -------- Net asset value, beginning of period $ 23.45 $ 21.69 $ 20.58 $ 18.04 $ 19.05 $ 24.57 -------- -------- -------- -------- -------- -------- Income from investment operations: Net investment income 0.15 0.27(a) 0.25(b) 0.18 0.23 0.21 Net realized and unrealized gain (loss) on investments 2.88 1.75 1.10 2.54 (1.00) (5.12) -------- -------- -------- -------- -------- -------- Total from investment operations 3.03 2.02 1.35 2.72 (0.77) (4.91) -------- -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income (0.15) (0.26) (0.24) (0.18) (0.24) (0.20) From capital gains -- -- -- -- -- (0.41) -------- -------- -------- -------- -------- -------- Total dividends and distributions (0.15) (0.26) (0.24) (0.18) (0.24) (0.61) -------- -------- -------- -------- -------- -------- Net asset value, end of period $ 26.33 $ 23.45 $ 21.69 $ 20.58 $ 18.04 $ 19.05 ======== ======== ======== ======== ======== ======== Total return 12.93%(c) 9.33% 6.60% 15.11% (3.99)% (20.34)% Ratios/Supplemental Data: Net assets, end of period (in 000's) $181,019 $159,981 $159,132 $195,193 $182,470 $196,914 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 0.77%+ 0.80% 0.80% 0.72% 0.71% 0.71% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 0.75%+ 0.75% 0.75% 0.72% 0.71% 0.71% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 1.14%+ 1.10% 1.14%(b) 0.90% 1.34% 0.95% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 1.16%+ 1.15% 1.19%(b) 0.90% 1.34% 0.95% Portfolio turnover 47% 98% 127% 39.13% 30.77% 14.95%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 66 MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z ----------------------------------------------------------------------- FOR THE SIX YEAR ENDED JUNE 30, MONTHS ENDED ------------------------------------------------------ 12/31/2006++ 2006 2005 2004 2003 2002 ------------ ------- ------ ------- ------- ------- Net asset value, beginning of period $ 23.43 $ 21.69 $20.57 $ 18.04 $ 19.05 $ 24.57 ------- ------- ------ ------- ------- ------- Income from investment operations: Net investment income 0.11 0.20(a) 0.17(b) 0.13 0.18 0.15 Net realized and unrealized gain (loss) on investments 2.89 1.75 1.14 2.53 (1.00) (5.11) ------- ------- ------ ------- ------- ------- Total from investment operations 3.00 1.95 1.31 2.66 (0.82) (4.96) ------- ------- ------ ------- ------- ------- Less dividends and distributions: From net investment income (0.12) (0.21) (0.19) (0.13) (0.19) (0.15) From capital gains -- -- -- -- -- (0.41) ------- ------- ------ ------- ------- ------- Total dividends and distributions (0.12) (0.21) (0.19) (0.13) (0.19) (0.56) ------- ------- ------ ------- ------- ------- Net asset value, end of period $ 26.31 $ 23.43 $21.69 $ 20.57 $ 18.04 $ 19.05 ======= ======= ====== ======= ======= ======= Total return 12.80%(c) 9.01% 6.38% 14.78% (4.23)% (20.52)% Ratios/Supplemental Data: Net assets, end of period (in 000's) $13,826 $12,755 $6,904 $11,181 $10,170 $12,637 Ratio of expenses to average net assets before reimbursement of expenses by Advisor 1.02%+ 1.05% 1.05% 0.97% 0.96% 0.96% Ratio of expenses to average net assets after reimbursement of expenses by Advisor 1.00%+ 1.00% 1.00% 0.97% 0.96% 0.96% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor 0.89%+ 0.85% 0.89%(b) 0.65% 1.09% 0.70% Ratio of net investment income to average net assets after reimbursement of expenses by Advisor 0.91%+ 0.90% 0.94%(b) 0.65% 1.09% 0.70% Portfolio turnover 47% 98% 127% 39.13% 30.77% 14.95%
- -------------- (a) Per share data based on average shares outstanding during the period. (b) Included in net investment income per share and the ratio of net investment income to average net assets are $0.06 per share and 0.03%, respectively, resulting from a special one-time dividend from Microsoft Corp. that paid $3.00 per share. (c) Total return is not annualized. + Annualized. ++ Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 67 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2006 (UNAUDITED) NOTE (A) ORGANIZATION AND BUSINESS: McMorgan Funds (the "Trust"), is a no-load, open-end management investment company that is registered under the Investment Company Act of 1940, as amended (the "Act"). The Trust was organized as a Delaware statutory trust (formerly business trust) on February 3, 1994. The Trust offers shares of beneficial interest (collectively, the "Shares") in the following series: McMorgan Principal Preservation Fund (the "Principal Preservation Fund"), McMorgan Intermediate Fixed Income Fund (the "Intermediate Fixed Income Fund"), McMorgan Fixed Income Fund (the "Fixed Income Fund"), McMorgan High Yield Fund (the "High Yield Fund"), McMorgan Balanced Fund (the "Balanced Fund") and McMorgan Equity Investment Fund (the "Equity Investment Fund") (each a "Fund" and collectively, the "Funds"). The Principal Preservation Fund commenced investment operations on July 13, 1994. The Intermediate Fixed Income Fund, Fixed Income Fund, Balanced Fund and Equity Investment Fund commenced investment operations on July 14, 1994. The High Yield Fund commenced investment operations on November 3, 2003. The Principal Preservation Fund and the High Yield Fund only offer the McMorgan Funds class of shares. The Intermediate Fixed Income Fund, Balanced Fund, and the Equity Investment Fund offer two classes of shares: McMorgan Funds shares and Class Z shares. The Fixed Income Fund offers four classes of shares: McMorgan Funds shares, Class Z shares, Class R1 shares and Class R2 shares. Class Z shares commenced operations on January 25, 2001 for the Balanced Fund, on February 1, 2001 for the Fixed Income and Equity Investment Funds and on September 4, 2001 for the Intermediate Fixed Income Fund. Class R1 shares and Class R2 shares for the Fixed Income Fund commenced operations on January 2, 2004. Each class of shares has equal rights as to earnings and assets except that each class bears different distribution expenses. Each class of shares has exclusive voting rights with respect to matters that affect just that class. Income, expenses (other than expenses attributable to a specific class), and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets. Investment in the Principal Preservation Fund is neither insured nor guaranteed by the U.S. Government, and there can be no assurance that the Principal Preservation Fund will be able to maintain a stable net asset value of $1.00. Certain officers and trustees of the Funds are also officers and directors of McMorgan & Company LLC (the "Adviser"). The Adviser is a wholly-owned subsidiary of New York Life Investment Management Holdings LLC ("NYLIM Holdings"), which is a diversified financial services holding company and a wholly-owned subsidiary of New York Life Insurance Company ("New York Life"). New York Life Investment Management LLC ("NYLIM"), a wholly-owned subsidiary of NYLIM Holdings, is the sub-advisor to the High Yield Fund, Equity Investment Fund and the equity portion of the Balanced Fund. No officer or employee of the Adviser receives any compensation from the Funds for acting as a trustee of the Funds. All Trust officers serve without direct compensation from the Funds. The following is a summary of the significant accounting policies consistently followed by each Fund in the preparation of its financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America. NOTE (B) SIGNIFICANT ACCOUNTING POLICIES: (1) SECURITY VALUATION: The net asset value per share of each Fund is computed as of the close of regular trading on the New York Stock Exchange. The net asset value per share is computed by adding the value of all securities and other assets in the portfolio, deducting any liabilities (expenses and fees are accrued daily) and dividing by the number of shares outstanding. The equity securities of each Fund listed or traded on a stock exchange are valued at the last sale price on its principal exchange. If no sale price is reported, the security shall be valued at the mean between the closing bid price and asked price on that exchange. Securities traded over-the-counter are priced at the closing bid price supplied through such system. Fixed-income securities are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the Funds' Board of Trustees. The prices for futures contracts are valued at the settlement prices established each day on the exchange where they are principally traded. Rights and warrants are valued at the last sale price at the close of the exchange on which the security to which the right or warrant relates is principally traded. In some situations, certain markets may be closed at the time at which a security must be valued. In these situations, a pricing service provides "snapshot" prices of such securities. All securities held in the portfolio of the Principal Preservation Fund and all debt securities with maturities of 60 days or less held by the other Funds are valued at amortized cost. When a security is valued at amortized cost, it is valued at its cost when purchased, and thereafter by assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. Securities for which market quotations are not readily available, or for which an independent pricing service does not provide a value or 68 MCMORGAN FUNDS provides a value that does not represent the fair value in the judgment of the Fund's investment adviser or designee, are valued at fair value as determined in good faith by the Funds' Board of Trustees. Such fair valuation is determined by taking into account relevant factors and surrounding circumstances. (2) REPURCHASE AGREEMENTS: Each Fund may enter into repurchase agreements to earn income. A Fund may only enter into repurchase agreements with financial institutions that are deemed to be creditworthy by the Adviser or Subadvisor, pursuant to guidelines established by the Board of Trustees. During the term of any repurchase agreement, the Adviser will continue to monitor the creditworthiness of the seller. Repurchase agreements are considered under the Act to be collateralized loans by a Fund to the seller secured by the securities transferred to the Fund. Repurchase agreement will be fully collateralized by securities in which the Fund may invest directly. Such collateral will be marked to market daily. If the seller of the underlying security under the repurchase agreement should default on its obligation to repurchase the underlying security, a Fund may experience a delay or difficulty in exercising its right to realize upon the security and, in addition, may incur a loss if the value of the security should decline, as well as disposition costs in liquidating the security. (3) INVESTMENT INCOME AND SECURITY TRANSACTIONS: Dividend income is recorded on the ex-dividend date. Interest income is accrued daily. Premiums/discounts on fixed income securities are amortized/accreted daily. Security transactions are accounted for on the date securities are purchased and sold. The cost of securities sold is determined using the first-in-first-out method. Income from payment in kind securities is recorded daily based on the effective interest method of accrual. (4) FEDERAL INCOME TAXES: The Trust has elected to be treated as a "regulated investment company" under Sub-chapter M of the Internal Revenue Code and to distribute substantially all of the Funds' net taxable income. Each Fund qualified for such treatment for the year ended June 30, 2006. Accordingly, no provisions for federal income taxes have been made in the accompanying financial statements. (5) DIVIDENDS AND DISTRIBUTIONS: Dividends and distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. (6) EXPENSES: Most expenses of the Trust can be directly attributed to a Fund. Expenses, which cannot be directly attributed, are apportioned among each Fund in the Trust. (7) FOREIGN SECURITIES: Investments in foreign securities, whether made directly or indirectly, involve certain inherent risks. There may be less information publicly available about a foreign corporate issuer than about a U.S. issuer, and foreign corporate issuers are not generally subject to accounting, auditing and financial reporting standards and practices comparable to those in the United States. The securities of some foreign issuers are less liquid and at times more volatile than securities of comparable U.S. issuers. Foreign brokerage commissions and securities custody costs are often higher than those in the United States, and judgments against foreign entities may be more difficult to obtain and enforce. Other risks include those related to changes in foreign currency exchange rates, political and economic developments, the possible imposition of foreign withholding tax on the interest or dividend income payable on such instruments, the possible establishment of foreign controls, the possible seizure or nationalization of foreign deposits or assets, or the adoption of other foreign government restrictions that might adversely affect the foreign securities held by a Fund. (8) USE OF ESTIMATES: In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (9) HIGH-YIELD SECURITIES ("JUNK BONDS"): Securities rated lower than Baa by Moody's or lower than BBB by S&P (sometimes referred to as "high yield" or "junk" bonds) are not considered "investment grade." There is more price volatility, more risk of losing your principal investment, a greater possibility of the issuer going bankrupt, plus additional risks. These securities are considered speculative. In addition, there may be special tax considerations associated with investing in high yield/high risk bonds structured as zero coupon or payment-in-kind securities. Interest on these securities is recorded annually as income even though no cash interest is received until the security's maturity or payment date. As a result, the amounts that have accrued 69 NOTES TO FINANCIAL STATEMENTS (CONTINUED) each year are required to be distributed to shareholders and such amounts will be taxable to shareholders. Therefore, the Fund may have to sell some of its assets to distribute cash to shareholders. These actions are likely to reduce the Fund's assets and may thereby increase its expense ratios and decrease its rate of return. (10) MORTGAGE DOLLAR ROLLS: Some of the Funds may enter into mortgage dollar roll ("MDR") transactions in which a Fund sells mortgage-backed securities ("MBS") for delivery to a counterparty and simultaneously agrees to buy a similar security on a delayed delivery basis. The MDR transactions of the Fund are classified as purchase and sale transactions. The securities sold in connection with the MDRs are removed from the portfolio and a realized gain or loss is recognized. The securities the Fund has agreed to acquire are included at market value in the Portfolio of Investments and liabilities for such purchase commitments are included as payables for investments purchased. During the roll period, the Fund foregoes principal and interest on the securities. The Fund is compensated by the difference between the current sales price and the forward price for the future purpose as well as by the earnings on the cash proceeds of the initial sale. MDRs may be renewed without physical delivery of the securities subject to the contract. The Fund maintains liquid assets having a value not less than the repurchase price, including accrued interest. MDR transactions involve certain risks, including the risk that the MBS returned to the Fund at the end of the roll, while substantially similar, could be inferior to what was initially sold to the counterparty. (11) SECURITIES LENDING: Each fund (except the Principal Preservation Fund) may seek to increase its income by lending portfolio securities to certain broker-dealers and institutions, to the extent permitted by the 1940 Act, as modified or interpreted by regulatory authorities having jurisdiction, from time to time, in accordance with procedures adopted by the Board. Under present regulatory policies, such loans would be required to be secured continuously by collateral in cash or U.S. government securities maintained on a current basis at an amount at least equal to 100% of the current market value of the securities loaned. The Fund would have the right to call a loan and obtain the securities loaned at any time generally on less than five days' notice. For the duration of a loan, the Fund would continue to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and would also receive compensation from the investment of the collateral. The Fund would not, however, have the right to vote any securities having voting rights during the existence of the loan, but the Fund would call the loan in anticipation of an important vote to be taken among holders of the securities or of the giving or withholding of their consent on a material matter affecting the investment. As with other extensions of credit, there are risks of delay in recovery of, or even loss of rights in, the collateral should the borrower of the securities fail financially or breach its agreement with a Fund. However, the loans would be made only to firms deemed by the Adviser or Subadvisor to be creditworthy and approved by the Board, and when, in the judgment of the Adviser or Subadvisor, the consideration that can be earned currently from securities loans of this type, justifies the attendant risk. (See Note G on page 75.) (12) RESTRICTED SECURITIES: Each Fund will limit investments in securities of issuers which the Fund is restricted from selling to the public without registration under the 1933 Act, to no more than 10% of the Fund's net assets, excluding restricted securities eligible for resale pursuant to Rule 144A that have been determined to be liquid by the Board of Trustees. Restricted securities have no ready market and are subject to legal restrictions on their sale (other than those eligible for resale pursuant to Rule 144A or Section 4(2) under the 1933 Act determined to be liquid pursuant to guidelines adopted by the Board of Trustees). Difficulty in selling securities may result in a loss or be costly to a Fund. Restricted securities generally can be sold only in privately negotiated transactions, pursuant to an exemption from registration under the 1933 Act, or in a registered public offering. Information regarding restricted securities is included at the end of the Funds' Schedule of Investments. 70 MCMORGAN FUNDS Restricted securities held at December 31, 2006: HIGH YIELD FUND
NUMBER OF WARRANTS/ DATE(S) OF SHARE 12/31/06 PERCENT OF SECURITY ACQUISITION AMOUNT COST VALUE NET ASSETS - -------- ----------- --------- -------- -------- ---------- Haights Cross Communications, Inc. Preferred Stock 16.00%, Class B 1/22/04 6,286 $292,429 $257,726 0.2% Warrants 1/22/04 7 0(a) 0(a) 0.0(b) Warrants, Preferred Class A 1/22/04 6,225 62 62 0.0(b) -------- -------- --- $292,491 $257,788 0.2% ======== ======== ===
(a) Less than one dollar. (b) Less than one tenth of a percent. NOTE (C) DIVIDENDS FROM NET INVESTMENT INCOME AND DISTRIBUTIONS OF CAPITAL GAINS: The Principal Preservation Fund declares dividends daily from its net investment income. The Principal Preservation Fund's dividends are payable monthly and are automatically reinvested in additional Fund shares, at the month-end net asset value, for those shareholders that have elected the reinvestment option. The Fixed Income Fund, High Yield Fund and Intermediate Fixed Income Fund distribute their respective net investment income to shareholders monthly and net realized capital gains, if any, are distributed annually. With respect to the Balanced Fund and the Equity Investment Fund, dividends from net investment income are distributed quarterly and net realized capital gains from investment transactions, if any, are distributed to shareholders annually. The tax character of distributions paid during the years ended June 30, 2006 and June 30, 2005, was as follows:
INTERMEDIATE FIXED INCOME FIXED INCOME FUND FUND ------------------------------ ------------------------------ 2006 2005 2006 2005 ---------- ---------- ---------- ---------- Distribution paid from: Ordinary income $6,538,757 $5,538,479 $2,938,769 $2,592,400 Long-term capital gain -- 243,103 -- 215,287 ---------- ---------- ---------- ---------- $6,538,757 $5,781,582 $2,938,769 $2,807,687 ========== ========== ========== ==========
HIGH YIELD BALANCED EQUITY INVESTMENT FUND FUND FUND ---------------------------- --------------------------- --------------------------- 2006 2005 2006 2005 2006 2005 ----------- ---------- ---------- ---------- ---------- ---------- Distribution paid from: Ordinary income $10,655,458 $6,164,765 $1,471,130 $2,057,120 $1,916,318 $2,031,850 Long-term capital gain -- -- -- -- -- -- ----------- ---------- ---------- ---------- ---------- ---------- $10,655,458 $6,164,765 $1,471,130 $2,057,120 $1,916,318 $2,031,850 ----------- ---------- ---------- ---------- ---------- ----------
As of June 30, 2006, the components of distributable earnings on a tax basis were as follows:
PRINCIPAL INTERMEDIATE PRESERVATION FIXED INCOME FIXED INCOME FUND FUND FUND ------------ ------------ ------------ Undistributed ordinary income $ 19,969 $ 514,803 $ 248,475 Undistributed long-term capital gain (Capital loss carryforward) -- (747,036) (153,472) Other temporary differences (19,969) -- -- Unrealized appreciation (depreciation) -- (3,649,677) (2,418,832) Post October loss (1,030) (2,658,954) (1,009,761) -------- ----------- ----------- $ (1,030) $(6,540,864) $(3,333,590) ======== =========== ===========
71 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EQUITY HIGH YIELD BALANCED INVESTMENT FUND FUND FUND ----------- ----------- ------------ Undistributed ordinary income $ 700,289 $ 62,084 $ 100,887 Undistributed long-term capital gain (Capital loss carryforward) (768,270) (4,938,810) (15,575,677) Other temporary differences (15,782) -- -- Unrealized appreciation (depreciation) (4,450,547) 757,608 5,196,724 Post October loss (1,053,181) -- -- ----------- ----------- ------------ $(5,587,491) $(4,119,118) $(10,278,066) ----------- ----------- ------------
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to wash sales. In order to avoid imposition of the excise tax applicable to regulated investment companies, each Fund intends to declare as dividends, in each calendar year, at least 98% of its net realized capital gains (earned during the twelve months ended October 31) plus undistributed amounts, if any, from prior years. NOTE (D) CAPITAL SHARE TRANSACTIONS (IN 000'S): Each Fund is authorized to issue an unlimited number of shares of beneficial interest with no par value. Transactions in shares of beneficial interest were as follows:
PRINCIPAL PRESERVATION FUND INTERMEDIATE FIXED INCOME FUND ------------------------------- ----------------------------------------------------------------- CLASS MCMORGAN CLASS MCMORGAN CLASS Z ------------------------------- ------------------------------- ------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 ------------------ ---------- ------------------ ---------- ------------------ ---------- Shares sold 86,244 130,643 2,261 4,011 --(a) 1 -- Shares issued in reinvestment of dividends and distributions 3,232 5,596 385 633 --(a) --(a) ------- -------- ----- ------ -- -- 89,476 136,239 2,646 4,644 --(a) 1 Shares redeemed (66,076) (136,686) (711) (5,260) --(a) --(a) ------- -------- ----- ------ -- -- Net increase (decrease) 23,400 (447) 1,935 (616) --(A) 1 ======= ======== ===== ====== == ==
FIXED INCOME FUND ----------------------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------------- ----------------------------------- YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 ------------------ ---------- ------------------ ---------- Shares sold 310 1,795 172 578 Shares issued in reinvestment of dividends and distributions 91 156 69 117 ---- ------ ---- ---- 401 1,951 241 695 Shares redeemed (485) (1,465) (227) (488) ---- ------ ---- ---- Net increase (decrease) (84) 486 14 207 ==== ====== ==== ====
FIXED INCOME FUND ----------------------------------------------------------------------------- CLASS R1 CLASS R2 ----------------------------------- ----------------------------------- YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 ------------------ ---------- ------------------ ---------- Shares sold -- -- -- -- Shares issued in reinvestment of dividends and distributions --(a) --(a) --(a) --(a) -- -- -- -- --(a) --(a) --(a) --(a) Shares redeemed -- --(a) -- -- -- -- -- -- Net increase --(a) --(a) --(a) --(a) == == == ==
72 MCMORGAN FUNDS
HIGH YIELD FUND --------------------------------- CLASS MCMORGAN --------------------------------- YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 ------------------ ---------- Shares sold 6 3,105 Shares issued in reinvestment of dividends 604 1,028 --- ----- 610 4,133 Shares redeemed (1) (825) --- ----- Net increase 609 3,308 === =====
BALANCED FUND ----------------------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------------- ----------------------------------- YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 ------------------ ---------- ------------------ ---------- Shares sold 159 411 28 50 Shares issued in reinvestment of dividends 34 73 5 8 ---- ------ --- --- 193 484 33 58 Shares redeemed (332) (1,346) (31) (65) ---- ------ --- --- Net increase (decrease) (139) (862) 2 (7) ==== ====== === ===
EQUITY INVESTMENT FUND ----------------------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------------- ----------------------------------- YEAR ENDED YEAR ENDED SIX MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, DECEMBER 31, 2006* 2006 DECEMBER 31, 2006* 2006 ------------------ ---------- ------------------ ---------- Shares sold 226 1,100 29 325 Shares issued in reinvestment of dividends 39 77 2 5 ---- ------ --- ---- 265 1,177 31 330 Shares redeemed (213) (1,689) (49) (104) ---- ------ --- ---- Net increase (decrease) 52 (512) (18) 226 ==== ====== === ====
* Unaudited. (a) Less than one thousand. NOTE (E) INVESTMENT TRANSACTIONS: Aggregate purchases and proceeds from sales of investment securities (other than short-term investments) for the six month period ended December 31, 2006 were:
INTERMEDIATE FIXED INCOME FUND FIXED INCOME FUND HIGH YIELD FUND ----------------------------- ----------------------------- --------------------------- PURCHASES SALES PURCHASES SALES PURCHASES SALES ------------ ------------ ------------ ------------ ----------- ----------- U.S. Government Securities $203,989,337 $201,843,623 $ 88,308,170 $ 94,025,747 $ -- $ -- All others 43,328,029 34,982,069 19,739,212 14,419,448 31,786,564 26,703,997 ----------- ----------- ----------- ----------- ---------- ---------- Total $247,317,366 $236,825,692 $108,047,382 $108,445,195 $31,786,564 $26,703,997 ============ ============ ============ ============ =========== ===========
BALANCED FUND EQUITY INVESTMENT FUND --------------------------- --------------------------- PURCHASES SALES PURCHASES SALES ----------- ----------- ----------- ----------- U.S. Government Securities $24,903,885 $24,439,098 $ -- $ -- All others 21,686,604 23,975,191 86,873,693 86,145,581 ---------- ---------- ---------- ---------- Total $46,590,489 $48,414,289 $86,873,693 $86,145,581 =========== =========== =========== ===========
NOTE (F) FEES AND RELATED PARTY TRANSACTIONS: (1) ADVISORY: Under its investment advisory agreements with each of the Funds, the Adviser provides investment advisory services to the Funds. The Funds will pay the Adviser at the following annual percentage rates of the average daily net assets of each Fund: 0.25% for the Principal Preservation Fund; 0.35% for the Intermediate Fixed Income Fund and the Fixed Income Fund; 0.45% for the Balanced Fund; and 0.50% for the Equity Investment Fund and the 73 NOTES TO FINANCIAL STATEMENTS (CONTINUED) High Yield Fund. These fees are accrued daily and paid monthly. The Adviser has voluntarily undertaken to absorb for the McMorgan Funds Class of Principal Preservation Fund, Intermediate Fixed Income Fund, Fixed Income Fund, High Yield Fund, Balanced Fund and Equity Investment Fund, operating expenses which cause total expenses to exceed 0.30%, 0.50%, 0.50%, 0.75%, 0.60% and 0.75%, respectively. While the Adviser has not undertaken to limit the total annual operating expenses of the Class Z shares, the Advisory fee waiver would also apply to these shares. For the period July 1, 2006 through December 31, 2006, the net amount of expenses the Adviser absorbed, subject to repayment, totaled $126,975 for the Principal Preservation Fund; $81,949 for the Intermediate Fixed Income Fund; $88,554 for the Fixed Income Fund; $112,911 for the Balanced Fund and $14,877 for the Equity Investment Fund. It was not necessary for the Adviser to reimburse the High Yield Fund for expenses for the period ended December 31, 2006. The investment advisory agreements provide that any reductions or expense reimbursements made by the Adviser in its fees are subject to reimbursement by the Funds within the following three years of such reduction or reimbursement provided that the Funds are able to effect such reimbursement and remain in compliance with applicable expense limitations. Since July 1, 2003 through December 31, 2006, the Adviser has reduced its management fee and otherwise absorbed Fund expenses for each Fund in the following amounts: Principal Preservation Fund $934,139; Intermediate Fixed Income Fund $582,931; Fixed Income Fund $637,019; Balanced Fund $767,263 and Equity Investment Fund $198,089. This amount is included within investment advisory fees in the Statement of Operations. As of December 31, 2006 the Adviser can recover the following reimbursement amounts:
EXPIRES 2007 EXPIRES 2008 EXPIRES 2009 EXPIRES 2010 TOTAL ------------ ------------ ------------ ------------ -------- Principal Preservation Fund $242,530 $271,924 $292,710 $126,975 $934,139 Intermediate Fixed Income Fund 132,200 175,303 193,479 81,949 582,931 Fixed Income Fund 160,536 189,912 198,017 88,554 637,019 Balanced Fund 164,865 246,909 242,578 112,911 767,263 Equity Investment Fund -- 92,699 90,513 14,877 198,089
Pursuant to sub-advisory agreements, the Adviser pays NYLIM the following: 50% of the fee received by the Adviser from the High Yield Fund and 0.25% of the net asset value of the assets of the Equity Investment Fund and Balanced Fund. During the period, the Adviser of the Principal Preservation Fund identified a trade error, which resulted from a violation of a non- fundamental investment restriction. The Fund liquidated its position in the securities, which resulted in a gain to the Fund in the amount of $8,543 as shown in the Statement of Operations for the period ended December 31, 2006 as net increase from the disposal of investments in violation of restrictions. This trade error did not affect the Fund's total return. (2) DISTRIBUTION AND SERVICE FEES: The Trust has adopted a Distribution Plan (the "Plan") on behalf of the Class Z Shares of the Intermediate Fixed Income Fund, Fixed Income Fund, Balanced Fund and Equity Investment Fund and Class R2 shares of the Fixed Income Fund in accordance with Rule 12b-1 under the Investment Company Act of 1940. The Plan provides that the applicable Fund will reimburse NYLIFE Distributors LLC, an affiliate of the Adviser, who serves as distributor to the Funds pursuant to an Underwriting Agreement, or a third party administrator for actual distributions and shareholder servicing expenses incurred, on an annual basis of 0.25% of each Fund's Class Z and Class R2 Shares average daily net assets. The High Yield Fund, which is also covered under the Plan, does not currently offer Class Z shares. The Trust has also adopted Shareholder Service Plans for the Class R1 and R2 Shares of the Fixed Income Fund. In accordance with the Shareholder Service Plans, the Adviser has agreed to provide, through its affiliates or independent third parties, various shareholder and administrative support services to shareholders of the Class R1 and R2 shares. For its services, the Adviser is entitled to a Shareholder Service Fee accrued daily and paid monthly at an annual rate of 0.10% of the average daily net assets attributable to the Class R1 and R2 shares. (3) TRANSFER, DIVIDEND DISBURSING AND SHAREHOLDER SERVICING AGENT: NYLIM Service Company LLC, an affiliate of the Adviser, serves as the Funds transfer agent. NYLIM Service Company LLC has entered into an agreement with 74 MCMORGAN FUNDS Boston Financial Data Services, by which it will perform certain of the services for which NYLIM Service Company LLC is responsible. Transfer agent expenses accrued for the six month period ended December 31, 2006 for each Fund were as follows: Principal Preservation Fund $16,839; Intermediate Fixed Income Fund $20,675; Fixed Income Fund $18,869; High Yield Fund $8,313; Balanced Fund $24,295; and Equity Investment Fund $26,669. (4) ADMINISTRATOR: NYLIM serves as Administrator for the Funds. For providing administrative services to the Funds, NYLIM receives from each Fund a basic fee, computed daily and paid monthly. Administration fees accrued for the six month period ended December 31, 2006 for each Fund were as follows: Principal Preservation Fund $38,668; Intermediate Fixed Income Fund $46,161; Fixed Income Fund $22,735; High Yield Fund $38,806; Balanced Fund $20,349; and Equity Investment Fund $50,921. The Funds pay the Administrator a monthly fee for accounting services provided. Fees for accounting services provided to the Funds by the Administrator, or its designee for the six month period ended December 31, 2006 were as follows: Principal Preservation Fund $23,671; Intermediate Fixed Income Fund $30,143; Fixed Income Fund $23,060; High Yield Fund $23,733; Balanced Fund $22,338; and Equity Investment Fund $31,583. Investors Bank & Trust Company, 200 Clarendon Street, P.O. Box 9130, Boston, Massachusetts, 02116 ("IBT") provides sub-administration and sub- accounting services to the Funds pursuant to an agreement with NYLIM. These services include calculating daily net asset values of the Funds, maintaining general ledger and sub-ledger accounts for the calculation of the Fund's respective net asset values, and assisting NYLIM in conducting various aspects of the Funds' administrative operations. For providing these services to the Funds, IBT is compensated by NYLIM. (5) TRUSTEES FEES: The non-interested Trustees of McMorgan Funds each receive a flat fee of $33,000 per year, plus reimbursement for all out-of- pocket expenses incurred for each meeting of the Board of Trustees they attend. The Independent Chairman receives a flat fee of $40,000 per year, plus reimbursement for all out-of-pocket expenses incurred for each meeting attended. No officer or employee of McMorgan & Company LLC receives any compensation from McMorgan Funds for acting as a Trustee of McMorgan Funds. The Statement of Additional Information ("SAI") includes additional information about the Trustees and is available, without charge, upon request, by calling 1-800-788-9485. NOTE (G) PORTFOLIO SECURITIES LOANED: As of December 31, 2006, the following Funds had securities on loan and received collateral as follows:
MARKET VALUE OF CASH PORTFOLIO SECURITIES ON LOAN COLLATERAL - --------- ------------------ ----------- Intermediate Fixed Income Fund $ 72,620 $ 75,543 Fixed Income Fund 4,082,924 4,188,792 High Yield Fund 12,609,982 12,934,957 Balanced Fund 3,194,188 3,286,776 Equity Investment Fund 11,784,335 12,197,235
The cash collateral received for securities on loan used to purchase highly liquid short-term investments. Securities purchased with collateral received are valued at amortized cost which approximates market value. NOTE (H) CAPITAL LOSS CARRYFORWARD AND POST OCTOBER LOSSES: As of June 30, 2006, the Funds had available for federal tax purposes unused capital loss carryforwards as follows:
EXPIRES IN 2012 EXPIRES IN 2014 TOTAL --------------- --------------- ----------- Intermediate Fixed Income Fund $ -- $747,036 $ 747,036 Fixed Income Fund -- 153,472 153,472 Balanced Fund 4,938,810 -- 4,938,810 High Yield Fund -- 768,270 768,270 Equity Investment Fund 15,575,677 -- 15,575,677
75 NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2006, the Funds had realized capital losses during the period November 1, 2005 through June 30, 2006, which are treated for federal income tax purposes as arising in the tax year ending June 30, 2007.
POST OCTOBER LOSS ----------------- Principal Preservation Fund $ 1,030 Intermediate Fixed Income Fund 2,658,954 Fixed Income Fund 1,009,761 High Yield Fund 1,053,181
NOTE (I) INDEMNIFICATIONS: In the normal course of business the Funds enter into contracts with third party service providers that contain a variety of representations and warranties that provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. Based on experience, management is of the view that the risk of loss in connection with these potential indemnification obligations is remote; however, there can be no assurance that material liabilities related to such obligations will not arise in the future that could adversely impact the Funds. NOTE (J) NEW ACCOUNTING PRONOUNCEMENTS: On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN 48 provides guidance for how uncertain tax provisions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. FIN 48 is effective during the first required financial reporting period for fiscal years beginning after December 15, 2006. Management of the Funds is currently evaluating the impact that FIN 48 will have on the Fund's financial statements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." This standard establishes a single authoritative definition of "fair value", sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The changes to current generally accepted accounting principles from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. As of December 31, 2006, the Funds do not believe the adoption of SFAS No. 157 will impact the amounts reported in the financial statements, however, additional disclosures may be required about the inputs used to develop the measurements and the effect of certain measurements reported in the financial statements for a fiscal period. 76 [MCMORGAN FUNDS LOGO] STRAIGHT FORWARD INVESTING ESTD. 1994 BOARD OF TRUSTEES Alan C. Lindquist Walter B. Rose Kenneth I. Rosenblum Mark R. Taylor OFFICERS Mark R. Taylor, President and Principal Executive Officer Arphiela Arizmendi, Treasurer and Principal Financial Officer Vincent J. Bencivenga, Chief Compliance Officer Robert A. Anselmi, Chief Legal Officer Teresa Matzelle, Vice President and Secretary INVESTMENT ADVISOR McMorgan & Company LLC One Bush Street, Suite 800 San Francisco, CA 94104 CUSTODIAN Investors Bank & Trust Company 200 Clarendon Street P.O. Box 9130 Boston, MA 02117 UNDERWRITER NYLIFE Distributors LLC 169 Lackawanna Avenue Parsippany, NJ 07054 LEGAL COUNSEL Sutherland Asbill & Brennan, LLP 1275 Pennsylvania Avenue, N.W. Washington, DC 20004 SHAREHOLDER SERVICES NYLIM Service Company LLC 169 Lackawanna Avenue Parsippany, NJ 07054 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Tait, Weller & Baker LLP 1818 Market Street, Suite 2400 Philadelphia, PA 19103 For Additional Information about McMorgan Funds call: (800) 831-1994 (7AM TO 5PM PST) This report is submitted for general information of the shareholders of the Funds. It is not authorized for distribution to prospective investors in the Funds unless preceded or accompanied by an effective Prospectus which includes details regarding the Funds' objectives, policies, expenses and other information. ITEM 2. CODE OF ETHICS. Registrant has adopted a code of ethics (the "Code") that applies to Registrant's principal executive officer ("PEO") and principal financial officer ("PFO"). There were no amendments to the Code during the period covered by the report. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the PEO and PFO during the period covered by this report. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Board of Trustees has determined that the registrant has at least one "audit committee financial expert" (as defined in Item 3 of Form N-CSR) serving on its Audit Committee. The Audit Committee financial expert is Alan Lindquist. Mr. Lindquist is "independent" within the meaning of that term used in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Not applicable ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS Please see schedule of investments contained in the Report to Stockholders included under Item 1 of this Form N-CSRS. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Since the Registrant's last response to this Item, there have been no material changes to the procedures by which shareholders may recommend Nominees to the Registrant's Board of Directors. -1- ITEM 11. CONTROLS AND PROCEDURES. (a) Based on an evaluation of the Disclosure Controls and Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure Controls") as of a date within 90 days prior to the filing date (the "Filing Date") of this Form N-CSRS (the "Report"), the principal executive officer and principal financial officer have concluded that the Disclosure Controls are reasonably designed to ensure that information required to be disclosed by the Registrant in the Report is recorded, processed, summarized and reported by the Filing Date, including ensuring that information required to be disclosed in the Report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this Report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Not applicable. (a)(2) Certifications of each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 and section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this filing. (b) Certifications of each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 and Section 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this filing. -2- 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. MCMORGAN FUNDS By: /s/ Mark R. Taylor --------------------------------- MARK R. TAYLOR PRESIDENT AND PRINCIAL EXECUTIVE OFFICER Date: March 9, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ MARK R. TAYLOR --------------------------------- MARK R. TAYLOR PRESIDENT AND PRINCIAL EXECUTIVE OFFICER Date: March 9, 2007 By: /s/ ARPHIELA ARIZMENDI --------------------------------- ARPHIELA ARIZMENDI TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER Date: March 9, 2007 -3- EXHIBIT INDEX (a)(2) Certifications of each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940 and section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this filing. (b) Certifications of each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2(b) under the Investment Company Act of 1940 and Section 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits to this filing. -4- EX-99.CERT 2 w29869exv99wcert.txt SECTION 302 CERTIFICATIONS EXHIBIT (A)(2) SECTION 302 CERTIFICATIONS I, Mark R. Taylor, President and Principal Executive Officer of McMorgan Funds, certify that: 1. I have reviewed this report on Form N-CSRS of McMorgan Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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 quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and -1- (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Mark R. Taylor ------------------------------------ Mark R. Taylor President and Principal Executive Officer Date: March 9, 2007 -2- EXHIBIT (A)(2) SECTION 302 CERTIFICATIONS I, Arphiela Arizmendi, Treasurer and Principal Financial and Accounting Officer of McMorgan Funds, certify that: 1. I have reviewed this report on Form N-CSRS of McMorgan Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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 registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and -3- (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/ Arphiela Arizmendi ------------------------------------ Arphiela Arizmendi Treasurer and Principal Financial and Accounting Officer Date: March 9, 2007 -4- EX-99.906CERT 3 w29869exv99w906cert.txt SECTION 906 CERTIFICATIONS EXHIBIT (B) SECTION 906 CERTIFICATIONS In connection with this report on Form N-CSRS for the Registrant as furnished to the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. By: /s/ Mark R. Taylor ------------------------------------ Mark R. Taylor President and Principal Executive Officer Date: March 9, 2007 By: /s/ Arphiela Arizmendi ------------------------------------ Arphiela Arizmendi Treasurer and Principal Financial and Accounting Officer Date: March 9, 2007 A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request. -1- -----END PRIVACY-ENHANCED MESSAGE-----