-----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, Mbrl0JzvkTou0wX+h87/WHb/t03SMWSkqewKOhd0zWZ/wQp9+iL01YC6u3FVyC1L qSm+lZuqxXWS2xD4nn5a6A== 0001125282-06-005612.txt : 20060906 0001125282-06-005612.hdr.sgml : 20060906 20060906165403 ACCESSION NUMBER: 0001125282-06-005612 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060906 DATE AS OF CHANGE: 20060906 EFFECTIVENESS DATE: 20060906 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-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-08370 FILM NUMBER: 061077080 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-CSR 1 p414146_n-csr.txt FORM N-CSR UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-8370 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: June 30, 2006 FORM N-CSR ITEM 1. REPORTS TO STOCKHOLDERS. [MCMORGAN FUNDS LOGO] ANNUAL REPORT 2006 June 30, 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. [GRAPHIC] LETTER FROM THE PRESIDENT Dear Shareholder, 2006 began with a show of resilience as the pace of growth accelerated meaningfully from the fourth quarter of 2005. Real gross domestic product increased at an annual rate of 5.6% in the first quarter of 2006. After experiencing a very strong pace of activity, growth slowed in the second quarter and expectations are for real gross domestic product to be about 3% for the period. Consumer spending continues to increase but recent reports indicate a softer pattern. There is evidence that higher gasoline prices, weaker stock markets and a softer housing market have caused enough of a drop in confidence to impact spending habits. The labor market has been mixed and the most recent reports show labor markets continuing to tighten, with wage pressures remaining moderate. The U.S. unemployment rate stands at 4.6% in June. The equity market continued the rally that began late last year into 2006, pushing the S&P 500 to a four-year high at the beginning of May. Following May 5, fears of inflation, rising interest rates, and possibly slowing economic growth led to increased market volatility. The S&P 500 declined and moved into negative territory before rallying to finish up 2.7% for the six months ended June 30, 2006. Although sentiment toward equity assets has vacillated between positive and negative, corporate fundamentals remain good. First quarter earnings were much better than expected, and second quarter estimates have increased to around 11%. The fixed income markets as a whole struggled during the first half of the year, looking very similar to 2005: higher yields, flatter curve and tighter spreads. Economic growth, elevated energy prices, and the potential for inflationary pressure moved the Federal Reserve to continue its tightening campaign of raising rates. By June 30, Fed Fund rates were increased for the seventeenth time since 2004. As the Fed talked tough on inflation and inflation expectations, the U.S. Treasury yield curve regained a positive slope in April, reverted to flat in May and inverted in June with yields on two-, five-, and 10 year Treasurys exceeding those on 30-year Treasurys. Our annual report for the twelve months ending June 30, 2006 that follows, provides additional information about the market forces, investment decisions, and securities that affected the McMorgan Funds. 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. 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 MCMORGAN FUNDS ANNUAL REPORT 2006 PRINCIPAL PRESERVATION FUND NASDAQ SYMBOL: MCPXX | JUNE 30, 2006 This portfolio of short-term, high-quality investments is composed of U.S. Treasury and government securities and other short-term vehicles. The Fund seeks principal preservation while providing maximum current income and maintaining liquidity. The Principal Preservation Fund is a money market fund and is appropriate for investors wishing to avoid principal fluctuations while earning interest income. Q: What factors affected the short-term bond market during the year ended June 30, 2006? A: During the first half of the year, money markets adjusted to stronger than expected first quarter economic growth and heightened concern over rising consumer prices. Economic activity, while generally healthy, has slowed from the rapid pace in the first quarter. Core inflation measures remained well-contained despite persistently high energy and commodity prices. Still, inflation metrics moved closer toward the upper bounds of the Federal Reserve's comfort level. The Federal Reserve continued to raise interest rates, with the Fed Funds target ending the period at 5.25%. Recent commentary from Fed officials suggests that the gradual unwinding of the Federal Reserve's accommodative monetary policy is nearly complete and further monetary tightening, if needed, will depend on future incoming economic data. Q: How did the economic environment affect the results of the portfolio? A: Solid economic growth with moderate inflation has led to gradual increases in short-term interest rates. This has increased the overall yield of the portfolio, while reducing the term premium on longer maturity money market instruments. The 7-day current yield and 30-day SEC yield as of June 30, 2006 were 4.83% and 4.80%, respectively. Q: How did the Principal Preservation Fund invest during the reporting period? A: The Fund maintained a somewhat shortened average maturity, as the flat term structure of money market rates did not fully reflect the Fed's ongoing removal of accommodative monetary conditions. 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. Rich valuations on government securities necessitated a slighter higher allocation to commercial paper to increase 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 nearing the end of the current monetary tightening cycle, though as always we expect policy makers to remain vigilant for signs of inflationary pressure. Given the slight recent moderation in economic growth and well-contained inflation, we do not anticipate significant further increases in short-term interest rates. As such, the flat term structure of money market rates appears to be fairly consistent with the likely path of monetary policy. 2 MCMORGAN PRINCIPAL PRESERVATION FUND AS OF JUNE 30, 2006 Diversification [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Gov't 13% Corporate 7% Certificate of Deposit 4% Cash++++ (4%) Commercial Paper 80% Credit Quality++ [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] A-2/P-2 4% Floating Rate Notes 11% Gov't 12% A-1/P-1 73% Maturity [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] 16-30 days 21% 31-90 days 14% 1-15 days 65% Average Annual Total Returns For Periods Ended June 30 (%) Inception One Three Five Ten Date Year Years Years Years ---------- ---- ----- ----- ----- McMorgan Principal Preservation Fund 7/13/94 4.01 2.26 2.09 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 Yield (%) [GRAPHIC] AN INVESTMENT IN THE FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. ++ Ratings such as "P-1" refer to individual bonds, and not to the Fund itself. Ratings by Moody's. ++++ Cash equals liabilities in excess of cash and other assets. 3 MCMORGAN FUNDS ANNUAL REPORT 2006 INTERMEDIATE FIXED INCOME FUND NASDAQ SYMBOL: MCMNX | JUNE 30, 2006 This Fund invests in high-quality, investment grade corporate, government and mortgage-backed bonds, seeking to deliver above-average returns consistent with maintaining liquidity and preserving capital. Unlike a money market fund, the Intermediate Fixed Income Fund does not seek a stable net asset of $1 per share and is not suitable for investors seeking consistent principal stability. Q: What factors affected the bond market during the reporting period ending June 30, 2006? A: During the first half of 2006, bond yields moved steadily higher, primarily from a surge in economic growth in first quarter and modestly higher inflation pressures. In response, the Federal Reserve continued raising rates at each of the four FOMC meetings, taking the Federal Funds rate from 4.25% at year-end 2005 to 5.25% by the end of June 2006. During the first four months, risk premiums remained at historically low levels with higher risk fixed income sectors such as high yield and emerging market debt providing the strongest relative returns. In May and June, risk premiums increased and higher quality bond market sectors regained ground. High energy, commodity, and precious metals prices put upwards pressure on inflation rates. Q: How did the Fund perform compared to its benchmark during the reporting period? A: The Fund performed in line with its benchmark. For the six months ending June 30, 2006, the Fund's return, was -0.20% versus the Lehman Brothers Intermediate U.S. Government Credit Index of -0.17%. 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 holdings in single family and commercial mortgage backed sectors contributed positively to performance. The Fund had significant exposure to the automobile sector early in the period which aided relative performance. Holdings in General Motors Acceptance Corp. were eliminated after strong relative performance in first quarter and exposure to Ford Motor Credit was reduced from approximately 1.2% at the beginning of the period to 0.5%. Kinder Morgan debentures detracted from performance resulting from the announcement of a leveraged buyout and anticipation of the downgrading of its credit ratings. Q: How is the Fund positioned going forward? A: The Fund's interest rate strategy remains neutral to the benchmark with a modest bias to greater interest rate sensitivity. Portfolio duration is targeted equal to the benchmark as we expect the rise in yields orchestrated by Federal Reserve policy is nearing an end. The Fund remains focused on intermediate maturities in the 5 to 9 year part of the yield curve and minimal exposure to very long maturity issues. Overall portfolio exposure to corporate and credit sensitive non-corporate sectors is lower than the benchmark, owing to our assessment that currently small yield spreads available within this sector present minimal potential for superior returns. The Fund has a substantial commitment to commercial mortgage backed and U. S. Agency single family mortgage backed securities, both of which are not a part of the benchmark index. The Fund has a modest position in U.S. Treasury Inflation Protected Securities and is modestly underweighted in other Treasurys 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 JUNE 30, 2006 Diversification [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Corporate 30% Mortgage 17% Short-Term 7% Cash (9%)++++ Gov't 55% Bond Quality++ [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Aaa 14% Aa 6% A 9% Baa 15% Gov't 56% Maturity [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Short Term 16% 10+ years 3% 5-10 years 48% 1-5 years 33% Average Annual Total Returns* For Periods Ended June 30 (%)
Inception One Three Five Ten Years or Date Year Years Years Life of Class Section --------- ----- ----- ----- --------------------- McMorgan Int. Fixed Income Fund............. 7/14/94 (0.43) 1.25 3.85 5.29Section McMorgan Int. Fixed Income Fund (Class Z)... 7/4/01 (0.78) 0.96 N/A 3.20 Lehman Bros Int. US Gov't/Credit Index**.... N/A (0.18) 1.49 4.62 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 [GRAPHIC] 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 ANNUAL REPORT 2006 FIXED INCOME FUND NASDAQ SYMBOL: MCMFX | JUNE 30, 2006 This diversified portfolio invests in high-quality corporate, government and mortgage-backed bonds, with average remaining maturities of up to 30 years. The average weighted portfolio maturity is generally between 5 to 10 years. The Fund seeks above-average returns consistent with maintaining liquidity and preserving capital. Q: What factors affected the bond market during the reporting period ending June 30, 2006? A: During the first half of 2006, bond yields moved steadily higher, primarily from a surge in economic growth in first quarter and modestly higher inflation pressures. In response, the Federal Reserve continued raising rates at each of the four FOMC meetings, taking the Federal Funds rate from 4.25% at year-end 2005 to 5.25% by the end of June. During the first four months, risk premiums remained at historically low levels with higher risk fixed income sectors such as high yield and emerging market debt providing the strongest relative returns. In May and June, risk premiums increased and higher quality bond market sectors regained ground. High energy, commodity, and precious metals prices put upwards pressure on inflation rates. Q: How did the Fund perform compared to its benchmark during the reporting period? A: The Fund performed in line with its benchmark. For the six months ending June 30, 2006, the Fund's return was -1.26% versus the Lehman Brothers U.S. Government/Credit Index return of -1.15%. Overall interest rate exposure, or duration, had no impact on performance relative to the benchmark as the Fund's duration was at the same as the index. Q: Were there any particular holdings or sectors that enhanced or detracted from performance? A: The Fund's holdings in single family and commercial mortgage backed sectors contributed positively to performance. The Fund had significant exposure to the automobile sector early in the period which aided relative performance. Holdings in General Motors Acceptance Corp. were eliminated after strong relative performance in first quarter and exposure to Ford Motor Credit was reduced from approximately 1.5% at the beginning of the period to 0.2%. Kinder Morgan debentures detracted from performance resulting from the announcement of a leveraged buyout and anticipation of the downgrading of its credit ratings. Q: How is the Fund positioned going forward? A: The Fund's interest rate strategy remains neutral to the benchmark with a modest bias to greater interest rate sensitivity. Portfolio duration is targeted equal to the benchmark as we expect the rise in yields orchestrated by Federal Reserve policy is nearing an end. The Fund remains focused on intermediate maturities in the 7 to 15 year part of the yield curve and underweighting very long maturity issues. Overall portfolio exposure to corporate and credit sensitive non-corporate sectors is lower than the benchmark, owing to our assessment that currently small yield spreads available within this sector present minimal potential for superior returns. The Fund has a substantial commitment to commercial mortgage backed and U. S. Agency single family mortgage backed securities, both of which are not a part of the benchmark index. The Fund has a modest position in U.S. Treasury Inflation Protected Securities and is modestly underweighted in other Treasurys 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 JUNE 30, 2006 Diversification [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Corporate 34% Mortgage 13% Short-Term 10% Cash (8%)++++ Gov't 51% Bond Quality++ [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Aaa 13% Aa 7% A 11% Baa 17% Gov't 52% Maturity [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] 5-10 years 53% 10+ years 17% Short Term 3% 1-5 years 27% Average Annual Total Returns* For Periods Ended June 30 (%)
Inception One Three Five Ten years or Date Year Years Years Life of Class Section ---------- ----- ----- ----- --------------------- McMorgan Fixed Income Fund 7/14/94 (1.90) 1.32 4.66 5.86 McMorgan Fixed Income Fund (Class Z) 2/1/01 (2.24) 1.07 4.41 4.27Section McMorgan Fixed Income Fund (Class R1) 1/2/04 (2.08) N/A N/A 1.87Section McMorgan Fixed Income Fund (Class R2) 1/2/04 (2.24) N/A N/A 1.57Section Lehman Brothers U.S. Gov't/Credit Index N/A (1.52) 1.60 5.13 6.25
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 [GRAPHIC] 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 ANNUAL REPORT 2006 HIGH YIELD FUND NASDAQ SYMBOL: MCMHX | JUNE 30, 2006 The Fund normally invests at least 80% of its net assets in high yield debt securities. The Fund invests in securities that are rated below investment grade, or that are unrated but that are considered to be of comparable quality by the sub-advisor. The Fund will invest in securities with average remaining maturities of up to 30 years. 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 June 30, 2006? A: After a strong start to the year for the high yield market, investor sentiment turned negative toward the end of the second quarter, paring some of the gains generated in the first quarter. The Citigroup High Yield Market Capped Index returned 2.16% for the first half of 2006 which, compared to other fixed income assets, represented a relatively strong return. Q: What factors affected the market during the reporting period? A: Stable economic growth and healthy corporate profits supported the high yield market's march toward historically tight spreads. Default rates for domestic high yield issuers, at 2.7% for the trailing twelve months, remain well below long-term averages. In spite of the solid fundamental backdrop, second quarter closed with growing investor pessimism, fueled by uncertain Federal Reserve policy, Middle East tension, rising oil prices, and equity market instability. The high yield market was not immune to the volatility and returns came under pressure during the final weeks. No industry had a significant impact on returns other than the automotive sector which posted an extraordinary 8.73% return during the first half, far exceeding the 2.16% benchmark return. Q: How has the Fund performed during these market conditions? A: In the first half of 2006, the Fund generated a gross return of 2.66% and a net return of 2.28%, comparing favorably to the Citigroup High Yield Market Capped Index return of 2.16%. The portfolio maintained its overweight position in single-B rated securities and its underweight in double-B rated securities. This risk posture had a positive impact on the Fund's performance. Q: What sectors affected the Fund's performance? A: Our underweight to the Automotive sector was the biggest detractor to Fund performance. In addition, our underweight to Technology also hindered performance. These were offset by our overweight in the Broadcasting, Building Products, and Consumer Products sectors, combined with solid credit performance in the Cable & Satellite and Food & Beverage sectors. Q: How is the Fund positioned going forward? A: The Fund is overweight in single-B rated securities and underweight in double-B rated securities. Despite the solid fundamental backdrop, we plan to reconsider the portfolio's current ratings posture due to relative value considerations and challenging macro environment. Key areas of consideration include the compression of the single-B/double-B spread, the likelihood of slowing economic and corporate profit growth, and potential change in Federal Reserve policy. The Fund's underweight to the automotive industry will be evaluated as operational restructurings progress and asset values become more evident. The Fund will favor Gaming and Energy industries given their stability of cash flows, as the current credit cycle enters its latter stages. 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 JUNE 30, 2006 Diversification [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Corporate 95% Short-Term 11% Preferred Stock 1%(a) Common Stock 0% Warrants 0%(a) Cash (7%)++++ (a) Less than one tenth of a percent Bond Quality++ [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] B 62% Investment Grade 1% Ba 20% NR 2% Caa 15% Maturity [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] 3-5 years 11% 0-3 years 5% 10+ years 4% 5-10 years 80% Average Annual Total Returns* For Periods Ended June 30 (%) Inception One Three Five Since Date Year Years Years Inception --------- ---- ----- ----- --------- McMorgan High Yield Fund 11/3/03 4.45 N/A N/A 7.00 Citigroup High Yield Market Capped** N/A 3.96 N/A N/A 7.18 Lehman Brothers U.S. Corp High Yield*** N/A 4.80 N/A N/A 7.72 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 [GRAPHIC] 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. *** The Lehman Brothers U.S. Corp High Yield Index covers the universe of fixed rate, non-investment grade debt, and reflects no deduction for fees, expenses or taxes. 9 MCMORGAN FUNDS ANNUAL REPORT 2006 BALANCED FUND NASDAQ SYMBOL: MCMBX | JUNE 30, 2006 This portfolio of stocks, bonds and cash focuses on capital appreciation, creating current income, and preservation of capital. This Fund is diversified among different kinds of securities, with approximately 60% of the assets invested in equities and 40% in bonds over the long term. The mix of securities will change based on existing and anticipated 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: Over the six month period from December 31, 2005 to June 30, 2006, the Federal Reserve continued to raise the Federal Funds rate. Interest rates across all maturities responded by moving higher, pushing down bond prices. With negative price movement offsetting income, fixed income returns were roughly flat. Equities generated low single digit returns, with a higher than average allocation to equities adding incremental return. 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 11 consecutive quarters. The Fed tightening cycle is likely to end soon, which could provide positive sentiment to both equity and fixed investments. However, Fed policy acts with a lag, which could result in some modest slowing to the overall economic growth rate. The interest rate strategy within the fixed income portion of the Fund remains neutral, as yields are not expected to rise significantly and the treasury curve remains flat. The current yield curve strategy emphasizes intermediate maturities (7 - 15 years) over long maturities, which have sub-optimal risk/return characteristics. In this low volatility environment, the Fund is overweight mortgage-backed securities, while the underweight in credit-sensitive issues reflects both tight spreads and the potential for negative event risk to impact corporate spreads. Within the equity portfolio, the overall characteristics remain similar to both December 31, 2005 and the characteristics of the S&P 500. The beta (risk) of the portfolio was slightly higher than the market at 1.02 (versus 1.00 for the S&P 500). The Fund maintained a slight tilt toward value, and the weighted average market capitalization remains marginally lower than the index. Sectors weightings have changed since the end of 2005. Energy, which had been emphasized all last year and was a positive contributor to overall equity performance, is now neutral versus the index. The weighting in Technology has increased and exceeds the benchmark. The Fund continues to emphasize Financials and Utilities. The poor valuations in the Consumer (both Discretionary and Staples) and Health Care sectors are reflected in their underweight relative to the index. 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 JUNE 30, 2006 Asset Allocation [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Bonds 32% Short-Term 10% Investment Company 1% Cash (7%)++++ Stocks 64% Bond Quality++ [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Baa 17% Gov't 50% A 11% Aaa 15% Aa 7% Ten Largest Equity Holdings (%) ExxonMobil Corp. 2.5 BellSouth Corp. 1.6 Microsoft Corp. 1.5 General Electric Co. 1.5 Citigroup, Inc. 1.4 Pfizer, Inc. 1.3 Cisco Systems, Inc. 1.1 IBM Corp. 1.1 Hewlett-Packard Co. 0.9 JPMorgan Chase & Co. 0.9 ---- Total 13.8 ==== (data subject to change) Average Annual Total Returns* For Periods Ended June 30 (%)
Ten Years or Inception One Three Five Life of Class Date Year Years Years Section --------- ----- ----- ----- ------------- McMorgan Balanced Fund 7/14/94 5.62 7.24 2.83 7.11 McMorgan Balanced Fund (Class Z) 1/25/01 5.36 6.97 2.56 1.47Section lehman Brothers U.S. Gov't/Credit Index** N/A (1.52) 1.60 5.13 6.25 Standard & Poor's 500 Index*** N/A 8.63 11.22 2.49 8.32
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 [GRAPHIC] 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. *** The S&P 500 Index is a market capitalization-weighted index of common stocks, and reflects no deduction for fees, expenses or taxes. 11 MCMORGAN FUNDS ANNUAL REPORT 2006 EQUITY INVESTMENT FUND NASDAQ SYMBOL: MCMEX | JUNE 30, 2006 This portfolio of high-quality stocks focuses on selecting companies that demonstrate strong management, sustained earnings, growth potential, and the ability to pay above-average dividends. Since the Equity Investment Fund is comprised primarily of stocks, it assumes greater risk but also enjoys greater potential for capital growth and appreciation over the long term. The portfolio is well diversified among common stocks of U.S. companies. Q: What major factors affected the stock market during the reporting period ending June 30, 2006? A: The equity market rallied through May 5th as investors focused on continued strong earnings, low inflation, and the possible near-term end to the Fed tightening cycle. Market volatility was low, and sentiment was good. Sentiment reversed after May 5th. Fears of inflation, rising interest rates, and possibly slowing economic growth led to increased market volatility, pushing equity markets lower. A spike in commodity prices rattled the market, followed by comments from Federal Reserve officials expressing a desire to control inflation through interest rate increases. Investors began to worry about the impact of continued interest rate increases on both the economy and corporate profits. Q: How did the Fund perform during the reporting period ended June 30, 2006? A: The Fund outperformed the index for the six month and twelve month time horizons. The Fund returned 9.33% for the past twelve months (versus 8.63% for the S&P 500) and 2.83% for the past six months (versus 2.71% for the index). Q: How did market conditions and investment strategies affect the Fund's performance? A: The market's overall performance was below average the first half of the year and was marked by a very low volatility environment for four months followed by a significant increase in price volatility. The market continues to reward companies exhibiting positive stock price momentum; overweighting momentum has been a significant contributor to the Fund's strong relative performance. The slight emphasis on value stocks also helped returns, while the lower size bias had little impact. Small capitalization stocks outperformed but gave back much of their strong performance from earlier in the year. Q: Were there any significant shifts in sector allocation during the reporting period? A: There were a few significant changes to sectors allocations since the end of 2005. Energy, which had been emphasized all last year and was a positive contributor to performance, is now neutral versus the index. The weighting in Technology has increased and exceeds the benchmark. The Fund continues to emphasize Financials and Utilities. The poor valuations in Consumer (both Discretionary and Staples) and Health Care are reflected in their underweight relative to the index. 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. Technology, Financials, and Utilities are the most overweight sectors compared to the benchmark. Consumer Staples, Health Care, Consumer Discretionary, and Energy were all underweight on a relative basis; Industrials, Telecommunication Services, and Materials sectors are near that of the index. 12 MCMORGAN EQUITY INVESTMENT FUND AS OF JUNE 30, 2006 Ten Largest Holdings (%) ExxonMobil Corp. 3.9 BellSouth Corp. 2.5 Microsoft Corp. 2.4 General Electric Co. 2.4 Citigroup, Inc. 2.3 Pfizer, Inc. 2.1 Cisco Systems, Inc. 1.7 IBM Corp. 1.7 Hewlett-Packard Co. 1.4 JPMorgan Chase & Co. 1.4 Total 21.8 (data subject to change) Stock Weightings (%) Financials 23.7 Information Technology 17.2 Industrials 12.1 Health Care 11.2 Energy 10.0 Consumer Discretionary 8.7 Consumer Staples 6.3 Utilities 4.2 Telecommunication Services 3.5 Materials 3.1 Total 100.0 (data subject to change) Portfolio Characteristics P/E Ratio (Trailing) 14.48 Historical Beta 0.98 Market Weighted Capitalization $80.62bil Number of Issues 460 Average Annual Total Returns* For Periods Ended June 30 (%)
Inception One Three Five Ten years or Date Year Years Years Life of Class Section --------- ----- ----- ------ ----------------------- McMorgan Equity Investment Fund 7/14/94 9.33 10.29 0.52 6.89 McMorgan Equity Invest. Fund (Class Z) 2/1/01 9.01 10.00 0.26 (1.89)Section S&P's 500 Index** N/A 8.63 11.22 2.49 8.32
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 [GRAPHIC] 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. 13 MCMORGAN FUNDS ANNUAL REPORT 2006 Cost in Dollars of a $1,000 Investment in McMorgan Fund 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 ongoing costs, including management fees, distribution and/or service (12b-1) fees (if applicable), and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 made at the beginning of the period and held for the entire six month period from January 1, 2006, to June 30, 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 of investing in the Funds. As a shareholder of a Fund, you are not subject to any transactional costs, such as redemption fees, exchange fees, or sales charges (loads). However, investments in other funds may be subject to such transactional costs. 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, including funds that may be subject to transactional costs. 14
Based on Actual Returns and Based on Hypothetical 5% Return and Expenses Expenses ------------------------------ ----------------------------------- Annualized++++ Beginning Expense Account Ending Account Expenses Paid Ending Account Expenses Paid Share Class++ Ratio Value 1/1/06 Value 6/30/06 During Period Value 6/30/06 During Period - ------------ -------------- ------------ -------------- ------------- -------------- ------------------ PRINCIPAL PRESERVATION FUND McMorgan Class Shares 0.30% $1,000 $1,020.80 $1.50 $1,023.50 $1.51 INTERMEDIATE FIXED INCOME FUND McMorgan Class Shares 0.50% $1,000 $ 999.00 $2.48 $1,022.50 $2.51 Z Class Shares 0.75% $1,000 $ 996.75 $3.71 $1,021.25 $3.76 FIXED INCOME FUND McMorgan Class Shares 0.50% $1,000 $ 987.30 $2.46 $1,022.50 $2.51 Z Class Shares 0.75% $1,000 $ 986.15 $3.69 $1,021.25 $3.76 R1 Class Shares 0.60% $1,000 $ 986.90 $2.96 $1,022.00 $3.01 R2 Class Shares 0.85% $1,000 $ 985.65 $4.18 $1,020.75 $4.26 HIGH YIELD FUND McMorgan Class Shares 0.74% $1,000 $1,022.90 $3.71 $1,021.30 $3.71 BALANCED FUND McMorgan Class Shares 0.60% $1,000 $1,015.90 $3.00 $1,022.00 $3.01 Z Class Shares 0.85% $1,000 $1,014.65 $4.25 $1,020.75 $4.26 EQUITY INVESTMENT FUND McMorgan Class Shares 0.75% $1,000 $1,028.45 $3.77 $1,021.25 $3.76 Z Class Shares 1.00% $1,000 $1,027.20 $5.03 $1,020.00 $5.01
++ Expenses are equal to the Fund's annualized expense ratio++ multiplied by the average account value over the period, divided by 365, multiplied by 181 (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 JUNE 30, 2006 FIXED INCOME SECURITIES 104.4% U.S. GOVERNMENT AGENCY NOTES 12.9% PRINCIPAL AMORTIZED AMOUNT COST ---------- ------------ Federal Home Loan Mortgage Corporation (Discount Note) - 2.7% 4.48%, due 7/18/06 ............................... $4,000,000 $ 3,991,538 ------------ Federal National Mortgage Association (Discount Notes) - 10.2% 4.475%, due 7/12/06 .............................. 8,935,000 8,922,783 4.94%, due 7/19/06 ............................... 6,000,000 5,985,180 ------------ 14,907,963 ------------ Total U.S. Government Agency Notes (Cost $18,899,501) ............................... 18,899,501 ------------ CERTIFICATE OF DEPOSIT 4.1% U.S. Trust Co. of New York 5.22%, due 9/12/06 (a) ........................... 6,000,000 6,000,922 ------------ Total Certificate of Deposit (Cost $6,000,922) ................................ 6,000,922 ------------ COMMERCIAL PAPER 80.3% Alcoa, Inc. 5.10%, due 7/11/06 ............................... 6,050,000 6,041,429 BHP Billiton Finance USA, Ltd. 5.06%, due 7/14/06 (b) ........................... 4,000,000 3,992,691 5.07%, due 7/14/06 (b) ........................... 2,000,000 1,996,338 Brown-Forman Beverages, Europe, Ltd. 5.10%, due 7/6/06 (b) ............................ 1,980,000 1,978,597 Caterpillar Financial Services Corp. 5.17%, due 7/7/06 (b) ............................ 1,655,000 1,653,574 Countrywide Financial Corp. 5.07%, due 7/13/06 ............................... 3,000,000 2,994,930 5.12%, due 7/13/06 ............................... 1,050,000 1,048,208 CVS Corp. 5.33%, due 7/13/06 (b) ........................... 1,200,000 1,197,868 Danaher Corp. 5.05%, due 7/11/06 ............................... 5,000,000 4,992,986 Dresdner U.S. Finance, Inc. 5.04%, due 7/7/06 ................................ 6,000,000 5,994,960 Enbridge Energy Partners, L.P. 5.13%, due 7/3/06 (b) ............................ 1,200,000 1,199,658 FPL Group Capital, Inc. 5.13%, due 7/10/06 (b) ........................... 3,000,000 2,996,152 5.35%, due 7/27/06 (b) ........................... 1,565,000 1,558,953 5.35%, due 7/31/06 (b) ........................... 2,500,000 2,489,597 Hartford Financial Services Group, Inc. 5.08%, due 7/10/06 (b) ........................... 5,000,000 4,993,650 5.12%, due 7/6/06 (b) ............................ 1,500,000 1,498,933 ING America Insurance Holdings 4.90%, due 7/19/06 ............................... 6,000,000 5,985,300 National Cooperative Services Corp. 5.08%, due 7/3/06 (b) ............................ 5,000,000 4,998,589 PB Finance, Inc. (Delaware) 5.10%, due 7/7/06 ................................ 3,068,000 3,065,392 PepsiAmericas, Inc. 5.17%, due 7/13/06 ............................... 5,000,000 4,991,383 Private Export Funding Corp. 5.05%, due 8/10/06 (b) ........................... 6,000,000 5,966,333 Prudential Financial Corp. 5.03%, due 7/6/06 ................................ 6,000,000 5,995,808 Royal Bank of Scotland Group PLC 5.06%, due 7/10/06 ............................... $1,350,000 $ 1,348,292 Schlumberger Technology Corp. 5.06%, due 8/7/06 (b) ............................ 6,000,000 5,968,797 Societe Generale North America, Inc. 5.065%, due 8/16/06 .............................. 2,000,000 1,987,056 5.07%, due 7/11/06 ............................... 1,600,000 1,597,747 Textron Financial Corp. 5.11%, due 7/6/06 ................................ 1,250,000 1,249,113 Time Warner, Inc. 5.12%, due 7/7/06 ................................ 1,400,000 1,398,805 Torchmark Corp. 5.38%, due 7/6/06 (b) ............................ 1,500,000 1,498,879 5.41%, due 7/7/06 (b) ............................ 4,000,000 3,997,596 UBS Finance Delaware LLC 5.02%, due 7/6/06 ................................ 1,725,000 1,723,797 5.05%, due 7/6/06 ................................ 1,750,000 1,748,773 5.07%, due 7/7/06 ................................ 1,200,000 1,198,986 Verizon Communications, Inc. 5.13%, due 7/10/06 (b) ........................... 2,500,000 2,496,794 5.17%, due 7/5/06 (b) ............................ 3,000,000 2,998,277 5.23%, due 7/5/06 (b) ............................ 1,000,000 999,419 5.36%, due 8/2/06 (b) ............................ 1,810,000 1,801,376 Viacom, Inc. 5.50%, due 7/5/06 (b) ............................ 1,250,000 1,249,236 WPS Resources Corp. 5.35%, due 7/11/06 (b) ........................... 1,500,000 1,497,771 Xtra, Inc. 5.08%, due 7/3/06 ................................ 1,500,000 1,499,577 5.20%, due 7/13/06 ............................... 2,470,000 2,465,719 5.28%, due 7/20/06 ............................... 1,500,000 1,495,820 ------------ Total Commercial Paper (Cost $117,853,159) .............................. 117,853,159 ------------ CORPORATE BONDS 7.1% Bear Stearns Co., Inc. 5.429%, due 9/15/06 (a) .......................... 6,415,000 6,418,531 CIT Group, Inc. 5.377%, due 8/31/06 (a) .......................... 2,600,000 2,600,510 Metropolitan Life Global Funding I 5.37%, due 8/28/06 (a)(b) ........................ 1,500,000 1,500,279 ------------ Total Corporate Bonds (Cost $10,519,320) ............................... 10,519,320 ------------ Total Fixed Income Securities (Cost $153,272,902) (c) .......................... 104.4% 153,272,902 Liabilities in Excess of Cash and Other Assets ............................ (4.4) (6,506,684) ---------- ------------ Net Assets ........................................ 100.0% $146,766,218 ========== ============ (a) Floating/variable rate. Rate shown is the rate in effect at June 30, 2006. (b) May be sold to institutional investors only. The total market value of these securities at June 30, 2006 is $60,529,357, which represents 41.2% of the Fund's net assets. (c) At June 30, 2006, cost is identical for book and federal income tax purposes. See accompanying notes to financial statements. 16 PRINCIPAL PRESERVATION FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $153,272,902) ......................................... $153,272,902 Cash-interest bearing accounts ................................ 10,897 Receivable for fund shares sold ............................... 56,329 Interest receivable ........................................... 51,211 Other assets .................................................. 29,985 ------------ Total assets ................................................ 153,421,324 ------------ LIABILITIES: Payable for securities purchased .............................. 6,487,193 Payable for fund shares redeemed .............................. 96,645 Distributions payable ......................................... 19,969 Payable to Advisor, net ....................................... 17,201 Legal fees payable ............................................ 15,915 Administration fees payable ................................... 5,715 Transfer agent fees payable ................................... 4,666 Accounting fees payable ....................................... 3,587 Custodian fees payable ........................................ 2,876 Trustees fees payable ......................................... 903 Accrued expenses .............................................. 436 ------------ Total liabilities ........................................... 6,655,106 ------------ Net Assets ..................................................... $146,766,218 ============ NET ASSETS CONSIST OF: Capital paid-in ............................................... $146,767,248 Net realized loss on investments .............................. (1,030) ------------ $146,766,218 ============ Net Assets: Class McMorgan ................................................ $146,766,218 ============ Shares Outstanding: Class McMorgan ................................................ 146,784,784 ============ Net asset value and redemption price per share: Class McMorgan ................................................ $ 1.00 ============ STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Interest ...................................................... $ 6,275,258 ------------ Expenses: Investment advisory fees (Note F) ............................. 371,154 Administration fees ........................................... 74,017 Legal fees .................................................... 52,463 Accounting fees ............................................... 47,359 Transfer agent fees ........................................... 46,688 Insurance fees ................................................ 45,533 Trustees fees ................................................. 31,204 Registration expenses ......................................... 21,897 Report to shareholder expense ................................. 18,620 Auditing fees ................................................. 13,000 Custodian fees ................................................ 11,306 Miscellaneous expenses ........................................ 4,867 ------------ Total expenses .............................................. 738,108 Expenses reimbursed (Note F) .................................. (292,710) ------------ Net expenses ............................................... 445,398 ------------ Net investment income .......................................... 5,829,860 ------------ REALIZED LOSS ON INVESTMENTS: Net realized loss on investments .............................. (1,030) ------------ Increase in net assets from operations ......................... $ 5,828,830 ============ See accompanying notes to financial statements. 17 PRINCIPAL PRESERVATION FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income ........................ $ 5,829,860 $ 2,672,930 Net realized loss on investments ............. (1,030) -- ------------- ------------- Increase in net assets ....................... 5,828,830 2,672,930 ------------- ------------- Dividends and distributions to shareholders: From net investment income ................... (5,829,860) (2,672,930) From capital gains ........................... -- (12,238) ------------- ------------- Total dividends and distributions to shareholders ............................... (5,829,860) (2,685,168) ------------- ------------- Capital share transactions: Net proceeds from sale of shares ............. 130,643,105 141,679,503 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions .......................... 5,595,835 2,623,491 ------------- ------------- 136,238,940 144,302,994 Cost of shares redeemed ...................... (136,686,654) (130,458,113) ------------- ------------- Increase (decrease) in net assets derived from capital share transactions ............ (447,714) 13,844,881 ------------- ------------- Total increase (decrease) in net assets ...... (448,744) 13,832,643 Net Assets: Beginning of year ............................ 147,214,962 133,382,319 ------------- ------------- End of year .................................. $ 146,766,218 $ 147,214,962 ============= ============= See accompanying notes to financial statements. 18 PRINCIPAL PRESERVATION FUND MCMORGAN FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The table below set forth financial data for a share of beneficial interest outstanding throughout each year presented.
CLASS MCMORGAN YEAR ENDED JUNE 30, ------------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of year................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- Income from investment operations: Net investment income............................................. 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) -- -------- -------- -------- -------- -------- Total from investment operations................................ 0.04 0.02 0.01 0.01 0.02 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income........................................ (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............................... (0.04) (0.02) (0.01) (0.01) (0.02) -------- -------- -------- -------- -------- Net asset value, end of year....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======== ======== ======== ======== ======== Total return....................................................... 4.01% 1.92% 0.87% 1.30% 2.41% Ratios/Supplemental Data: Net assets, end of year (in 000's)................................ $146,766 $147,215 $133,382 $160,150 $141,127 Ratio of expenses to average net assets before reimbursement of expenses by Advisor............................................. 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor............................ 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............................ 3.93% 1.90% 0.86% 1.28% 2.33%
- ---------- (a) Less than one cent per share. See accompanying notes to financial statements. 19 INTERMEDIATE FIXED INCOME FUND PORTFOLIO OF INVESTMENTS JUNE 30, 2006 FIXED INCOME SECURITIES 102.0% CORPORATE ASSET-BACKED SECURITIES 2.9% PRINCIPAL AMOUNT VALUE ---------- ----------- Financials - 2.9% Accredited Mortgage Loan Trust Series 2005-2 Class A2A 5.423%, due 7/25/35 (a)(b) ......................... $ 299,676 $ 299,665 Merrill Lynch Mortgage Investors, Inc. Series 2005-WMC2 Class A2A 5.413%, due 4/25/36 (a)(b) ......................... 33,913 33,909 Newcastle Mortgage Securities Trust Series 2006-1 Class A1 5.393%, due 3/25/36 (a)(b) ......................... 3,802,684 3,803,224 Novastar Home Equity Loan Series 2005-2 Class A2A 5.413%, due 10/25/35 (a)(b) ........................ 203,581 203,583 Soundview Home Equity Loan Trust Series 2005-2 Class A1 5.423%, due 7/25/35 (a)(b) ......................... 43,451 43,450 ----------- Total Corporate Asset-Backed Securities (Cost $4,383,305) .................................. 4,383,831 ----------- CORPORATE BONDS 29.9% Consumer Discretionary - 4.8% Cox Communications, Inc. 6.75%, due 3/15/11 ................................. 300,000 305,495 7.125%, due 10/1/12 ................................ 1,095,000 1,132,584 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 ................................. 1,350,000 1,404,841 Fortune Brands, Inc. 5.125%, due 1/15/11 ................................ 930,000 890,702 Johnson Controls, Inc. 5.25%, due 1/15/11 ................................. 895,000 872,173 Office Depot, Inc. 6.25%, due 8/15/13 ................................. 840,000 834,119 Tele-Communications, Inc. 9.80%, due 2/1/12 .................................. 875,000 1,009,399 Time Warner, Inc. 9.125%, due 1/15/13 ................................ 710,000 811,908 ----------- 7,261,221 ----------- Consumer Staples - 1.5% Diageo Finance B.V. 5.50%, due 4/1/13 .................................. 985,000 958,717 Kraft Foods, Inc. 4.00%, due 10/1/08 ................................. 1,295,000 1,247,863 ----------- 2,206,580 ----------- Energy - 1.7% Anadarko Finance Corp. 6.75%, due 5/1/11 .................................. 165,000 169,540 Dominion Resources, Inc. 8.125%, due 6/15/10 ................................ 695,000 745,871 Kinder Morgan, Inc. 6.50%, due 9/1/12 .................................. 450,000 427,588 Pacific Gas & Electric Co. 4.20%, due 3/1/11 .................................. 445,000 416,126 Progress Energy, Inc. 7.10%, due 3/1/11 .................................. 820,000 855,385 ----------- 2,614,510 ----------- Financials - 16.8% American General Finance Corp. 4.875%, due 7/15/12 ................................ $ 350,000 $ 331,124 Ameriprise Financial, Inc. 5.35%, due 11/15/10 ................................ 485,000 475,540 Archstone-Smith Trust 5.75%, due 3/15/16 ................................. 700,000 675,878 Bank One Corp. 5.90%, due 11/15/11 ................................ 1,785,000 1,790,940 Capital One Financial Corp. 6.25%, due 11/15/13 ................................ 505,000 508,723 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 .................................. 760,000 728,746 CIT Group, Inc. 6.875%, due 11/1/09 ................................ 250,000 257,608 Citigroup, Inc. 5.625%, due 8/27/12 ................................ 1,715,000 1,694,458 Credit Suisse First Boston USA, Inc. 4.875%, due 8/15/10 ................................ 1,540,000 1,492,645 EOP Operating L.P. 6.763%, due 6/15/07 ................................ 520,000 524,098 8.10%, due 8/1/10 .................................. 895,000 962,419 Ford Motor Credit Co. 7.375%, due 10/28/09 ............................... 875,000 808,971 Goldman Sachs Group, Inc. (The) 4.50%, due 6/15/10 ................................. 370,000 353,746 6.875%, due 1/15/11 ................................ 1,055,000 1,096,234 HSBC Finance Corp. 5.875%, due 2/1/09 ................................. 420,000 422,582 6.375%, due 10/15/11 ............................... 1,205,000 1,231,439 6.75%, due 5/15/11 ................................. 395,000 409,750 Jefferies Group, Inc. 7.75%, due 3/15/12 ................................. 740,000 794,892 MBNA America Bank N.A. 7.125%, due 11/15/12 ............................... 665,000 709,867 Merrill Lynch & Co., Inc. 4.79%, due 8/4/10 .................................. 785,000 758,363 MetLife, Inc. 6.125%, due 12/1/11 ................................ 800,000 813,730 Residential Capital Corp. 6.00%, due 2/22/11 ................................. 875,000 847,853 6.375%, due 6/30/10 ................................ 1,985,000 1,957,986 Simon Property Group, L.P. 4.60%, due 6/15/10 ................................. 430,000 412,084 6.35%, due 8/28/12 ................................. 520,000 527,607 6.375%, due 11/15/07 ............................... 1,115,000 1,119,641 SLM Corp. 5.45%, due 4/25/11 ................................. 805,000 791,072 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 ................................. 995,000 990,729 Textron Financial Corp. 4.125%, due 3/3/08 ................................. 715,000 696,609 Wachovia Bank N.A. 4.80%, due 11/1/14 ................................. 1,135,000 1,048,121 ----------- 25,233,455 ----------- See accompanying notes to financial statements. 20 MCMORGAN FUNDS CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ----------- ----------- Industrials - 1.0% International Lease Finance Corp. 5.75%, due 6/15/11 ............................... $ 1,490,000 $ 1,479,053 5.875%, due 5/1/13 ............................... 10,000 9,925 ------------ 1,488,978 ------------ Information Technology - 0.9% Cisco Systems, Inc. 5.25%, due 2/22/11 ............................... 1,290,000 1,266,073 ------------ Telecommunication Services - 3.2% British Telecommunications PLC 8.375%, due 12/15/10 ............................. 1,225,000 1,344,890 Embarq Corp. 7.082%, due 6/1/16 ............................... 1,120,000 1,113,848 New Cingular Wireless Services, Inc. 7.875%, due 3/1/11 ............................... 800,000 861,698 Sprint Capital Corp. 8.375%, due 3/15/12 .............................. 1,400,000 1,546,857 ------------ 4,867,293 ------------ Total Corporate Bonds (Cost $46,447,792) ............................... 44,938,110 ------------ U.S. GOVERNMENT SECURITIES 55.0% U.S. GOVERNMENT AGENCY OBLIGATIONS 39.9% Federal Home Loan Bank - 9.5% o 3.125%, due 11/15/06 ............................ 9,050,000 8,974,270 o 4.50%, due 5/21/07 .............................. 5,395,000 5,346,828 ------------ 14,321,098 ------------ Federal Home Loan Mortgage Corporation - 2.0% 3.875%, due 6/15/08 .............................. 3,045,000 2,956,110 ------------ Federal Home Loan Mortgage Corporation (Mortgage Pass-Through Securities) - 3.8% 5.366%, due 9/1/35 (a) ........................... 2,958,986 2,926,590 5.487%, due 3/1/36 (a) ........................... 2,783,291 2,731,483 6.00%, due 2/1/11 ................................ 16,951 16,953 ------------ 5,675,026 ------------ Federal National Mortgage Association - 15.8% o 2.375%, due 2/15/07 ............................. 8,830,000 8,661,312 o 4.25%, due 9/15/07 .............................. 4,760,000 4,690,537 4.375%, due 3/15/13 .............................. 1,985,000 1,860,362 o 4.75%, due 12/15/10 ............................. 8,875,000 8,622,222 ------------ 23,834,433 ------------ Federal National Mortgage Association (Mortgage Pass-Through Securities) - 8.8% 6.50%, due 9/1/33 ................................ 4,728,334 4,771,461 o 6.50%, due 7/1/36 TBA (c) ....................... 8,425,000 8,467,125 ------------ 13,238,586 ------------ Total U.S. Government Agency Obligations (Cost $60,541,654) ............................... 60,025,253 ------------ U.S. TREASURY OBLIGATIONS 15.1% United States Treasury Bond - 0.9% 8.125%, due 8/15/19 (d) .......................... 1,075,000 1,360,967 ------------ United States Treasury Note - 8.6% o 4.25%, due 8/15/13 (d) .......................... 13,650,000 12,950,438 ------------ United States Treasury TII - 5.6% o 1.875%, due 7/15/13 (e) ......................... $ 8,670,204 $ 8,329,153 ------------ Total U.S. Treasury Obligations (Cost $23,168,554) ............................... 22,640,558 ------------ Total U.S. Government Securities (Cost $83,710,208) ............................... 82,665,811 ------------ COLLATERALIZED MORTGAGE OBLIGATIONS 14.2% Federal Home Loan Mortgage Corporation - 0.1% Series 2478 Class DK 5.50%, due 2/15/32 ............................... 164,115 162,590 ------------ Federal National Mortgage Association - 0.0%++ Series D Class 1 6.00%, due 4/1/09 ................................ 668 664 Series 1988-15 Class A 9.00%, due 6/25/18 ............................... 7,865 8,295 ------------ 8,959 ------------ Financials - 14.1% Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 (a) .......................... 1,475,000 1,442,374 Greenwich Capital Commercial Funding Corp. Series 2005-GG5 Class A5 5.224%, due 4/10/37 (a) .......................... 1,615,000 1,540,459 Series 2004-GG1 Class A7 5.317%, due 6/10/36 (a) .......................... 2,300,000 2,221,068 GS Mortgage Securities Corp. o Series 2005-GG4 Class A4 4.761%, due 7/10/39 (a) .......................... 4,900,000 4,524,849 Series 2004-GG2 Class A6 5.396%, due 8/10/38 (a) .......................... 1,675,000 1,620,297 Merrill Lynch Mortgage Investors, Inc. o Series 2006-A3 Class 3A1 5.869%, due 5/25/36 (a) .......................... 4,036,186 4,015,295 Merrill Lynch Mortgage Trust Series 2005-CKI1 Class A6 5.244%, due 11/12/37 (a) ......................... 3,150,000 3,021,764 Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 6.008%, due 1/25/36 (a) .......................... 2,862,931 2,855,613 ------------ 21,241,719 ------------ Total Collateralized Mortgage Obligations (Cost $22,192,335) ............................... 21,413,268 ------------ Total Fixed Income Securities (Cost $156,733,640) .............................. 153,401,020 ------------ Short-Term Investments 7.4% Repurchase Agreement - 2.9% Morgan Stanley & Co. 5.42%, dated 6/30/06 due 7/3/06 Proceeds at Maturity $4,340,797 (Collateralized by various bonds with a Principal Amount of $5,104,107 and a Market Value of $4,467,800) (f) ............................... 4,338,837 4,338,837 ------------ Total Repurchase Agreement (Cost $4,338,837) ................................ 4,338,837 ------------ See accompanying notes to financial statements. 21 INTERMEDIATE FIXED INCOME FUND (continued) SHORT-TERM INVESTMENTS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ------------ Time Deposits - 1.8% Calyon 5.265%, due 8/2/06 (f) ........................... $ 936,856 $ 936,856 Credit Suisse First Boston Corp. 5.305%, due 7/27/06 (f) .......................... 936,856 936,856 Fortis Bank 5.26%, due 7/7/06 (f) ............................ 936,856 936,856 ------------ Total Time Deposits (Cost $2,810,568) ................................ 2,810,568 ------------ U.S. Government Agency - 2.7% Federal National Mortgage Association (Discount Note) 5.21%, due 9/6/06 (b) ............................ 4,055,000 4,016,709 ------------ Total U.S. Government Agency (Cost $4,015,681) ................................ 4,016,709 ------------ Total Short-Term Investments (Cost $11,165,086) ............................... 11,166,114 ------------ Total Investments (Cost $167,898,726) (g) .......................... 109.4% 164,567,134 Liabilities in Excess of Cash and Other Assets ............................ (9.4) (14,183,694) ---------- ------------ Net Assets ........................................ 100.0% $150,383,440 ========== ============ o 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) Floating/variable rate. Rate shown is the rate in effect at June 30, 2006. (b) Segregated as collateral for TBAs. (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 June 30, 2006 is $8,467,125. (d) Represents security, or a portion thereof, which is out on loan. (e) Treasury Inflation Indexed Security - Pays a fixed rate of interest on a principal amount that is continuously adjusted for inflation based on the Consumer Price Index-Urban Consumers. (f) Represents security, or a portion thereof, purchased with cash collateral received for securities on loan. (g) Aggregate cost for federal income tax purposes is $168,216,811 and net unrealized depreciation is as follows: Gross unrealized appreciation ........................... $ -- Gross unrealized depreciation ........................... (3,649,677) ----------- Net unrealized depreciation ............................. $(3,649,677) =========== See accompanying notes to financial statements. 22 INTERMEDIATE FIXED INCOME FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $167,898,726) including $6,999,116 market value of securities loaned ........................... $164,567,134 Cash-interest bearing accounts ................................ 11,550,162 Receivable for securities sold ................................ 5,111,598 Interest receivable ........................................... 1,487,737 Receivable for fund shares sold ............................... 149 Other assets .................................................. 39,462 ------------ Total assets ................................................ 182,756,242 ------------ LIABILITIES: Payable for securities purchased .............................. 13,560,622 Payable for fund shares redeemed .............................. 11,567,970 Securities lending collateral ................................. 7,149,405 Payable to Advisor, net ....................................... 52,041 Legal fees payable ............................................ 17,496 Administration fees payable ................................... 7,749 Transfer agent fees payable ................................... 6,316 Accounting fees payable ....................................... 5,035 Trustees fees payable ......................................... 1,004 12B-1 fees payable ............................................ 6 Accrued expenses .............................................. 5,158 ------------ Total liabilities ........................................... 32,372,802 ------------ Net Assets ..................................................... $150,383,440 ============ NET ASSETS CONSIST OF: Capital paid-in ............................................... $156,924,304 Accumulated undistributed net investment income ............... 514,803 Accumulated net realized loss on investments .................. (3,724,075) Net unrealized depreciation on investments .................... (3,331,592) ------------ $150,383,440 ============ Net Assets: Class McMorgan ................................................ $150,355,306 Class Z ....................................................... 28,134 ------------ $150,383,440 ============ Shares Outstanding: Class McMorgan ................................................ 15,178,834 ============ Class Z ....................................................... 2,844 ============ Net asset value and redemption price per share: Class McMorgan ................................................ $ 9.91 ============ Class Z ....................................................... $ 9.89 ============ STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Interest ...................................................... $ 7,333,617 Income from securities loaned - net ........................... 12,347 ------------ Total investment income ..................................... 7,345,964 ------------ Expenses: Investment advisory fees (Note F) ............................. 570,872 Administration fees ........................................... 93,455 Accounting fees ............................................... 60,605 Legal fees .................................................... 57,306 Insurance fees ................................................ 52,212 Transfer agent fees ........................................... 48,900 Trustees fees ................................................. 34,212 Registration expenses ......................................... 31,275 Report to shareholder expense ................................. 19,608 Custodian fees ................................................ 18,555 Auditing fees ................................................. 15,500 12B-1 distribution fees (Class Z) ............................. 64 Miscellaneous expenses ........................................ 6,236 ------------ Total expenses .............................................. 1,008,800 Expenses reimbursed (Note F) .................................. (193,479) ------------ Net expenses ................................................ 815,321 ------------ Net investment income .......................................... 6,530,643 ------------ REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments .............................. (3,567,887) Net change in unrealized appreciation on investments .......... (3,732,163) ------------ Net realized and unrealized loss on investments ............... (7,300,050) ------------ Decrease in net assets from operations ......................... $ (769,407) ============ See accompanying notes to financial statements. 23 INTERMEDIATE FIXED INCOME FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------ ------------ DECREASE IN NET ASSETS: Operations: Net investment income ......................... $ 6,530,643 $ 5,432,619 Net realized gain (loss) on investments ....... (3,567,887) 420,585 Net change in unrealized appreciation/ (depreciation) on investments................. (3,732,163) 2,433,572 ------------ ------------ Increase (decrease) in net assets ............. (769,407) 8,286,776 ------------ ------------ Dividends and distributions to shareholders: From net investment income: Class McMorgan shares........................ (6,172,965) (5,464,514) Class Z shares............................... (906) (39,878) From capital gains: Class McMorgan shares........................ (364,830) (274,313) Class Z shares............................... (56) (2,877) ------------ ------------ Total dividends and distributions to shareholders.................................. (6,538,757) (5,781,582) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares........................ 40,592,670 38,005,390 Class Z shares............................... 5,947 897,702 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class McMorgan shares........................ 6,384,114 5,614,438 Class Z shares............................... 962 42,753 ------------ ------------ 46,983,693 44,560,283 Cost of shares redeemed: Class McMorgan shares........................ (52,936,529) (54,821,916) Class Z shares............................... (2,418) (2,617,979) ------------ ------------ Decrease in net assets derived from capital share transactions............................ (5,955,254) (12,879,612) ------------ ------------ Total decrease in net assets .................. (13,263,418) (10,374,418) Net Assets: Beginning of year ............................. 163,646,858 174,021,276 ------------ ------------ End of year (including undistributed net investment income of $514,803 and $157,351, respectively)................................. $150,383,440 $163,646,858 ============ ============ See accompanying notes to financial statements. 24 INTERMEDIATE 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 YEAR ENDED JUNE 30, ---------------------------------------------------------- 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of period ............................... $ 10.36 $ 10.22 $ 10.93 $ 10.46 $ 10.50 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ............................................. 0.40(b) 0.34(b) 0.36 0.49 0.56 Net realized and unrealized gain (loss) on investments ............ (0.45) 0.16 (0.43) 0.51 0.06 -------- -------- -------- -------- -------- Total from investment operations................................. (0.05) 0.50 (0.07) 1.00 0.62 -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income ........................................ (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................................ (0.40) (0.36) (0.64) (0.53) (0.66) -------- -------- -------- -------- -------- Net asset value, end of period ..................................... $ 9.91 $ 10.36 $ 10.22 $ 10.93 $ 10.46 ======== ======== ======== ======== ======== Total return ....................................................... (0.43)% 4.93% (0.64)% 9.79% 5.98% Ratios/Supplemental Data: Net assets, end of period (in 000's) .............................. $150,355 $163,622 $172,331 $191,682 $164,068 Ratio of expenses to average net assets before reimbursement of expenses by Advisor .............................................. 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor ............................. 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 ............................. 4.00% 3.24% 3.39% 4.62% 5.22% Portfolio turnover ................................................ 262%(c) 286%(c) 225.59% 204.18% 76.07%
See accompanying notes to financial statements. 25 INTERMEDIATE FIXED INCOME FUND FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z YEAR ENDED JUNE 30, ------------------------------------------------ 2006 2005 2004 2003 2002* ------ ------ ------- ------- ------ Net asset value, beginning of period......................................... $10.35 $10.21 $ 10.92 $ 10.45 $10.65 ------ ------ ------- ------- ------ Income from investment operations: Net investment income....................................................... 0.38(b) 0.34(b) 0.35 0.47 0.44 Net realized and unrealized gain (loss) on investments...................... (0.46) 0.13 (0.45) 0.50 (0.10) ------ ------ ------- ------- ------ Total from investment operations.......................................... (0.08) 0.47 (0.10) 0.97 0.34 ------ ------ ------- ------- ------ Less dividends and distributions: From net investment income.................................................. (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......................................... (0.38) (0.33) (0.61) (0.50) (0.54) ------ ------ ------- ------- ------ Net asset value, end of period............................................... $ 9.89 $10.35 $ 10.21 $ 10.92 $10.45 ====== ====== ======= ======= ====== Total return................................................................. (0.78)% 4.67% (0.91)% 9.53% 3.25%(a) Ratios/Supplemental Data: Net assets, end of period (in 000's)........................................ $ 28 $ 25 $ 1,690 $ 3,682 $1,987 Ratio of expenses to average net assets before reimbursement of expenses by Advisor.................................................................... 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%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor........................................................ 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........................................................ 3.75% 2.99% 3.14% 4.37% 4.97%+ Portfolio turnover.......................................................... 262%(c) 286%(c) 225.59% 204.18% 76.07%
- ---------- * Class Z commenced operations on September 4, 2001. (a) Total Return is not annualized. (b) Per share data based on average shares outstanding during the year. (c) The portfolio turnover not including mortgage dollar rolls for the years ended June 30, 2006 and June 30, 2005 is 93% and 199%, respectively. + Annualized. See accompanying notes to financial statements. 26 FIXED INCOME FUND MCMORGAN FUNDS PORTFOLIO OF INVESTMENTS JUNE 30, 2006 FIXED INCOME SECURITIES 97.5% CORPORATE ASSET-BACKED 0.4% PRINCIPAL AMOUNT VALUE --------- ---------- Financials - 0.4% Accredited Mortgage Loan Trust Series 2005-2 Class A2A 5.423%, due 7/25/35 (a)(b) ........................... $ 122,595 $ 122,590 Merrill Lynch Mortgage Investors, Inc. Series 2005-WMC2 Class A2A 5.413%, due 4/25/36 (a)(b) ........................... 13,727 13,725 Novastar Home Equity Loan Series 2005-2 Class A2A 5.413%, due 10/25/35 (a)(b) .......................... 83,371 83,372 Soundview Home Equity Loan Trust Series 2005-2 Class A1 5.423%, due 7/25/35 (a)(b) ........................... 17,947 17,947 ---------- Total Corporate Asset-Backed (Cost $237,639) ..................................... 237,634 ---------- CORPORATE BONDS 33.8% Consumer Discretionary - 6.4% AT&T Broadband Corp. 9.455%, due 11/15/22 ................................. 235,000 291,987 Cox Communications, Inc. 7.125%, due 10/1/12 .................................. 910,000 941,234 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 ................................... 965,000 1,004,201 Fortune Brands, Inc. 5.375%, due 1/15/16 .................................. 340,000 314,509 Johnson Controls, Inc. 5.25%, due 1/15/11 ................................... 395,000 384,926 Office Depot, Inc. 6.25%, due 8/15/13 ................................... 350,000 347,550 Tele-Communications, Inc. 9.80%, due 2/1/12 .................................... 340,000 392,224 Time Warner, Inc. 7.625%, due 4/15/31 .................................. 475,000 511,444 9.125%, due 1/15/13 .................................. 35,000 40,024 ---------- 4,228,099 ---------- Consumer Staples - 1.1% Diageo Finance B.V. 5.30%, due 10/28/15 .................................. 385,000 364,031 Kraft Foods, Inc. 4.00%, due 10/1/08 ................................... 410,000 395,076 ---------- 759,107 ---------- Energy - 2.9% Anadarko Finance Corp. 6.75%, due 5/1/11 .................................... 565,000 580,545 Dominion Resources, Inc. 5.15%, due 7/15/15 ................................... 370,000 340,107 Kinder Morgan, Inc. 6.50%, due 9/1/12 .................................... 225,000 213,794 Pacific Gas & Electric Co. 4.20%, due 3/1/11 .................................... 430,000 402,099 Progress Energy, Inc. 7.10%, due 3/1/11 .................................... 375,000 391,182 ---------- 1,927,727 ---------- Financials - 18.5% American General Finance Corp. 5.375%, due 10/1/12 .................................. $ 75,000 $ 72,971 Ameriprise Financial, Inc. 5.35%, due 11/15/10 .................................. 200,000 196,099 Archstone-Smith Trust 5.75%, due 3/15/16 ................................... 405,000 391,044 Capital One Bank 6.50%, due 6/13/13 ................................... 205,000 209,629 Capital One Financial Corp. 6.25%, due 11/15/13 .................................. 135,000 135,995 Caterpillar Financial Services Corp. 4.30%, due 6/1/10 .................................... 420,000 399,470 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 .................................... 335,000 321,223 CIT Group, Inc. 6.875%, due 11/1/09 .................................. 120,000 123,652 Citigroup, Inc. 5.625%, due 8/27/12 .................................. 1,050,000 1,037,423 Credit Suisse First Boston USA, Inc. 5.125%, due 8/15/15 .................................. 460,000 429,933 EOP Operating L.P. 7.00%, due 7/15/11 ................................... 395,000 410,351 Ford Motor Credit Co. 6.375%, due 11/5/08 .................................. 200,000 187,067 7.375%, due 10/28/09 ................................. 180,000 166,417 Goldman Sachs Group, Inc. (The) 5.25%, due 4/1/13 .................................... 515,000 495,521 HSBC Finance Corp. 5.875%, due 2/1/09 ................................... 60,000 60,369 6.75%, due 5/15/11 ................................... 650,000 674,273 7.00%, due 5/15/12 ................................... 155,000 163,111 Jefferies Group, Inc. 5.50%, due 3/15/16 ................................... 155,000 144,737 7.75%, due 3/15/12 ................................... 100,000 107,418 JPMorgan Chase & Co. 5.125%, due 9/15/14 .................................. 425,000 401,434 5.75%, due 1/2/13 .................................... 225,000 222,721 7.125%, due 6/15/09 .................................. 225,000 233,063 MBNA America Bank N.A. 7.125%, due 11/15/12 ................................. 275,000 293,554 MBNA Corp. 7.50%, due 3/15/12 ................................... 240,000 259,611 Merrill Lynch & Co., Inc. 4.79%, due 8/4/10 .................................... 345,000 333,293 MetLife, Inc. 5.50%, due 6/15/14 ................................... 125,000 120,697 6.125%, due 12/1/11 .................................. 300,000 305,149 Residential Capital Corp. 6.00%, due 2/22/11 ................................... 740,000 717,041 6.375%, due 6/30/10 .................................. 600,000 591,835 Simon Property Group, L.P. 4.60%, due 6/15/10 ................................... 185,000 177,292 5.10%, due 6/15/15 ................................... 205,000 189,463 6.35%, due 8/28/12 ................................... 160,000 162,341 6.375%, due 11/15/07 ................................. 410,000 411,706 See accompanying notes to financial statements. 27 FIXED INCOME FUND (continued) CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ----------- Financials (continued) SLM Corp. 5.45%, due 4/25/11 ................................. $ 370,000 $ 363,598 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 ................................. 420,000 418,197 Textron Financial Corp. 4.125%, due 3/3/08 ................................. 740,000 720,966 Wachovia Bank N.A. 4.80%, due 11/1/14 ................................. 735,000 678,739 ----------- 12,327,403 ----------- Industrials - 1.2% International Lease Finance Corp. 5.75%, due 6/15/11 ................................. 395,000 392,098 5.875%, due 5/1/13 ................................. 430,000 426,769 ----------- 818,867 ----------- Information Technology - 0.6% Cisco Systems, Inc. 5.25%, due 2/22/11 ................................. 420,000 412,210 ----------- Telecommunication Services - 3.1% AT&T Wireless Services, Inc. 8.75%, due 3/1/31 .................................. 215,000 263,595 British Telecommunications PLC 8.375%, due 12/15/10 ............................... 720,000 790,466 Embarq Corp. 7.082%, due 6/1/16 ................................. 555,000 551,951 Sprint Capital Corp. 8.75%, due 3/15/32 ................................. 370,000 446,184 ----------- 2,052,196 ----------- Total Corporate Bonds (Cost $23,560,765) ................................. 22,525,609 ----------- U.S. GOVERNMENT SECURITIES 50.5% U.S. GOVERNMENT AGENCY OBLIGATIONS 28.9% Federal Home Loan Bank - 2.2% 3.125%, due 11/15/06 ............................... 1,475,000 1,462,657 ----------- Federal Home Loan Mortgage Corporation (Mortgage Pass-Through Securities) - 3.6% 5.366%, due 9/1/35 (a) ............................. 1,288,757 1,274,647 5.487%, due 3/1/36 (a) ............................. 1,157,652 1,136,103 ----------- 2,410,750 ----------- Federal National Mortgage Association - 14.9% o 4.25%, due 9/15/07 ................................ 4,260,000 4,197,834 o 4.375%, due 3/15/13 ............................... 1,625,000 1,522,966 o 4.75%, due 12/15/10 ............................... 4,325,000 4,201,815 ----------- 9,922,615 ----------- Federal National Mortgage Association (Mortgage Pass-Through Securities) - 8.2% 6.50%, due 9/1/33 .................................. 806,220 813,573 o 6.50%, due 7/1/36 TBA (c) ......................... 4,675,000 4,698,375 ----------- 5,511,948 ----------- Total U.S. Government Agency Obligations (Cost $19,496,719) ................................. 19,307,970 ----------- U.S. TREASURY OBLIGATIONS 21.6% United States Treasury Bonds - 13.6% 4.50%, due 2/15/36 (d) ............................. $ 675,000 $ 605,233 o 5.25%, due 2/15/29 ................................ 2,410,000 2,399,456 o 7.50%, due 11/15/16 ............................... 1,985,000 2,347,882 o 8.125%, due 8/15/19 (d) ........................... 2,925,000 3,703,097 ----------- 9,055,668 ----------- United States Treasury Note - 1.4% 4.25%, due 8/15/13 (d) ............................. 980,000 929,775 ----------- United States Treasury Strips - 1.4% (zero coupon), due 8/15/17 ......................... 1,670,000 937,672 ----------- United States Treasury TII - 5.2% o 1.875%, due 7/15/13 (e) ........................... 3,608,472 3,466,529 ----------- Total U.S. Treasury Obligations (Cost $15,150,360) ................................. 14,389,644 ----------- Total U.S. Government Securities (Cost $34,647,079) ................................. 33,697,614 ----------- COLLATERALIZED MORTGAGE OBLIGATIONS 12.8% Federal Home Loan Mortgage Corporation - 0.2% Series 2478 Class DK 5.50%, due 2/15/32 ................................. 48,269 47,821 Series 2113 Class QE 6.00%, due 11/15/27 ................................ 83,407 83,447 ----------- 131,268 ----------- Financials - 12.6% Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 (a) ............................ 575,000 562,282 Greenwich Capital Commercial Funding Corp. Series 2005-GG5 Class A5 5.224%, due 4/10/37 (a) ............................ 1,345,000 1,282,921 Series 2004-GG1 Class A7 5.317%, due 6/10/36 (a) ............................ 950,000 917,398 GS Mortgage Securities Corp. o Series 2005-GG4 Class A4 4.761%, due 7/10/39 (a) ............................ 2,200,000 2,031,565 Series 2004-GG2 Class A6 5.396%, due 8/10/38 (a) ............................ 700,000 677,139 o Merrill Lynch Mortgage Investors, Inc. Series 2006-A3 Class 3A1 5.869%, due 5/25/36 (a) ............................ 1,683,808 1,675,093 Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 6.008%, due 1/25/36 (a) ............................ 1,240,603 1,237,432 ----------- 8,383,830 ----------- Total Collateralized Mortgage Obligations (Cost $8,817,289) .................................. 8,515,098 ----------- Total Fixed Income Securities (Cost $67,262,772) ................................. 64,975,955 ----------- See accompanying notes to financial statements. 28 MCMORGAN FUNDS PRINCIPAL AMOUNT VALUE ---------- ----------- SHORT-TERM INVESTMENTS 10.2% Repurchase Agreement - 2.2% Morgan Stanley & Co. 5.42%, dated 6/30/06 due 7/3/06 Proceeds at Maturity $1,450,735 (Collateralized by various bonds with a Principal Amount of $1,705,840 and a Market Value of $1,493,181) (f)............................... $1,450,080 $ 1,450,080 ----------- Total Repurchase Agreement (Cost $1,450,080) ................................ 1,450,080 ----------- Time Deposits - 1.4% Calyon 5.265%, due 8/2/06 (f) ........................... 313,106 313,106 Credit Suisse First Boston Corp. 5.305%, due 7/27/06 (f) .......................... 313,106 313,106 Fortis Bank 5.26%, due 7/7/06 (f) ............................ 313,106 313,106 ----------- Total Time Deposits (Cost $939,318) .................................. 939,318 ----------- U.S. Government Agency - 6.6% Federal National Mortgage Association (Discount Notes) 4.931%, due 7/13/06 (b) .......................... 755,000 753,919 5.29%, due 9/6/06 (b) ............................ 3,705,000 3,670,014 ----------- Total U.S. Government Agency (Cost $4,423,134) ................................ 4,423,933 ----------- Total Short-Term Investments (Cost $6,812,532) ................................ 6,813,331 ----------- Total Investments (Cost $74,075,304) (g) ........................... 107.7% 71,789,286 Liabilities in Excess of Cash and Other Assets............................ (7.7) (5,132,520) ---------- ----------- Net Assets 100.0% $66,656,766 ========== =========== o Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. (a) Floating/variable rate. Rate shown is the rate in effect at June 30, 2006. (b) Segregated as collateral for TBAs. (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 June 30, 2006 is $4,698,375. (d) Represents security, or a portion thereof, which is out on loan. (e) Treasury Inflation Indexed Security - Pays a fixed rate of interest on a principal amount that is continuously adjusted for inflation based on the Consumer Price Index-Urban Consumers. (f) Represents security, or a portion thereof, purchased with cash collateral received for securities on loan. (g) Aggregate cost for federal income tax purposes is $74,208,118 and net unrealized depreciation is as follows: Gross unrealized appreciation ........................... $ -- Gross unrealized depreciation ........................... (2,418,832) ----------- Net unrealized depreciation ............................. $(2,418,832) =========== See accompanying notes to financial statements. 29 FIXED INCOME FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $74,075,304) including $2,334,525 market value of securities loaned ............................ $71,789,286 Cash-interest bearing accounts ................................. 428,378 Receivable for securities sold ................................. 2,830,583 Receivable for fund shares sold ................................ 864,549 Interest receivable ............................................ 719,296 Other assets ................................................... 33,518 ----------- Total assets ................................................ 76,665,610 ----------- LIABILITIES: Payable for securities purchased ............................... 7,528,136 Securities lending collateral .................................. 2,389,398 Payable for fund shares redeemed ............................... 41,302 Payable to Advisor, net ........................................ 18,595 Legal fees payable ............................................. 7,249 12B-1 fees payable ............................................. 6,079 Transfer agent fees payable .................................... 5,866 Accounting fees payable ........................................ 3,834 Administration fees payable .................................... 3,766 Custodian fees payable ......................................... 3,755 Trustees fees payable .......................................... 415 Accrued expenses ............................................... 449 ----------- Total liabilities ........................................... 10,008,844 ----------- Net Assets ...................................................... $66,656,766 =========== NET ASSETS CONSIST OF: Capital paid-in ................................................ $69,990,356 Accumulated undistributed net investment income ................ 248,475 Accumulated net realized loss on investments ................... (1,296,047) Net unrealized depreciation on investments ..................... (2,286,018) ----------- $66,656,766 =========== Net Assets: Class McMorgan ................................................. $37,155,888 Class Z ........................................................ 29,498,791 Class R1 ....................................................... 1,047 Class R2 ....................................................... 1,040 ----------- $66,656,766 =========== Shares Outstanding: Class McMorgan ................................................. 3,541,892 =========== Class Z ........................................................ 2,811,511 =========== Class R1 ....................................................... 100 =========== Class R2 ....................................................... 99 =========== Net asset value and redemption price per share: Class McMorgan ................................................. $ 10.49 =========== Class Z ........................................................ $ 10.49 =========== Class R1 ....................................................... $ 10.49 =========== Class R2 ....................................................... $ 10.48 =========== STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Interest ....................................................... $ 3,180,291 Income from securities loaned - net ............................ 3,339 ----------- Total investment income ..................................... 3,183,630 ----------- Expenses: Investment advisory fees (Note F) .............................. 233,478 12B-1 distribution fees (Class Z) .............................. 73,302 12B-1 distribution fees (Class R2) ............................. 3 Registration expenses .......................................... 56,511 Accounting fees ................................................ 46,277 Administration fees ............................................ 45,391 Transfer agent fees ............................................ 45,239 Legal fees ..................................................... 23,151 Insurance fees ................................................. 21,848 Custodian fees ................................................. 15,604 Auditing fees .................................................. 14,500 Trustees fees .................................................. 13,765 Report to shareholder expense .................................. 9,456 Miscellaneous expenses ......................................... 6,362 ----------- Total expenses .............................................. 604,887 Expenses reimbursed (Note F) ................................... (198,017) ----------- Net expenses ................................................ 406,870 ----------- Net investment income ........................................... 2,776,760 ----------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments ............................... (1,254,533) Net change in unrealized appreciation on investments ............................................... (2,886,123) ----------- Net realized and unrealized loss on investments ................ (4,140,656) ----------- Decrease in net assets from operations .......................... $(1,363,896) =========== See accompanying notes to financial statements. 30 FIXED INCOME FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income ........................... $ 2,776,760 $ 2,238,098 Net realized gain (loss) on investments ......... (1,254,533) 934,900 Net change in unrealized appreciation on investments .................................... (2,886,123) 1,475,090 ------------ ------------ Increase (decrease) in net assets ............... (1,363,896) 4,648,088 ------------ ------------ Dividends and distributions to shareholders: From net investment income: Class McMorgan shares.......................... (1,503,022) (1,331,359) Class Z shares................................. (1,111,638) (912,135) Class R1 shares................................ (42) (38) Class R2 shares................................ (39) (35) From capital gains: Class McMorgan shares.......................... (180,169) (324,543) Class Z shares................................. (143,849) (239,557) Class R1 shares................................ (5) (10) Class R2 shares................................ (5) (10) ------------ ------------ Total dividends and distributions to shareholders .................................. (2,938,769) (2,807,687) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares.......................... 19,483,520 7,074,115 Class Z shares................................. 6,260,344 7,426,819 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions: Class McMorgan shares.......................... 1,675,943 1,649,321 Class Z shares................................. 1,255,445 1,151,646 Class R1 shares................................ 47 46 Class R2 shares................................ 44 43 ------------ ------------ 28,675,343 17,301,990 Cost of shares redeemed: Class McMorgan shares.......................... (15,803,182) (14,091,415) Class Z shares................................. (5,278,292) (5,861,494) Class R1 shares................................ (75) -- Class R2 shares................................ (75) -- ------------ ------------ Increase (decrease) in net assets derived from capital share transactions ...................... 7,593,719 (2,650,919) ------------ ------------ Total increase (decrease) in net assets ......... 3,291,054 (810,518) Net Assets: Beginning of year ............................... 63,365,712 64,176,230 ------------ ------------ End of year (including undistributed net investment income of $248,475 and $86,421, respectively) ................................. $ 66,656,766 $ 63,365,712 ============ ============
See accompanying notes to financial statements. 31 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 YEAR ENDED JUNE 30, ------------------------------------------------------ 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------- Net asset value, beginning of period .......................... $ 11.19 $ 10.88 $ 11.71 $ 10.86 $ 10.74 ------- ------- ------- ------- ------- Income from investment operations: Net investment income ........................................ 0.46 0.40 0.46 0.53 0.60 Net realized and unrealized gain (loss) on investments ....... (0.67) 0.40 (0.61) 0.86 0.12 ------- ------- ------- ------- ------- Total from investment operations............................ (0.21) 0.80 (0.15) 1.39 0.72 ------- ------- ------- ------- ------- Less dividends and distributions: From net investment income ................................... (0.44) (0.39) (0.46) (0.54) (0.60) From capital gains ........................................... (0.05) (0.10) (0.22) -- -- ------- ------- ------- ------- ------- Total dividends and distributions........................... (0.49) (0.49) (0.68) (0.54) (0.60) ------- ------- ------- ------- ------- Net asset value, end of period ................................ $ 10.49 $ 11.19 $ 10.88 $ 11.71 $ 10.86 ======= ======= ======= ======= ======= Total return .................................................. (1.90)% 7.42% (1.29)% 13.06% 6.81% Ratios/Supplemental Data: Net assets, end of period (in 000's) ......................... $37,156 $34,203 $38,484 $39,753 $29,292 Ratio of expenses to average net assets before reimbursement of expenses by Advisor...................................... 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor........................ 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........................ 4.27% 3.47% 4.09% 4.74% 5.27% Portfolio turnover ........................................... 287%(b) 347%(b) 231.21% 142.48% 94.80%
See accompanying notes to financial statements. 32 MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z YEAR ENDED JUNE 30, ----------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- ------- ------- ------ Net asset value, beginning of period .......................... $ 11.20 $ 10.88 $ 11.71 $ 10.86 $10.74 ------- ------- ------- ------- ------ Income from investment operations: Net investment income ........................................ 0.43 0.35 0.42 0.52 0.55 Net realized and unrealized gain (loss) on investments ....... (0.68) 0.43 (0.60) 0.84 0.14 ------- ------- ------- ------- ------ Total from investment operations............................ (0.25) 0.78 (0.18) 1.36 0.69 ------- ------- ------- ------- ------ Less dividends and distributions: From net investment income ................................... (0.41) (0.36) (0.43) (0.51) (0.57) From capital gains ........................................... (0.05) (0.10) (0.22) -- -- ------- ------- ------- ------- ------ Total dividends and distributions........................... (0.46) (0.46) (0.65) (0.51) (0.57) ------- ------- ------- ------- ------ Net asset value, end of period ................................ $ 10.49 $ 11.20 $ 10.88 $ 11.71 $10.86 ======= ======= ======= ======= ====== Total return .................................................. (2.24)% 7.26% (1.53)% 12.80% 6.55% Ratios/Supplemental Data Net assets, end of period (in 000's) ......................... $29,499 $29,161 $25,690 $15,646 $3,114 Ratio of expenses to average net assets before reimbursement of expenses by Advisor...................................... 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor........................ 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........................ 4.02% 3.22% 3.84% 4.49% 5.02% Portfolio turnover ........................................... 287%(b) 347%(b) 231.21% 142.48% 94.80%
See accompanying notes to financial statements. 33 FIXED INCOME FUND FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS R1 YEAR ENDED JUNE 30, ------------------------------- 2006 2005 2004* ------------------------------- Net asset value, beginning of period .......................... $11.20 $10.88 $ 11.11 ------ ------ ------- Income from investment operations: Net investment income ........................................ 0.45 0.39 0.20 Net realized and unrealized gain (loss) on investments ....... (0.68) 0.41 (0.24) ------ ------ ------- Total from investment operations............................ (0.23) 0.80 (0.04) ------ ------ ------- Less dividends and distributions: From net investment income ................................... (0.43) (0.38) (0.19) From capital gains ........................................... (0.05) (0.10) -- ------ ------ ------- Total dividends and distributions........................... (0.48) (0.48) (0.19) ------ ------ ------- Net asset value, end of period ................................ $10.49 $11.20 $ 10.88 ====== ====== ======= Total return .................................................. (2.08)% 7.42% (0.42)%(a) Ratios/Supplemental Data Net assets, end of period (in 000's) ......................... $ 1 $ 1 $ 1 Ratio of expenses to average net assets before reimbursement of expenses by Advisor...................................... 0.90% 0.81% 0.87%+ Ratio of expenses to average net assets after reimbursement of expenses by Advisor......................................... 0.60% 0.50% 0.60%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor........................ 3.87% 3.06% 3.72%+ Ratio of net investment income to average net assets after reimbursement of expenses by Advisor........................ 4.17% 3.36% 3.99%+ Portfolio turnover ........................................... 287%(b) 347%(b) 231.21%
See accompanying notes to financial statements. 34 MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS R2 YEAR ENDED JUNE 30, ------------------------------- 2006 2005 2004* ------------------------------- Net asset value, beginning of period .......................... $11.18 $10.88 $ 11.11 ------ ------ ------- Income from investment operations: Net investment income ........................................ 0.42 0.34 0.18 Net realized and unrealized gain (loss) on investments ....... (0.67) 0.41 (0.24) ------ ------ ------- Total from investment operations............................ (0.25) 0.75 (0.06) ------ ------ ------- Less dividends and distributions: From net investment income ................................... (0.40) (0.35) (0.17) From capital gains ........................................... (0.05) (0.10) -- ------ ------ ------- Total dividends and distributions........................... (0.45) (0.45) (0.17) ------ ------ ------- Net asset value, end of period ................................ $10.48 $11.18 $ 10.88 ====== ====== ======= Total return .................................................. (2.24)% 6.97% (0.58)%(a) Ratios/Supplemental Data Net assets, end of period (in 000's) ......................... $ 1 $ 1 $ 1 Ratio of expenses to average net assets before reimbursement of expenses by Advisor...................................... 1.15% 1.06% 1.12%+ Ratio of expenses to average net assets after reimbursement of expenses by Advisor......................................... 0.85% 0.75% 0.85%+ Ratio of net investment income to average net assets before reimbursement of expenses by Advisor........................ 3.62% 2.73% 3.47%+ Ratio of net investment income to average net assets after reimbursement of expenses by Advisor........................ 3.92% 3.03% 3.74%+ Portfolio turnover ........................................... 287%(b) 347%(b) 231.21%
- ---------- * Class R1 and R2 commenced operations on January 2, 2004. (a) Total return in not annualized. (b) The portfolio turnover not including mortgage dollar rolls for the years ended June 30, 2006 and 2005 is 96% and 216%, respectively. + Annualized. See accompanying notes to financial statements. 35 HIGH YIELD FUND PORTFOLIO OF INVESTMENTS JUNE 30, 2006 LONG-TERM BONDS 95.0% CORPORATE BONDS 88.0% PRINCIPAL AMOUNT VALUE ---------- ---------- Advertising - 0.4% R.H. Donnelley Corp. 8.875%, due 1/15/16 (a) ........................... $ 635,000 $ 640,556 ---------- Aerospace & Defense - 1.3% BE Aerospace, Inc. Series B 8.875%, due 5/1/11 ................................ 635,000 657,225 DRS Technologies, Inc. 7.625%, due 2/1/18 ................................ 629,000 625,855 Moog, Inc. 6.25%, due 1/15/15 ................................ 330,000 310,200 TransDigm, Inc. 7.75%, due 7/15/14 (a) ............................ 450,000 447,750 ---------- 2,041,030 ---------- Airlines - 0.2% American Airlines, Inc. Class A 7.25%, due 2/5/09 ................................. 350,000 350,000 ---------- Auto Components - 1.8% Accuride Corp. 8.50%, due 2/1/15 ................................. 396,000 380,160 Commercial Vehicle Group, Inc. 8.00%, due 7/1/13 ................................. 385,000 368,637 Cooper Standard Automotive, Inc. 8.375%, due 12/15/14 (b) .......................... 495,000 390,431 Lear Corp. 8.11%, due 5/15/09 (b) ............................ 380,000 370,500 Rexnord Corp. 10.125%, due 12/15/12 ............................. 750,000 830,505 Sunstate Equipment Co. LLC 10.50%, due 4/1/13 (a) ............................ 350,000 360,500 ---------- 2,700,733 ---------- Auto Manufacturers - 0.1% General Motors Corp. 8.375%, due 7/15/33 (b) ........................... 230,000 185,150 ---------- Beverages - 0.4% Le-Natures, Inc. 10.00%, due 6/15/13 (a) ........................... 575,000 605,906 ---------- Building Materials & Components - 0.6% Ahern Rentals, Inc. 9.25%, due 8/15/13 ................................ 475,000 479,750 Goodman Global Holding Co., Inc. 8.329%, due 6/15/12 (c) ........................... 495,000 496,237 ---------- 975,987 ---------- Building Products - 2.7% Building Materials Corp. of America Series B 8.00%, due 10/15/07 ............................... $ 200,000 $ 201,000 8.00%, due 12/1/08 ................................ 290,000 292,175 Covalence Specialty Materials Corp. 10.25%, due 3/1/16 (a) ............................ 540,000 518,400 Da-Lite Screen Co., Inc. 9.50%, due 5/15/11 ................................ 545,000 577,700 ERICO International Corp. 8.875%, due 3/1/12 ................................ 800,000 818,000 KI Holdings, Inc. (zero coupon), due 11/15/14 9.875%, beginning 11/15/09 ........................ 375,000 268,125 Nortek, Inc. 8.50%, due 9/1/14 ................................. 616,000 595,980 NTK Holdings, Inc. (zero coupon), due 3/1/14 ......................... 418,000 302,527 Ply Gem Industries, Inc. 9.00%, due 2/15/12 ................................ 620,000 564,200 ---------- 4,138,107 ---------- Capital Markets - 3.8% o TRAINS HY-2006-1 7.548%, due 5/1/16 (a)(b)(d) ...................... 6,000,000 5,880,000 ---------- Chemicals - 3.3% BCI U.S. Finance Corp. 10.577%, due 7/15/10 (a)(c) ....................... 470,000 479,400 Compression Polymers Corp. 10.50%, due 7/1/13 (a) ............................ 413,000 421,260 Huntsman International LLC 8.125%, due 1/1/15 (a) ............................ 530,000 496,875 9.875%, due 3/1/09 ................................ 425,000 442,000 Innophos, Inc. 8.875%, due 8/15/14 ............................... 275,000 270,875 Invista 9.25%, due 5/1/12 (a) ............................. 760,000 798,000 MacDermid, Inc. 9.125%, due 7/15/11 ............................... 425,000 444,125 PQ Corp. 7.50%, due 2/15/13 ................................ 715,000 672,100 Rockwood Specialties Group, Inc. 7.50%, due 11/15/14 ............................... 265,000 259,700 10.625%, due 5/15/11 .............................. 259,000 276,806 Westlake Chemical Corp. 6.625%, due 1/15/16 ............................... 550,000 508,062 ---------- 5,069,203 ---------- Coal - 0.3% International Coal Group, Inc. 10.25%, due 7/15/14 (a) ........................... 380,000 379,525 ---------- Commercial Banks - 1.0% UGS Capital Corp. II 10.38%, due 6/1/11 (a)(c)(e) ...................... 800,000 792,000 UGS Corp. 10.00%, due 6/1/12 ................................ 635,000 682,625 ---------- 1,474,625 ---------- See accompanying notes to financial statements. 36 MCMORGAN FUNDS CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ---------- Commercial Services & Supplies - 4.8% Allied Waste North America 7.875%, due 4/15/13 ............................... $1,090,000 $1,090,000 American Color Graphics, Inc. 10.00%, due 6/15/10 ............................... 150,000 106,875 Avis Budget Car Rental LLC 7.576%, due 5/15/14 (a)(c) ........................ 385,000 384,037 Cardtronics, Inc. 9.50%, due 8/15/13 (a) ............................ 810,000 797,850 Geo Group, Inc. (The) 8.25%, due 7/15/13 ................................ 590,000 590,000 Hertz Corp. 8.875%, due 1/1/14 (a) ............................ 725,000 743,125 Insurance Auto Auctions, Inc. 11.00%, due 4/1/13 ................................ 575,000 566,375 Mac-Gray Corp. 7.625%, due 8/15/15 ............................... 622,000 628,220 Mobile Mini, Inc. 9.50%, due 7/1/13 ................................. 403,000 431,210 United Rentals North America, Inc. 6.50%, due 2/15/12 ................................ 580,000 548,100 Waste Services, Inc. 9.50%, due 4/15/14 ................................ 710,000 717,100 WCA Waste Corp. 9.25%, due 6/15/14 (a) ............................ 810,000 818,100 ---------- 7,420,992 ---------- Construction Materials - 0.4% Texas Industries, Inc. 7.25%, due 7/15/13 ................................ 120,000 118,800 U.S. Concrete, Inc. 8.375%, due 4/1/14 ................................ 500,000 505,000 ---------- 623,800 ---------- Containers & Packaging - 2.1% AEP Industries, Inc. 7.875%, due 3/15/13 ............................... 175,000 175,437 Berry Plastics Corp. 10.75%, due 7/15/12 ............................... 410,000 443,825 Crown Americas, Inc. 7.625%, due 11/15/13 (a) .......................... 515,000 505,987 Graham Packaging Co., Inc. 8.50%, due 10/15/12 ............................... 195,000 191,100 9.875%, due 10/15/14 (b) .......................... 265,000 262,350 Owens-Brockway Glass Container, Inc. 7.75%, due 5/15/11 ................................ 847,000 853,352 Plastipak Holdings, Inc. 8.50%, due 12/15/15 (a) ........................... 360,000 360,000 Pregis Corp. 12.375%, due 10/15/13 (a) ......................... 365,000 379,600 ---------- 3,171,651 ---------- Diversified Financial Services - 4.3% Altra Industrial Motion, Inc. 9.00%, due 12/1/11 ................................ $ 500,000 $ 502,500 BCP Crystal U.S. Holdings Corp. 9.625%, due 6/15/14 ............................... 80,000 86,800 CCM Merger, Inc. 8.00%, due 8/1/13 (a) ............................. 591,000 558,495 Cellu Tissue Holdings, Inc. 9.75%, due 3/15/10 ................................ 355,000 346,125 Couche-Tard U.S. L.P. 7.50%, due 12/15/13 ............................... 530,000 527,350 General Motors Acceptance Corp. 6.125%, due 8/28/07 ............................... 475,000 470,032 o 6.875%, due 9/15/11 ............................. 1,270,000 1,211,783 Global Cash Access LLC 8.75%, due 3/15/12 ................................ 296,000 311,910 Innophos Investments Holdings, Inc. 13.17%, due 2/15/15 (c)(e) ........................ 319,639 320,039 JOSTENS IH Corp. 7.625%, due 10/1/12 ............................... 725,000 703,250 KRATON Polymers LLC/KRATON Polymers Capital Corp. 8.125%, due 1/15/14 ............................... 210,000 208,425 Nalco Finance Holdings, Inc. (zero coupon), due 2/1/14 9.00%, beginning 2/1/09 (b) ....................... 430,000 322,500 Rainbow National Services LLC 8.75%, due 9/1/12 (a) ............................. 195,000 204,750 10.375%, due 9/1/14 (a) ........................... 310,000 343,325 Southern Star Central Corp. 6.75%, due 3/1/16 (a) ............................. 220,000 211,200 Standard Aero Holdings, Inc. 8.25%, due 9/1/14 ................................. 377,000 335,530 ---------- 6,664,014 ---------- Diversified Telecommunication Services - 1.7% Cincinnati Bell, Inc. 8.375%, due 1/15/14 ............................... 585,000 576,225 GCI, Inc. 7.25%, due 2/15/14 ................................ 650,000 627,250 Qwest Capital Funding, Inc. 6.875%, due 7/15/28 ............................... 925,000 797,812 Time Warner Telecommunications Holdings, Inc. 9.25%, due 2/15/14 ................................ 635,000 650,875 ---------- 2,652,162 ---------- Electric Utilities - 2.3% CMS Energy Corp. 8.50%, due 4/15/11 ................................ 1,040,000 1,084,200 Mirant North America LLC 7.375%, due 12/31/13 (a) .......................... 662,000 638,830 o Sierra Pacific Power Co. 6.25%, due 4/15/12 ................................ 1,185,000 1,164,644 Sierra Pacific Resources 6.75%, due 8/15/17 ................................ 700,000 661,375 ---------- 3,549,049 ---------- See accompanying notes to financial statements. 37 HIGH YIELD FUND (continued) CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ---------- Electronic Equipment & Instruments - 0.6% Itron, Inc. 7.75%, due 5/15/12 ................................ $ 705,000 $ 719,100 Sanmina-SCI Corp. 6.75%, due 3/1/13 (b) ............................. 275,000 256,437 ---------- 975,537 ---------- Energy Equipment & Services - 0.7% Newpark Resources, Inc. 8.625%, due 12/15/07 .............................. 575,000 575,000 Pride International, Inc. 7.375%, due 7/15/14 ............................... 430,000 432,150 ---------- 1,007,150 ---------- Food & Staples Retailing - 0.2% Stater Brothers Holdings, Inc. 8.125%, due 6/15/12 ............................... 370,000 365,375 ---------- Food Products - 1.1% Del Monte Corp. 8.625%, due 12/15/12 .............................. 380,000 391,400 Pinnacle Foods Holding Corp. 8.25%, due 12/1/13 ................................ 625,000 614,062 Reddy Ice Holdings, Inc. (zero coupon), due 11/1/12 10.50%, beginning 11/1/08 ......................... 865,000 696,325 ---------- 1,701,787 ---------- Gas Utilities - 0.7% ANR Pipeline, Inc. 8.875%, due 3/15/10 ............................... 620,000 654,877 Ferrellgas Partners L.P. 6.75%, due 5/1/14 ................................. 475,000 450,062 ---------- 1,104,939 ---------- Health Care Equipment & Supplies - 1.0% Fisher Scientific International, Inc. 6.125%, due 7/1/15 ................................ 375,000 361,406 Fresenius Medical Capital Trust IV 7.875%, due 6/15/11 ............................... 325,000 328,250 Hanger Orthopedic Group, Inc. 10.25%, due 6/1/14 (a) ............................ 295,000 292,050 Norcross Safety Products LLC Series B 9.875%, due 8/15/11 ............................... 400,000 415,000 Safety Products Holdings, Inc. Series B 11.75%, due 1/1/12 (e) ............................ 145,453 151,271 ---------- 1,547,977 ---------- Health Care Providers & Services - 4.2% Concentra Operating Corp. 9.125%, due 6/1/12 ................................ 450,000 465,750 9.50%, due 8/15/10 ................................ 275,000 284,625 DaVita, Inc. 7.25%, due 3/15/15 ................................ 350,000 336,000 HCA, Inc. 5.75%, due 3/15/14 ................................ 835,000 746,649 6.375%, due 1/15/15 ............................... 720,000 667,115 IASIS Healthcare LLC 8.75%, due 6/15/14 ................................ 530,000 519,400 Res-Care, Inc. 7.75%, due 10/15/13 ............................... $ 589,000 $ 584,582 Service Corp. International 7.00%, due 6/15/17 (a) ............................ 865,000 808,775 Tenet Healthcare Corp. 6.50%, due 6/1/12 ................................. 150,000 132,375 9.25%, due 2/1/15 (a) ............................. 600,000 589,500 9.875%, due 7/1/14 ................................ 150,000 150,000 Triad Hospitals, Inc. 7.00%, due 11/15/13 ............................... 200,000 194,500 Vanguard Health Holding Co. II 9.00%, due 10/1/14 ................................ 325,000 324,187 VWR International, Inc. 6.875%, due 4/15/12 ............................... 240,000 229,200 8.00%, due 4/15/14 ................................ 370,000 359,362 ---------- 6,392,020 ---------- Hotels, Restaurants & Leisure - 7.5% American Casino & Entertainment Properties LLC 7.85%, due 2/1/12 ................................. 540,000 541,350 Boyd Gaming Corp. 7.125%, due 2/1/16 ................................ 199,000 192,284 Herbst Gaming, Inc. 8.125%, due 6/1/12 ................................ 620,000 624,650 Inn of the Mountain Gods Resort & Casino 12.00%, due 11/15/10 .............................. 515,000 547,187 Isle of Capri Casinos, Inc. 7.00%, due 3/1/14 ................................. 225,000 212,344 9.00%, due 3/15/12 ................................ 400,000 417,500 Majestic Star Casino LLC/ Majestic Star Casino Capital Corp. II 9.75%, due 1/15/11 (a)(b) ......................... 786,000 787,965 Mandalay Resort Group 6.375%, due 12/15/11 .............................. 530,000 504,162 MGM Mirage 5.875%, due 2/27/14 ............................... 500,000 448,125 Mohegan Tribal Gaming Authority 6.125%, due 2/15/13 ............................... 440,000 414,150 7.125%, due 8/15/14 ............................... 300,000 290,250 Pinnacle Entertainment, Inc. 8.75%, due 10/1/13 ................................ 460,000 479,550 Pokagon Gaming Authority 10.375%, due 6/15/14 (a) .......................... 440,000 454,850 San Pasqual Casino 8.00%, due 9/15/13 (a) ............................ 525,000 523,688 Scientific Games Corp. 6.25%, due 12/15/12 ............................... 575,000 537,625 Seneca Gaming Corp. 7.25%, due 5/1/12 ................................. 450,000 435,938 Six Flags, Inc. 8.875%, due 2/1/10 (b) ............................ 140,000 133,000 9.75%, due 4/15/13 (b) ............................ 160,000 147,000 Station Casinos, Inc. 6.50%, due 2/1/14 ................................. 650,000 604,500 6.875%, due 3/1/16 ................................ 720,000 671,400 Town Sports International, Inc. 9.625%, due 4/15/11 ............................... 257,000 265,353 See accompanying notes to financial statements. 38 MCMORGAN FUNDS CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ----------- Hotels, Restaurants & Leisure (continued) Tunica-Biloxi Gaming Authority 9.00%, due 11/15/15 (a) ........................... $ 393,000 $ 402,825 Turning Stone Casino Resort Enterprise 9.125%, due 12/15/10 (a) .......................... 245,000 247,450 Vail Resorts, Inc. 6.75%, due 2/15/14 ................................ 370,000 351,500 Worldspan, L.P./WS Financing Corp. 11.42%, due 2/15/11 (b)(c) ........................ 760,000 746,700 Wynn Las Vegas LLC 6.625%, due 12/1/14 ............................... 575,000 541,938 ----------- 11,523,284 ----------- Household Durables - 4.4% ALH Finance LLC 8.50%, due 1/15/13 (b) ........................... 750,000 723,750 American Greetings Corp. 7.375%, due 6/1/16 ............................... 660,000 663,300 Beazer Homes USA, Inc. 6.50%, due 11/15/13 .............................. 390,000 352,950 K. Hovnanian Enterprises, Inc. 8.875%, due 4/1/12 ............................... 425,000 422,875 KB Home 5.75%, due 2/1/14 ................................ 925,000 813,285 Meritage Homes Corp. 6.25%, due 3/15/15 ............................... 885,000 745,613 Norcraft Holdings L.P. (zero coupon), due 9/1/12 9.75%, beginning 9/1/08 .......................... 490,000 396,900 Sealy Mattress Co. 8.25%, due 6/15/14 ............................... 575,000 575,000 Simmons Co. 7.875%, due 1/15/14 (b) .......................... 410,000 383,350 (zero coupon), due 12/15/14 10.00%, beginning 12/15/09 ....................... 580,000 385,700 Stanley-Martin Communities LLC 9.75%, due 8/15/15 ............................... 741,000 633,555 Tempur-Pedic, Inc./Tempur Production USA, Inc. 10.25%, due 8/15/10 .............................. 675,000 712,125 ----------- 6,808,403 ----------- Household Products - 1.0% Johnsondiversey Holdings, Inc. (zero coupon), due 5/15/13 10.67%, beginning 5/15/07 ........................ 571,000 485,350 Johnsondiversey, Inc. Series B 9.625%, due 5/15/12 .............................. 479,000 476,605 Spectrum Brands, Inc. 7.375%, due 2/1/15 ............................... 726,000 589,875 ----------- 1,551,830 ----------- Iron & Steel - 0.3% Chaparral Steel Co. 10.00%, due 7/15/13 .............................. 378,000 412,020 ----------- IT Services - 0.9% Activant Solutions, Inc. 9.50%, due 5/1/16 (a) ............................ $ 385,000 $ 372,488 Iron Mountain, Inc. 8.625%, due 4/1/13 ............................... 530,000 530,000 Sungard Data Systems, Inc. 9.125%, due 8/15/13 (a) .......................... 515,000 534,313 ----------- 1,436,801 ----------- Leisure Equipment & Products - 0.9% Leslie's Poolmart 7.75%, due 2/1/13 ................................ 655,000 635,350 True Temper Sports, Inc. 8.375%, due 9/15/11 .............................. 750,000 682,500 ----------- 1,317,850 ----------- Machinery - 1.3% Columbus McKinnon Corp. 8.875%, due 11/1/13 .............................. 927,000 945,540 Gardner Denver, Inc. 8.00%, due 5/1/13 ................................ 445,000 467,250 Mueller Group, Inc. 10.00%, due 5/1/12 ............................... 135,000 145,125 Mueller Holdings, Inc. (zero coupon), due 4/15/14 14.75%, beginning 4/15/09 ........................ 425,000 357,000 ----------- 1,914,915 ----------- Machinery & Engineering - 0.3% Douglas Dynamics LLC 7.75%, due 1/15/12 (a) ........................... 500,000 475,000 ----------- Media - 8.6% Adelphia Communications Corp. 10.875%, due 10/1/10 (f) ......................... 635,000 346,075 Affinity Group, Inc. 9.00%, due 2/15/12 ............................... 450,000 447,750 10.875%, due 2/15/12 (e) ......................... 263,827 257,231 AMC Entertainment, Inc. 9.42%, due 8/15/10 (c) ........................... 223,000 229,690 CBD Media Holdings 9.25%, due 7/15/12 ............................... 675,000 671,625 o CCH I LLC 11.00%, due 10/1/15 .............................. 1,411,000 1,234,625 Charter Communications Operation LLC 8.00%, due 4/30/12 (a) ........................... 200,000 199,000 CSC Holdings, Inc. 6.75%, due 4/15/12 (a) ........................... 400,000 386,000 7.625%, due 7/15/18 .............................. 635,000 628,650 Dex Media, Inc. 8.00%, due 11/15/13 .............................. 395,000 396,975 (zero coupon), due 11/15/13 9.00%, beginning 11/15/08 ........................ 560,000 471,800 DirectTV Holdings, Inc. 8.375%, due 3/15/13 .............................. 525,000 549,938 Echostar DBS Corp. 5.75%, due 10/1/08 ............................... 630,000 615,825 Houghton Mifflin Co. (zero coupon), due 10/15/13 11.50%, beginning 10/15/08 ....................... 710,000 585,750 See accompanying notes to financial statements. 39 HIGH YIELD FUND (continued) CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ----------- Media (continued) Mediacom Broadband LLC 8.50%, due 10/15/15 .............................. $ 400,000 $ 384,000 11.00%, due 7/15/13 .............................. 420,000 443,625 Medianews Group, Inc. 6.875%, due 10/1/13 .............................. 705,000 641,550 Nexstar Finance Holdings LLC (zero coupon), due 4/1/13 11.375%, beginning 4/1/08 ........................ 465,000 376,650 Nexstar Finance, Inc. 7.00%, due 1/15/14 ............................... 400,000 364,000 PanAmSat Corp. 9.00%, due 8/15/14 ............................... 349,000 354,235 PanAmSat Holding Corp. (zero coupon), due 11/1/14 10.375%, beginning 11/1/09 ....................... 110,000 81,311 River Rock Entertainment Authority 9.75%, due 11/1/11 ............................... 300,000 315,750 Salem Communciations Corp. 7.75%, due 12/15/10 .............................. 760,000 754,300 Sinclair Broadcast Group, Inc. 8.00%, due 3/15/12 ............................... 750,000 761,250 Vertis, Inc. Series B 10.875%, due 6/15/09 (b) ......................... 200,000 197,000 13.50%, due 12/7/09 (a) .......................... 200,000 168,000 Warner Music Group 7.375%, due 4/15/14 .............................. 450,000 436,500 WMG Holdings Corp. (zero coupon), due 12/15/14 9.50%, beginning 12/15/09 ........................ 605,000 435,600 Young Broadcasting, Inc. 8.75%, due 1/15/14 ............................... 100,000 83,500 10.00%, due 3/1/11 (b) ........................... 475,000 422,750 ----------- 13,240,955 ----------- Metals & Mining - 0.5% Century Aluminum Co. 7.50%, due 8/15/14 ............................... 475,000 475,000 International Steel Group, Inc. 6.50%, due 4/15/14 ............................... 350,000 330,750 ----------- 805,750 ----------- Multiline Retail - 0.2% Neiman-Marcus Group, Inc. 9.00%, due 10/15/15 (a) .......................... 310,000 323,950 ----------- Multi-Utilities & Unregulated Power - 5.6% AES Corp. (The) 8.75%, due 5/15/13 (a) ........................... 780,000 834,600 Aquila, Inc. 7.625%, due 11/15/09 ............................. 485,000 502,377 Calpine Corp. 8.75%, due 7/15/13 (a)(f) ........................ 250,000 235,000 Dynegy Holdings, Inc. 8.375%, due 5/1/16 (a) ........................... 760,000 748,600 o Edison Mission Energy 7.50%, due 6/15/13 (a) ........................... 1,150,000 1,127,000 NorthWestern Corp. 5.875%, due 11/1/14 .............................. 305,000 298,814 NRG Energy, Inc. 7.25%, due 2/1/14 ................................ $ 370,000 $ 360,750 7.375%, due 2/1/16 ............................... 705,000 687,375 Reliant Energy, Inc. 6.75%, due 12/15/14 .............................. 425,000 391,000 9.50%, due 7/15/13 ............................... 275,000 276,375 o Sonat, Inc. 7.625%, due 7/15/11 .............................. 1,770,000 1,787,700 o Williams Cos., Inc. 7.625%, due 7/15/19 .............................. 1,400,000 1,421,000 ----------- 8,670,591 ----------- Oil & Gas - 5.8% Allis-Chalmers Energy, Inc. 9.00%, due 1/15/14 (a) ........................... 500,000 500,000 Chaparral Energy, Inc. 8.50%, due 12/1/15 (a) ........................... 725,000 721,375 Chesapeake Energy Corp. 6.50%, due 8/15/17 ............................... 500,000 456,250 6.625%, due 1/15/16 .............................. 485,000 451,050 6.875%, due 1/15/16 .............................. 400,000 378,000 Comstock Resources, Inc. 6.875%, due 3/1/12 ............................... 385,000 359,494 Denbury Resources, Inc. 7.50%, due 12/15/15 .............................. 552,000 549,240 Encore Acquisition Co. 7.25%, due 12/1/17 ............................... 575,000 552,000 Hilcorp Energy I L.P. 9.00%, due 6/1/16 (a) ............................ 395,000 397,963 MarkWest Energy Partners, L.P. Series B 6.875%, due 11/1/14 .............................. 800,000 736,000 SESI LLC 6.875%, due 6/1/14 (a) ........................... 655,000 630,438 Stone Energy Corp. 8.24%, due 7/15/10 (a)(c) ........................ 860,000 860,000 Swift Energy Co. 7.625%, due 7/15/11 .............................. 275,000 273,625 9.375%, due 5/1/12 ............................... 300,000 316,500 Targa Resources, Inc. 8.50%, due 11/1/13 (a) ........................... 725,000 699,625 Transcontinental Gas Pipe Line Corp. 6.40%, due 4/15/16 (a) ........................... 760,000 727,700 Whiting Petroleum Corp. 7.00%, due 2/1/14 ................................ 295,000 278,775 ----------- 8,888,035 ----------- Paper & Forest Products - 1.7% Appleton Papers, Inc. 8.125%, due 6/15/11 .............................. 475,000 479,750 Buckeye Technologies, Inc. 8.00%, due 10/15/10 .............................. 550,000 503,250 o Georgia-Pacific Corp. 8.125%, due 5/15/11 .............................. 1,625,000 1,616,875 ----------- 2,599,875 ----------- See accompanying notes to financial statements. 40 MCMORGAN FUNDS CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ------------ Pharmaceuticals - 1.3% AmerisourceBergen Corp. 5.875%, due 9/15/15 (a) ......................... $ 500,000 $ 471,250 o NBTY, Inc. 7.125%, due 10/1/15 ............................. 1,286,000 1,208,840 Omnicare, Inc. 6.875%, due 12/15/15 ............................ 367,000 348,650 ------------ 2,028,740 ------------ Real Estate - 1.4% American Real Estate Partners, L.P. 7.125%, due 2/15/13 ............................. 770,000 739,200 Ashton Woods USA LLC 9.50%, due 10/1/15 .............................. 968,000 856,680 Host Marriott L.P. 7.125%, due 11/1/13 (b) ......................... 530,000 528,013 ------------ 2,123,893 ------------ Semiconductors & Semiconductor Equipment - 0.1% Amkor Technologies, Inc. 9.25%, due 6/1/16 ............................... 190,000 180,025 ------------ Specialized Services - 0.4% Crystal U.S. Holdings 3 LLC Series B (zero coupon), due 10/1/14 10.50%, beginning 10/1/09 ....................... 330,000 258,225 K&F Acquisition, Inc. 7.75%, due 11/15/14 ............................. 380,000 374,300 ------------ 632,525 ------------ Specialty Retail - 1.1% Asbury Automotive Group, Inc. 9.00%, due 6/15/12 .............................. 430,000 425,700 AutoNation, Inc. 7.045%, due 4/15/13 (a)(c) ...................... 580,000 577,100 Lazydays RV Center, Inc. 11.75%, due 5/15/12 ............................. 530,000 500,850 Nebraska Book Co., Inc. 8.625%, due 3/15/12 ............................. 250,000 232,500 ------------ 1,736,150 ------------ Telecommunications - 0.9% American Cellular Corp. Series B 10.00%, due 8/1/11 .............................. 335,000 352,588 CCO Holdings LLC 8.75%, due 11/15/13 ............................. 200,000 195,000 Qwest Communications International, Inc. 7.50%, due 2/15/14 .............................. 895,000 872,625 ------------ 1,420,213 ------------ Textiles, Apparel & Luxury Goods - 0.3% Collins & Aikman Floor Cover Series B 9.75%, due 2/15/10 .............................. 480,000 471,600 ------------ Transportation Infrastructure - 0.8% Bristow Group, Inc. 6.125%, due 6/15/13 ............................. $ 652,000 $ 601,470 Great Lakes Dredge & Dock Corp. 7.75%, due 12/15/13 ............................. 200,000 184,250 Hornbeck Offshore Services, Inc. Series B 6.125%, due 12/1/14 ............................. 425,000 394,188 ------------ 1,179,908 ------------ Wireless Telecommunication Services - 2.7% Alamosa Delaware, Inc. 8.50%, due 1/31/12 .............................. 530,000 561,800 American Tower Corp. 7.125%, due 10/15/12 ............................ 805,000 802,988 Dobson Cellular Systems 9.875%, due 11/1/12 ............................. 71,000 74,905 Dobson Communications Corp. 8.875%, due 10/1/13 (b) ......................... 249,000 244,643 Nextel Communications, Inc. 7.375%, due 8/1/15 .............................. 330,000 335,900 Nextel Partners, Inc. 8.125%, due 7/1/11 .............................. 400,000 418,500 Rural Cellular Corp. 8.25%, due 3/15/12 .............................. 135,000 138,544 9.75%, due 1/15/10 (b) .......................... 625,000 622,656 Syniverse Technologies, Inc. Series B 7.75%, due 8/15/13 .............................. 697,000 677,833 U.S. Unwired, Inc. Series B 10.00%, due 6/15/12 ............................. 175,000 194,250 ------------ 4,072,019 ------------ Total Corporate Bonds (Cost $139,594,376) ............................. 135,431,607 ------------ FOREIGN CORPORATE BONDS 7.0% Chemicals - 0.7% Ineos Group Holdings PLC 8.50%, due 2/15/16 (a)(b) ....................... 580,000 543,025 Nova Chemicals Corp. 6.50%, due 1/15/12 .............................. 580,000 533,600 ------------ 1,076,625 ------------ Diversified Financial Services - 1.1% Dollarama Group L.P. 8.875%, due 8/15/12 (a)(b) ...................... 376,000 377,880 JSG Funding PLC 9.625%, due 10/1/12 ............................. 895,000 921,850 Nell AF SARL 8.375%, due 8/15/15 (a)(b) ...................... 370,000 355,663 ------------ 1,655,393 ------------ Electronic Equipment & Instruments - 0.3% Flextronics International, Ltd. 6.50%, due 5/15/13 .............................. 530,000 503,500 ------------ See accompanying notes to financial statements. 41 HIGH YIELD FUND (continued) FOREIGN CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ------------ Food & Staples Retailing - 0.2% Jean Coutu Group (PJC), Inc. 8.50%, due 8/1/14 (b) ............................. $ 315,000 $ 289,800 ------------ Hotels, Restaurants & Leisure - 1.4% Intrawest Corp. 7.50%, due 10/15/13 ............................... 475,000 472,625 o Kerzner International, Ltd. 6.75%, due 10/1/15 ................................ 1,225,000 1,278,594 Royal Caribbean Cruises, Ltd. 6.875%, due 12/1/13 ............................... 400,000 391,953 ------------ 2,143,172 ------------ Machinery - 0.2% MAAX Corp. 9.75%, due 6/15/12 ................................ 420,000 342,825 ------------ Metals & Mining - 0.7% Novelis, Inc. 7.25%, due 2/15/15 (a) ............................ 630,000 604,800 Russel Metals, Inc. 6.375%, due 3/1/14 ................................ 525,000 485,625 ------------ 1,090,425 ------------ Oil & Gas - 0.3% Compton Petroleum Finance Corp. 7.625%, due 12/1/13 ............................... 515,000 491,825 ------------ Paper & Forest Products - 0.5% Abitibi-Consolidated, Inc. 6.00%, due 6/20/13 ................................ 425,000 344,250 Bowater Canada Finance 7.95%, due 11/15/11 ............................... 445,000 422,750 ------------ 767,000 ------------ Semiconductors & Semiconductor Equipment - 0.7% Magnachip Semiconductor S.A. 8.579%, due 12/15/11 (c) .......................... 585,000 555,750 Sensata Technologies B.V. 8.00%, due 5/1/14 (a)(b) .......................... 470,000 453,550 ------------ 1,009,300 ------------ Wireless Telecommunication Services - 0.9% Inmarsat Finance PLC (zero coupon), due 11/15/12 10.375%, beginning 11/15/08 ....................... 125,000 106,406 7.625%, due 6/30/12 ............................... 293,000 300,325 Intelsat Bermuda, Ltd. 9.25%, due 6/15/16 (a) ............................ 300,000 309,750 Intelsat Subsidiary Holding Co., Ltd. 9.614%, due 1/15/12 (c) ........................... 600,000 606,000 ------------ 1,322,481 ------------ Total Foreign Corporate Bonds (Cost $11,175,500) ................................ 10,692,346 ------------ Total Long-Term Bonds (Cost $150,769,876) ............................... 146,123,953 ------------ SHARES VALUE ---------- ---------- PREFERRED STOCKS 1.4% Media - 1.4% Haights Cross Communications, Inc. 16.00% Class B (g)(h) ............................... 6,286 $ 276,584 ION Media Networks, Inc. 14.25% (e) .......................................... 91 782,828 Spanish Broadcasting System, Inc. 10.75% Series B ..................................... 995 1,106,438 ---------- Total Preferred Stocks (Cost $2,028,305) ................................... 2,165,850 ----------
NUMBER OF WARRANTS ---------- WARRANTS 0.0% ++ Media - 0.0% ++ Haights Cross Communications, Inc. Strike Price $0.001 Expire 12/10/11 (g)(h)(i)(k) ....................... 7 0(j) Preferred Class A Strike Price $0.001 Expire 12/10/11 (g)(h)(i)(k) ....................... 6,225 62 --- Total Warrants (Cost $62) ......................................... 62 ---
SHARES ---------- COMMON STOCK 0.1% Chemicals - 0.1% Huntsman Corp. (k) .................................. 5,871 101,686 ---------- Total Common Stock (Cost $43,855) ..................................... 101,686 ---------- PRINCIPAL AMOUNT ---------- SHORT-TERM INVESTMENTS 11.0% Commercial Paper - 1.6% Aluminum Co. of America 5.32%, due 7/5/06 .................................. $2,175,000 2,173,714 Countrywide Financial Corp. 5.30%, due 7/3/06 .................................. 305,000 304,910 ---------- Total Commercial Paper (Cost $2,478,624) .................................. 2,478,624 ---------- Repurchase Agreement - 5.3% Morgan Stanley & Co. 5.42%, dated 6/30/06 due 7/3/06 Proceeds at Maturity $8,198,526 (Collateralized by various bonds with a Principal Amount of $9,640,203 and a Market Value of $8,438,400) (l) ................................. 8,194,826 8,194,826 ---------- Total Repurchase Agreement (Cost $8,194,826) .................................. 8,194,826 ---------- See accompanying notes to financial statements. 42 MCMORGAN FUNDS SHORT-TERM INVESTMENTS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ------------ Time Deposits - 3.5% Calyon 5.265%, due 8/2/06 (l) ........................... $1,769,454 $ 1,769,454 Credit Suisse First Boston Corp. 5.305%, due 7/27/06 (l) .......................... 1,769,454 1,769,454 Fortis Bank 5.26%, due 7/7/06 (l) ............................ 1,769,454 1,769,454 ------------ Total Time Deposits (Cost $5,308,362) ................................ 5,308,362 ------------ U.S. Government Agency - 0.6% Farmer Mac (Discount Note) 5.06%, due 7/14/06 ............................... 1,000,000 998,173 ------------ Total U.S. Government Agency (Cost $998,173) .................................. 998,173 ------------ Total Short-Term Investments (Cost $16,979,985) ............................... 16,979,985 ------------ Total Investments (Cost $169,822,083) (m) .......................... 107.5% 165,371,536 Liabilities in Excess of Cash and Other Assets ............................ (7.5) (11,488,913) ---------- ------------ Net Assets ........................................ 100.0% $153,882,623 ========== ============ o 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) May be sold to institutional investors only. The total market value of these securities at June 30, 2006 is $35,506,644, which represents 23.1% of the Fund's net assets. (b) Represents security, or a portion thereof, which is out on loan. (c) Floating/variable rate. Rate shown is the rate in effect at June 30, 2006. (d) Target Return Index Securities Trust. Static portfolio comprised of 100 bullet 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 June 30, 2006 is $276,646, which represents 0.2% of the Fund's net assets. (h) Restricted security. The total market value of these securities at June 30, 2006 is $276,646, which represents 0.2% of the Fund's net assets. (i) Fair Valued security. The total market value of these securities at June 30, 2006 is $62, which represents less than 0.1% of the Fund's net assets. (j) Less than one dollar. (k) Non-income producing security. (l) Represents security, or a portion thereof, purchased with cash collateral received for securities on loan. (m) At June 30, 2006, cost is identical for book and federal income tax purposes and net unrealized depreciation is as follows: Gross unrealized appreciation ........................... $ 1,105,584 Gross unrealized depreciation ........................... (5,556,131) ----------- Net unrealized depreciation ............................. $(4,450,547) =========== See accompanying notes to financial statements. 43 HIGH YIELD FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $169,822,083) including $13,168,966 market value of securities loaned ............................ $165,371,536 Cash-interest bearing accounts ................................ 3,697 Dividends and interest receivable ............................. 3,207,856 Receivable for securities sold ................................ 248,125 Other assets .................................................. 33,121 ------------ Total assets ............................................... 168,864,335 ------------ LIABILITIES: Securities lending collateral ................................. 13,503,188 Payable for securities purchased .............................. 1,360,969 Payable to Advisor, net ....................................... 63,318 Legal fees payable ............................................ 15,460 Audit fees payable ............................................ 15,000 Custodian fees payable ........................................ 9,712 Administration fees payable ................................... 6,398 Accounting fees payable ....................................... 3,929 Trustees fees payable ......................................... 886 Accrued expenses .............................................. 2,852 ------------ Total liabilities .......................................... 14,981,712 ------------ Net Assets ..................................................... $153,882,623 ============ NET ASSETS CONSIST OF: Capital paid-in ............................................... $159,470,114 Accumulated undistributed net investment income ............... 684,507 Accumulated net realized loss on investments .................. (1,821,451) Net unrealized depreciation on investments .................... (4,450,547) ------------ $153,882,623 ============ Net Assets: Class McMorgan ................................................ $153,882,623 ============ Shares Outstanding: Class McMorgan ................................................ 15,632,261 ============ Net asset value and redemption price per share: Class McMorgan ................................................ $ 9.84 ============ STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Interest ....................................................... $11,868,180 Dividends ...................................................... 65,358 Income from securities loaned - net ............................ 60,681 ----------- Total investment income ..................................... 11,994,219 ----------- Expenses: Investment advisory fees (Note F) .............................. 724,645 Administration fees ............................................ 71,423 Accounting fees ................................................ 48,385 Legal fees ..................................................... 47,065 Custodian fees ................................................. 35,553 Insurance fees ................................................. 34,075 Trustees fees .................................................. 28,731 Auditing fees .................................................. 15,000 Report to shareholder expense .................................. 14,520 Registration expenses .......................................... 9,111 Transfer agent fees ............................................ 8,365 Miscellaneous expenses ......................................... 8,194 ----------- Total expenses .............................................. 1,045,067 Net recovered fees (Note F) .................................... 22,202 ----------- Net expenses ................................................ 1,067,269 ----------- Net investment income ........................................... 10,926,950 ----------- REALIZED AND UNREALIZED LOSS ON INVESTMENTS: Net realized loss on investments ............................... (1,637,052) Net change in unrealized depreciation on investments .................................................. (3,291,918) ----------- Net realized and unrealized loss on investments ................ (4,928,970) ----------- Increase in net assets from operations .......................... $ 5,997,980 =========== See accompanying notes to financial statements. 44 HIGH YIELD FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------ ------------ INCREASE IN NET ASSETS: Operations: Net investment income .......................... $ 10,926,950 $ 5,939,946 Net realized gain (loss) on investments ........ (1,637,052) 1,556 Net change in unrealized depreciation on investments.................................... (3,291,918) (425,768) ------------ ------------ Increase in net assets ......................... 5,997,980 5,515,734 ------------ ------------ Dividends and distributions to shareholders: From net investment income ..................... (10,470,194) (5,828,372) From capital gains ............................. (185,264) (336,393) ------------ ------------ Total dividends and distributions to shareholders................................... (10,655,458) (6,164,765) ------------ ------------ Capital share transactions: Net proceeds from sale of shares ............... 31,515,539 66,740,076 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions.................................. 10,288,697 6,164,761 ------------ ------------ 41,804,236 72,904,837 Cost of shares redeemed ........................ (8,249,945) (3,160,084) ------------ ------------ Increase in net assets derived from capital share transactions ............................ 33,554,291 69,744,753 ------------ ------------ Total increase in net assets ................... 28,896,813 69,095,722 Net Assets: Beginning of year .............................. 124,985,810 55,890,088 ------------ ------------ End of year (including undistributed net investment income of $684,507 and $227,068, respectively).................................. $153,882,623 $124,985,810 ============ ============ See accompanying notes to financial statements. 45 HIGH YIELD FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The table below set forth financial data for a share of beneficial interest outstanding throughout each period presented.
CLASS MCMORGAN ---------------------------------- YEAR ENDED JUNE 30, FOR THE ------------------- PERIOD ENDED 2006 2005 6/30/2004* -------- -------- ------------ Net asset value, beginning of period............................. $ 10.14 $ 9.94 $ 10.00 -------- -------- ------- Income from investment operations: Net investment income........................................... 0.75 0.72 0.48 Net realized and unrealized gain (loss) on investments.......... (0.31) 0.25 (0.06) -------- -------- ------- Total from investment operations.............................. 0.44 0.97 0.42 -------- -------- ------- Less dividends and distributions: From net investment income...................................... (0.73) (0.72) (0.48) From capital gains.............................................. (0.01) (0.05) -- -------- -------- ------- Total dividends and distributions............................. (0.74) (0.77) (0.48) -------- -------- ------- Net asset value, end of period................................... $ 9.84 $ 10.14 $ 9.94 ======== ======== ======= Total return..................................................... 4.45% 9.94% 4.23%(a) Ratios/Supplemental Data: Net assets, end of period (in 000's)............................ $153,883 $124,986 $55,890 Ratio of expenses to average net assets before reimbursement and recovery of expenses by Advisor................................ 0.72% 0.75% 0.81%+ Ratio of expenses to average net assets after reimbursement and recovery of expenses by Advisor................................ 0.74% 0.75% 0.75%+ Ratio of net investment income to average net assets before reimbursement and recovery of expenses by Advisor.............. 7.56% 7.24% 7.62%+ Ratio of net investment income to average net assets after reimbursement and recovery of expenses by Advisor.............. 7.54% 7.24% 7.68%+ Portfolio turnover.............................................. 38% 86% 40.00%
- ---------- * The Fund commenced operations on November 3, 2003. (a) Total return is not annualized. + Annualized. See accompanying notes to financial statements. 46 BALANCED FUND MCMORGAN FUNDS PORTFOLIO OF INVESTMENTS JUNE 30, 2006 COMMON STOCKS 63.6% SHARES VALUE ------ ---------- Consumer Discretionary - 5.7% Aeropostale, Inc. (a) ................................... 200 $ 5,778 American Eagle Outfitters, Inc. ......................... 1,371 46,669 American Greetings Corp. Class A (b) .................... 703 14,770 AnnTaylor Stores Corp. (a) .............................. 745 32,318 Apollo Group, Inc. Class A (a)(b) ....................... 1,154 59,627 ArvinMeritor, Inc. (b) .................................. 258 4,435 AutoNation, Inc. (a) .................................... 1,425 30,552 AutoZone, Inc. (a) ...................................... 468 41,278 Barnes & Noble, Inc. .................................... 570 20,805 Best Buy Co., Inc. ...................................... 1,934 106,061 Big Lots, Inc. (a) ...................................... 758 12,947 Black & Decker Corp. (The) .............................. 241 20,355 Blyth, Inc. ............................................. 97 1,791 Bob Evans Farms, Inc. ................................... 55 1,651 Brinker International, Inc. ............................. 269 9,765 Career Education Corp. (a)(b) ........................... 1,025 30,637 CBRL Group, Inc. ........................................ 47 1,594 CBS Corp. Class B (b) ................................... 7,725 208,961 Circuit City Stores, Inc. ............................... 1,531 41,674 Claire's Stores, Inc. ................................... 1,000 25,510 Clear Channel Communications, Inc. ...................... 2,247 69,545 Corinthian Colleges, Inc. (a) ........................... 558 8,013 Darden Restaurants, Inc. (b) ............................ 1,292 50,905 DeVry, Inc. (a)(b) ...................................... 108 2,373 Dillards, Inc. Class A .................................. 208 6,625 Dollar Tree Stores, Inc. (a)(b) ......................... 1,080 28,620 Eastman Kodak Co. (b) ................................... 967 22,995 Emmis Communications Corp. Class A (a) .................. 204 3,191 Entercom Communications Corp. ........................... 151 3,950 Ford Motor Co. (b) ...................................... 14,696 101,843 Furniture Brands International, Inc. (b) ................ 570 11,879 Gap, Inc. (The) (b) ..................................... 5,655 98,397 Goodyear Tire & Rubber Co. (The) (a)(b) ................. 1,119 12,421 Harley-Davidson, Inc. ................................... 2,195 120,484 Hasbro, Inc. ............................................ 1,430 25,897 Home Depot, Inc. (The) .................................. 1,326 47,458 International Game Technology ........................... 1,240 47,046 ITT Educational Services, Inc. (a) ...................... 122 8,029 J.C. Penney Co., Inc. ................................... 2,308 155,813 Jones Apparel Group, Inc. ............................... 1,163 36,972 Kohl's Corp. (a)(b) ..................................... 1,152 68,106 Lear Corp. .............................................. 102 2,265 Leggett & Platt, Inc. ................................... 612 15,288 Lennar Corp. Class A (b) ................................ 366 16,239 Limited Brands, Inc. .................................... 1,828 46,778 Liz Claiborne, Inc. ..................................... 488 18,085 Mattel, Inc. ............................................ 1,426 23,543 McClatchy Co. (The) Class A ............................. 17 678 McDonald's Corp. ........................................ 4,650 156,240 McGraw-Hill Cos., Inc. (The) ............................ 3,691 185,399 Michaels Stores, Inc. ................................... 447 18,434 Modine Manufacturing Co. ................................ 71 1,659 Newell Rubbermaid, Inc. ................................. 2,755 71,162 Nordstrom, Inc. ......................................... 762 27,813 Office Depot, Inc. (a) .................................. 2,958 112,404 OfficeMax, Inc. ......................................... 237 9,658 Omnicom Group, Inc. ..................................... 1,227 109,313 Payless ShoeSource, Inc. (a) ............................ 722 $ 19,617 PETsMART, Inc. .......................................... 436 11,162 RadioShack Corp. (b) .................................... 434 6,076 Rent-A-Center, Inc. (a)(b) .............................. 744 18,496 Ross Stores, Inc. ....................................... 545 15,287 Ryland Group, Inc. (The) ................................ 59 2,571 Saks, Inc. .............................................. 207 3,347 Scholastic Corp. (a) .................................... 258 6,700 Sears Holdings Corp. (a)(b) ............................. 513 79,433 Sherwin-Williams Co. (The) .............................. 884 41,972 Snap-On, Inc. ........................................... 195 7,882 Sotheby's Holdings, Inc. Class A (a) .................... 406 10,657 Starbucks Corp. (a) ..................................... 3,654 137,975 Starwood Hotels & Resorts Worldwide, Inc. ............... 331 19,973 Thor Industries, Inc. (b) ............................... 294 14,244 Timberland Co. Class A (a) .............................. 304 7,934 Time Warner, Inc. ....................................... 538 9,307 TJX Cos., Inc. (The) .................................... 694 15,865 Tupperware Corp. ........................................ 255 5,021 Univision Communications, Inc. Class A (a) .............. 411 13,768 Walt Disney Co. (The) ................................... 8,155 244,650 Westwood One, Inc. ...................................... 514 3,855 Whirlpool Corp. ......................................... 75 6,199 Yum! Brands, Inc. ....................................... 2,154 108,282 ---------- 3,272,971 ---------- Consumer Staples - 4.0% Altria Group, Inc. ...................................... 3,315 243,420 Archer-Daniels-Midland Co. .............................. 6,459 266,628 Avon Products, Inc. ..................................... 1,514 46,934 Campbell Soup Co. ....................................... 78 2,895 Church & Dwight Co., Inc. ............................... 579 21,087 Coca-Cola Co. (The) ..................................... 4,928 212,003 Coca-Cola Enterprises, Inc. ............................. 464 9,452 Colgate-Palmolive Co. ................................... 1,183 70,862 ConAgra Foods, Inc. ..................................... 2,434 53,816 Dean Foods Co. (a) ...................................... 876 32,578 Energizer Holdings, Inc. (a) ............................ 114 6,677 Estee Lauder Cos., Inc. (The) Class A ................... 180 6,961 General Mills, Inc. ..................................... 3,187 164,640 H.J. Heinz Co. .......................................... 1,005 41,426 Kimberly-Clark Corp. .................................... 4,565 281,660 McCormick & Co., Inc. ................................... 500 16,775 Pepsi Bottling Group, Inc. (The) ........................ 843 27,102 PepsiAmericas, Inc. ..................................... 277 6,124 PepsiCo, Inc. ........................................... 1,349 80,994 Procter & Gamble Co. (The) .............................. 6,374 354,394 Reynolds American, Inc. (b) ............................. 856 98,697 Sara Lee Corp. .......................................... 3,291 52,722 SUPERVALU, Inc. (b) ..................................... 1,572 48,260 UST, Inc. (b) ........................................... 867 39,180 Wal-Mart Stores, Inc. (b) ............................... 2,804 135,069 ---------- 2,320,356 ---------- See accompanying notes to financial statements. 47 BALANCED FUND (CONTINUED) COMMON STOCKS (CONTINUED) SHARES VALUE ------ ---------- Energy - 6.4% Anadarko Petroleum Corp. (b) ............................ 790 $ 37,675 Baker Hughes, Inc. ...................................... 628 51,402 BJ Services Co. ......................................... 552 20,567 Cameron International Corp. (a) ......................... 200 9,554 Chevron Corp. ........................................... 6,042 374,967 ConocoPhillips .......................................... 1,187 77,784 Devon Energy Corp. ...................................... 3,498 211,314 o ExxonMobil Corp. ...................................... 23,598 1,447,737 Grant Prideco, Inc. (a) ................................. 487 21,793 Helmerich & Payne, Inc. ................................. 194 11,690 Hess Corp. (b) .......................................... 465 24,575 Kerr-McGee Corp. ........................................ 744 51,596 Marathon Oil Corp. (b) .................................. 1,844 153,605 Noble Energy, Inc. ...................................... 1,797 84,207 Occidental Petroleum Corp. .............................. 728 74,656 Overseas Shipholding Group, Inc. ........................ 175 10,351 Pioneer Natural Resources Co. ........................... 225 10,442 Pogo Producing Co. (b) .................................. 588 27,107 Pride International, Inc. (a) ........................... 599 18,707 Rowan Cos., Inc. ........................................ 209 7,438 Schlumberger, Ltd. (b) .................................. 6,683 435,130 Southwestern Energy Co. (a) ............................. 579 18,042 Sunoco, Inc. ............................................ 870 60,282 Tidewater, Inc. ......................................... 140 6,888 Transocean, Inc. (a) .................................... 3,210 257,827 Valero Energy Corp. ..................................... 3,152 209,671 ---------- 3,715,007 ---------- Financials - 15.0% ACE, Ltd. ............................................... 2,654 134,266 AFLAC, Inc. ............................................. 4,856 225,076 Allstate Corp. (The) .................................... 6,452 353,118 Ambac Financial Group, Inc. ............................. 478 38,766 American Express Co. .................................... 7,556 402,130 American Financial Group, Inc. .......................... 476 20,420 American International Group, Inc. ...................... 6,092 359,733 AmeriCredit Corp. (a) ................................... 1,364 38,083 Ameriprise Financial, Inc. .............................. 2,464 110,058 AmerUs Group Co. (b) .................................... 97 5,679 AmSouth Bancorporation .................................. 1,720 45,494 AON Corp. ............................................... 3,157 109,927 Arthur J. Gallagher & Co. (b) ........................... 613 15,533 Bank of America Corp. ................................... 9,038 434,728 Bank of Hawaii Corp. .................................... 151 7,490 Bank of New York Co., Inc. (The) ........................ 6,545 210,749 BB&T Corp. (b) .......................................... 1,196 49,742 Capital One Financial Corp. ............................. 2,088 178,420 Charles Schwab Corp. (The) (b) .......................... 10,228 163,443 Chubb Corp. (The) ....................................... 3,906 194,909 CIT Group, Inc. ......................................... 345 18,040 o Citigroup, Inc. ....................................... 17,347 836,819 Comerica, Inc. .......................................... 1,616 84,016 Cullen/Frost Bankers, Inc. .............................. 153 8,767 E*Trade Financial Corp. (a) ............................. 1,743 39,775 Equity Office Properties Trust (REIT) (c) ............... 1,921 70,136 Everest Re Group, Ltd. .................................. 98 8,484 Fannie Mae .............................................. 7,750 372,775 Federated Investors, Inc. Class B ....................... 324 10,206 Fidelity National Financial, Inc. ....................... 645 25,123 Fifth Third Bancorp ..................................... 849 $ 31,371 First American Corp. .................................... 312 13,188 First Horizon National Corp. ............................ 187 7,517 FirstMerit Corp. ........................................ 121 2,534 Franklin Resources, Inc. ................................ 657 57,034 Genworth Financial, Inc. Class A ........................ 1,250 43,550 Goldman Sachs Group, Inc. (The) ......................... 2,057 309,434 Hanover Insurance Group, Inc. (The) ..................... 98 4,651 Hartford Financial Services Group, Inc. (The) ........... 820 69,372 HCC Insurance Holdings, Inc. ............................ 1,068 31,442 Horace Mann Educators Corp. ............................. 151 2,559 Janus Capital Group, Inc. ............................... 2,170 38,843 Jefferies Group, Inc. ................................... 1,044 30,934 JPMorgan Chase & Co. .................................... 11,958 502,236 KeyCorp ................................................. 2,120 75,642 LaBranche & Co., Inc. (a)(b) ............................ 128 1,550 Legg Mason, Inc. ........................................ 453 45,083 Lehman Brothers Holdings, Inc. .......................... 2,396 156,099 Leucadia National Corp. ................................. 1,061 30,971 Lincoln National Corp. .................................. 840 47,410 Loews Corp. ............................................. 4,055 143,750 Longview Fibre Co. (REIT) (c) ........................... 170 3,245 Mercury General Corp. ................................... 54 3,044 Merrill Lynch & Co., Inc. ............................... 1,076 74,847 MetLife, Inc. (b) ....................................... 7,134 365,332 MGIC Investment Corp. ................................... 322 20,930 Moody's Corp. ........................................... 1,625 88,497 National City Corp. (b) ................................. 4,387 158,766 New Plan Excel Realty Trust (REIT) (c) .................. 303 7,481 North Fork Bancorporation, Inc. ......................... 2,497 75,334 Northern Trust Corp. .................................... 1,526 84,388 Old Republic International Corp. ........................ 2,288 48,895 PMI Group, Inc. (The) ................................... 299 13,329 Principal Financial Group, Inc. ......................... 2,769 154,095 Progressive Corp. (The) ................................. 676 17,380 Protective Life Corp. ................................... 717 33,427 Prudential Financial, Inc. .............................. 4,770 370,629 Radian Group, Inc. ...................................... 827 51,092 Raymond James Financial, Inc. ........................... 880 26,638 Regions Financial Corp. (b) ............................. 620 20,534 SAFECO Corp. (b) ........................................ 768 43,277 SEI Investments Co. ..................................... 212 10,363 Shurgard Storage Centers, Inc. Class A (REIT) (c) ....... 586 36,625 St. Paul Travelers Cos., Inc. (The) ..................... 2,801 124,869 StanCorp Financial Group, Inc. .......................... 256 13,033 State Street Corp. ...................................... 507 29,452 T. Rowe Price Group, Inc. (b) ........................... 1,138 43,028 Torchmark Corp. ......................................... 379 23,013 UnumProvident Corp. (b) ................................. 2,382 43,186 W.R. Berkley Corp. ...................................... 1,682 57,407 Wachovia Corp. .......................................... 2,570 138,986 Waddell & Reed Financial, Inc. Class A .................. 475 9,766 Washington Mutual, Inc. ................................. 1,282 58,434 Wells Fargo & Co. ....................................... 3,115 208,954 XL Capital, Ltd. Class A (b) ............................ 470 28,811 ---------- 8,704,162 ---------- See accompanying notes to financial statements. 48 MCMORGAN FUNDS COMMON STOCKS (continued) SHARES VALUE ------ ---------- Health Care - 7.0% Abbott Laboratories ..................................... 3,574 $ 155,862 Aetna, Inc. ............................................. 5,721 228,440 AmerisourceBergen Corp. ................................. 2,055 86,146 Amgen, Inc. (a) ......................................... 5,637 367,701 Applera Corp.- Applied Biosystems Group ................. 1,831 59,233 Baxter International, Inc. .............................. 1,896 69,697 Becton, Dickinson & Co. ................................. 2,510 153,436 Biogen Idec, Inc. (a) ................................... 1,451 67,225 Boston Scientific Corp. (a) ............................. 376 6,332 Cardinal Health, Inc. ................................... 3,398 218,593 Caremark Rx, Inc. ....................................... 268 13,365 Coventry Health Care, Inc. (a) .......................... 1,608 88,344 DENTSPLY International, Inc. ............................ 101 6,121 Forest Laboratories, Inc. (a) ........................... 2,745 106,204 HCA, Inc. (b) ........................................... 1,202 51,866 Health Net, Inc. (a) .................................... 409 18,475 Henry Schein, Inc. (a) .................................. 112 5,234 Humana, Inc. (a) ........................................ 1,438 77,221 Johnson & Johnson ....................................... 6,255 374,800 King Pharmaceuticals, Inc. (a) .......................... 2,389 40,613 Laboratory Corp. of America Holdings (a) ................ 795 49,473 Lincare Holdings, Inc. (a) .............................. 965 36,516 Manor Care, Inc. (b) .................................... 808 37,911 McKesson Corp. .......................................... 3,039 143,684 Medicis Pharmaceutical Corp. Class A .................... 200 4,800 Merck & Co., Inc. ....................................... 13,643 497,014 Mylan Laboratories, Inc. ................................ 2,180 43,600 PerkinElmer, Inc. ....................................... 687 14,358 Pfizer, Inc. ............................................ 32,331 758,809 STERIS Corp. ............................................ 224 5,121 Techne Corp. (a) ........................................ 67 3,412 UnitedHealth Group, Inc. ................................ 1,464 65,558 Universal Health Services, Inc. Class B ................. 497 24,979 Varian Medical Systems, Inc. (a) ........................ 864 40,910 Varian, Inc. (a) ........................................ 274 11,374 Waters Corp. (a) ........................................ 317 14,075 Watson Pharmaceuticals, Inc. (a) ........................ 1,032 24,025 Wellpoint, Inc. (a) ..................................... 926 67,385 ---------- 4,037,912 ---------- Industrials - 7.6% AGCO Corp. (a) .......................................... 203 5,343 Allied Waste Industries, Inc. (a)(b) .................... 752 8,543 American Standard Cos., Inc. ............................ 75 3,245 Boeing Co. (The) ........................................ 5,556 455,092 Brink's Co. (The) ....................................... 88 4,964 Burlington Northern Santa Fe Corp. ...................... 3,700 293,225 C.H. Robinson Worldwide, Inc. ........................... 1,143 60,922 Carlisle Cos., Inc. ..................................... 107 8,485 Caterpillar, Inc. ....................................... 1,518 113,061 Cooper Industries, Ltd. Class A ......................... 483 44,880 Corporate Executive Board Co. ........................... 329 32,966 Crane Co. ............................................... 519 21,590 CSX Corp. ............................................... 1,589 111,929 Cummins, Inc. (b) ....................................... 460 56,235 Danaher Corp. ........................................... 933 60,011 Deere & Co. ............................................. 435 36,318 Dun & Bradstreet Corp. (a).............................. 247 $ 17,211 Eaton Corp.............................................. 271 20,433 Emerson Electric Co..................................... 984 82,469 Equifax, Inc............................................ 483 16,586 Expeditors International of Washington, Inc. ........... 1,109 62,115 Fastenal Co............................................. 87 3,505 Federal Signal Corp..................................... 101 1,529 Flowserve Corp. (a)..................................... 370 21,053 Fluor Corp.............................................. 579 53,806 General Dynamics Corp................................... 827 54,135 o General Electric Co................................... 26,355 868,661 Graco, Inc.............................................. 104 4,782 Granite Construction, Inc............................... 227 10,276 Illinois Tool Works, Inc................................ 609 28,927 Jacobs Engineering Group, Inc. (a)...................... 190 15,132 Joy Global, Inc......................................... 1,072 55,840 Korn/Ferry International (a)............................ 65 1,273 Lincoln Electric Holdings, Inc.......................... 64 4,010 Lockheed Martin Corp.................................... 3,517 252,310 Manpower, Inc........................................... 457 29,522 Masco Corp. (b)......................................... 4,107 121,731 Monster Worldwide, Inc. (a)............................. 219 9,343 MSC Industrial Direct Co. Class A....................... 370 17,601 Nordson Corp............................................ 300 14,754 Norfolk Southern Corp................................... 3,427 182,385 Northrop Grumman Corp................................... 1,587 101,663 Oshkosh Truck Corp...................................... 270 12,830 Parker Hannifin Corp.................................... 670 51,992 Precision Castparts Corp................................ 220 13,147 Quanta Services, Inc. (a)............................... 817 14,159 Raytheon Co............................................. 4,468 199,139 Republic Services, Inc.................................. 799 32,232 Robert Half International, Inc.......................... 1,008 42,336 Rockwell Collins, Inc................................... 516 28,829 Ryder System, Inc....................................... 93 5,434 Southwest Airlines Co................................... 7,121 116,571 Swift Transportation Co., Inc. (a)...................... 81 2,573 Teleflex, Inc........................................... 415 22,418 Thomas & Betts Corp. (a)................................ 448 22,982 Tyco International, Ltd................................. 2,924 80,410 Union Pacific Corp...................................... 1,267 117,780 United Parcel Service, Inc. Class B..................... 739 60,842 United Rentals, Inc. (a)(b)............................. 371 11,865 United Technologies Corp................................ 1,304 82,700 Waste Management, Inc................................... 3,369 120,880 ---------- 4,406,980 ---------- Information Technology - 10.9% Acxiom Corp............................................. 883 22,075 Advent Software, Inc. (a)............................... 33 1,190 Agilent Technologies, Inc. (a).......................... 2,714 85,654 Altera Corp. (a)........................................ 2,045 35,890 Analog Devices, Inc..................................... 673 21,630 Apple Computer, Inc. (a)................................ 3,106 177,415 Applied Materials, Inc.................................. 2,626 42,751 Arrow Electronics, Inc. (a)............................. 490 15,778 Atmel Corp. (a)......................................... 1,445 8,020 Automatic Data Processing, Inc.......................... 879 39,863 See accompanying notes to financial statements. 49 BALANCED FUND (CONTINUED) COMMON STOCKS (CONTINUED) SHARES VALUE ------ ---------- Information Technology (continued) Avaya, Inc. (a) ........................................ 624 $ 7,126 BMC Software, Inc. (a) ................................. 2,155 51,504 CA, Inc. (b) ........................................... 4,624 95,023 CDW Corp. .............................................. 306 16,723 Ceridian Corp. (a) ..................................... 1,479 36,147 Ciena Corp. (a) ........................................ 902 4,339 Cisco Systems, Inc. (a) ................................ 31,154 608,438 Citrix Systems, Inc. (a) ............................... 1,780 71,449 CommScope, Inc. (a) .................................... 105 3,299 Computer Sciences Corp. (a) ............................ 1,819 88,112 Compuware Corp. (a) .................................... 3,817 25,574 Convergys Corp. (a) .................................... 471 9,184 CSG Systems International, Inc. (a) .................... 552 13,656 Dell, Inc. (a) ......................................... 16,468 401,984 DST Systems, Inc. (a) .................................. 237 14,101 Dycom Industries, Inc. (a) ............................. 68 1,448 Electronic Data Systems Corp. .......................... 792 19,055 Fair Isaac Corp. (b) ................................... 683 24,800 First Data Corp. ....................................... 5,907 266,051 Freescale Semiconductor, Inc. Class B (a) .............. 1,375 40,425 Google, Inc. Class A (a) ............................... 25 10,483 Harris Corp. ........................................... 508 21,087 Hewlett-Packard Co. .................................... 16,154 511,759 Imation Corp. .......................................... 117 4,803 Intel Corp. ............................................ 26,191 496,319 International Business Machines Corp. (IBM) ............ 7,915 608,030 Intersil Corp. Class A ................................. 1,254 29,155 Intuit, Inc. (a) ....................................... 1,746 105,441 Jabil Circuit, Inc. .................................... 874 22,374 Lam Research Corp. (a) ................................. 1,385 64,569 Lexmark International, Inc. (a) ........................ 566 31,600 LSI Logic Corp. (a) .................................... 646 5,782 McAfee, Inc. (a) ....................................... 1,287 31,235 Micrel, Inc. (a) ....................................... 115 1,151 Micron Technology, Inc. (a) ............................ 4,974 74,908 o Microsoft Corp. ...................................... 38,028 886,052 Molex, Inc. ............................................ 261 8,762 MoneyGram International, Inc. .......................... 314 10,660 Motorola, Inc. ......................................... 14,870 299,630 MPS Group, Inc. (a) .................................... 878 13,223 National Semiconductor Corp. ........................... 3,398 81,042 NCR Corp. (a) .......................................... 948 34,735 Network Appliance, Inc. (a) ............................ 688 24,286 Novell, Inc. (a) ....................................... 1,434 9,507 Novellus Systems, Inc. (a) ............................. 1,112 27,466 NVIDIA Corp. (a) ....................................... 3,294 70,129 Oracle Corp. (a) ....................................... 137 1,985 Palm, Inc. (a) ......................................... 138 2,222 Plexus Corp. (a) ....................................... 479 16,387 Polycom, Inc. (a) ...................................... 780 17,098 QLogic Corp. (a) ....................................... 1,374 23,688 QUALCOMM, Inc. ......................................... 238 9,537 Reynolds & Reynolds Co. (The) Class A .................. 279 8,557 Sanmina-SCI Corp. (a) .................................. 3,694 16,992 Silicon Laboratories, Inc. (a) ......................... 315 11,072 Solectron Corp. (a) .................................... 9,266 31,690 Sybase, Inc. (a) ....................................... 329 6,383 Symantec Corp. (a)(b)................................... 1,579 $ 24,538 Synopsys, Inc. (a)...................................... 247 4,636 Tech Data Corp. (a)..................................... 376 14,405 Tektronix, Inc.......................................... 554 16,299 Tellabs, Inc. (a)....................................... 3,737 49,739 Texas Instruments, Inc.................................. 7,422 224,812 Transaction Systems Architects, Inc. Class A (a)........ 124 5,170 Unisys Corp. (a)........................................ 1,781 11,185 UTStarcom, Inc. (a)..................................... 46 358 VeriSign, Inc. (a)(b)................................... 2,097 48,587 Western Digital Corp. (a)............................... 197 3,903 ---------- 6,282,135 ---------- Materials - 2.0% Airgas, Inc............................................. 280 10,430 Albemarle Corp. (b)..................................... 129 6,176 Commercial Metals Co.................................... 51 1,311 Cytec Industries, Inc................................... 134 7,190 Eastman Chemical Co..................................... 35 1,890 Freeport-McMoran Copper & Gold, Inc. Class B (b)........ 1,794 99,406 Glatfelter.............................................. 81 1,285 Hercules, Inc. (a)...................................... 376 5,738 Louisiana-Pacific Corp.................................. 1,099 24,068 Lyondell Chemical Co.................................... 2,050 46,453 Martin Marietta Materials, Inc.......................... 302 27,527 MeadWestvaco Corp....................................... 309 8,630 Monsanto Co............................................. 1,310 110,289 Newmont Mining Corp..................................... 2,522 133,489 Nucor Corp.............................................. 3,080 167,090 Olin Corp............................................... 753 13,501 Packaging Corp. of America.............................. 110 2,422 Pactiv Corp. (a)........................................ 1,447 35,813 Phelps Dodge Corp....................................... 2,033 167,031 PPG Industries, Inc..................................... 304 20,064 Reliance Steel & Aluminum Co............................ 48 3,982 Rohm & Haas Co.......................................... 498 24,960 Sensient Technologies Corp.............................. 494 10,330 Steel Dynamics, Inc..................................... 414 27,216 Temple-Inland, Inc...................................... 204 8,745 United States Steel Corp................................ 1,101 77,202 Valspar Corp. (The)..................................... 372 9,825 Vulcan Materials Co..................................... 655 51,090 Weyerhaeuser Co......................................... 1,158 72,085 ---------- 1,175,238 ---------- Telecommunication Services - 2.2% o BellSouth Corp........................................ 24,907 901,633 CenturyTel, Inc. (b).................................... 1,206 44,803 Cincinnati Bell, Inc. (a)............................... 1,300 5,330 Citizens Communications Co.............................. 3,278 42,778 Embarq Corp. (a)........................................ 227 9,305 Qwest Communications International, Inc. (a)(b)......... 15,312 123,874 Verizon Communications, Inc............................. 3,754 125,721 ---------- 1,253,444 ---------- See accompanying notes to financial statements. 50 MCMORGAN FUNDS COMMON STOCKS (CONTINUED) SHARES VALUE ------ ----------- Utilities - 2.8% AES Corp. (The) (a).................................... 2,211 $ 40,793 Allegheny Energy, Inc. (a)............................. 768 28,470 Alliant Energy Corp.................................... 679 23,290 American Electric Power Co., Inc....................... 851 29,147 CenterPoint Energy, Inc................................ 1,461 18,262 Constellation Energy Group, Inc........................ 2,320 126,486 Duke Energy Corp....................................... 2,584 75,892 Dynegy, Inc. Class A (a)(b)............................ 391 2,139 Edison International................................... 3,186 124,254 Entergy Corp........................................... 317 22,428 Equitable Resources, Inc............................... 1,032 34,572 Exelon Corp............................................ 555 31,541 FirstEnergy Corp....................................... 1,218 66,028 FPL Group, Inc. (b).................................... 2,438 100,884 Great Plains Energy, Inc. (b).......................... 530 14,766 KeySpan Corp........................................... 364 14,706 National Fuel Gas Co................................... 440 15,462 Nicor, Inc. (b)........................................ 232 9,628 OGE Energy Corp........................................ 39 1,366 Pepco Holdings, Inc.................................... 1,937 45,674 PG&E Corp.............................................. 1,241 48,746 Pinnacle West Capital Corp............................. 450 17,959 PPL Corp. (b).......................................... 2,571 83,043 Public Service Enterprise Group, Inc................... 500 33,060 Puget Energy, Inc. (b)................................. 211 4,532 SCANA Corp............................................. 995 38,387 Southern Co. (The) (b)................................. 6,312 202,300 TXU Corp............................................... 4,635 277,127 Westar Energy, Inc..................................... 183 3,852 Xcel Energy, Inc. (b).................................. 3,520 67,514 ----------- 1,602,308 ----------- Total Common Stocks (Cost $35,202,369).................................... 36,770,513 ----------- PRINCIPAL AMOUNT --------- FIXED INCOME SECURITIES 31.6% CORPORATE ASSET-BACKED SECURITIES 0.2% Financials - 0.2% Accredited Mortgage Loan Trust Series 2005-2 Class A2A 5.423%, due 7/25/35 (e)(f) .......................... $ 45,405 45,404 Merrill Lynch Mortgage Investors, Inc. Series 2005-WMC2 Class A2A 5.413%, due 4/25/36 (e)(f) .......................... 4,845 4,844 Novastar Home Equity Loan Series 2005-2 Class A2A 5.413%, due 10/25/35 (e)(f) ......................... 31,022 31,022 Soundview Home Equity Loan Trust Series 2005-2 Class A1 5.423%, due 7/25/35 (e)(f) .......................... 6,612 6,612 ----------- Total Corporate Asset-Backed Securities (Cost $87,884) ...................................... 87,882 ----------- CORPORATE BONDS 11.1% Consumer Discretionary - 2.2% AT&T Broadband Corp. 9.455%, due 11/15/22 ................................ $ 90,000 $ 111,825 Cox Communications, Inc. 7.125%, due 10/1/12 ................................. 265,000 274,096 DaimlerChrysler North American Holdings Corp. 7.30%, due 1/15/12 .................................. 270,000 280,968 Fortune Brands, Inc. 5.375%, due 1/15/16 ................................. 115,000 106,378 Johnson Controls, Inc. 5.25%, due 1/15/11 .................................. 130,000 126,684 Office Depot, Inc. 6.25%, due 8/15/13 .................................. 120,000 119,160 Tele-Communications, Inc. 9.80%, due 2/1/12 ................................... 90,000 103,824 Time Warner, Inc. 7.625%, due 4/15/31 ................................. 110,000 118,440 ----------- 1,241,375 ----------- Consumer Staples - 0.4% Diageo Finance B.V. 5.30%, due 10/28/15 ................................. 115,000 108,737 Kraft Foods, Inc. 4.00%, due 10/1/08 .................................. 135,000 130,086 ----------- 238,823 ----------- Energy - 0.7% Anadarko Finance Corp. 6.75%, due 5/1/11 ................................... 35,000 35,963 Dominion Resources, Inc. 5.15%, due 7/15/15 .................................. 95,000 87,325 Kinder Morgan, Inc. 6.50%, due 9/1/12 ................................... 65,000 61,763 Pacific Gas & Electric Co. 4.20%, due 3/1/11 ................................... 130,000 121,565 Progress Energy, Inc. 7.10%, due 3/1/11 ................................... 115,000 119,963 ----------- 426,579 ----------- Financials - 6.0% Ameriprise Financial, Inc. 5.35%, due 11/15/10 ................................. 35,000 34,317 Archstone-Smith Trust 5.75%, due 3/15/16 .................................. 95,000 91,726 Capital One Bank 6.50%, due 6/13/13 .................................. 80,000 81,806 Capital One Financial Corp. 6.25%, due 11/15/13 ................................. 25,000 25,184 Caterpillar Financial Services Corp. 4.30%, due 6/1/10 ................................... 50,000 47,556 CIT Group Funding Co. of Canada 4.65%, due 7/1/10 ................................... 70,000 67,121 CIT Group, Inc. 6.875%, due 11/1/09 ................................. 60,000 61,826 Citigroup, Inc. 5.625%, due 8/27/12 ................................. 300,000 296,407 Credit Suisse First Boston USA, Inc. 5.125%, due 8/15/15 ................................. 120,000 112,156 See accompanying notes to financial statements. 51 BALANCED FUND (CONTINUED) CORPORATE BONDS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ---------- Financials (continued) EOP Operating L.P. 7.00%, due 7/15/11 .................................. $ 110,000 $ 114,275 Ford Motor Credit Co. 7.25%, due 10/25/11 ................................. 90,000 79,837 7.375%, due 10/28/09 ................................ 30,000 27,736 Goldman Sachs Group, Inc. (The) 4.50%, due 6/15/10 .................................. 55,000 52,584 5.25%, due 4/1/13 ................................... 125,000 120,272 HSBC Finance Corp. 6.75%, due 5/15/11 .................................. 265,000 274,896 Jefferies Group, Inc. 5.50%, due 3/15/16 .................................. 60,000 56,027 7.75%, due 3/15/12 .................................. 45,000 48,338 JPMorgan Chase & Co. 5.125%, due 9/15/14 ................................. 150,000 141,682 7.125%, due 6/15/09 ................................. 100,000 103,584 MBNA America Bank NA 7.125%, due 11/15/12 ................................ 130,000 138,771 Merrill Lynch & Co., Inc. 4.79%, due 8/4/10 ................................... 95,000 91,776 MetLife, Inc. 5.50%, due 6/15/14 .................................. 105,000 101,386 Residential Capital Corp. 6.00%, due 2/22/11 .................................. 200,000 193,795 6.375%, due 6/30/10 ................................. 170,000 167,686 Simon Property Group, L.P. 4.60%, due 6/15/10 .................................. 50,000 47,917 5.10%, due 6/15/15 .................................. 30,000 27,726 6.35%, due 8/28/12 .................................. 115,000 116,682 6.375%, due 11/15/07 ................................ 90,000 90,375 SLM Corp. 5.45%, due 4/25/11 .................................. 110,000 108,097 St. Paul Travelers Cos., Inc. (The) 6.25%, due 6/20/16 .................................. 125,000 124,463 Textron Financial Corp. 4.125%, due 3/3/08 .................................. 240,000 233,827 Wachovia Bank N.A. 4.80%, due 11/1/14 .................................. 205,000 189,308 ---------- 3,469,139 ---------- Industrials - 0.5% International Lease Finance Corp. 5.75%, due 6/15/11 .................................. 185,000 183,641 5.875%, due 5/1/13 .................................. 100,000 99,249 ---------- 282,890 ---------- Information Technology - 0.2% Cisco Systems, Inc. 5.25%, due 2/22/11 .................................. 130,000 127,589 ---------- Telecommunication Services - 1.1% AT&T Wireless Services, Inc. 8.75%, due 3/1/31 ................................... 60,000 73,561 British Telecommunications PLC 8.375%, due 12/15/10 ................................ 220,000 241,531 Embarq Corp. 7.082%, due 6/1/16 .................................. 155,000 154,149 Sprint Capital Corp. 8.375%, due 3/15/12 ................................. 15,000 16,573 8.75%, due 3/15/32 .................................. 110,000 132,649 ---------- 618,463 ---------- Total Corporate Bonds (Cost $6,697,017) ................................... 6,404,858 ---------- U.S. GOVERNMENT SECURITIES 15.7% U.S. GOVERNMENT AGENCY OBLIGATIONS 8.6% Federal Home Loan Mortgage Corporation - 0.9% 2.375%, due 2/15/07 ................................. $ 540,000 $ 529,684 ---------- Federal Home Loan Mortgage Corporation (Mortgage Pass-Through Securities) - 1.4% 5.366%, due 9/1/35 (e) .............................. 427,867 423,183 5.487%, due 3/1/36 (e) .............................. 369,463 362,586 ---------- 785,769 ---------- Federal National Mortgage Association - 3.1% 4.25%, due 9/15/07 .................................. 805,000 793,253 o 4.375%, due 3/15/13 ................................ 1,035,000 970,012 ---------- 1,763,265 ---------- Federal National Mortgage Association (Mortgage Pass-Through Securities) - 3.2% 6.50%, due 9/1/33 .................................. 537,482 542,385 o 6.50%, due 7/1/36 TBA (g) ........................ 1,325,000 1,331,625 ---------- 1,874,010 ---------- Total U.S. Government Agency Obligations (Cost $4,985,461) ................................... 4,952,728 ---------- U.S. TREASURY OBLIGATIONS 7.1% United States Treasury Bonds - 2.9% 4.50%, due 2/15/36 (b) .............................. 225,000 201,744 5.25%, due 2/15/29 .................................. 805,000 801,478 8.125%, due 8/15/19 (b) ............................. 565,000 715,299 ---------- 1,718,521 ---------- United States Treasury Note - 1.4% o 4.25%, due 8/15/13 (b) ............................. 855,000 811,181 ---------- United States Treasury Strip - 1.1% (zero coupon), due 8/15/17 .......................... 1,120,000 628,858 ---------- United States Treasury TII - 1.7% o 1.875%, due 7/15/13 (h) ............................ 1,014,253 974,356 ---------- Total U.S. Treasury Obligations (Cost $4,346,540) ................................... 4,132,916 ---------- Total U.S. Government Securities (Cost $9,332,001) ................................... 9,085,644 ---------- COLLATERALIZED MORTGAGE OBLIGATIONS 4.6% Federal Home Loan Mortgage Corporation - 0.1% Series 2113 Class QE 6.00%, due 11/15/27 ................................. 33,363 33,379 ---------- Financials - 4.5% Bear Stearns Commercial Mortgage Securities Series 2006-T22 Class A4 5.467%, due 4/12/38 (e) ............................. 175,000 171,129 Greenwich Capital Commercial Funding Corp. Series 2005-GG5 Class A5 5.224%, due 4/10/37 (e) ............................. 420,000 400,615 Series 2004-GG1 Class A7 5.317%, due 6/10/36 (e) ............................. 350,000 337,989 GS Mortgage Securities Corp. Series 2005-GG4 Class A4 4.761%, due 7/10/39 (e) ............................. 650,000 600,235 See accompanying notes to financial statements. 52 MCMORGAN FUNDS COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) PRINCIPAL AMOUNT VALUE ---------- ----------- Financials (continued) GS Mortgage Securities Corp. (continued) Series 2004-GG2 Class A6 5.396%, due 8/10/38 (e) ........................... $ 250,000 $ 241,835 Merrill Lynch Mortgage Investors, Inc. Series 2006-A3 Class 3A1 5.869%, due 5/25/36 (e) ........................... 470,476 468,041 Residential Accredit Loans, Inc. Series 2006-QA1 Class A21 6.008%, due 1/25/36 (e) ........................... 405,582 404,545 ----------- 2,624,389 ----------- Total Collateralized Mortgage Obligations (Cost $2,759,106) ................................. 2,657,768 ----------- Total Fixed Income Securities (Cost $18,876,008) ................................ 18,236,152 ----------- SHARES ---------- INVESTMENT COMPANY 1.4% Capital Markets - 1.4% o S&P 500 Index-SPDR Trust, Series 1 (b)(d) ........ 6,351 807,276 ----------- Total Investment Company (Cost $792,867) ................................... 807,276 ----------- PRINCIPAL AMOUNT ---------- SHORT-TERM INVESTMENTS 9.9% Repurchase Agreement - 4.7% Morgan Stanley & Co. 5.42%, dated 6/30/06 due 7/3/06 Proceeds at Maturity $2,742,634 (Collateralized by various bonds with a Principal Amount of $3,224,915 and a Market Value of $2,822,879) (i) ................................ $2,741,396 2,741,396 ----------- Total Repurchase Agreement (Cost $2,741,396) ................................. 2,741,396 ----------- Time Deposits - 3.1% Calyon 5.265%, due 8/2/06 (i) ................................. 591,932 591,932 Credit Suisse First Boston Corp. 5.305%, due 7/27/06 (i) ................................ 591,932 591,932 Fortis Bank 5.26%, due 7/7/06 (i) .................................. 591,932 591,932 --------- Total Time Deposits (Cost $1,775,796) ...................................... 1,775,796 --------- U.S. Government Agency - 2.1% Federal National Mortgage Association (Discount Notes) 4.931%, due 7/13/06 (f) ................................ 395,000 394,435 5.287%, due 9/6/06 (f) ................................. 845,000 837,020 --------- Total U.S. Government Agency (Cost $1,231,199) ...................................... 1,231,455 --------- Total Short-Term Investments (Cost $5,748,391) ...................................... 5,748,647 --------- Total Investments (Cost $60,619,635) (j) ................................ 106.5% $ 61,562,588 Liabilities in Excess of Cash and Other Assets ................................. (6.5) (3,755,114) ----- ------------ Net Assets ............................................. 100.0% $ 57,807,474 ===== ============ o Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. (a) Non-income producing security. (b) Represents 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) Floating/variable rate. Rate shown is the rate in effect at June 30, 2006. (f) Segregated as collateral for TBAs. (g) 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 June 30, 2006 is $1,331,625. (h) Treasury Inflation Indexed Security - Pays a fixed rate of interest on a principal amount that is continuously adjusted for inflation based on the Consumer Price Index-Urban Consumers. (i) Represents security, or a portion thereof, purchased with cash collateral received for securities on loan. (j) Aggregate cost for federal income tax purposes is $60,804,980 and net unrealized appreciation is as follows: Gross unrealized appreciation $ 2,800,642 Gross unrealized depreciation (2,043,034) ----------- Net unrealized appreciation $ 757,608 =========== See accompanying notes to financial statements. 53 BALANCED FUND STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $60,619,635) including $4,392,751 market value of securities loaned ............................ $61,562,588 Cash-interest bearing accounts ................................. 1,766,885 Receivable for securities sold ................................. 909,249 Dividends and interest receivable .............................. 261,061 Receivable for fund shares sold ................................ 81,134 Receivable from Advisor, net ................................... 8,154 Other assets ................................................... 24,873 ----------- Total assets ................................................ 64,613,944 ----------- LIABILITIES: Securities lending collateral .................................. 4,517,192 Payable for securities purchased ............................... 2,238,239 Custodian fees payable ......................................... 17,688 Payable for fund shares redeemed ............................... 9,582 Transfer agent fees payable .................................... 7,149 Legal fees payable ............................................. 7,040 Accounting fees payable ........................................ 3,712 Administration fees payable .................................... 3,363 12B-1 fees payable ............................................. 1,483 Trustees fees payable .......................................... 575 Accrued expenses ............................................... 447 ----------- Total liabilities ........................................... 6,806,470 ----------- Net Assets ...................................................... $57,807,474 =========== NET ASSETS CONSIST OF: Capital paid-in ................................................ $61,926,592 Accumulated undistributed net investment income ................ 62,084 Accumulated net realized loss on investments ................... (5,124,155) Net unrealized appreciation on investments ..................... 942,953 ----------- $57,807,474 =========== Net Assets: Class McMorgan ................................................. $50,491,336 Class Z ........................................................ 7,316,138 ----------- $57,807,474 =========== Shares Outstanding: Class McMorgan ................................................. 2,817,664 =========== Class Z ........................................................ 408,471 =========== Net asset value and redemption price per share: Class McMorgan ................................................. $ 17.92 =========== Class Z ........................................................ $ 17.91 =========== STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Interest ....................................................... $ 1,092,416 Dividends ...................................................... 806,158 Income from securities loaned - net ............................ 4,712 ----------- Total investment income ..................................... 1,903,286 ----------- Expenses: Investment advisory fees (Note F) .............................. 297,196 Transfer agent fees ............................................ 60,622 Custodian fees ................................................. 54,135 Accounting fees ................................................ 45,020 Administration fees ............................................ 44,661 Registration expenses .......................................... 32,765 Auditing fees .................................................. 24,500 Legal fees ..................................................... 24,476 Insurance fees ................................................. 23,328 12B-1 distribution fees (Class Z) .............................. 18,389 Trustees fees .................................................. 14,435 Report to shareholder expense .................................. 10,851 Miscellaneous expenses ......................................... 7,201 ----------- Total expenses .............................................. 657,579 Expenses reimbursed (Note F) ................................... (242,578) ----------- Net expenses ................................................ 415,001 ----------- Net investment income ........................................... 1,488,285 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments ............................... 3,588,233 Net change in unrealized appreciation on investments ........... (1,149,554) ----------- Net realized and unrealized gain on investments ................ 2,438,679 ----------- Increase in net assets from operations .......................... $ 3,926,964 =========== See accompanying notes to financial statements. 54 BALANCED FUND MCMORGAN FUNDS STATEMENT OF CHANGES IN NET ASSETS
FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------ ------------ DECREASE IN NET ASSETS: Operations: Net investment income ............................................................................ $ 1,488,285 $ 2,008,977 Net realized gain on investments ................................................................. 3,588,233 3,919,633 Net realized gain on redemption-in-kind .......................................................... -- 3,409,747 Net change in unrealized appreciation on investments ............................................. (1,149,554) (2,100,869) ------------ ------------ Increase in net assets ........................................................................... 3,926,964 7,237,488 ------------ ------------ Dividends to shareholders: From net investment income: Class McMorgan shares............................................................................ (1,320,497) (1,908,919) Class Z shares................................................................................... (150,633) (148,201) ------------ ------------ Total dividends to shareholders .................................................................. (1,471,130) (2,057,120) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares............................................................................ 7,391,368 7,695,458 Class Z shares................................................................................... 892,751 750,905 Net asset value of shares issued to shareholders in reinvestment of dividends: Class McMorgan shares............................................................................ 1,307,062 1,846,874 Class Z shares................................................................................... 150,633 148,200 ------------ ------------ 9,741,814 10,441,437 Cost of shares redeemed: Class McMorgan shares............................................................................ (24,313,706) (70,869,458) Class Z shares................................................................................... (1,157,865) (1,473,923) ------------ ------------ Decrease in net assets derived from capital share transactions ................................... (15,729,757) (61,901,944) ------------ ------------ Total decrease in net assets ..................................................................... (13,273,923) (56,721,576) Net Assets: Beginning of year ................................................................................ 71,081,397 127,802,973 ------------ ------------ End of year (including undistributed net investment income of $62,084 and $44,929, respectively).. $ 57,807,474 $ 71,081,397 ============ ============
See accompanying notes to financial statements. 55 BALANCED FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each year presented.
CLASS MCMORGAN YEAR ENDED JUNE 30, ---------------------------------------------------- 2006 2005 2004 2003 2002 ------- ------- -------- -------- -------- Net asset value, beginning of year ........................................ $ 17.36 $ 16.64 $ 15.52 $ 15.51 $ 18.15 ------- ------- -------- -------- -------- Income from investment operations: Net investment income .................................................... 0.42 0.38(b)(c) 0.34 0.44 0.48 Net realized and unrealized gain (loss) on investments ................... 0.55 0.72 1.12 0.02 (2.16) ------- ------- -------- -------- -------- Total from investment operations......................................... 0.97 1.10 1.46 0.46 (1.68) ------- ------- -------- -------- -------- Less dividends and distributions: From net investment income ............................................... (0.41) (0.38) (0.34) (0.45) (0.48) From capital gains ....................................................... -- -- -- (0.00) (a) (0.48) ------- ------- -------- -------- -------- Total dividends and distributions........................................ (0.41) (0.38) (0.34) (0.45) (0.96) ------- ------- -------- -------- -------- Net asset value, end of year .............................................. $ 17.92 $ 17.36 $ 16.64 $ 15.52 $ 15.51 ======= ======= ======== ======== ======== Total return .............................................................. 5.62% 6.65% 9.50% 3.16% (9.65)% Ratios/Supplemental Data: Net assets, end of year (in 000's) ....................................... $50,491 $63,886 $120,325 $125,658 $161,436 Ratio of expenses to average net assets before reimbursement of expenses by Advisor ................................................. 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor ................................... 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 ................................... 2.28% 1.99%(b) 2.10% 2.89% 2.77% Portfolio turnover ....................................................... 153%(d) 177%(d) 101.99% 56.23% 45.80%
See accompanying notes to financial statements. 56 MCMORGAN FUNDS FINANCIAL HIGHLIGHTS (CONTINUED)
CLASS Z YEAR ENDED JUNE 30, ------------------------------------------------ 2006 2005 2004 2003 2002 ------ ------ ------- ------ ------ Net asset value, beginning of year ........................................... $17.35 $16.63 $ 15.52 $15.51 $18.15 ------ ------ ------- ------ ------ Income from investment operations: Net investment income ....................................................... 0.37 0.28(b)(c) 0.30 0.40 0.43 Net realized and unrealized gain (loss) on investments ...................... 0.56 0.78 1.11 0.03 (2.16) ------ ------ ------- ------ ------ Total from investment operations ........................................... 0.93 1.06 1.41 0.43 (1.73) ------ ------ ------- ------ ------ Less dividends and distributions: From net investment income .................................................. (0.37) (0.34) (0.30) (0.42) (0.43) From capital gains .......................................................... -- -- -- (0.00)(a)(0.48) ------ ------ ------- ------ ------ Total dividends and distributions .......................................... (0.37) (0.34) (0.30) (0.42) (0.91) ------ ------ ------- ------ ------ Net asset value, end of year ................................................. $17.91 $17.35 $ 16.63 $15.52 $15.51 ====== ====== ======= ====== ====== Total return ................................................................. 5.36% 6.40% 9.17% 2.90% (9.87)% Ratios/Supplemental Data: Net assets, end of year (in 000's) .......................................... $7,316 $7,195 $ 7,478 $6,892 $6,842 Ratio of expenses to average net assets before reimbursement of expenses by Advisor .................................................... 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% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor ...................................... 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 ...................................... 2.03% 1.74%(b) 1.85% 2.64% 2.52% Portfolio turnover .......................................................... 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 years ended June 30, 2006 and 2005 is 93% and 133%, respectively. See accompanying notes to financial statements. 57 EQUITY INVESTMENT FUND PORTFOLIO OF INVESTMENTS JUNE 30, 2006 COMMON STOCKS 98.8% SHARES VALUE ------ ----------- Consumer Discretionary - 8.6% Aeropostale, Inc. (a) ................................... 897 $ 25,914 American Eagle Outfitters, Inc. (b) ..................... 6,089 207,270 American Greetings Corp. Class A ........................ 2,871 60,320 AnnTaylor Stores Corp. (a) .............................. 3,357 145,627 Apollo Group, Inc. Class A (a)(b) ....................... 5,782 298,756 ArvinMeritor, Inc. (b) .................................. 1,181 20,301 AutoNation, Inc. (a) .................................... 5,616 120,407 AutoZone, Inc. (a) ...................................... 2,107 185,837 Barnes & Noble, Inc. .................................... 2,425 88,512 Best Buy Co., Inc. ...................................... 8,174 448,262 Big Lots, Inc. (a) ...................................... 3,691 63,042 Black & Decker Corp. (The) .............................. 1,237 104,477 Blyth, Inc. ............................................. 639 11,796 Bob Evans Farms, Inc. ................................... 285 8,553 Brinker International, Inc. ............................. 1,387 50,348 Career Education Corp. (a)(b) ........................... 4,483 133,997 CBRL Group, Inc. ........................................ 244 8,276 CBS Corp. Class B ....................................... 35,689 965,387 Circuit City Stores, Inc. ............................... 7,094 193,099 Claire's Stores, Inc. ................................... 4,569 116,555 Clear Channel Communications, Inc. ...................... 8,744 270,627 Corinthian Colleges, Inc. (a) ........................... 2,804 40,265 Darden Restaurants, Inc. ................................ 6,034 237,740 DeVry, Inc. (a) (b) ..................................... 501 11,007 Dillards, Inc. Class A .................................. 1,016 32,360 Dollar Tree Stores, Inc. (a)(b) ......................... 4,934 130,751 Eastman Kodak Co. (b) ................................... 4,544 108,056 Emmis Communications Corp. Class A (a) .................. 621 9,712 Entercom Communications Corp. ........................... 517 13,525 Ford Motor Co. (b) ...................................... 69,437 481,198 Furniture Brands International, Inc. (b) ................ 2,367 49,328 Gap, Inc. (The) ......................................... 26,246 456,680 Goodyear Tire & Rubber Co. (The) (a)(b) ................. 5,616 62,338 Harley-Davidson, Inc. ................................... 9,715 533,256 Hasbro, Inc. ............................................ 6,664 120,685 Home Depot, Inc. (The) .................................. 5,072 181,527 International Game Technology ........................... 5,547 210,453 ITT Educational Services, Inc. (a) ...................... 596 39,223 J.C. Penney Co., Inc. ................................... 10,735 724,720 Jones Apparel Group, Inc. ............................... 5,292 168,233 Kohl's Corp. (a) ........................................ 5,602 331,190 Lear Corp. .............................................. 526 11,682 Leggett & Platt, Inc. ................................... 2,980 74,440 Lennar Corp. Class A .................................... 1,273 56,483 Limited Brands, Inc. .................................... 8,412 215,263 Liz Claiborne, Inc. ..................................... 2,503 92,761 Mattel, Inc. ............................................ 6,380 105,334 McClatchy Co. (The) Class A ............................. 89 3,552 McDonald's Corp. ........................................ 20,463 687,557 McGraw-Hill Cos., Inc. (The) ............................ 17,034 855,618 Michaels Stores, Inc. ................................... 2,102 86,686 Modine Manufacturing Co. ................................ 285 6,658 Newell Rubbermaid, Inc. ................................. 12,684 327,628 Nordstrom, Inc. ......................................... 2,911 106,251 Office Depot, Inc. (a) .................................. 13,747 522,386 OfficeMax, Inc. ......................................... 1,157 47,148 Omnicom Group, Inc. ..................................... 5,155 459,259 Payless ShoeSource, Inc. (a) ............................ 3,169 86,102 PETsMART, Inc. .......................................... 2,232 $ 57,139 RadioShack Corp. (b) .................................... 1,801 25,214 Rent-A-Center, Inc. (a)(b) .............................. 3,229 80,273 Ross Stores, Inc. ....................................... 1,981 55,567 Ryland Group, Inc. (The) ................................ 370 16,121 Saks, Inc. .............................................. 1,068 17,270 Scholastic Corp. (a) .................................... 1,090 28,307 Sears Holdings Corp. (a)(b) ............................. 2,402 371,926 Sherwin-Williams Co. (The) .............................. 4,523 214,752 Snap-On, Inc. ........................................... 947 38,278 Sotheby's Holdings, Inc. Class A (a) .................... 1,735 45,544 Starbucks Corp. (a) ..................................... 18,679 705,319 Starwood Hotels & Resorts Worldwide, Inc................. 1,707 103,000 Thor Industries, Inc. (b) ............................... 1,401 67,878 Timberland Co. Class A (a) .............................. 1,336 34,870 Time Warner, Inc. ....................................... 2,290 39,617 TJX Cos., Inc. (The) .................................... 3,229 73,815 Tupperware Corp. ........................................ 1,296 25,518 Univision Communications, Inc. Class A (a) .............. 1,902 63,717 Walt Disney Co. (The) ................................... 33,325 999,750 Westwood One, Inc. ...................................... 1,972 14,790 Whirlpool Corp. ......................................... 545 45,044 Yum! Brands, Inc. ....................................... 11,319 569,006 ----------- 14,907,133 ----------- Consumer Staples - 6.2% Altria Group, Inc. ...................................... 15,561 1,142,644 Archer-Daniels-Midland Co. .............................. 30,126 1,243,601 Avon Products, Inc. ..................................... 7,365 228,315 Campbell Soup Co. ....................................... 124 4,602 Church & Dwight Co., Inc. ............................... 2,470 89,957 Coca-Cola Co. (The) ..................................... 22,797 980,727 Coca-Cola Enterprises, Inc. ............................. 2,389 48,664 Colgate-Palmolive Co. ................................... 3,205 191,979 ConAgra Foods, Inc. ..................................... 11,047 244,249 Dean Foods Co. (a) ...................................... 4,003 148,872 Energizer Holdings, Inc. (a) ............................ 530 31,042 Estee Lauder Cos., Inc. (The) Class A ................... 931 36,002 General Mills, Inc. ..................................... 15,100 780,066 H.J. Heinz Co. .......................................... 5,533 228,070 Kimberly-Clark Corp. .................................... 21,272 1,312,482 McCormick & Co., Inc. ................................... 1,846 61,933 Pepsi Bottling Group, Inc. (The) ........................ 4,442 142,810 PepsiAmericas, Inc. ..................................... 1,481 32,745 PepsiCo, Inc. ........................................... 6,294 377,892 Procter & Gamble Co. (The) .............................. 29,748 1,653,989 Reynolds American, Inc. (b) ............................. 3,932 453,360 Sara Lee Corp. .......................................... 16,791 268,992 SUPERVALU, Inc. ......................................... 7,623 234,026 UST, Inc. (b) ........................................... 3,540 159,973 Wal-Mart Stores, Inc. ................................... 13,332 642,202 ----------- 10,739,194 ----------- Energy - 9.9% Anadarko Petroleum Corp. (b) ............................ 4,010 191,237 Baker Hughes, Inc. ...................................... 1,646 134,725 BJ Services Co. ......................................... 2,722 101,422 Cameron International Corp. (a) ......................... 959 45,811 Chevron Corp. ........................................... 29,767 1,847,340 ConocoPhillips .......................................... 6,799 445,538 See accompanying notes to financial statements. 58 MCMORGAN FUNDS COMMON STOCKS (CONTINUED) SHARES VALUE ------- ----------- Energy (continued) Devon Energy Corp. ..................................... 16,594 $ 1,002,444 o ExxonMobil Corp. ..................................... 109,565 6,721,813 Grant Prideco, Inc. (a) ................................ 1,768 79,118 Helmerich & Payne, Inc. ................................ 711 42,845 Hess Corp. (b) ......................................... 1,266 66,908 Kerr-McGee Corp. ....................................... 3,401 235,859 Marathon Oil Corp. ..................................... 7,788 648,740 Noble Energy, Inc. ..................................... 8,242 386,220 Occidental Petroleum Corp. ............................. 4,175 428,146 Overseas Shipholding Group, Inc. ....................... 751 44,422 Peabody Energy Corp. ................................... 71 3,958 Pioneer Natural Resources Co. .......................... 1,083 50,262 Pogo Producing Co. (b) ................................. 2,703 124,608 Pride International, Inc. (a) .......................... 2,185 68,238 Rowan Cos., Inc. ....................................... 922 32,814 Schlumberger, Ltd. ..................................... 28,038 1,825,554 Southwestern Energy Co. (a) ............................ 2,104 65,561 Sunoco, Inc. ........................................... 3,998 277,021 Tidewater, Inc. ........................................ 337 16,580 Transocean, Inc. (a) ................................... 15,026 1,206,888 Valero Energy Corp. .................................... 13,481 896,756 ----------- 16,990,828 ----------- Financials - 23.4% ACE, Ltd. .............................................. 12,400 627,316 AFLAC, Inc. ............................................ 22,612 1,048,066 Allstate Corp. (The) ................................... 29,653 1,622,909 Ambac Financial Group, Inc. ............................ 2,574 208,751 American Express Co. ................................... 32,669 1,738,644 American Financial Group, Inc. ......................... 2,154 92,407 American International Group, Inc. ..................... 27,886 1,646,668 AmeriCredit Corp. (a) .................................. 6,073 169,558 Ameriprise Financial, Inc. ............................. 11,461 511,972 AmerUs Group Co. ....................................... 438 25,645 AmSouth Bancorporation ................................. 7,427 196,444 AON Corp. .............................................. 14,790 514,988 Arthur J. Gallagher & Co. (b) .......................... 2,815 71,332 Bank of America Corp. .................................. 44,595 2,145,019 Bank of Hawaii Corp. ................................... 805 39,928 Bank of New York Co., Inc. (The) ....................... 29,491 949,610 BB&T Corp. ............................................. 5,537 230,284 Capital One Financial Corp. ............................ 9,766 834,505 Charles Schwab Corp. (The) ............................. 47,545 759,769 Chubb Corp. (The) ...................................... 18,056 900,994 CIT Group, Inc. ........................................ 1,683 88,004 o Citigroup, Inc. ...................................... 83,763 4,040,727 Comerica, Inc. ......................................... 7,531 391,537 Cullen/Frost Bankers, Inc. ............................. 632 36,214 E*Trade Financial Corp. (a) ............................ 8,331 190,113 Equity Office Properties Trust (REIT) (c) .............. 8,971 327,531 Everest Re Group, Ltd. ................................. 508 43,978 Fannie Mae ............................................. 35,825 1,723,182 Federated Investors, Inc. Class B ...................... 1,163 36,634 Fidelity National Financial, Inc. ...................... 2,853 111,124 Fifth Third Bancorp .................................... 4,372 161,545 First American Corp. (b) ............................... 1,548 65,434 First Horizon National Corp. ........................... 967 38,873 FirstMerit Corp. ....................................... 624 13,067 Franklin Resources, Inc. ............................... 3,725 323,367 Genworth Financial, Inc. Class A ....................... 5,859 204,128 Goldman Sachs Group, Inc. (The) ........................ 9,053 $ 1,361,843 Hanover Insurance Group, Inc. (The) .................... 425 20,170 Hartford Financial Services Group, Inc. (The)........... 4,858 410,987 HCC Insurance Holdings, Inc. ........................... 4,997 147,112 Horace Mann Educators Corp. ............................ 690 11,696 Janus Capital Group, Inc. .............................. 9,890 177,031 Jefferies Group, Inc. .................................. 4,594 136,120 o JPMorgan Chase & Co................................... 56,145 2,358,090 KeyCorp ................................................ 8,836 315,268 LaBranche & Co., Inc. (a)(b) ........................... 530 6,418 Legg Mason, Inc. ....................................... 1,679 167,094 Lehman Brothers Holdings, Inc. ......................... 10,906 710,526 Leucadia National Corp. ................................ 5,304 154,824 Lincoln National Corp. ................................. 3,781 213,400 Loews Corp. ............................................ 18,749 664,652 Longview Fibre Co. (REIT) (c) .......................... 829 15,826 Mercury General Corp. .................................. 279 15,727 Merrill Lynch & Co., Inc. .............................. 5,257 365,677 MetLife, Inc. (b) ...................................... 33,634 1,722,397 MGIC Investment Corp. .................................. 1,440 93,600 Moody's Corp. .......................................... 7,301 397,612 National City Corp. .................................... 20,539 743,306 New Plan Excel Realty Trust (REIT) (c) ................. 1,718 42,417 North Fork Bancorporation, Inc. ........................ 11,936 360,109 Northern Trust Corp. ................................... 6,967 385,275 Old Republic International Corp. ....................... 10,539 225,218 PMI Group, Inc. (The) .................................. 1,409 62,813 Principal Financial Group, Inc. ........................ 12,849 715,047 Progressive Corp. (The) ................................ 2,124 54,608 Protective Life Corp. .................................. 3,227 150,443 Prudential Financial, Inc. ............................. 22,135 1,719,890 Radian Group, Inc. ..................................... 3,809 235,320 Raymond James Financial, Inc. .......................... 4,013 121,474 Regions Financial Corp. (b) ............................ 3,529 116,880 SAFECO Corp. ........................................... 3,961 223,202 SEI Investments Co. .................................... 1,038 50,737 Shurgard Storage Centers, Inc. Class A (REIT) (c)................................... 2,638 164,875 St. Paul Travelers Cos., Inc. (The) .................... 12,123 540,443 StanCorp Financial Group, Inc. ......................... 1,331 67,761 State Street Corp. ..................................... 2,610 151,615 T. Rowe Price Group, Inc. (b) .......................... 6,443 243,610 Torchmark Corp. ........................................ 1,694 102,860 UnumProvident Corp. (b) ................................ 12,177 220,769 W.R. Berkley Corp. ..................................... 7,736 264,030 Wachovia Corp. ......................................... 7,827 423,284 Waddell & Reed Financial, Inc. Class A ................. 2,052 42,189 Washington Mutual, Inc. ................................ 6,603 300,965 Wells Fargo & Co. ...................................... 14,327 961,055 XL Capital, Ltd. Class A (b) ........................... 2,261 138,599 ----------- 40,425,131 ----------- Health Care - 11.0% Abbott Laboratories .................................... 17,372 757,593 Aetna, Inc. ............................................ 26,673 1,065,053 AmerisourceBergen Corp. ................................ 9,634 403,857 Amgen, Inc. (a) ........................................ 26,541 1,731,269 Applera Corp.- Applied Biosystems Group ................ 8,515 275,460 Baxter International, Inc. ............................. 10,064 369,953 Becton, Dickinson & Co. ................................ 11,464 700,794 See accompanying notes to financial statements. 59 EQUITY INVESTMENT FUND (continued) COMMON STOCKS (CONTINUED) SHARES VALUE ------- ----------- Health Care (continued) Biogen Idec, Inc. (a) .................................. 8,247 $ 382,084 Boston Scientific Corp. (a) ............................ 979 16,486 Cardinal Health, Inc. .................................. 15,935 1,025,099 Caremark Rx, Inc. ...................................... 1,160 57,849 Coventry Health Care, Inc. (a) ......................... 7,418 407,545 DENTSPLY International, Inc. ........................... 633 38,360 Forest Laboratories, Inc. (a) .......................... 12,623 488,384 HCA, Inc. .............................................. 5,524 238,361 Health Net, Inc. (a) ................................... 1,573 71,052 Henry Schein, Inc. (a) ................................. 701 32,758 Humana, Inc. (a) ....................................... 6,213 333,638 Johnson & Johnson ...................................... 28,083 1,682,733 King Pharmaceuticals, Inc. (a)(b) ...................... 11,167 189,839 Laboratory Corp. of America Holdings (a) ............... 4,043 251,596 Lincare Holdings, Inc. (a) ............................. 4,433 167,745 Manor Care, Inc. (b) ................................... 3,657 171,586 McKesson Corp. ......................................... 14,117 667,452 Medicis Pharmaceutical Corp. Class A ................... 895 21,480 Merck & Co., Inc. ...................................... 64,586 2,352,868 Mylan Laboratories, Inc. ............................... 10,037 200,740 PerkinElmer, Inc. ...................................... 2,810 58,729 o Pfizer, Inc. ....................................... 151,610 3,558,287 STERIS Corp. ........................................... 1,089 24,895 Techne Corp. (a) ....................................... 330 16,804 UnitedHealth Group, Inc. ............................... 8,395 375,928 Universal Health Services, Inc. Class B ................ 2,054 103,234 Varian Medical Systems, Inc. (a) ....................... 3,916 185,423 Varian, Inc. (a) ....................................... 1,188 49,314 Waters Corp. (a) ....................................... 1,772 78,677 Watson Pharmaceuticals, Inc. (a) ....................... 4,638 107,973 Wellpoint, Inc. (a) .................................... 4,711 342,819 ----------- 19,003,717 ----------- Industrials - 11.9% AGCO Corp. (a) ......................................... 826 21,740 Allied Waste Industries, Inc. (a)(b) ................... 3,665 41,634 American Standard Cos., Inc. ........................... 118 5,106 Boeing Co. (The) ....................................... 26,151 2,142,028 Brink's Co. (The) ...................................... 411 23,185 Burlington Northern Santa Fe Corp. ..................... 17,127 1,357,315 C.H. Robinson Worldwide, Inc. .......................... 5,070 270,231 Carlisle Cos., Inc. .................................... 481 38,143 Caterpillar, Inc. ...................................... 8,386 624,589 Cooper Industries, Ltd. Class A ........................ 2,310 214,645 Corporate Executive Board Co. .......................... 1,487 148,997 Crane Co. .............................................. 2,322 96,595 CSX Corp. .............................................. 6,682 470,680 Cummins, Inc. .......................................... 2,140 261,615 Danaher Corp. .......................................... 3,289 211,548 Deere & Co. ............................................ 2,012 167,982 Dun & Bradstreet Corp. (a) ............................. 915 63,757 Eaton Corp. ............................................ 1,173 88,444 Emerson Electric Co. ................................... 6,064 508,224 Equifax, Inc. .......................................... 2,103 72,217 Expeditors International of Washington, Inc. ........... 5,183 290,300 Fastenal Co. ........................................... 376 15,149 Federal Signal Corp. ................................... 419 6,344 Flowserve Corp. (a) .................................... 1,634 92,975 Fluor Corp. ............................................ 2,581 239,852 General Dynamics Corp. ................................. 2,162 $ 141,525 o General Electric Co. ................................. 123,412 4,067,660 Graco, Inc. ............................................ 540 24,829 Granite Construction, Inc. ............................. 981 44,410 Illinois Tool Works, Inc. .............................. 3,137 149,008 Jacobs Engineering Group, Inc. (a) ..................... 780 62,119 Joy Global, Inc. ....................................... 4,952 257,950 Korn/Ferry International (a) ........................... 482 9,442 Lincoln Electric Holdings, Inc. ........................ 333 20,862 Lockheed Martin Corp. .................................. 16,455 1,180,482 Manpower, Inc. ......................................... 2,137 138,050 Masco Corp. (b) ........................................ 19,114 566,539 Monster Worldwide, Inc. (a) ............................ 1,039 44,324 MSC Industrial Direct Co. Class A ...................... 1,777 84,532 Nordson Corp. .......................................... 1,270 62,459 Norfolk Southern Corp. ................................. 15,688 834,915 Northrop Grumman Corp. ................................. 8,376 536,567 Oshkosh Truck Corp. .................................... 1,207 57,357 Parker Hannifin Corp. .................................. 2,593 201,217 Precision Castparts Corp. .............................. 1,122 67,051 Quanta Services, Inc. (a)(b) ........................... 3,903 67,639 Raytheon Co. ........................................... 20,565 916,582 Republic Services, Inc. ................................ 3,603 145,345 Robert Half International, Inc. ........................ 4,802 201,684 Rockwell Collins, Inc. ................................. 2,747 153,475 Ryder System, Inc. ..................................... 481 28,105 Southwest Airlines Co. ................................. 32,490 531,861 Swift Transportation Co., Inc. (a) ..................... 420 13,339 Teleflex, Inc. ......................................... 1,847 99,775 Thomas & Betts Corp. (a) ............................... 2,006 102,908 Tyco International, Ltd. ............................... 12,618 346,995 Union Pacific Corp. .................................... 6,479 602,288 United Parcel Service, Inc. Class B .................... 3,473 285,932 United Rentals, Inc. (a)(b) ............................ 1,671 53,439 United Technologies Corp. .............................. 6,030 382,423 Waste Management, Inc. ................................. 17,792 638,377 ----------- 20,594,760 ----------- Information Technology - 17.0% Acxiom Corp. ........................................... 3,578 89,450 Advanced Micro Devices, Inc. (a) ....................... 148 3,614 Advent Software, Inc. (a) .............................. 137 4,942 Agilent Technologies, Inc. (a) ......................... 12,486 394,058 Altera Corp. (a) ....................................... 9,835 172,604 Analog Devices, Inc. ................................... 3,111 99,988 Apple Computer, Inc. (a) ............................... 13,843 790,712 Applied Materials, Inc. ................................ 11,333 184,501 Arrow Electronics, Inc. (a) ............................ 2,228 71,742 Atmel Corp. (a) ........................................ 7,030 39,017 Automatic Data Processing, Inc. ........................ 4,529 205,390 Avaya, Inc. (a) ........................................ 3,217 36,738 BMC Software, Inc. (a) ................................. 9,857 235,582 CA, Inc. (b) ........................................... 21,065 432,886 CDW Corp. .............................................. 1,531 83,669 Ceridian Corp. (a) ..................................... 6,687 163,430 Ciena Corp. (a) ........................................ 4,647 22,352 o Cisco Systems, Inc. (a) .............................. 146,988 2,870,676 Citrix Systems, Inc. (a) ............................... 8,204 329,309 CommScope, Inc. (a) .................................... 455 14,296 Computer Sciences Corp. (a) ............................ 8,578 415,518 See accompanying notes to financial statements. 60 MCMORGAN FUNDS COMMON STOCKS (CONTINUED) SHARES VALUE ------- ----------- Information Technology (continued) Compuware Corp. (a) .................................... 17,484 $ 117,143 Convergys Corp. (a) .................................... 2,214 43,173 CSG Systems International, Inc. (a) .................... 2,179 53,908 Dell, Inc. (a) ......................................... 75,607 1,845,567 DST Systems, Inc. (a) .................................. 868 51,646 Dycom Industries, Inc. (a) ............................. 332 7,068 Electronic Data Systems Corp. .......................... 4,078 98,117 Fair Isaac Corp. (b) ................................... 3,003 109,039 First Data Corp. ....................................... 28,611 1,288,639 Freescale Semiconductor, Inc. Class B (a) .............. 6,677 196,304 Google, Inc. Class A (a) ............................... 134 56,190 Harris Corp. ........................................... 1,840 76,378 o Hewlett-Packard Co. .................................. 76,255 2,415,758 Imation Corp. .......................................... 550 22,578 Intel Corp. ............................................ 122,484 2,321,072 o International Business Machines Corp. (IBM) .......... 37,108 2,850,637 Intersil Corp. Class A ................................. 5,603 130,270 Intuit, Inc. (a) ....................................... 8,106 489,521 Jabil Circuit, Inc. .................................... 3,802 97,331 Lam Research Corp. (a) ................................. 6,385 297,669 Lexmark International, Inc. (a) ........................ 2,748 153,421 LSI Logic Corp. (a) .................................... 3,200 28,640 McAfee, Inc. (a) ....................................... 6,761 164,089 Micrel, Inc. (a) ....................................... 498 4,985 Micron Technology, Inc. (a) ............................ 19,930 300,146 o Microsoft Corp........................................ 177,248 4,129,878 Molex, Inc. ............................................ 1,209 40,586 MoneyGram International, Inc. .......................... 1,409 47,836 Motorola, Inc. ......................................... 75,834 1,528,055 MPS Group, Inc. (a) .................................... 3,906 58,824 National Semiconductor Corp. (b) ....................... 15,627 372,704 NCR Corp. (a) .......................................... 4,428 162,242 Network Appliance, Inc. (a) ............................ 2,972 104,912 Novell, Inc. (a) ....................................... 5,259 34,867 Novellus Systems, Inc. (a) ............................. 4,955 122,389 NVIDIA Corp. (a) ....................................... 15,350 326,802 Oracle Corp. (a) ....................................... 545 7,897 Palm, Inc. (a) ......................................... 713 11,479 Plexus Corp. (a) ....................................... 2,072 70,883 Polycom, Inc. (a) ...................................... 3,315 72,665 QLogic Corp. (a) ....................................... 6,260 107,922 QUALCOMM, Inc. ......................................... 1,093 43,797 Reynolds & Reynolds Co. (The) Class A .................. 1,100 33,737 Sanmina-SCI Corp. (a) .................................. 15,735 72,381 Silicon Laboratories, Inc. (a) ......................... 1,343 47,206 Solectron Corp. (a) .................................... 41,969 143,534 Sybase, Inc. (a) ....................................... 1,478 28,673 Symantec Corp. (a)(b) .................................. 8,129 126,325 Synopsys, Inc. (a) ..................................... 1,219 22,881 Tech Data Corp. (a) .................................... 1,834 70,261 Tektronix, Inc. ........................................ 2,699 79,405 Tellabs, Inc. (a) ...................................... 16,935 225,405 Texas Instruments, Inc. ................................ 35,427 1,073,084 Transaction Systems Architects, Inc. Class A (a) ......................................... 605 25,222 Unisys Corp. (a) ....................................... 8,322 52,262 UTStarcom, Inc. (a) .................................... 72 561 VeriSign, Inc. (a)(b) .................................. 9,288 215,203 Western Digital Corp. (a) .............................. 1,014 20,087 ----------- 29,359,728 ----------- Materials - 3.1% Airgas, Inc. ........................................... 948 $ 35,313 Albemarle Corp. (b) .................................... 632 30,260 Commercial Metals Co. .................................. 80 2,056 Cytec Industries, Inc. ................................. 656 35,201 Eastman Chemical Co. ................................... 55 2,970 Freeport-McMoran Copper & Gold, Inc. Class B (b) ....... 8,463 468,935 Glatfelter ............................................. 350 5,555 Hercules, Inc. (a) ..................................... 1,833 27,972 Louisiana-Pacific Corp. ................................ 4,851 106,237 Lyondell Chemical Co. .................................. 9,410 213,231 Martin Marietta Materials, Inc. ........................ 1,362 124,146 MeadWestvaco Corp. ..................................... 1,533 42,817 Monsanto Co. ........................................... 5,870 494,195 Newmont Mining Corp. ................................... 9,965 527,447 Nucor Corp. ............................................ 14,291 775,287 Olin Corp. ............................................. 3,333 59,761 Packaging Corp. of America ............................. 476 10,482 Pactiv Corp. (a) ....................................... 6,592 163,152 Phelps Dodge Corp. ..................................... 9,537 783,560 PPG Industries, Inc. ................................... 1,312 86,592 Reliance Steel & Aluminum Co. .......................... 248 20,572 Rohm & Haas Co. ........................................ 2,362 118,383 Sensient Technologies Corp. ............................ 1,792 37,471 Steel Dynamics, Inc. ................................... 1,844 121,225 Temple-Inland, Inc. .................................... 944 40,469 United States Steel Corp. .............................. 5,110 358,313 Valspar Corp. (The) .................................... 1,666 43,999 Vulcan Materials Co. ................................... 3,062 238,836 Weyerhaeuser Co. ....................................... 5,961 371,072 ----------- 5,345,509 ----------- Telecommunication Services - 3.5% o BellSouth Corp........................................ 118,554 4,291,655 CenturyTel, Inc. ....................................... 5,634 209,303 Cincinnati Bell, Inc. (a) .............................. 5,144 21,090 Citizens Communications Co. ............................ 15,209 198,477 Embarq Corp. (a) ....................................... 1,170 47,958 Qwest Communications International, Inc. (a)(b)......... 71,422 577,804 Verizon Communications, Inc. ........................... 20,418 683,799 ----------- 6,030,086 ----------- Utilities - 4.2% AES Corp. (The) (a) .................................... 10,755 198,430 Allegheny Energy, Inc. (a) ............................. 3,553 131,710 Alliant Energy Corp. ................................... 2,605 89,352 American Electric Power Co., Inc. ...................... 3,876 132,753 CenterPoint Energy, Inc. ............................... 6,752 84,400 Constellation Energy Group, Inc. ....................... 10,388 566,354 Duke Energy Corp. ...................................... 11,441 336,022 Dynegy, Inc. Class A (a) ............................... 2,525 13,812 Edison International ................................... 14,971 583,869 Entergy Corp. .......................................... 1,632 115,464 Equitable Resources, Inc. .............................. 4,595 153,933 Exelon Corp. ........................................... 2,399 136,335 FirstEnergy Corp. ...................................... 4,576 248,065 FPL Group, Inc. (b) .................................... 11,244 465,277 Great Plains Energy, Inc. (b) .......................... 2,255 62,824 See accompanying notes to financial statements. 61 EQUITY INVESTMENT FUND (continued) COMMON STOCKS (CONTINUED)
SHARES VALUE ------ ------------ Utilities (continued) KeySpan Corp. .......................................... 1,839 $ 74,296 National Fuel Gas Co. .................................. 2,205 77,484 Nicor, Inc. (b) ........................................ 957 39,716 OGE Energy Corp. ....................................... 61 2,137 Pepco Holdings, Inc. ................................... 8,749 206,301 PG&E Corp. ............................................. 4,693 184,341 Pinnacle West Capital Corp. ............................ 2,294 91,554 PPL Corp. (b) .......................................... 11,326 365,830 Public Service Enterprise Group, Inc. .................. 2,156 142,555 Puget Energy, Inc. (b) ................................. 976 20,964 SCANA Corp. ............................................ 4,395 169,559 Southern Co. (The) (b) ................................. 28,379 909,547 TXU Corp. .............................................. 21,592 1,290,986 Westar Energy, Inc. .................................... 733 15,430 Xcel Energy, Inc. ...................................... 15,493 297,156 ------------ 7,206,456 ------------ Total Common Stocks (Cost $163,994,621) ................................. 170,602,542 ------------ INVESTMENT COMPANY 0.9% Capital Markets - 0.9% S&P 500 Index-SPDR Trust, Series 1 (b)(d) .............. 12,900 1,639,719 ------------ Total Investment Company (Cost $1,624,557) ................................... 1,639,719 ------------ PRINCIPAL AMOUNT ---------- SHORT-TERM INVESTMENTS 6.1% Repurchase Agreement - 3.7% Morgan Stanley & Co. 5.42%, dated 6/30/06 due 7/3/06 Proceeds at Maturity $6,434,132 (Collateralized by various bonds with a Principal Amount of $7,565,547 and a Market Value of $6,622,383) (e) ........................ $6,431,229 6,431,229 ------------ Total Repurchase Agreement (Cost $6,431,229) ............................... 6,431,229 ------------ Time Deposits - 2.4% Calyon 5.265%, due 8/2/06 (e) .......................... 1,388,652 1,388,652 Credit Suisse First Boston Corp. 5.305%, due 7/27/06 (e) ......................... 1,388,652 1,388,652 Fortis Bank 5.26%, due 7/7/06 (e) ........................... 1,388,652 1,388,652 ------------ Total Time Deposits (Cost $4,165,956) ............................... 4,165,956 ------------ Total Short-Term Investments (Cost $10,597,185) .............................. 10,597,185 ------------ Total Investments (Cost $176,216,363) (f) ......................... 105.8% 182,839,446 Liabilities in Excess of Cash and Other Assets ..... (5.8) (10,103,610) ---------- ------------ Net Assets 100.0% $172,735,836 ========== ============
o Among the Fund's 10 largest holdings, excluding short-term investments. May be subject to change daily. (a) Non-income producing security. (b) Represents 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 security, or a portion thereof, purchased with cash collateral received for securities on loan. (f) Aggregate cost for federal income tax purposes is $177,642,722 and net unrealized appreciation is as follows: Gross unrealized appreciation ................................... $11,461,527 Gross unrealized depreciation ................................... (6,264,803) ----------- Net unrealized appreciation ..................................... $ 5,196,724 =========== See accompanying notes to financial statements. 62 EQUITY INVESTMENT FUND MCMORGAN FUNDS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 2006 ASSETS: Investment in securities at value (cost $176,216,363) including $10,228,143 market value of securities loaned ..................................... $182,839,446 Cash-interest bearing accounts .............................. 748,046 Receivable for securities sold .............................. 515,617 Dividends and interest receivable ........................... 239,250 Receivable for fund shares sold ............................. 31,447 Other assets ................................................ 41,504 ------------ Total assets ............................................. 184,415,310 ------------ LIABILITIES: Securities lending collateral ............................... 10,597,185 Payable for securities purchased ............................ 891,977 Payable to Advisor, net ..................................... 87,962 Payable for fund shares redeemed ............................ 44,548 Legal fees payable .......................................... 18,812 Custody fees payable ........................................ 14,103 Administration fees payable ................................. 8,018 Transfer agent fees payable ................................. 7,857 Accounting fees payable ..................................... 5,116 12B-1 fees payable .......................................... 2,584 Trustees fees payable ....................................... 1,072 Accrued expenses ............................................ 240 ------------ Total liabilities ........................................ 11,679,474 ------------ Net Assets ..................................................... $172,735,836 ============ NET ASSETS CONSIST OF: Capital paid-in ............................................. $183,013,902 Accumulated undistributed net investment income ............. 100,887 Accumulated net realized loss on investments ................ (17,002,036) Net unrealized appreciation on investments .................. 6,623,083 ------------ $172,735,836 ============ Net Assets: Class McMorgan .............................................. $159,981,288 Class Z ..................................................... 12,754,548 ------------ $172,735,836 ============ Shares Outstanding: Class McMorgan .............................................. 6,823,548 ============ Class Z ..................................................... 544,412 ============ Net asset value and redemption price per share: Class McMorgan .............................................. $ 23.45 ============ Class Z ..................................................... $ 23.43 ============ STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 2006 INVESTMENT INCOME: Dividends ................................................... $ 3,228,615 Interest .................................................... 24,331 Income from securities loaned - net ......................... 15,871 ------------ Total investment income .................................. 3,268,817 ------------ Expenses: Investment advisory fees (Note F) ........................... 860,917 Administration fees ......................................... 98,312 Transfer agent fees ......................................... 68,934 Accounting fees ............................................. 61,938 Legal fees .................................................. 59,472 Custodian fees .............................................. 55,827 Insurance fees .............................................. 53,951 Trustees fees ............................................... 36,000 Registration expenses ....................................... 32,180 Auditing fees ............................................... 25,500 12B-1 distribution fees (Class Z) ........................... 25,059 Report to shareholder expense ............................... 21,843 Miscellaneous expenses ...................................... 7,016 ------------ Total expenses ........................................... 1,406,949 Expenses reimbursed (Note F) ................................ (90,513) ------------ Net expenses ............................................. 1,316,436 ------------ Net investment income .......................................... 1,952,381 ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on investments ............................ 13,070,807 Net change in unrealized appreciation on investments ........ 420,575 ------------ Net realized and unrealized gain on investments ............. 13,491,382 ------------ Increase in net assets from operations ......................... $ 15,443,763 ============ See accompanying notes to financial statements. 63 EQUITY INVESTMENT FUND STATEMENT OF CHANGES IN NET ASSETS FOR THE FOR THE YEAR ENDED YEAR ENDED 6/30/2006 6/30/2005 ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: Operations: Net investment income ....................... $ 1,952,381 $ 2,064,558 Net realized gain on investments ............ 13,070,807 12,304,076 Net change in unrealized appreciation on investments .............................. 420,575 (2,892,052) ------------ ------------ Increase in net assets ...................... 15,443,763 11,476,582 ------------ ------------ Dividends to shareholders: From net investment income: Class McMorgan shares..................... (1,810,940) (1,943,021) Class Z shares............................ (105,378) (88,829) ------------ ------------ Total dividends to shareholders ............. (1,916,318) (2,031,850) ------------ ------------ Capital share transactions: Net proceeds from sale of shares: Class McMorgan shares..................... 25,150,893 33,682,935 Class Z shares............................ 7,512,188 1,094,354 Net asset value of shares issued to shareholders in reinvestment of dividends Class McMorgan shares..................... 1,789,480 1,925,333 Class Z shares............................ 105,378 88,829 ------------ ------------ 34,557,939 36,791,451 Cost of shares redeemed: Class McMorgan shares..................... (39,023,978) (80,770,357) Class Z shares............................ (2,361,980) (5,803,403) ------------ ------------ Decrease in net assets derived from capital share transactions........................ (6,828,019) (49,782,309) ------------ ------------ Total increase (decrease) in net assets ..... 6,699,426 (40,337,577) Net Assets: Beginning of year ........................... 166,036,410 206,373,987 ------------ ------------ End of year (including undistributed net investment income of $100,887 and $64,824, respectively).................... $172,735,836 $166,036,410 ============ ============ See accompanying notes to financial statements. 64 EQUITY INVESTMENT FUND MCMORGAN FUNDS - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- The tables below set forth financial data for a share of beneficial interest outstanding throughout each year presented.
CLASS MCMORGAN YEAR ENDED JUNE 30, ------------------------------------------------------ 2006 2005 2004 2003 2002 -------- -------- -------- -------- -------- Net asset value, beginning of year ............. $ 21.69 $ 20.58 $ 18.04 $ 19.05 $ 24.57 -------- -------- -------- -------- -------- Income from investment operations: Net investment income ....................... 0.27(a) 0.25(b) 0.18 0.23 0.21 Net realized and unrealized gain (loss) on investments .............................. 1.75 1.10 2.54 (1.00) (5.12) -------- -------- -------- -------- -------- Total from investment operations.......... 2.02 1.35 2.72 (0.77) (4.91) -------- -------- -------- -------- -------- Less dividends and distributions: From net investment income .................. (0.26) (0.24) (0.18) (0.24) (0.20) From capital gains .......................... -- -- -- -- (0.41) -------- -------- -------- -------- -------- Total dividends and distributions......... (0.26) (0.24) (0.18) (0.24) (0.61) -------- -------- -------- -------- -------- Net asset value, end of year ................... $ 23.45 $ 21.69 $ 20.58 $ 18.04 $ 19.05 ======== ======== ======== ======== ======== Total return ................................... 9.33% 6.60% 15.11% (3.99)% (20.34)% Ratios/Supplemental Data: Net assets, end of year (in 000's) .......... $159,981 $159,132 $195,193 $182,470 $196,914 Ratio of expenses to average net assets before reimbursement of expenses by Advisor .................................. 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% 0.72% 0.71% 0.71% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor ...................... 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 ...................... 1.15% 1.19%(b) 0.90% 1.34% 0.95% Portfolio turnover .......................... 98% 127% 39.13% 30.77% 14.95%
See accompanying notes to financial statements. 65 EQUITY INVESTMENT FUND FINANCIAL HIGHLIGHTS (continued)
CLASS Z YEAR ENDED JUNE 30, ------------------------------------------------ 2006 2005 2004 2003 2002 ------- ------ ------- ------- ------- Net asset value, beginning of year.............. $ 21.69 $20.57 $ 18.04 $ 19.05 $ 24.57 ------- ------ ------- ------- ------- Income from investment operations: Net investment income ....................... 0.20(a) 0.17(b) 0.13 0.18 0.15 Net realized and unrealized gain (loss) on investments .............................. 1.75 1.14 2.53 (1.00) (5.11) ------- ------ ------- ------- ------- Total from investment operations.......... 1.95 1.31 2.66 (0.82) (4.96) ------- ------ ------- ------- ------- Less dividends and distributions: From net investment income .................. (0.21) (0.19) (0.13) (0.19) (0.15) From capital gains .......................... -- -- -- -- (0.41) ------- ------ ------- ------- ------- Total dividends and distributions......... (0.21) (0.19) (0.13) (0.19) (0.56) ------- ------ ------- ------- ------- Net asset value, end of year.................... $ 23.43 $21.69 $ 20.57 $ 18.04 $ 19.05 ======= ====== ======= ======= ======= Total return.................................... 9.01% 6.38% 14.78% (4.23)% (20.52)% Ratios/Supplemental Data: Net assets, end of year (in 000's) .......... $12,755 $6,904 $11,181 $10,170 $12,637 Ratio of expenses to average net assets before reimbursement of expenses by Advisor .................................. 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% 0.97% 0.96% 0.96% Ratio of net investment income to average net assets before reimbursement of expenses by Advisor ...................... 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 ...................... 0.90% 0.94%(b) 0.65% 1.09% 0.70% Portfolio turnover .......................... 98% 127% 39.13% 30.77% 14.95%
- ---------- (a) Per share data based on an 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. See accompanying notes to financial statements. 66 NOTES TO FINANCIAL STATEMENTS JUNE 30, 2006 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 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 not 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 67 NOTES TO FINANCIAL STATEMENTS (CONTINUED) value or 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. The Funds may only enter into repurchase agreements with financial institutions that are deemed to be creditworthy by the Adviser, pursuant to guidelines established by the Funds' 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, the Fund may experience a delay or difficulty in exercising its right to the collateral. In addition, the Funds 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: Foreign securities may be subject to greater risks than U.S. investments, including currency fluctuations, less-liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater in emerging markets than in developed markets. (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"): are generally considered speculative because they present a greater risk of loss than higher-quality debt securities and may be subject to greater price volatility. (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 counterparty and simultaneously agree 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 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. 68 MCMORGAN FUNDS (11) SECURITIES LENDING: Each Fund (except Principal Preservation Fund) may lend its portfolio securities on a short-term basis to banks, broker-dealers and other institutional investors pursuant to agreements requiring that the loans be continuously secured by collateral equal at all times in value to at least the market value of the securities loaned. Collateral will consist of U.S. government securities, cash equivalents or irrevocable letters of credit. There may be risks of delay in receiving additional collateral or in recovering the securities loaned or even a loss of rights in the collateral should the borrower of the securities fail financially. (See Note J on page 73.) (12) RESTRICTED SECURITIES: Each Fund (other than the McMorgan Principal Preservation Fund) may invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted securities is included at the end of the Funds' Schedule of Investments. Restricted securities held at June 30, 2006: HIGH YIELD FUND
PERCENT SECURITY DATE(S)OF SHARE 6/30/06 OF - -------- ACQUISITION AMOUNT COST VALUE NET ASSETS ----------- ------ -------- -------- ---------- Haights Cross Communications, Inc. Preferred Stock 16.00%, Class B..................... 1/22/04 6,286 $292,429 $276,584 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 $276,646 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 Intermediate Fixed Income Fund, the Fixed Income Fund and the High Yield Fund distribute their respective net investment income to shareholders monthly and net 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 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 =========== ========== ========== ========== ========== ==========
69 Notes to Financial Statements (CONTINUED) 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 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) ======== =========== ===========
HIGH YIELD BALANCED EQUITY INVESTMENT FUND FUND FUND ----------- ----------- ----------------- Undistributed ordinary income.............................. $ 700,289 $ 62,084 $ 100,887 Undistributed long-term 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. On June 30, 2006, the following Funds had reclassifications between undistributed net investment income and accumulated net realized gain (loss) on investments as a result of other reclassifications. INCREASE INCREASE (DECREASE) (DECREASE) IN ACCUMULATED IN UNDISTRIBUTED NET REALIZED NET INVESTMENT GAIN/LOSS ON INCOME INVESTMENTS ---------------- ------------------- Intermediate Fixed Income Fund ....... $680 $(680) Fixed Income Fund .................... 35 (35) High Yield Fund ...................... 683 (683) Net assets of the Fund was unaffected by the reclassifications discussed. 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 YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- ------------- ------------- ------------- ------------- Shares sold .................... 130,643 141,679 4,011 3,670 1 87 Shares issued in reinvestment of dividends and distributions... 5,596 2,623 633 542 --(a) 4 -------- -------- ------ ------ --- ---- 136,239 144,302 4,644 4,212 1 91 Shares redeemed ................ (136,686) (130,458) (5,260) (5,287) --(a) (254) -------- -------- ------ ------ --- ---- Net increase (decrease) ........ (447) 13,844 (616) (1,075) 1 (163) ======== ======== ====== ====== === ====
FIXED INCOME FUND ------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- ------------- ------------- Shares sold ....................... 1,795 634 578 668 Shares issued in reinvestment of dividends and distributions... 156 148 117 104 ------ ------ ---- ---- 1,951 782 695 772 Shares redeemed ................... (1,465) (1,264) (488) (528) ------ ------ ---- ---- Net increase (decrease) ........... 486 (482) 207 244 ====== ====== ==== ====
70 MCMORGAN FUNDS
FIXED INCOME FUND ------------------------------------------------------------- CLASS R1 CLASS R2 ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- ------------- ------------- Shares sold ....................... -- -- -- -- Shares issued in reinvestment of dividends and distributions... --(a) --(a) --(a) --(a) --- --- --- --- --(a) --(a) --(a) --(a) Shares redeemed ................... --(a) -- --(a) -- --- --- --- --- Net increase ...................... --(A) --(A) --(A) --(A) === === === ===
HIGH YIELD FUND ----------------------------- CLASS MCMORGAN ----------------------------- YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- Shares sold ................................... 3,105 6,403 Shares issued in reinvestment of dividends .... 1,028 604 ----- ----- 4,133 7,007 Shares redeemed ............................... (825) (308) ----- ----- Net increase .................................. 3,308 6,699 ===== =====
BALANCED FUND ------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- ------------- ------------- Shares sold .................................. 411 456 50 45 Shares issued in reinvestment of dividends ... 73 108 8 9 ------ ------ --- --- 484 564 58 54 Shares redeemed .............................. (1,346) (4,117) (65) (89) ------ ------ --- --- Net decrease ................................. (862) (3,553) (7) (35) ====== ====== === ===
EQUITY INVESTMENT FUND ------------------------------------------------------------- CLASS MCMORGAN CLASS Z ----------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED JUNE 30, 2006 JUNE 30, 2005 JUNE 30, 2006 JUNE 30, 2005 ------------- ------------- ------------- ------------- Shares sold .................................. 1,100 1,599 325 52 Shares issued in reinvestment of dividends ... 77 90 5 4 ------ ------ ---- ---- 1,177 1,689 330 56 Shares redeemed .............................. (1,689) (3,839) (104) (282) ------ ------ ---- ---- Net increase (decrease) ...................... (512) (2,150) 226 (226) ====== ====== ==== ====
(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 year ended June 30, 2006 were:
INTERMEDIATE FIXED INCOME FUND FIXED INCOME FUND HIGH YIELD FUND --------------------------- --------------------------- ------------------------- PURCHASES SALES PURCHASES SALES PURCHASES SALES ------------ ------------ ------------ ------------ ----------- ----------- U.S. Government Securities ... $353,704,328 $347,861,087 $166,643,226 $159,779,219 $ -- $ -- All others ................... 58,990,748 64,357,308 25,812,318 25,997,733 85,429,137 53,355,209 ------------ ------------ ------------ ------------ ----------- ----------- Total ........................ $412,695,076 $412,218,395 $192,455,544 $185,776,952 $85,429,137 $53,355,209 ============ ============ ============ ============ =========== ===========
BALANCED FUND EQUITY INVESTMENT FUND -------------------------- --------------------------- PURCHASES SALES PURCHASES SALES ----------- ------------ ------------ ------------ U.S. Government Securities ... $54,718,172 $ 56,487,681 $ -- $ -- All others ................... 43,564,955 59,415,451 168,330,146 182,294,813 ----------- ------------ ------------ ------------ Total ........................ $98,283,127 $115,903,132 $168,330,146 $182,294,813 =========== ============ ============ ============
NOTE (F) AFFILIATED - ADVISORY, ADMINISTRATION AND DISTRIBUTION SERVICES AGREEMENTS: 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 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, 2005 through June 30, 2006, the net amount of expenses the Adviser absorbed, subject to repayment, totaled $292,710 for the Principal Preservation Fund; $193,479 for the Intermediate Fixed Income Fund; $198,017 for the Fixed Income Fund; $242,578 for the Balanced Fund and $90,513 for the Equity Investment Fund. 71 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 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 though June 30, 2006, the Adviser has reduced its management fee and otherwise absorbed Fund expenses for each Fund in the following amounts: Principal Preservation Fund $807,164; Intermediate Fixed Income Fund $500,982; Fixed Income Fund $548,465, Balanced Fund $654,352 and Equity Investment Fund $183,212. High Yield Fund recovered $22,202 from Adviser fee reimbursement during the year ended June 30, 2006. As of June 30, 2006 the Adviser can recover the following reimbursement amounts:
EXPIRES 2007 EXPIRES 2008 EXPIRES 2009 TOTAL ------------ ------------ ------------ -------- Principal Preservation Fund ...... $242,530 $271,924 $292,710 $807,164 Intermediate Fixed Income Fund ... 132,200 175,303 193,479 500,982 Fixed Income Fund ................ 160,536 189,912 198,017 548,465 Balanced Fund .................... 164,865 246,909 242,578 654,352 Equity Investment Fund ........... -- 92,699 90,513 183,212
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. 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, High Yield 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 does not currently offer Class Z shares to the public nor has any Class Z shares currently outstanding. 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. NOTE (G) TRANSFER 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 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 year ended June 30, 2006 for each Fund were as follows: Principal Preservation Fund $46,688; Intermediate Fixed Income Fund $48,900; Fixed Income Fund $45,239; High Yield Fund $8,365; Balanced Fund $60,622; and Equity Investment Fund $68,934. NOTE (H) 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 year ended June 30, 2006 for each Fund were as follows: Principal Preservation Fund $74,017; Intermediate Fixed Income Fund $93,455; Fixed Income Fund $45,391; High Yield Fund $71,423; Balanced Fund $44,661; and Equity Investment Fund $98,312. The Funds pay the Administrator a monthly fee for accounting services provided. Fees for accounting services provided to the Funds by the Administrator for the year ended June 30, 2006 were as follows: Principal Preservation Fund $47,359; Intermediate Fixed Income Fund $60,605; Fixed Income Fund $46,277; High Yield Fund $48,385; Balanced Fund $45,020; and Equity Investment Fund $61,938. 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 72 MCMORGAN FUNDS calculation of the Funds' 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. NOTE (I) 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 is available, without charge, upon request, by calling 1-800-788-9485. NOTE (J) PORTFOLIO SECURITIES LOANED: As of June 30, 2006, the following Funds had securities on loan and received collateral as follows: PORTFOLIO MARKET VALUE OF CASH - --------- SECURITIES ON LOAN COLLATERAL ------------------ ------------- Intermediate Fixed Income Fund ... $ 6,999,116 $ 7,149,405 Fixed Income Fund ................ 2,334,525 2,389,398 High Yield Fund .................. 13,168,966 13,503,188 Balanced Fund .................... 4,392,751 4,517,192 Equity Investment Fund ........... 10,228,143 10,597,185 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 (K) 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
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 (L) 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 and which provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. 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 (M) SUBSEQUENT EVENT: 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 positions 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 Funds' 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. Adoption of FIN 48 is required for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of the effective date. Management believes that the adoption of FIN 48 will have no impact on the financial statements of the Funds. 73 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE SHAREHOLDERS AND TRUSTEES OF MCMORGAN FUNDS SAN FRANCISCO, CALIFORNIA We have audited the accompanying statements of assets and liabilities of McMorgan Principal Preservation Fund, McMorgan Intermediate Fixed Income Fund, McMorgan Fixed Income Fund, McMorgan High Yield Fund, McMorgan Balanced Fund and McMorgan Equity Investment Fund, each a series of shares of beneficial interest of McMorgan Funds, including the portfolios of investments, as of June 30, 2006 and the related statements of operations for the year then ended, the statements of changes in net assets, and the financial highlights for the periods indicated thereon. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmations of securities owned as of June 30, 2006, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of McMorgan Principal Preservation Fund, McMorgan Intermediate Fixed Income Fund, McMorgan Fixed Income Fund, McMorgan High Yield Fund, McMorgan Balanced Fund and McMorgan Equity Investment Fund as of June 30, 2006, the results of their operations for the year then ended, the changes in their net assets and the financial highlights for the periods indicated thereon, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER LLP PHILADELPHIA, PENNSYLVANIA AUGUST 7, 2006 74 MCMORGAN FUNDS MCMORGAN FUNDS -- TRUSTEES AND OFFICERS (UNAUDITED) The Trust's Board of Trustees has the ultimate responsibility of running the Funds. Information about the Trust's Trustees are provided below. Additional board member information is included in the SAI, which is available free of charge by calling 1-800-831-1994.
NUMBER OF PORTFOLIOS IN FUND TERM OF OFFICE PRINCIPAL COMPLEX Other NAME, ADDRESS POSITION(S) AND LENGTH OF OCCUPATION(S) OVERSEEN Directorships AND AGE HELD WITH FUND TIME SERVED(1) DURING PAST 5 YEARS BY TRUSTEE Held by Trustee - ------------------------------------------------------------------------------------------------------------------------------- Kenneth I. Rosenblum Chairman and Since inception Independent 6 N/A McMorgan & Company LLC Trustee Consultant One Bush Street San Francisco, CA 94104 65 - ------------------------------------------------------------------------------------------------------------------------------- Robert C. Daney, CPA Trustee Since 5/2004 Partner, Brach, 6 N/A McMorgan & Company LLC Neal, Daney & One Bush Street Spence LLP San Francisco, CA 94104 (1981-Present) 56 - ------------------------------------------------------------------------------------------------------------------------------- Alan Lindquist Trustee Since 8/24/04 Retired; prior 6 N/A McMorgan & Company LLC thereto, Partner, One Bush Street Thomas Harvey LLP San Francisco, CA 94104 61 - ------------------------------------------------------------------------------------------------------------------------------- Walter B. Rose Trustee Since inception President, Venture 6 N/A McMorgan & Company LLC Consulting Corp. One Bush Street (1998 - Present); San Francisco, CA 94104 prior thereto, 60 President, McBain, Rose Partners - ------------------------------------------------------------------------------------------------------------------------------- Mark R. Taylor* President & Since 7/04 Executive Vice 6 N/A McMorgan & Company LLC Trustee Since 8/04/04 President, One Bush Street McMorgan & San Francisco, CA 94104 Company LLC 47 - ------------------------------------------------------------------------------------------------------------------------------- Arphiela Arizmendi* Treasurer and Since 2005 Director and Manager 6 N/A New York Life Investment Principal of Fund Accounting Management LLC Financial and Administration, 169 Lackawanna Avenue Officer New York Life Parsippany, NJ 07054 Investment 49 Management LLC (since March 2003); Treasurer and Principal Financial and Accounting Officer, Eclipse Funds Inc., Eclipse Funds, MainStay VP Series Fund, Inc. and MainStay Funds (since December 2005); Assistant Treasurer, The MainStay Funds, Eclipse Funds Inc., Eclipse Funds, MainStay VP Series Fund, Inc. and McMorgan Funds (1992 to December 2005). - -------------------------------------------------------------------------------------------------------------------------------
- ---------- (1) Each Trustee and Officer serves for an indefinite term, until his resignation, death or removal. * An "interested person" as defined in the 1940 Act. 75 MCMORGAN FUNDS -- TRUSTEES AND OFFICERS (UNAUDITED)
Number of Portfolios in Fund Term of Office Principal Complex Other Name, Address Position(s) and Length of Occupation(s) Overseen Directorships and Age Held with Fund Time Served1 During Past 5 years by Trustee Held by Trustee - -------------------------------------------------------------------------------------------------------------------------------- Vincent J. Bencivenga* Chief Compliance Since 8/23/04 Chief Compliance 6 N/A McMorgan & Company LLC Officer Officer, One Bush Street McMorgan & San Francisco, CA 94104 Company LLC; 55 prior thereto Principal, Compliance Group West - -------------------------------------------------------------------------------------------------------------------------------- Robert A. Anselmi* Chief Legal Since 2005 Senior Managing 6 N/A New York Life Investment Officer Director, General Management LLC Counsel, and Secretary, 51 Madison Avenue New York Life New York, NY 10010 Investment 59 Management LLC (including predecessor advisory organizations); General Counsel and Secretary, New York Life Investment Management Holdings LLC; Senior Vice President, New York Life Insurance Company; Vice President and Secretary, McMorgan & Company LLC; Secretary, NYLIM Service Company LLC, NYLCAP Manager LLC, and Madison Capital Funding LLC; Chief Legal Officer, Eclipse Funds, Eclipse Funds Inc., MainStay VP Series Fund, Inc., and McMorgan Funds. - -------------------------------------------------------------------------------------------------------------------------------- Teresa Matzelle* Vice President & Since 8/23/04 Vice President, 6 N/A McMorgan & Company Secretary McMorgan & One Bush Street Company LLC San Francisco, CA 94104 53 - ---------------------------------------------------------------------------------------------------------------------------------
- ---------- (1) Each Trustee and Officer serves for an indefinite term, until his resignation, death or removal. * An "interested person" as defined in the 1940 Act. 76 MCMORGAN FUNDS ADVISORY AGREEMENT RENEWALS. The Board of Trustees of the Trust (the "Board"), including all of the independent Trustees, met on March 2, 2006 to consider the Investment Advisory Agreements between the Funds and McMorgan & Company LLC, the investment adviser to the Funds (the "Adviser"). At the meeting, the Board requested and received written materials and oral presentations from the Adviser and Morningstar Associates, LLC ("Morningstar"), an independent fund consultant. On the basis of the information provided to it and its evaluation of that information, the Board, including all of the independent Trustees, determined to approve the renewal of the Investment Advisory Agreements for an additional year. In reaching its determinations, the Board considered the following factors, among others: NATURE, EXTENT AND QUALITY OF SERVICES. The Board examined the nature, extent and quality of the services provided and to be provided by the Adviser to the Funds. The Board evaluated the Adviser's experience in serving as an investment adviser and noted that the Adviser currently provides investment advice to various clients, including other pooled investment vehicles. The Board noted the experience of key personnel at the Adviser in providing investment management and administrative services and the systems used by such persons, as well as the reputation, resources, financial condition, compliance program and compliance history of the Adviser and its affiliates. The Board also noted the terms of the Investment Advisory Agreements and the Sub- Advisory Agreements and the responsibilities that the Adviser has as investment adviser to the Funds, including the day-to-day management of the fixed income portfolios of the Funds, the oversight of general Fund compliance, and the implementation of Board directives as they relate to the Funds. The Board additionally noted the Adviser's oversight of New York Life Investment Management LLC ("NYLIM"), and affiliate, as the sub-adviser of the equity portfolios of the Balanced and Equity Investment Funds. The Board concluded that each Fund is likely to benefit from the extent and quality of these services as a result of the Adviser's experience, personnel, operations and resources. INVESTMENT PERFORMANCE OF THE FUNDS AND THE ADVISER. The Board examined performance information for the Funds provided by Morningstar and considered the independence of Morningstar and the assumptions underlying the information provided by Morningstar. The Board reviewed the average annual total returns for the Funds for the last one, three and five years ended December 31, 2005 and compared the returns to those of the Funds' peer groups for the same time periods. The Board observed that the performance record of the Equity Investment and Balanced Funds had improved significantly since equity portfolio management responsibilities had been transferred from the Adviser to NYLIM in 2005, with both Funds advancing to the second quartile of their respective peer groups for the one year period. The Board noted the second and third quartile performance of the High Yield Fund over the first two years of its existence. The Board took into account the higher quality and short performance history of the High Yield Fund. The independent Trustees considered the first quartile performance of the Fixed Income Fund during the three and five year periods and the third and fourth quartile performances of the Intermediate Fixed Income Fund during the same periods. It was noted that the Intermediate Fixed Income Fund had been managed conservatively as to both quality and duration and required a higher level of cash to meet scheduled redemptions. Nevertheless, neither the Adviser nor the Board was satisfied with the returns of the Intermediate Fixed Income Fund, and the Adviser committed to implement changes to improve the performance of that Fund going forward. The independent Trustees commended the Adviser on the top quartile performance of the Principal Preservation Fund over the one, three and five year periods. COMPARATIVE FEES AND EXPENSE RATIOS. The Board examined fee and expense information for the Funds, as compared to other funds in the Funds' category and peer group, provided by Morningstar. The Board determined that the management fees for each Fund were lower than the median management fees for other mutual funds similar in size, investment style and distribution structure. The Board also evaluated the expense ratios for comparable funds and determined that each Fund's expense ratio was lower than the median ratio of those funds, with the exception of that of the High Yield Fund, which was at the median. It was noted that the High Yield Fund was still a relatively new fund with relatively few assets. The Board concluded that each Fund's management fee was reasonable. COSTS OF SERVICES AND PROFITS REALIZED BY THE ADVISER. The Board considered the costs to the Adviser of serving as the investment adviser to the Funds, including the direct and indirect costs associated with the personnel, systems and equipment necessary to manage the Funds in accordance with the Investment Advisory and Sub-Advisory Agreements. The Board noted that the Adviser is also responsible for paying NYLIM's sub-advisory fees. In addition, the Board noted that the Adviser is responsible for paying the salaries, expenses, and fees of all Trustees and officers of the Trust who are also directors and officers of the Adviser. The Board considered the revenues that the Adviser expected to receive for 77 serving as the investment adviser to the Funds, the fact that the Adviser was still reimbursing certain expenses of the Funds (other than the High Yield Fund), and the relatively low management fees and expense ratios of the Funds. In light of these and other considerations, the Board concluded that the profits to be realized by the Adviser were not excessive. ECONOMIES OF SCALE. The Board considered the extent to which the management fees to be paid to the Adviser reflected economies of scale. In this connection, the Board noted that the Funds were still relatively small, the Adviser was currently reimbursing certain expenses of the Funds (other than the High Yield Fund) and the management fees were below the median fees for other similar funds at the same asset levels. Based on its review, the Board concluded that each Fund's management fee structure was reasonable. OTHER BENEFITS TO THE ADVISER AND AFFILIATES. In evaluating the benefits that are expected to accrue to the Adviser from its relationship with the Funds, the Board recognized that the Adviser and certain of its affiliates serve the Trust in various other capacities, including as sub-adviser, administrator, accounting agent, transfer agent and distributor, and receive compensation from the Trust for these services. The Board noted that the Funds provide an investment vehicle for clients of the Adviser. SUB-ADVISORY AGREEMENT RENEWALS (McMorgan Equity Investment, Balanced and High Yield Funds only). The Board, including all of the independent Trustees, met on March 2, 2006, to consider the renewal of the Sub-Advisory Agreements between NYLIM, as the sub-adviser, and the Adviser with respect to the McMorgan Equity Investment Fund, McMorgan Balanced Fund, and McMorgan High Yield Fund (the "Sub-Advised Funds"). At the meeting, the Board requested and received written materials and oral presentations from NYLIM, the Adviser and Morningstar. On the basis of the information provided to it and its evaluation of that information, the Board, including all of the independent Trustees, determined to approve the renewal of the Sub-Advisory Agreements for an additional year. In reaching its determinations, the Board considered the following factors, among others: NATURE, EXTENT AND QUALITY OF SERVICES. The Board examined the nature, extent and quality of the services provided and to be provided by NYLIM to the Sub- Advised Funds. The Board evaluated NYLIM's experience in serving as an adviser and sub-adviser and noted that NYLIM currently provides investment advice to various clients, including other funds and pooled investment vehicles. The Board noted the experience of key personnel at NYLIM in providing investment management services and the systems used by such persons, as well as the reputation, resources, financial condition, compliance program and compliance history of NYLIM and its affiliates. The Board also noted the terms of the Sub-Advisory Agreements and the responsibilities that NYLIM has as sub-adviser , including the day-to-day management of the equity portfolios of Sub-Advised Funds, compliance with each Sub-Advised Fund's policies and objectives, and the implementation of Board directives as they relate to the Sub-Advised Funds. The Board concluded that each Sub-Advised Fund is likely to benefit from the extent and quality of these services as a result of NYLIM's experience, personnel, operations and resources. INVESTMENT PERFORMANCE OF NYLIM. The Board examined performance information for the Sub-Advised Funds. The independent Trustees noted that the performance record of the Equity Investment and Balanced Funds had improved significantly since equity portfolio management responsibilities had been transferred from the Adviser to NYLIM in 2005, with both Funds advancing to the second quartile of their respective peer groups for the one year period. The independent Trustees noted the second and third quartile performance of the High Yield Fund over the first two years of its existence. The independent Trustees took into account the higher quality and short performance history of the High Yield Fund. COMPARATIVE FEES AND EXPENSE RATIOS; COSTS OF SERVICES AND PROFITS REALIZED BY NYLIM; ECONOMIES OF SCALE. Because NYLIM is an affiliate of the Adviser and the Adviser is paying NYLIM's sub-advisory fees, the Board did not consider comparative fees and expense ratios, costs of services and profits realized and economies of scale as they related to NYLIM separately from its consideration of the same factors as they related to the Adviser. BENEFITS ACCRUED BY NYLIM AND ITS AFFILIATES. In evaluating the benefits that are expected to accrue to NYLIM from its relationship with the Sub-Advised Funds, the Board recognized that NYLIM and certain of its affiliates serve the Trust in various other capacities, including as investment adviser, administrator, accounting agent, transfer agent, and distributor, and receive compensation from the Trust for these services. The Board took into account that in 2005 NYLIM outsourced its day-to-day responsibilities as the Funds' administrator and accounting agent to a third party. The Board noted that the Funds provide an investment vehicle for customers of NYLIM and its affiliates and that NYLIM is expected 78 MCMORGAN FUNDS to benefit from "soft dollar" arrangements by which brokers will provide research and other services to NYLIM in exchange for commissions on trades of portfolio securities of the Sub-Advised Funds. The foregoing discussions of the Investment Advisory Agreements and the Sub- Advisory Agreements are not intended to be all-inclusive. With respect to each Investment Advisory Agreement and Sub-Advisory Agreement, the Board reviewed a variety of factors and considered a significant amount of information, including information received on an ongoing basis at meetings of the Board and its committees. In view of the broad scope and variety of these factors and information, the Board did not find it practicable to, and did not, make specific assessments of, quantify, or otherwise assign relative weights to the specific factors considered in reaching its determinations to approve the Investment Advisory Agreements and the Sub-Advisory Agreements. The approval determinations were made on the basis of each Trustee's business judgment after consideration of all of the factors taken as a whole, although individual Trustees may have given different weights to certain factors and assigned various degrees of materiality to the determinations made. FEDERAL INCOME TAX INFORMATION - (UNAUDITED) A portion of the dividends paid by the following Funds during the fiscal year ended June 30, 2006 which are not designated as capital gain distributions should be multiplied by the following percentages to arrive at the amount eligible for the qualified dividend income and for the corporate dividend- received deduction. QDI% DRD% ---- ---- Balance Fund ............. 49.5% 45.9% Equity Investment Fund ... 96.6 96.6 In January 2007, shareholders will receive an IRS Form 1099-DIV or substitute Form 1099, as to the federal tax status of the distributions received by shareholders in calendar year 2006. The amounts that will be reported on such 1099-DIV will be the amounts you are to use on your federal income tax return and will differ from the amounts which we must report for the Funds' fiscal year end June 30, 2006. MCMORGAN FUNDS -- PROXY VOTING GUIDELINES (UNAUDITED) McMorgan & Company LLC, the investment adviser of the Funds ("Funds"), votes all proxies of the Funds. A description of the policies and procedures that McMorgan & Company LLC uses to determine how to vote proxies is available (1) without charge, upon request, by calling 1-800-831-1994, (2) on the McMorgan Funds' website (www.McMorganFunds.com), and (3) on the SEC's website (www.sec.gov). Information regarding how McMorgan & Company LLC voted proxies during the most recent 12 month period ended June 30 is available (without charge), (1) on the McMorgan Funds' website (www.McMorganFunds.com), and (2) on the SEC's website (www.sec.gov). MCMORGAN FUNDS -- SCHEDULE OF INVESTMENTS The Funds file their complete schedule of investments with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q are available on the SEC's website at www.sec.gov, or they may be reviewed and copied at the SEC's Public Reference Room in Washington, DC (call 1-800-732-0330 for information on the operation of the Public Reference Room). 79 [THIS PAGE INTENTIONALLY LEFT BLANK] [MCMORGAN Funds LOGO] -------------------------------- STRAIGHT FORWARD INVESTING -------------------------------- ESTD 1994 BOARD OF TRUSTEES Robert C. Daney 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 ADVISER 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 experts are Robert C. Daney and Alan Lindquist. Both Mr. Daney and Mr. Lindquist are "independent" within the meaning of that term used in Form N-CSR. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $$95,000 for 2005 and $101,000 for 2006. (b) Audit-Related Fees. No fees were billed by the principal accountant during the last two fiscal years for audit-related services. (c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning are $12,000 for 2005 and $12,000 for 2006. (d) All Other Fees. No fees were billed during the last two fiscal years for products and services provided by the principal accountant, other than services reported in paragraphs (a) and (c) of this item. (e) (1) All audit and non-audit services to be performed for the registrant by its independent auditor must be pre-approved by the Audit Committee. (2) N/A (f) N/A (g) None (h) N/A ITEM 5. 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-CSR. 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. The Nominating and Governance Committee selects and nominates candidates for membership on the Board as independent trustees. Currently, there is no procedure for shareholders to recommend candidates to serve on the Board. 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-CSR (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 period covered by this Report that has materially affected or is reasonably likely to materially affect the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics of Principal Executive and Senior Financial Officers (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940 are furnished as exhibits to this filing. Certifications of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002 are furnished as exhibits to this filing. 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: September 5, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Mark R. Taylor --------------------------------- MARK R. TAYLOR PRESIDENT AND PRINCIAL EXECUTIVE OFFICER Date: September 5, 2006 By: /s/ Arphiela Arizmendi --------------------------------- ARPHIELA ARIZMENDI TREASURER AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER Date: September 1, 2006 EXHIBIT INDEX (a)(1) Code of Ethics for Principal Executive and Senior Financial Officers (a)(2) Certifications of principal executive officer and principal financial officer as required by Rule 30a-2 under the Investment Company Act of 1940. Certification of principal executive officer and principal financial officer as required by Section 906 of the Sarbanes-Oxley Act of 2002. EXHIBIT (A)(1) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS MCMORGAN FUNDS Approved by the Board of Trustees of McMorgan Funds as of May 4, 2004 Pursuant to the Sarbanes-Oxley Act of 2002 I. INTRODUCTION AND APPLICATION McMorgan Funds (the "Trust") recognizes the importance of high ethical standards in the conduct of its business and requires this Code of Ethics for Principal Executive and Senior Financial Officers ("Code") to be observed by its principal executive officers (each, a "Covered Officer") (defined below). In accordance with the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and the rules promulgated thereunder by the U.S. Securities and Exchange Commission ("SEC"), the Trust is required to file reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended ("1934 Act"), and must disclose whether it has adopted a code of ethics applicable to the principal executive officers. The Trust's Board of Trustees ("Board"), including a majority of its Independent Trustees (defined below), has approved this Code as compliant with the requirements of the Act and related SEC rules. All recipients of the Code are directed to read it carefully, retain it for future reference, and abide by the rules and policies set forth herein. Any questions concerning the applicability or interpretation of such rules and policies, and compliance therewith, should be directed to the relevant Compliance Officer (defined below). II. PURPOSE This Code has been adopted by the Board in accordance with the Act and the rules promulgated by the SEC in order to deter wrongdoing and promote: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents filed by the Trust with the SEC or made in other public communications by the Trust; o compliance with applicable governmental laws, rules and regulations; o prompt internal reporting to an appropriate person or persons of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. III. DEFINITIONS (A) "Covered Officer" means the principal executive officer and senior financial officers, including the principal financial officer, controller or principal accounting officer, or persons performing similar functions. The Covered Officers of the Trust shall be identified in Schedule I, as amended from time to time. (B) "Compliance Officer" means the person appointed by the Trust's Board of Trustees to administer the Code. The Compliance Officer of the Trust shall be identified in Schedule II, as amended from time to time. (C) "Trustee" means a trustee of the Trust, as applicable. (D) "Executive Officer" shall have the same meaning as set forth in Rule 3b-7 of the 1934 Act. Subject to any changes in the Rule, an Executive Officer means the president, any vice president, any officer who performs a policy making function, or any other person who performs similar policy making functions for the Trust. (E) "Independent Trustee" means a trustee of the Trust who is not an "interested person" of the Trust within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as amended ("Investment Company Act"). (F) "Implicit Waiver" means the Compliance Officer failed to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an Executive Officer. (G) "Restricted List" means that listing of securities maintained by the Compliance Officer in which trading by certain individuals subject to the Trust's 17j-1 code of ethics is generally prohibited. (H) "Waiver" means the approval by the Compliance Officer of a material departure from a provision of the Code. IV. HONEST AND ETHICAL CONDUCT (A) Overview. A "conflict of interest" occurs when a Covered Officer's personal interest interferes with the interests of, or his or her service to, the Trust. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with the Trust. Certain conflicts of interest arise out of the relationships between Covered Officers and the Trust and already are subject to conflict of interest provisions in the Investment Company Act and the Investment Advisers Act of 1940, as amended (the "Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Trust because of their status as "affiliated persons" of the Trust. The Trust's and certain of its service providers' compliance policies, programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, restate or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise or result from the contractual relationship between the Trust and McMorgan & Company LLC (the "Adviser"). The Covered Officers may be officers or employees of the Adviser. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Trust or the Adviser), be involved in establishing policies and implementing decisions that will have different effects on the Adviser and the Trust. The participation of the Covered Officers in such activities is inherent in the contractual relationships between the Trust and the Adviser and is consistent with the performance by the Covered Officers of their duties as officers of the Trust. Thus, if performed in conformity with the provisions of the Investment Company Act and the Advisers Act, such activities normally will be deemed to have been handled ethically. In addition, it is recognized by the Board that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. (B) General Policy. Each Covered Officer shall adhere to high standards of honest and ethical conduct. Each Covered Officer has a duty to exercise his or her authority and responsibility for the benefit of the Trust and its shareholders, to place the interests of the shareholders first, and to refrain from having outside interests that conflict with the interests of the Trust and its shareholders. Each such person must avoid any circumstances that might adversely affect, or appear to affect, his or her duty of loyalty to the Trust and its shareholders in discharging his or her responsibilities, including the protection of confidential information and corporate integrity. (C) Conflicts of Interest. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions of the Investment Company Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Trust. (1) Prohibited Conflicts of Interest. Each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence decisions or financial reporting by the Trust whereby the Covered Officer would benefit personally to the detriment of the Trust; o not cause the Trust to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than benefit the Trust; o not use material non-public knowledge of portfolio transactions made or contemplated for the Trust to trade personally or cause others to trade personally in contemplation of the market effect of such transactions; or o report at least annually the information elicited in the Trust's Trustee's and Officer's Questionnaire relating to potential conflicts of interest. (2) Duty to Disclose Conflicts. Each Covered Officer has the duty to disclose to the Compliance Officer any interest that he or she may have in any firm, corporation or business entity that is not affiliated or participating in any joint venture or partnership with the Trust or its affiliates and that does business with the Trust or that otherwise presents a possible conflict of interest. Disclosure must be timely so that the Trust may take action concerning any possible conflict as it deems appropriate. It is recognized, however, that the Trust or its affiliates may have business relationships with many organizations and that a relatively small interest in publicly traded securities of an organization does not necessarily give rise to a prohibited conflict of interest. Therefore, the following procedures have been adopted. (3) Conflicts of Interest that may be Waived. There are some conflict of interest situations for which a Covered Officer may seek a Waiver from a provision(s) of the Code. Waivers must be sought in accordance with Section VII of the Code. Examples of these include: o Board Memberships. Except as described below, it is considered generally incompatible with the duties of a Covered Officer to assume the position of director of a corporation not affiliated with the Trust. A report should be made by a Covered Officer to the Compliance Officer of any invitation to serve as a director of a corporation that is not an affiliate and the person must receive the approval of the Compliance Officer prior to accepting any such directorship. In the event that approval is given, the Compliance Officer shall immediately determine whether the corporation in question is to be placed on the Trust's Restricted List. o "Other" Business Interests. Except as described below, it is considered generally incompatible with the duties of a Covered Officer to act as an officer, general partner, consultant, agent, representative or employee of any business other than an affiliate. A report should be made of any invitation to serve as an officer, general partner, consultant, agent, representative or employee of any business that is not an affiliate for the approval of the Compliance Officer prior to accepting any such position. In the event that approval is given, the Compliance Officer shall immediately determine whether the business in question is to be placed on the Trust's Restricted List. o Permissible Outside Activities. Covered Officers who, in the regular course of their duties relating to the Trust's private equity/venture capital advisory and investment activities, are asked to serve as the director, officer, general partner, consultant, agent, representative or employee of a privately-held business may do so with the prior written approval of the Compliance Officer. o Doing Business with the Trust. Except as approved by the Compliance Officer, Covered Officers may not have a monetary interest, as principal, co-principal, agent or beneficiary, directly or indirectly, or through any substantial interest in any other corporation or business unit, in any transaction involving the Trust, subject to such exceptions as are specifically permitted under law. V. FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE AND COMPLIANCE Covered Officers shall: o be familiar with the disclosure requirements generally applicable to the Trust; o not knowingly misrepresent, or cause others to misrepresent, facts about the Trust to others, whether within or outside the Trust, including the Trust's Trustees and auditors, governmental regulators and self-regulatory organizations; o to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Trust, the Adviser and other Trust service providers with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Trust files with, or submits to, the SEC and in other public communications made by the Trust; and o promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. VI. INTERNAL REPORTING BY COVERED PERSONS (A) Certifications and Accountability. Each Covered Officer shall: (1) upon adoption of the Code (or thereafter as applicable upon becoming a Covered Officer), affirm in writing on Schedule A hereto that the Covered Officer has received, read, and understands the Code; (2) annually thereafter affirm on Schedule A hereto that the Covered Officer has complied with the requirements of the Code; and (3) not retaliate against any other Covered Officer or employee of the Trust or their affiliated persons for reports of potential violations that are made in good faith. (B) Reporting. A Covered Officer shall promptly report any knowledge of a material violation of this Code to the Compliance Officer. Failure to do so is itself a violation of the Code. VII. WAIVERS OF PROVISIONS OF THE CODE (A) Application of the Code. The Compliance Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. The Compliance Officer is authorized to consult, as appropriate, with counsel to the Trust/counsel to the Independent Trustees. However, any approvals or Waivers sought by and/or granted to a Covered Officer will be reported to the Board in accordance with Section VIII, below. (B) Waivers. The Compliance Officer may grant Waivers to the Code in circumstances that present special hardship. Waivers shall be structured to be as narrow as is reasonably practicable with appropriate safeguards designed to prevent abuse of the Waiver. To request a Waiver from the Code, the Covered Officer shall submit to the Compliance Officer a written request describing the transaction, activity or relationship for which a Waiver is sought. The request shall briefly explain the reason for engaging in the transaction, activity or relationship. Notwithstanding the foregoing, no exception will be granted where such exception would result in a violation of SEC rules or other applicable laws. (C) Documentation. The Compliance Officer shall document all Waivers (including Implicit Waivers). If a Waiver is granted, the Compliance Officer shall prepare a brief description of the nature of the Waiver, the name of the Covered Officer and the date of the Waiver so that this information may be disclosed in the next Form N-CSR to be filed on behalf of the Trust or posted on the Trust's internet website within five business days following the date of the Waiver. All Waivers must be reported to the Board at each quarterly meeting as set forth in Section VIII below. VIII. BOARD REPORTING The Compliance Officer shall report any violations of the Code to the Board for its consideration on a quarterly basis. At a minimum, the report shall: o describe the violation under the Code and any sanctions imposed; o identify and describe any Waivers sought or granted under the Code; and o identify any recommended changes to the Code. IX. AMENDMENTS The Covered Officers and the Compliance Officer may recommend amendments to the Code for the consideration and approval of the Board. In connection with any amendment to the Code, the Compliance Officer shall prepare a brief description of the amendment so that the necessary disclosure may be made with the next Form N-CSR to be filed on behalf of the Trust, or posted on the Trust's internet website within five business days following the date of the amendment. X. SANCTIONS Compliance by Covered Officers with the provisions of the Code is required. Covered Officers should be aware that in response to any violation, the Trust will take whatever action is deemed necessary under the circumstances, including, but not limited to, the imposition of appropriate sanctions. These sanctions may include, among others, the reversal of trades, reallocation of trades to client accounts, fines, disgorgement of profits, suspension or termination. XI. RECORDKEEPING The Compliance Officer shall maintain all records, including any internal memoranda, relating to compliance with the Code or Waivers of a provision(s) of the Code, for a period of 7 years from the end of the fiscal year in which such document was created, 2 years in an accessible place. XII. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Trust for purposes of Section 406 of the Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Trust, the Adviser, and NYLIFE Distributors LLC (the "Underwriter"), or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Trust's, the Adviser's and the Underwriter's codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code. XIII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the Board, the Adviser and the Compliance Officer, and their respective counsels. XIV. INTERNAL USE The Code is intended solely for the internal use by the Trust and does not constitute an admission, by or on behalf of the Trust, as to any fact, circumstance, or legal conclusion. SCHEDULE I COVERED OFFICERS Mark R. Taylor, President and Principal Executive Officer Arphiela Arizmendi, Treasurer and Principal Financial and Accounting Officer SCHEDULE II COMPLIANCE OFFICER Vincent Bencivenga, Chief Compliance Officer EXHIBIT A MCMORGAN FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS INITIAL AND ANNUAL CERTIFICATION OF COMPLIANCE WITH THE MCMORGAN FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I hereby certify that I have received the McMorgan Funds Code of Ethics for Principal Executive and Senior Financial Officers adopted pursuant to the Sarbanes-Oxley Act of 2002 (the "Code") and that I have read and understood the Code. I further certify that I am subject to the Code and will comply with each of the Code's provisions to which I am subject. I hereby certify that I have received the McMorgan Funds Code of Ethics for Principal Executive and Senior Financial Officers adopted pursuant to the Sarbanes-Oxley Act of 2002 (the "Code") and that I have read and understood the Code. I further certify that I have complied with and will continue to comply with each of the provisions of the Code to which I am subject. /s/ Mark R. Taylor ----------------------------------------- (Signature) Name: Mark R. Taylor ----------------------------------- Title/Department: President and Principal Executive Officer of McMorgan Funds Date: September 5, 2006 /s/ Arphiela Arizmendi ---------------------------------------- (Signature) Name Arphiela Arizmendi ------------------------------------ Title/Department: Treasurer and Principal Financial and Accounting Officer of McMorgan Funds Date: September 1, 2006 Received by: Vincent Bencivenga --------------------- Signature: /s/ Vincent Bencivenga ------------------------ Date: September 5, 2006 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-CSR 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) 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 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; (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 (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: September 5, 2006 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-CSR 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) 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 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; (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 (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: September 1, 2006 EXHIBIT (A)(2) SECTION 906 CERTIFICATIONS In connection with this report on Form N-CSR for the Registrant as furnished to the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby 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: September 5, 2006 By: /s/ Arphiela Arizmendi ------------------------------------ Arphiela Arizmendi Treasurer and Principal Financial and Accounting Officer Date: September 1, 2006 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. -----END PRIVACY-ENHANCED MESSAGE-----