mutual funds newsletter · portunity to maximize your support for charitable causes. more important...

Mutual Funds NewsletterSummer 2003

Eugene C. Sit, CFAChairman

A Few Words from Gene Sit

Industry Focus: Natural Gas

I mentioned in our last newsletter that the relative improvement of growth stock performance has been encouraging.Since then, growth stocks have continued to rise across all capitalization sizes. We remain cautiously optimistic thatthe combination of low interest rates, tax cuts, and strong profits suggest further economic strength in the second halfof 2003. The stock market seems to be anticipating this stronger economy. As always, we encourage shareholders toinvest based upon your objectives, risk tolerances and with diversification over several asset classes.

I am pleased to announce that we willoffer a new product to investors thisfall. The Sit Charitable Endowment Pro-gram is a donor-advised fund that is acharitable vehicle offering individuals,families and corporations the ability tocreate an endowment with as little as$25,000. As a donor you will have theopportunity to benefit in many ways(see box).

We believe the Sit Charitable Endow-ment Program offers you a unique op-portunity to maximize your support forcharitable causes. More important than

the tax advantages and flexibility, thisProgram can help you create a legacy ofgiving for your family or business while

providing a needed source of revenuefor worthy charities.

• Make irrevocable charitable contributions of cash or securities to your endowment.• Research qualified U. S. charitable organizations using our extensive database.• Recommend grants on your own timetable, using efficient online payments.• Potentially increase charitable giving through expert investment management.• Receive an immediate federal income tax deduction and up to the maximum allowed by

law for contributions to public charities.

Chairman Greenspan’s comments and hissubsequent June 10th testimony before theHouse Energy and Commerce Committeecertainly riveted the public’s and investors’attention on “the natural gas problem.” Theproblem: North America faces a supply anddemand imbalance years in the making thatcould prevail for several years. The demandfor natural gas has increased primarily be-cause almost all of the new electric powerplants use cleaner-burning gas as fuel.Booming construction of new gas-heatedresidences and exports to gas-short Mexicoalso increase demand.

Several factors constrain supply. NorthAmerican producers have effectivelydrained the low-cost and easily recoverablegas reservoirs. The annual rate at which awell depletes has risen from 16% in 1992 toan estimated 28% in 2003. This means that

nearly 75% of a 2003 well’s reserves will beproduced in just four years, compared withsix years for a 1992 well. Moreover, theaverage amount of reserves added per newwell decreased 38% in 2002 from the 1999-2001 average. Thus, the U.S. needs to have950 to 1,000 rigs drilling just to keep produc-tion flat; today, 925 rigs in the U.S. drill forgas, up from only 715 a year ago. Federalpolicy that restricts access to gas-rich ba-sins in Alaska, the Rockies, and offshorelocations also pinches supplies. Because ofinfrastructure limitations, imports (other thanfrom Canada) can only account for about 5%of supply, in contrast with more than 60% foroil.

Higher natural gas prices have been thepredictable outcome of the tightened sup-ply and demand balance. For the first sevenmonths of 2003, U.S. natural gas prices av-

eraged $5.90 per million British Thermal Units,87% higher than the 1997-2002 average. Inthe recent past, most industry observersconsidered $2.75 - $3.50 as the long-termequilibrium gas price, but given current sup-ply and demand conditions, equilibrium nowprobably lies at $4.00 - $4.50.

This "natural gas problem" presents at-tractive investment opportunities for SitMutual Funds. Natural gas dominates theoutput of growing exploration and produc-tion holdings Devon Energy and XTO En-ergy. These expanded natural gas drillingefforts benefit energy services stocks suchas Schlumberger, BJ Services, and SmithInternational. Gas utilities Equitable Re-sources and Questar participate all along thenatural gas value chain with their natural gasproduction, pipeline, storage, and local dis-tribution businesses.

“I am quite surprised at how little attention the natural gas problem has been getting because it is a very serious problem.” — Federal Reserve Chairman Alan Greenspan, May 21, 2003, in testimony before the Joint Economic Committee of Congress

Sit Charitable Endowment Program

by Peter L.Mitchelson, CFA, Vice-ChairmanInvestment Outlook and Strategy Summary

Peter L. Mitchelson is a founding princi-pal of Sit Investment Associates. He is aChartered Financial Analyst and has aMasters Degree in Business Administra-tion from the Harvard Graduate School ofBusiness Administration.

Since our last letter,the initial phase of thewar in Iraq was con-cluded, a major tax cutpackage was passed,and the Federal Re-serve implemented a

further reduction in interest rates. In re-sponse, domestic common stocks recordedone of the strongest quarterly returns sinceW orld W ar II. These and other topics arediscussed below:

Economic OutlookThe final estimate of U.S. first quarter 2003real GDP was downwardly revised to +1.4percent, the same as in 4Q02. War concernscaused consumer spending to decelerate,inventory accumulation slowed and even thegovernment sector moderated due to budgetpressures at the state and local level. Despitethis disappointing rate of growth, consumerspending, the major component of total eco-nomic activity, has accelerated in more recentmonths. In addition, consumers should reactpositively to the latest federal tax cut pack-age, the first benefits of which will be seenaround the end of July, when checks totaling$14 billion in child tax credit payments willstart to be received by 25 million eligiblehouseholds. The major impact of theAdministration’s $350 billion total tax pack-age will be felt in 3Q03 and 1Q04. Thecountry’s growth rate for the second quartershould be accelerating and gaining momen-tum as the year unfolds. Real GDP growth of+3.5 percent is possible during the secondhalf of the year, which is higher than thecountry’s long-run average.

With respect to inflation, the year-over-yearrate of change in the Consumer Price Indexdecelerated from +3.0 percent in March to+2.1 percent in June with some of the fears ofhigher energy prices receding as the war inIraq concluded. However, prices for services,which represent more than half of the CPI,continue to advance at a +3.3 percent rate andare a major reason why fears of actual “defla-tion” are too pessimistic. We are carefullymonitoring whether the potent combination

of monetary and fiscal stimulus will produceexcessive price pressures in the economy. Overthe near term, we believe it is unlikely.

Fixed IncomeOn June 25th, the Federal Reserve loweredinterest rates an additional 25 basis pointsbringing the federal funds rate to 1.0 percent.In explaining the decision, the Fed observedthat the positive and negative risks to growthpotential for the economy were equally bal-anced, but that it still had concerns over apossible substantial fall in inflation. All but onevoting member of the Federal Reserve votedfor the 25 basis point reduction, and thatmember wanted a larger 50 basis point cut.

Despite the Fed’s reduction in short-terminterest rates, intermediate- and longer-termU.S. Treasury yields have subsequently risenand bond prices experienced their largestdrop after any monetary policy easing since1986. Given the large amounts of monetaryand fiscal stimulus that have been applied tothe economy and the stronger growth that islikely to result, it is quite possible that theJune lows in yields marked the bottom of thecurrent interest rate cycle and that interestrates will continue to rise gradually. Accord-ingly, we have positioned fixed income port-folios with shorter durations than their re-spective benchmarks. If the economy turnsout to be weaker than expected, the Fed stillhas some firepower to reduce rates furtherand to employ nontraditional techniques inproviding further stimulus to the economy.

Equity MarketsThe S&P 500 Index total return was +11.8percent for the first six months of 2003 and thesecond quarter return was +15.4%, a welcomeresult after the experience of three previousyears of stock market declines. Growth stockshave been outperforming value stocks in 2003,also for the first time in three years, and smallercompanies have outperformed larger ones.

The gains in equity prices have been sup-ported by already-improving corporate prof-its, with prospects of more to come if theeconomy shifts into higher gear. While somevaluation criteria cannot be considered“cheap,” there are a number of supportingreasons why price-earnings ratios could re-main relatively high for some time. Theseinclude sizable pools of cash reserves earn-ing subpar rates of return that are seekingmore attractive alternatives including divi-dend-paying shares. Low inflation and thereduced capital gains tax rates included in thetax package are also important factors help-ing to sustain today’s valuations, as sug-gested in the inserted panel.

Industry sector performance in the stockmarket recovery is behaving very much incharacter with previous expansion cycles.During periods of market consolidation, weare continually upgrading portfolio holdingsto maximize potential in the emerging cyclefavoring growth stocks. Largest sectoralweightings currently include electronic tech-nology, health technology, finance and tech-nology services.

All of our Investor Services Representativesare available to discuss your questions andpotential strategies that will assist you inaddressing the investment objectives thatare most suitable for you.

Price/Earnings Ratio Varies with Tax Policy

Source: Credit Suisse First Boston, June 18, 2003

Featured Associate

Michael BrilleyPresident and Chief Fixed Income OfficerSit Mutual Funds

Sit Investment Associates, Inc. wasfounded in July, 1981 in Minneapolis byEugene C. Sit. That same year Sit MutualFunds, a family of no-load mutual funds,was established.

90 South Seventh Street, Suite 4600Minneapolis, MN 55402-4130

e-mail address: [email protected] site: www.sitfunds.com

(612) 334-5888 (800) 332-5580

Past performance is not a guarantee offuture results. Share prices will vary, andredemption prices may be more or less thanoriginal share cost. Please read the prospectuscarefully before investing. It contains com-plete information including management feesand expenses.

This is a quarterly publication of the SitMutual Funds authorized for distribution onlywhen preceded or accompanied by a prospec-tus. The comments and forecasts contained inthis publication are the expressed opinions ofthe individuals named. Readers should notrely on this publication as their sole source ofinformation.

Important Information

On April 11, 2003, the Pension Preserva-tion & Savings Expansion Act was intro-duced in the House. If passed and signedinto law, this bill would provide investorswith new incentives when preparing forretirement and would help retirees manageand preserve their nest eggs. The billincludes provisions that would:

Allow You to Save More for RetirementThe annual contribution limit would increaseto $5,000 for IRAs, $10,000 for SIMPLE IRAsand $15,000 for 401(k), 403(b) and 457 plans.

Permit Company Stock to be Sold EarlierThe bill would allow employees to divestthemselves of company stock after 3 years ofservice (for matching contributions) and 5years of service (for profit sharing contribu-tions).

Eliminate Marriage PenaltiesTraditional IRA The bill would graduallyincrease this income limitation so that by2010, the income limit for joint filers wouldbe double that of single filers.

The bill would also permit a spouse to makea fully deductible IRA contribution begin-ning in 2007, regardless of their total jointincome.

Roth IRA The bill would increase the in-come limitation for joint filers to $220,000,twice the amount of single filers.

Increase the Mandatory Distribution AgeThe bill would gradually increase the age atwhich required minimum distributions mustoccur to age 75 by 2010.

Permit Retirement Plan Rollovers to Non-Spouse BeneficiariesThe bill would permit a non-spouse benefi-ciary to transfer the assets to an inherited IRAin the name of the decedent. Withdrawalscould then be made over a number of years,allowing the assets to grow on a tax-deferredbasis and delaying taxation on the full amount.

Permit IRA Transfers Between SpousesThe bill would allow an IRA to be transferredto their spouse’s IRA with no tax liability.

Steve Benjamin, Retirement Plan ServicesManager at Sit Mutual Funds, will offerthree free investment seminars this fall. Fora list of topics Steve will cover and the timesthe seminars are scheduled, please see theback page of this newsletter.

ProposedRetirement Changes

Mike Brilley has been the architect ofFixed Income strategy since the Funds’inception at Sit Investment Associates in1984. Mike and his team have developedsome of the highest rated fixed-incomefunds on the market — receiving perfor-mance achievement awards from LipperAnalytical Services, Inc. for the years1990, 1994, 1996, 1998, and 1999 for the bestyear-end performance in a specific sector.These achievements reflect his experienceworking with fixed-income markets for morethan three decades.

Mike’s philosophy of low risk coupledwith high income has produced attractivereturns since the inception of the Sit Fixed-Income Funds. By identifying sectors andsecurities that offer the most attractivereward/risk characteristics, our fixed-in-come funds strive to protect the principalvalue of your investment while providinghigh current income.

Many investors are familiar with the price-to-earnings (P/E) ratio when it comes to stockvaluation. However, another measure, thePEG ratio, has been gaining in popularityrecently because it provides a better pictureof a stock’s relative value.

The difference between P/E and PEGThe price to earnings ratio (P/E) is simply

the stock price divided by the company’searnings-per-share. The P/E is a "picture intime" showing what investors are currentlywilling to pay for a company’s earnings.

The PEG ratio compares a stock’s price/earnings ratio (P/E) to its expected earningsper share (EPS) growth rate.

Price/Earnings Ratio Annual EPS Growth

In general, a stock with a PEG ratio of 1indicates that the market has priced the stockthe same multiple as its earnings growth rate.

For example, let us say that ABC Truckingis selling at a P/E of 20 while its competitorsare selling at a P/E of 10. Using the P/E forevaluation would lead one to believe thisstock is expensive relative to its competitors,but what if ABC services a specialized indus-try and is growing at 20% versus only 5% forits competitors? The respective PEGs wouldbe 1 (20/20=1) for ABC Trucking and 2 (10/5=2) for its competitors: given ABC's lowerPEG, its valuation may actually be less expen-sive than its competitors.

Applying the PEG ratio The Sit Small Cap Growth Fund focuses

on companies growing their earnings at15%-20%. The portfolio has a weighted-average P/E of 23.2 and a 5-year projectedearnings growth rate of 19.33%. Thisequates to a PEG of 1.2. The Fund’s bench-mark, the Russell 2000 Index, has a PEG of1.5 measured in the same way. This limitedanalysis indicates that the Sit Small CapGrowth Fund could be considered under-valued in comparison to its benchmark*.

It is important to note that the PEGshould not be used in isolation. The PEGis just one of many valuation metrics usedto analyze a stock.

* Weighted-Average P/E-to-5-Year Earnings GrowthRatio for the 2003 Calendar as of 6/30/03.

What is aPEG Ratio?

PEG Ratio =

Focus on: Viacom Inc.

Second Quarter Review - Period ended June 30, 2003

1 Year 1.97% 0.25% 2.93%

5 Years -31.23 -7.81 -22.76

10 Year 92.57 160.35 121.74

Inception*** 744.83 1347.38 1012.21

*As of 6/30/03. **Not annualized.

3 Month** 14.50% 15.39% 14.30%

6 Month** 12.49 11.76 13.08

1 Year 1.97 0.25 2.93

5 Years -7.22 -1.61 -5.03

10 Year 6.77 10.04 8.29

Inception*** 10.78 13.68 12.25

(9/2/82)

Growth of $10,000

Total Returns (%)

Cumulative Total Returns (%)*

Average Annual Total Returns (%)*

Sit Large Cap Growth FundTop Ten Holdings

Inception 9/2/82

Technology Services

Portfolio Structure (%)Allocation by Sector

6.2

8.6

10.0

12.6

19.6

6.6

14.7

1.9

Electronic Technology

Retail Trade

Finance

Sectors less than 5.0%

Cash & OtherNet Assets

Health Technology

ProducerManufacturing

Sit

Larg

e C

apG

row

th F

und

S &

P50

0 In

dex

Rus

sell

1000

Gro

wth

Ind

ex

Sit Large Cap Growth Fund (SNIGX)Senior Portfolio Managers, Peter L. Mitchelson, CFA, Roger J. Sit and Ron D. Sit, CFA

1. Amgen, Inc.

2. Pfizer, Inc.

3. Target Corp.

4. General Electric Co.

5. Microsoft Corp.

6. Citigroup, Inc.

7. American International Group, Inc.

8. Viacom, Inc.

9. Johnson & Johnson

10. Wells Fargo Co.

Total Number of Holdings: 77

Net Asset Value 6/30/03: $26.92 Per Share6/30/02: $26.40 Per Share

Total Net Assets: $59.3 Million

Weighted Avg. Mkt. Cap: $84.5 Billion

Performance figures are historical and do not guarantee futureresults. Investment returns and principal value will vary, and youmay have a gain or loss when you sell shares. Average annual totalreturns include changes in share price as well as reinvestment of alldividends and capital gains. Management fees and administrativeexpenses are included in the Fund's performance; however, feesand expenses are not incorporated in the Russell 1000 GrowthIndex and theS&P 500 Index.***On 6/6/93, the Fund's investment objective changed to allow fora portfolio of 100% stocks. Prior to that time, the portfolio wasrequired to contain no more than 80% stocks.

19.8

Consumer Services

220,000

178,000

136,000

94,000

52,000

10,0009/2/82 6/30/03

$84,483

Sit Large Cap Growth FundS&P 500 Index

The Sit Large Cap Growth Fund’s quar-terly return was +14.5%, compared to theS&P 500 Index return of +15.4%. TheRussell 1000 Growth Index returned +14.3%over the same time period.

Recent returns rescue a choppy yearWhile the Fund posted a modest +2.0%

gain over the past 12 months, the path wasvolatile as returns were -15.2%, +6.8%,-1.8%, and +14.5% in the last four quarters,respectively. This mirrored the volatility ofthe S&P Index which posted quarterly re-turns of –17.3%, +8.4%, -3.2%, and +15.4%,for a total return of only +0.3% for the fiscalyear.

Better earnings should lead market higherWhile we believe much of the upward

progress for the market in recent monthsrepresents a “snap back” from the de-pressed valuation levels of last fall, theimproving outlook for corporate earningsprovides a basis for continued optimism.S&P 500 constituent earnings for 1Q 2003were up a surprisingly strong +10%, whileU.S. GDP growth was a mere +1.4%. We seea significantly stronger economy duringthe second half of 2003 (and into 2004), andwe view rising corporate profits as thecatalyst for higher stock prices during thatrecovery.

Growth should continue to outperformGrowth stocks have turned in solid re-

sults in the last year, and have ralliedsharply in 2003. Consequently, key growthsectors, including health technology, com-munications, technology services, and elec-tronic technology have driven the Fund’soutperformance relative to the S&P 500.Given the multi-year nature of growth ver-sus value performance cycles, we expectgrowth stock leadership over the near- tointermediate-term for several reasons. First,a stronger market and economic environ-ment should reduce investors’ premium on“safety”, a characteristic that typicallyfavors value issues. Second, growth valu-ations are now attractive following thesevere corrections since their peak in early2000. And finally, the improving funda-mentals for the heavily-weighted technol-ogy sector should positively impact thegrowth style.

Viacom is a leading global media com-pany, with dominant positions in broad-cast and cable television, radio, outdooradvertising and online entertainment.Viacom’s well-known brands include CBS,MTV, Nickelodeon, VH1, BET, ParamountPictures, Viacom Outdoor, Infinity Broad-casting, UPN, TNN, TV Land, CMT: Coun-try Music Television, Comedy Central,Showtime, Blockbuster and Simon &Schuster. Television accounted for 30% of2002 gross revenues; Video, 22%; CableNetworks, 19%; Radio Stations, 15% andEntertainment, 14%. With approximatelyhalf of Viacom’s revenues tied to advertis-ing revenues, Viacom is in an “offensive”position in the U.S. economy. Viacom hasthe strongest balance sheet of the majorU.S. entertainment companies and gener-ates substantial free cash flow.

Focus on: Devon Energy Corporation

1 Year 1.90% -0.71% 7.35%

5 Years -20.18 41.18 -3.18

10 Year 86.28 229.13 125.22

Inception 1198.43 2114.29 n/a

*As of 6/30/03. **Not annualized

3 Month** 16.81% 17.63% 18.76%

6 Month** 18.01 12.41 18.74

1 Year 1.90 -0.71 7.35

5 Years -4.41 7.14 -0.64

10 Year 6.42 12.65 8.46

Inception 13.09 16.03 n/a

(9/2/82)

Sit Mid Cap Growth Fund (NBNGX )

Growth of $10,000

Total Returns (%)



Sit Mid CapGrowth FundTop Ten Holdings

Technology Services


7.3

8.1

8.8

14.2

16.6

15.3

5.0

ElectronicTechnology

Retail Trade

Finance

Sectors LessThan 4.0%

Cash and OtherNet Assets

Consumer Services

Health Technology

4.6

20.1

Health Services

Sit

Mid

Cap

Gro

wth

Fun

d

S&

P M

idC

ap40

0 In

dex

Rus

sell

Mid

Cap

Gro

wth

Ind

ex

Inception 9/2/82

Senior Portfolio Managers, Eugene C. Sit, CFA and Erik S. Anderson, CFA




Performance figures are historical and do not guarantee futureresults. Investment returns and principal value will vary, and youmay have a gain or loss when you sell shares. Average annual totalreturns include changes in share price as well as reinvestment of alldividends and capital gains. Management fees and administrativeexpenses are included in the Fund's performance; however, feesand expenses are not incorporated in the Russell Mid Cap GrowthIndex and the S&P Mid Cap 400 Index.

1. TCF Financial Corp.

2. Wellpoint Health Networks, Inc.

3. Boston Scientific Corp.

4. Devon Energy Corp.

5. Teva Pharmaceutical Industries, A.D.R.

6. KLA-Tencor Corp.

7. Veritas Software Corp.

8. Analog Devices, Inc.

9. Legg Mason, Inc.

10. EchoStar Copmmunications Corp.


$129,843

400,000

335,000

270,000

205,000

140,000

10,000

Sit Mid Cap Growth Fund

S&P MidCap 400 Index

9/2/82 6/30/03

75,000


The Sit Mid Cap Growth Fund’s three-month return was +16.8%, compared to a17.6% return for the S&P Mid Cap 400 Indexand +18.8% return for the Russell Mid CapGrowth Index. For the year, the Fund returned+1.9%, versus a 0.7% decline for the S&PMid Cap Index and a +7.4% gain for theRussell Mid Cap Growth Index.

Lingering fears have diminishedMid cap stocks generally posted higher

returns over the past 12 months, overcomingsignificant hurdles on a number of fronts,including a war with Iraq, terrorism warnings,corporate governance concerns, and mutedgrowth in the economy. Recent market gains,however, have been particularly encouraging,as investors appear more convinced that theserisks have significantly diminished. Moreover,growth stocks have fared particularly well inrecent months, as signs of improvement intechnology spending has led to strong sec-tor performance in 2003.

Economy, earnings, and prices on the riseWith equity market valuations rising to

more reasonable levels, we believe stocks’future advances will be driven by earningsgains amid an improving backdrop for theeconomy. Catalysts for improving economicgrowth in the months ahead include lowerenergy prices, continued low interest rates,tax reductions, and improving consumer con-fidence.

More exposure to growth and cyclicalsOver the past 12 months, in anticipation of

an economic rebound, we have added topositions in the technology services, elec-tronic technology, and transportation sec-tors. We believe these groups have greatpotential for accelerating earnings growth asthe economy picks up steam throughout 2003and into 2004. Conversely, we have reducedthe weighting in less economically sensitivesectors, including finance and health ser-vices. Although the portfolio emphasis hasshifted to become more aggressive in re-sponse to a better environment that we seeahead, the Fund remains well diversified, withat least a 3% weighting in ten different eco-nomic sectors.

As managers of (and investors in) theFund, we are pleased to report positive re-turns over the three-month, YTD, and one-year periods.

Oklahoma City-based Devon EnergyCorporation is an independent energy com-pany. Operations primarily include oil andgas exploration, development and produc-tion, and acquiring producing properties.Approximately 90% of the company’s oiland gas production and approximately 85%of its proved reserves are located in theUnited States and Canada.

Devon is also the largest U.S.-basedindependent oil and gas producer and oneof the largest independent processors ofnatural gas and natural gas liquids in NorthAmerica. With its operations tilted to natu-ral gas, Devon stands poised to benefitfrom the current natural gas supply anddemand situation.

Focus on: Coach, Inc.

1 Year 2.75% -1.64% 0.67%

3 Years -46.76 -9.58 -42.13

5 Years 30.98 4.92 -19.53

Inception 192.71 110.87 51.64

*As of 6/30/03 **Not Annualized

3 Month** 20.02% 23.42% 24.15%

6 Month** 16.34 17.88 19.32

1 Year 2.75 -1.64 0.67

3 Years -18.95 -3.30 -16.67

5 Years 5.55 0.97 -4.25

Inception 12.67 8.64 4.73

(7/1/94)

Sit Small Cap Growth Fund (SSMGX)

Growth of $10,000

Eugene C. Sit, CFA, Senior Portfolio Manager

Total Returns (%)



Sit Small Cap Growth FundTop Ten Holdings

Health Services


5.0

6.0

13.3

17.8

6.9

13.6

31.3


Process Industries

Finance



Health Technology

Technology Services

6.1S

it S

mal

l Cap

Gro

wth

Fun

d

Rus

sell

2000

Inde

x

Rus

sell

2000

Gro

wth

Ind

ex

Inception 7/1/94




1. New York Community Bancorp, Inc.

2. Intersil Corp.

3. Biosite, Inc.

4. Millipore Corp.

5. Coach, Inc.

6. Mercury General Corp.

7. Cuno, Inc.

8. NetScreen Technologies, Inc.

9. Universal Health Services, Inc.

10. Airgas, Inc.


Performance figures are historical and do not guarantee futureresults. Investment returns and principal value will vary, and youmay have a gain or loss when you sell shares. Average annualtotal returns include changes in share price as well as reinvest-ment of all dividends and capital gains. Management fees andadministrative expenses are included in the Fund's performance;however, fees and expenses are not incorporated in the Russell2000 Index and the Russell 2000 Growth Index.

65,000

54,000

43,000

32,000

21,000

10,0007/1/94 6/30/03

Sit Small Cap Growth FundRussell 2000 Index


The Sit Small Cap Growth Fund returned+20.0% over the past quarter, compared tothe Russell 2000 Index return of +23.4%.The Russell 2000 Growth Index return was+24.2% over the same time period. For thefiscal year, the Fund’s return was +2.8%,compared to the –1.6% and +0.7% returnsfor the Russell 2000 and Russell 2000Growth indices, respectively.

Improving trends across the boardIn recent months, investor sentiment has

sharply improved following the outcome ofthe Iraq conflict, along with strengtheningcorporate profits, substantial monetarystimuli (interest rate cuts), and fiscal stimuli(tax cuts). While the economy clearly did notreach its growth potential during the first halfof 2003, we believe prospects are markedlybetter for the second half and 2004.

Added value through stock selectionOver the past 12 months, our strategy was

to emphasize stock selection rather thanmaking large sector “bets,” in light of themany cross-currents in the economy overmost of the period. We are pleased to reportthat the Fund’s positive returns, by our cal-culations, were achieved primarily throughsound stock picking, as we tried to takeadvantage of specific opportunities amid themarket volatility. Specifically, the strongestcontributors to the Fund’s performance since6/30/02 included Netscreen Technologies(+143% total return), Mercury Interactive(+69%), Coach (+81%), Biosite (+71%), Ca-reer Education (+52%), and New York Com-munity Bancorp (+50%).

Betting on a better economyAlthough the portfolio remains well diver-

sified, the improving outlook for growthstocks and the economy, in general, have ledus to take a more aggressive stance in oursector positioning. For example, we haverecently added significantly to our weightingsin both the electronic technology and healthtechnology sectors, based on both the strongcyclical and secular growth prospects inthese sectors. Conversely, health serviceshas been reduced, as we see high valuationsand limited opportunity for improving growthgoing forward.

We are enthused about the prospects inthe year ahead.

Coach, Inc. is a designer, producer andmarketer of accessories for men and women,including handbags, business cases, lug-gage and travel accessories, personal plan-ning products, leather outerwear, gloves andscarves. The Company’s products are soldthrough a number of direct-to-consumerchannels, which at fiscal year-end 2002 in-cluded 138 United States retail stores, 74United States factory stores and two UnitedKingdom retail stores. While Coach contin-ues to be one of the most recognized acces-sories brands in the United States, its long-term strategic plan is to increase distributionto the Japanese consumer. With the forma-tion of Coach Japan, Inc., a joint venture withSumitomo Corporation, Coach remains a sig-nificant growth investment.

$29,271

Focus on: Symantec Corp.

1 Year 7.05% 0.25%

3 Years -75.11 -29.98

5 Years -29.41 -7.81

Inception -16.91 8.52*As of 6/30/03. **Not Annualized

3 Month** 19.61% 15.39%

6 Month** 19.08 11.76

1 Year 7.05 0.25

3 Years -37.10 -11.20

5 Years -6.73 -1.61

Inception -3.31 1.50

(12/31/97)

Sit Science and Technology Growth Fund (SISTX)

Growth of $10,000

S &

P50

0 In

dex

Total Returns (%)



Sit Science and TechnologyGrowth Fund Top Ten Holdings

Technology Services


20.8

33.0

12.0

32.8

1.4




Health Technology

Sit

Sci

ence

and

Tec

hnol

ogy

Gro

wth

Fun

d

Eugene C. Sit, CFA, Senior Portfolio Manager

Inception 12/31/97




Performance figures are historical and do not guaranteefuture results. Investment returns and principal value willvary, and you may have a gain or loss when you sellshares. Average annual total returns include changes inshare price as well as reinvestment of all dividends andcapital gains. Management fees and administrative ex-penses are included in the Fund's performance; how-ever, fees and expenses are not incorporated in the S & P500 Index.

1. Elan Corp., A.D.R.

2. Amgen, Inc.

3. St. Jude Medical, Inc.

4. Analog Devices, Inc.

5. Boston Scientific Corp.

6. Synopsys, Inc.

7. Biogen, Inc.

8. Teva Pharmaceutical, Ltd., A.D.R.

9. Dell Computer Corp.

10. Millipore Corp.


45,000

35,000

25,000

15,000

5,00012/31/97 6/30/03

$8,309

Sit S&T Growth FundS&P 500 Index


The Sit Science and Technology GrowthFund returned +19.6% in the second quarter2003, compared to the +15.4% return for theS&P 500 Index .

Earnings will drive future returnsScience and technology stocks have

turned in solid performance since the market“bottom” in October 2002. While valuationsremain attractive for companies held in theFund, we believe earnings growth, ratherthan continued improvement in current valu-ations, will be the primary contributor toreturns going forward. We believe that theFund is well positioned to capitalize on con-tinued innovation in science and technologyindustries, bolstered by improvements in theeconomy. As we have often discussed, thelong-term fundamentals underlying scienceand technology are very positive, but in theend, technology spending is ultimately re-sponsive to trends in corporate profitabilityand the availability of free cash flow. Evenwith tepid economic growth during 1Q2003,however, the companies held in the Fundreported median sales growth of +16% for thequarter (compared to 1Q2002). Based on theoutlook for a significantly faster economicgrowth during the second half of 2003 into2004, we expect that company growth pros-pects will brighten further with the “tailwind”of a stronger economy.

Still a multitude of opportunitiesDespite the strong recent performance for

many science and technology sectors, wecontinue to find many opportunities in a vari-ety of high growth segments. Examples ofcurrent areas of emphasis include semicon-ductor capital equipment, business intelligencesoftware, security software, biotechnology,and medical instrumentation. Given the ongo-ing innovation in these and other areas intechnology-related industries, we remainkeenly focused on finding the strongest long-term opportunities for our shareholders.

We are pleased to report positive returnsfor the most recent period. Recent improve-ments in investor sentiment, improving eco-nomic conditions, and strong growth pros-pects for companies held in the Fund, makeus optimistic about the outlook for the yearahead.

Symantec Corporation is a leading pro-vider of Internet security technology. Itoffers a broad range of security software andservices to consumers, enterprises and ser-vice providers. The company has given theSit Science and Technology Growth Fund aboost in performance during the last fewyears while the overall technology sectorlagged.

The technology sector has slowly recov-ered over the past nine months, and Symantechas been no exception. In the first quarter of2003 it nearly doubled its price per sharevalue and in the last 12 months (ended March2003), Symantec posted operating income of$280 million, a 39% year-over-year increase.Demand for security software remains a topspending priority for corporate CIOs andSymantec will be a primary beneficiary.

1 Year -12.97 -6.46 -6.40

5 Years -43.05 -18.46 -13.21

10 Year 6.70 31.53 63.70

Inception 28.29 42.74 84.27

*As of 6/30/03 **Not Annualized.

3 Month** 16.50% 19.27% 19.72%

6 Month** 7.07 9.47 9.18

1 Year -12.97 -6.46 -6.40

5 Years -10.65 -4.00 -2.79

10 Year 0.65 2.78 5.05

Inception 2.16 3.10 5.38

(11/1/91)

Sit International Growth Fund (SNGRX)

41.1

Growth of $10,000

Cash andOther Net Assets

Portfolio Structure (%)Allocation by Region

Europe Other

France,Germany, UK

Pacific Basin

Japan

North America

Africa /Middle East

Latin America

41.3

17.2

0.0

9.8

20.6

3.0

28.5

12.420.6

0.02.8

0.01.1

0.01.6

Senior Portfolio Managers, Eugene C. Sit, CFA and Roger J. Sit

Total Returns (%)



Energy Minerals


16.6

5.4

9.3

12.1

19.1

8.5

14.6

1.6


Finance



ConsumerNon-Durables

Health Technology

Communications

Sit International Growth FundTop Ten Holdings

Sit Int'lGrowth FundMorgan StanleyEAFE Index

Sit

Inte

rnat

iona

lG

row

th F

und

Mor

gan

Sta

nley

Cap

ital

Int'l

EA

FE I

ndex

Lipp

erIn

t'l.

Inde

x

Inception 11/1/91

1. Nestle, S.A.

2. Royal Bank of Scotland

3. Vodafone Group, p.l.c.

4. HSBC Holdings p.l.c.

5. Total, S.A.

6. GlaxoSmithkline, A.D.R.

7. BP p.l.c., A.D.R.

8. Barclays, p.l.c.

9. UBS, A.G.

10. L'oreal Co.


Performance figures are historical and do not guaranteefuture results. Investment returns and principal value willvary, and you may have a gain or loss when you sell shares.Average annual total returns include changes in share priceas well as reinvestment of all dividends and capital gains.Management fees and administrative expenses are includedin the Fund's performance; however, fees and expenses arenot incorporated in the S & P 500 Index.




$12,829

38,000

32,000

26,000

20,000

14,000

8,00011/1/91 6/30/03

Sit Intl. Growth FundMorgan Stanley CapitalIntl. EAFE Index


The Sit International Growth Fund re-turned +16.5% for the past fiscal year. Dur-ing the same period, the MSCI EAFE andLipper International Fund Indices returned+19.3% and +19.7%, respectively. TheFund’s holdings in the pharmaceuticals andsoftware industries were the primarycontributyors to performance.

Stock pickers marketThe equity markets are attractively val-

ued and have not discounted the positivelong-term fundamentals of many compa-nies. We believe that we are now in a stockpicker's environment, where investors canfocus on company and industry fundamen-tals after three years of short-term, emo-tional emphasis. Recent economic indica-tors in the U.S. and Asia ex-Japan showencouraging signs, with business confi-dence and industrial production improving.This should help lift the European, LatinAmerican and Japanese economies.

In Europe, the Fund's weight is 61.9%versus 69.6%. The Fund remains under-weight in Japan, with a weighting of 12.4%,compared to 20.6%. The Fund has a weight-ing of 17.2% in Asia ex-Japan, compared to9.8% for the EAFE Index.

Betting on Pacific Rim, despite SARSThe Pacific Rim region has recovered rap-

idly from the SARS epidemic, and demandhas built up during the past couple of months,which leads us to expect improved economicperformance in the near term. Exports fromAsia have been in an uptrend, and we believethat this will continue as the region’s manu-facturers continue to increase their globalmarket share. Japanese stocks have recentlyseen a positive shift in investor sentiment,and the market’s low valuations are begin-ning to attract the attention of global institu-tional investors. This combined with signsthat some improvement may be occurring onthe economic reform front have led us toadopt a modestly more positive outlook to-wards this market, and we are raising ourweighting in Japan, with a target of 85% ofthe benchmark weighting. New additionsto the Fund during the quarter includedJohnson Electric, the Hong Kong micro-motor manufacturer with large-scale manu-facturing facilities in China, and Hilton Group,the London-based hotel and health cluboperator.

Retail Trade

Consumer Services

7.6

5.2

1 Year 0.25% 4.04% 6.14%

3 Years -39.53 -25.33 -18.42

5 Years -10.26 0.65 9.80

Inception -18.19 -30.57 -12.55

*As of 6/30/03 **Not Annualized.

3 Month** 19.41% 22.19% 23.43%

6 Month** 14.21 13.90 15.96

1 Year 0.25 4.04 6.14

3 Years -15.44 -9.28 -6.56

5 Years -2.14 0.13 1.89

Inception -2.21 -3.97 -1.48

(7/1/94)

Sit Developing Markets Growth Fund (SDMGX)

52.9

Growth of $10,000


Portfolio Structure (%)Allocation by Region

Europe

Asia

Africa/ Middle East

Latin America

60.1

21.5

18.7

10.1

18.5

9.9

1.4

0.0

6.9

Total Returns (%)



Energy Minerals


6.1

10.5

11.6

16.8

7.2

16.5

6.9


Retail Trade

Finance



Non-EnergyMinerals

Health Technology

Communications

Sit Developing MarketsGrowth Fund

Top Ten Holdings

Inception 7/1/94

Sit Dev. Mkts.Growth FundMorgan StanleyInt'l Emerging Mkts.Free Index

6.7

12.7

Sit

Dev

elop

ing

Mar

kets

Gro

wth

Fun

d

MS

CI E

mer

ging

Mar

kets

Free

Ind

ex

Lipp

er E

mer

ging

Mar

kets

Ind

ex

Senior Portfolio Managers, Eugene C. Sit, CFA and Roger J. Sit




Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returns includechanges in share price as well as reinvestment of all dividends andcapital gains. Management fees and administrative expensesare included in the Fund's performance; however, fees andexpenses are not incorporated in the MSCI Emerging MarketsFree Index. The Lipper averages and indices are obtained fromLipper Analytical Services, Inc., a large independent evaluatorof mutual funds.

1. Samsung Electronics

2. Teva Pharmaceutical, A.D.R.

3. Petrochina Co.

4. Wal-Mart de Mexico

5. Taiwan Semiconductor

6. Telefonos de Mexico, A.D.R.

7. Hon Hai Precision Industry

8. HSBC Holdings p.l.c.

9. Advanced Info Service

10. BHP Billiton Limited, A.D.R.


17,000

14,400

11,800

9,200

6,600

4,000

Sit Dev. Mkts. Growth FundMorgan Stanley Emg. Mkts. Free Index

7/1/94 6/30/03

$8,181


The Sit Developing Markets Growth Fundreturned +19.4% during the quarter endingJune 30, 2003, versus increases of +22.2%and +23.4% for the MSCI Emerging MarketsFree and Lipper Emerging Markets Indices,respectively. The Fund’s underweight posi-tion in South Africa and stock selection in theenergy and pharmaceuticals industries werethe main contributors to performance.

Asia’s strength overpowers SARS scareThe Fund remains overweight in Asia,

with a weighting of 60.1%, compared with52.9% for the Emerging Markets Free Index.The abating of SARS-related fears combinedwith increasing optimism over a global eco-nomic rebound and encouraging earningsresults from many Asian companies havefueled the recent rally in the region’s equitymarkets. We believe that the markets are onlyin the early stages of a sustainable long-termprice appreciation, as valuation levels remainlow relative to both historical ranges and thedeveloped markets. Positive secular trendssuch as outsourcing-fueled export growthand the emergence of China as a powerfuleconomic force in the region provide a solidfundamental underpinning for futuregrowth. During the quarter, Fund holdingPetrochina, the largest oil company in China,saw its share price boosted when WarrenBuffett’s Berkshire Hathaway purchased a7% stake in the company, a confirmation of ourbelief that the long-term fundamentals andvaluation of the company remain attractive.

Latin American outlook is improvingThe outlook for Latin American econo-

mies is gradually improving and the liquidity-induced equity market rallies that occurred inthe second quarter could carry prices stillhigher over the next few months. The ex-pected recovery in the U.S. should benefitMexico, and Brazil’s avoidance of a debtdefault is another positive sign for the re-gion. The Fund’s weighting in Latin Americais 21.5%, slightly overweight versus the18.7% weighting for the benchmark Index.

Other developing markets underweightedThe Fund has a weighting of 11.5% in

Emerging Europe, the Middle East, andAfrica, compared with 28.4% for the Index.While these regions are not relatively at-tractive, we look to specific stories, suchas a new position in Vimpelcom, the Rus-sian wireless telecom operator.

5.0

Consumer Services

Focus on: Pfizer Inc.

Stocks1. Pfizer, Inc.2. Amgen, Inc.3. Target Corp.4. Citigroup, Inc.5. General Electric Co.

Bonds1. Conseco Home Equity Loan, 2001-A-1A5,

7.06%, 3/15/322. Green Tree Home Equity Loan Trust, 1999-D

A5, 7.88%, 9/15/303. Advanta Mortgage Loan Trust, 1999-3 A4,

7.75%, 10/25/264. Conseco Mfg. Housing, 2000-4 A5, 7.97%,

5/1/325. EQCC Home Equity Loan Trust, 1996-4 A8,

7.41%, 1/15/28


1 Year 4.43% 0.25% 10.40%

3 Years -28.08 -29.98 33.39

5 Years -6.17 -7.81 43.87

Inception 89.86 148.05 95.42

*As of 6/30/03 **Not Annualized

3 Month** 9.72% 15.39% 2.50%

6 Month** 9.62 11.76 3.93

1 Year 4.43 0.25 10.40

3 Years -10.41 -11.20 10.08

5 Years -1.26 -1.61 7.55

Inception 6.98 10.03 7.31

(12/31/93)

Sit Balanced Fund (SIBAX)

Growth of $10,000

S &

P50

0 In

dex

Total Returns (%)



Sit Balanced FundTop Holdings

Bonds37.9%

Cash & Other NetAssets0.9%

Equities61.2%

Portfolio Structure(% of Total Net Assets)

Sit

Bal

ance

dF

und

Lehm

anA

ggre

gate

Bon

d In

dex

Senior Portfolio Managers Peter L. Mitchelson, CFA and Bryce A. Doty, CFA

Inception 12/31/93



Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returns includechanges in share price as well as reinvestment of all dividends andcapital gains. Management fees and administrative expenses areincluded in the Fund's performance; however, fees and expenses arenot incorporated in the Lehman Aggregate Bond Index and the S&P 500Index. Lipper averages and indices are obtained from Lipper Analyti-cal Services, Inc., a large independent evaluator of mutual funds.

12/31/93 6/30/03

39,000

34,000

29,000

24,000

19,000

14,000

9,000

$18,986


The Sit Balanced Fund’s second quarterreturn was +9.7%, while the Lipper BalancedFund Index increased +10.9%. The S&P 500Index return was +15.4%, while the LehmanAggregate Bond Index increased +2.5%.

Equity outlook: earnings growthshould drive stocks to next level

Following a difficult third quarter of 2002,equities have gained momentum over thepast three quarters as investor concernshave diminished over war, corporate gover-nance, and economic conditions. Whilestocks are not as undervalued as they wereat the market bottom, we believe valuationsremain reasonable, particularly given the lowlevel of interest rates. In addition, the pros-pects for economic growth have clearly im-proved, given the sizable tax cuts, continuedlow interest rates, and recent gains in con-sumer confidence. Corporate profits havealready begun to turn higher, largely drivenby cost-cutting efforts and productivitygains. As revenue growth resumes, concur-rent with better economic activity, cost-cut-ting efforts should have even more dramaticimpact on corporate profitability. Thus, webelieve strong earnings growth will driveequity returns higher in the second half of2003.

Fixed Income: prepared for rising ratesA stronger economy is likely to translate

into higher interest rates as 2003 progressesand into 2004, and we continue to positionthe fixed-income portion of the portfolio forthis eventuality. In fact, we believe that June2003 marked the bottom for interest rates inthis cycle, particularly for U.S. Treasuries.However, we believe that is unlikely that theFederal Reserve will raise interest rates untilthe economy is on solid footing and fears ofdeflation subside. Based on our outlook forslowly rising interest rates over the near-to-intermediate term, we are maintaining ourshort duration within the bond portion of theFund, while emphasizing corporate and mort-gage-backed securities.

Adding to equity weightingsBased on the stronger return potential for

equities, we have gradually increased theFund’s equity allocation over the past 12months. As of June 30th, the asset allocationof the Fund was 61% in stocks (vs. 53% inJune 2002), 38% in bonds (vs. 45%), and only1% (vs. 2%) in cash.

Pfizer Inc. discovers, develops, manufac-tures, and markets leading prescription medi-cines for consumer and animal health care.The cholesterol-reducing drug Lipitor hasbeen Pfizer’s best-selling drug, accountingfor over one fourth of their sales.

Lipitor's success and the company’s in-tense marketing campaigns have driven theirannual sales to more than $32 billion, whiletotal revenues have increased to $8.53 bil-lion in the first quarter of the year. Manyanalysts believe that the future of Pfizer liesin the drug Varenicline, which reducescravings for nicotine and is administered inthe form of a pill.

Sit Balanced Fund

S&P 500 IndexLehman Agg.BondIndex

1 Year 3.44% 8.62% 8.63%

5 Years 32.27 42.10 35.73

10 Year 80.21 89.33 80.40

Inception 216.52 235.31 217.39

*As of 6/30/03. **Not Annualized.

3 Month** 0.23% 1.69% 1.71%

6 Month** 0.77 2.63 n/a

1 Year 3.44 8.62 8.63

5 Years 5.75 7.28 6.30

10 Year 6.07 6.59 6.07

Inception 7.42 7.81 7.44

(6/2/87)

Sit U.S. Government Securities Fund (SNGVX)


Growth of $10,000

Total Returns (%)



1. US Treasury Strip, 3.48%, 8/15/12

2. FNMA, 4.38%, 3/15/13

3. FNMA, 4.00%, 11/25/32

4. FNMA (Pass-Through), 9.00%, 10/1/26

5. Vendee Series 2000-3, 7.50%, 11/15/14

6. FNMA, 6.00%, 5/15/11



9. US Treasury Note, 5.00%, 8/15/11

10. Vendee Series 1998-1, 7.00%, 9/15/27


U.S. Government SecuritiesFund Top Ten Holdings


4.9%

81.4%

12.5%

0.0%

0 - 1Year

1 - 5Years

5 - 10Years

10 - 20Years

Estimated Average Life Profile

1.2%

20+Years

GNMA Pass-Through

FNMA Pass-Through

CollateralizedMortgage Obligations

U.S. Treasury/Federal Agency

Taxable Municipal

Cash & Other NetAssets

FHLMC Pass-Through

0.4

13.0

13.7

35.4

4.9

16.7

15.9

Sit

U.S

. G

ov't.

Sec

uriti

es F

und

Lehm

an I

nter

.G

ov't.

Bon

dIn

dex

Lipp

er U

.S.

Gov

't.Fu

nd A

vg.

Senior Portfolio Managers Michael C. Brilley and Bryce A. Doty, CFA and Portfolio Manager Mark H. Book, CFA

Inception 6/2/87

Net Asset Value: 6/30/03: $10.80 Per Share

3/31/03: $10.83 Per Share


30-day SEC Yield: 2.11%

12-Mth Distribution Rate: 3.39%

Average Maturity: 17.6 Years

Effective Duration: 2.3 Years(1)

Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returns includechanges in share price as well as reinvestment of all dividends andcapital gains. Management fees and administrative expenses areincluded in the Fund's performance; however, fees and expenses arenot incorporated in the Lehman Intermediate Government Bond Index.The Lipper averages and indices are obtained from Lipper AnalyticalServices, Inc., a large independent evaluator of mutual funds.

Sit U.S. Gov't.Securities FundLehman Inter.Gov't. Bond Index

6/2/87 6/30/03

35,000

30,000

25,000

20,000

15,000

10,000

$31,652

(1) Effective duration is a measure which reflects estimated price sensitivityto a given change in interest rates. For example, for an interest ratechange of 1.0%, a portfolio with a duration of 5 years would be expectedto experience a price change of 5%. Effective duration is based oncurrent interest rates and the Adviser's assumptions regarding the expectedaverage life of individual securities held in the portfolio.

The Sit U.S. Government Securities Fundprovided investors with a +0.2% secondquarter 2003 return and a six-month return of+0.8%. The Lehman Intermediate Govern-ment Bond Index returned +1.7% and +2.6%for the same periods, respectively. TheFund’s 30-day SEC yield was 2.11% and its12-month distribution rate was 3.39%.

Yields bounce back from historic lowsU.S. Treasury yields declined throughout

much of the quarter on deflation fears and onspeculation that the Federal Reserve mightpurchase long bonds. In fact, yields reachedhistoric lows in June for the 2-year, 5-year,and 30-year maturity issues. However, whenthey cut rates by 25 basis points on June25th, the Fed made no mention of purchasingU.S. Treasuries. Consequently, intermediateand long-term yields rose sharply, ending themonth roughly 40 basis points above theirlows, although still down for the quarter.

Pass-throughs offer income and stabilityInvestment activity for the quarter con-

sisted of investing in high coupon agencymortgage pass-through securities. Thesemortgages, despite experiencing some re-cent increases in prepayments, exhibit morestable prepayment levels than lower couponmortgages, as homeowners on the underly-ing mortgages have consistently ignoredopportunities to refinance. Despite the bet-ter prepayment characteristics, the Fund’smortgage holdings experienced limited priceappreciation as yields declined, hinderingperformance, but this same characteristicshould help us outperform if rates begin torise as we expect.

Will rates now begin an upward cycle?This year, corporate profits and equity

markets rose meaningfully, which we expectwill contribute to economic growth. Therecent interest rate and tax cuts will furtherstimulate the economy and we expect +3% to+4% GDP growth over the next 12 months.As a result, we believe that last month’s lowsin yields marked the bottom of the currentinterest rate cycle and that interest rates willcontinue to rise as the economy improvesand fears of deflation fade. Accordingly, theportfolio’s duration remains shorter than itsbenchmark. The Fund will continue to focuson securities that provide the most attractivetotal return opportunities, particularly thoseoffering high current income.


Total Net Assets: $395.6 Million30-day SEC Yield: 4.63%

Tax Equivalent Yield: 7.12%(1)

12-Mth Distribution Rate: 4.49%Average Maturity: 12.5 Years

Duration to Est. Avg. Life: 4.1 Years(2)

Implied Duration: 3.8 Years(2)

1 Year 4.69% 7.43% 7.50%

5 Years 22.25 34.15 26.82

10 Year 70.97 73.60 67.97

Inception 152.78 158.49 167.27


3 Month** 0.99% 1.82% 2.65%

6 Month** 1.70 2.95 n/a

1 Year 4.69 7.43 7.50

5 Years 4.10 6.05 4.86

10 Year 5.51 5.67 5.32

Inception 6.48 6.65 6.89

(9/29/88)

Sit Tax-Free Income Fund (SNTIX)

Growth of $10,000

Total Returns (%)



Sit Tax-Free Income FundTop Five Holdings

Insured


16.8

11.9

13.2

13.8

24.3

18.8

1.2

Hospital/Health CareRevenue

Other Revenue



Industrial/PollutionControl

Multifamily MortageRevenue

Quality Ratings(% of Total Net Assets)

Lower of Moody's, S&P, Fitchor Duff & Phelps ratings used.

Other Assetsand Liabilities

1.2% AAA22.8%

BBB30.9%

AA5.5%

LessThanBBB7.7%

Sit

Tax-

Free

Inco

me

Fun

d

Lehm

an 5

-Yea

rM

uni.

Bon

dIn

dex

Lipp

er G

ener

alM

uni.

Bon

dFu

nd A

vg.

Senior Portfolio Managers Michael C. Brilley, Debra A. Sit, CFA, Paul J. Jungquist, CFA

Inception 9/29/88

(1)For individuals in the 35% federal tax bracket.(2) Duration is a measure which reflects estimated price sensitivity toa given change in interest rates. For example, for an interest ratechange of 1%, a portfolio with a duration of 5 years would be expectedto experience a price change of 5%. Estimated average life durationis based on current interest rates and the Adviser's assumptionsregarding the expected average life of individual securities held in theportfolio. Implied duration is calculated based on historical pricechanges of securities held by the Fund. The Adviser believes that theportfolio's implied duration is a more accurate estimate of pricesensitivity provided interest rates remain within their historical range.If interest rates exceed the historical range, the estimated average lifeduration may be a more accurate estimate of price sensitivity.

Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returnsinclude changes in share price as well as reinvestment of all divi-dends and capital gains. Management fees and administrativeexpenses are included in the Fund's performance; however, fees andexpenses are not incorporated in the Lehman 5-Year Muni. BondIndex. The Lipper averages and indices are obtained from LipperAnalytical Services, Inc., a large independent evaluator of mutualfunds.

1. Nortex Hsg. Fin. Corp. Multifamily Hsg. Rev.

Series 1999, 6.75%, 9/20/32

2. Houston Water & Sewer Sys. Rev. Series

1991B, 6.375%, 12/1/10

3. Dallas HFC Multifamily Mtg. Rev. Series

1998A, 6.75%, 10/20/32

4. Armstrong Co. Hosp. Auth. Rev. Refunding

Series 1992A, 6.25%, 6/1/13

5. Alaska HFC Gen. Mtg. Rev. 1997 Series A,

Zero Coupon, 6.15% Effective Yield, 12/1/17


A31.9%

26,000

22,000

18,000

10,0009/29/88 6/30/03

$25,278Sit Tax-Free Income FundLehman 5-Yr Muni. Bond Fund

14,000


The Tax Free Income Fund returned+1.0% for the quarter ended June 30th,2003, compared to a +1.8% return for theLehman 5-Year Municipal Bond Index.

Yields remain attractiveThe Fund’s 30-day SEC yield was 4.63%

as of June 30th and its 12-month distribu-tion rate was 4.49%. The Fund’s taxableequivalent yield of 7.12% in the highestfederal tax bracket compares favorably withtaxable alternatives.

Structured for higher bond yields aheadMunicipal bond yields reached record

lows in mid-June, and then rose sharply,giving up about half the decline since thebeginning of the quarter. The Fund’s currentaverage duration of 4.1 years will allow it toreinvest principal if rates go higher, while thecurrent yield should help produce strongreturns if rates remain stable. Sectorweightings were stable, shifting roughly 2%or less in each category. The Fund decreasedweightings in securities rated A or better by6.3%, reflecting rating downgrades on to-bacco settlement revenue bonds and in themultifamily housing sector.

Positive returns in most sectorsThirteen out of fifteen sectors (74% of the

portfolio) contributed positively to total re-turn in 2Q 2003. Unfortunately, multi-familyhousing, the Fund’s largest sector at 24.3%,substantially lagged with a return about 1.5%below the Fund’s return. This primarily re-flected price declines in bonds of one issuer,the National Benevolent Association (NBA),which had its rating reduced from Baa3 toBa2. NBA is a non-profit operator of seniorhousing and health care facilities that re-cently replaced its senior financial manage-ment. We expect the new team to improveoperations and strengthen NBA’s financialstructure, improvements that should increasethe value of their bonds by next year.

Improving economic conditions expectedWe anticipate more rapid economic growth

later this year, continuing through next year.This growth is expected to diminish concernsabout possible deflation. While the FederalReserve is not expected to raise short-terminterest rates until some time in 2004, inves-tors are likely to anticipate higher interestrates as economic growth becomes morerapid.

Sit Minnesota Tax-FreeIncome Fund

Top Five Holdings


Total Net Assets: $216.5 Million30-day SEC Yield: 4.72%

Tax Equivalent Yield: 7.88%(1)

12-Mth Distribution Rate: 4.57%Average Maturity: 13.8 Years

Duration to Est. Avg. Life: 4.8 Years(2)

Implied Duration: 3.8 Years(2)

1 Year 6.01% 7.43% 7.63%

3 Years 22.16 25.21 23.94

5 Years 24.91 34.15 26.94

Inception 67.90 70.12 63.73


3 Month** 1.43% 1.82% 2.35%

6 Month** 2.45 2.95 n/a

1 Year 6.01 7.43 7.63

3 Years 6.90 7.78 7.42

5 Years 4.55 6.05 4.88

Inception 5.56 5.70 5.28

(12/1/93)

Sit Minnesota Tax-Free Income Fund (SMTFX)

Growth of $10,000

Total Returns (%)



1.Dakota Co. Hsg. & Redev. Auth. Multifamily Hsg.Rev Refunding Series 1995A ,7.90%, 1/20/31

2.Minneapolis Multifamily Hsg. Rev. Series 1996A(Nicollet Towers)(Section 8), 6.00%, 12/01/19

3.Minneapolis & St. Paul Hsg. & Redev. Auth. Hlth.Care System Series 1992, 6.75%, 12/1/13

4.St. Paul Port Authority Multifamily Hsg. RefundingSenior Series 1998-1A (Jackson Towers Apts.Proj.)(GNMA collateralized), 6.95%, 4/20/33

5.Puerto Rico Childrens Trust Fund TobaccoSettlement Rev. Series 2002, 5.375%, 5/15/33


Single FamilyMortgage Revenue


10.4

6.1

8.2

9.9

34.2

6.9

17.1

7.2

Other Revenue Bonds

Hospital/HealthCare Revenue



Insured

Multifamily MortgageRevenue

Industrial/PollutionControl

Lower of Moody's, S&P, Fitchor Duff & Phelps ratings used.


A18.4%

AA9.1%

AAA13.3%


7.2%

Not Rated36.4%

BBB13.3%

LessThanBBB2.3%

Sit

Min

neso

taTa

x-Fr

eeIn

com

e F

und

Lehm

an 5

-Yea

rM

uni.

Bon

dIn

dex

Senior Portfolio Managers Michael C. Brilley, Debra A. Sit, CFA, Paul J. Jungquist, CFA

Inception 12/1/93

(1)For individuals in the 35.0% federal tax and 7.85% MN tax brackets.(2)Duration is a measure which reflects estimated price sensitivity to agiven change in interest rates. For example, for an interest rate changeof 1%, a portfolio with a duration of 5 years would be expected toexperience a price change of 5%. Estimated average life duration isbased on current interest rates and the Adviser's assumptions regard-ing the expected average life of individual securities held in the port-folio. Implied duration is calculated based on historical price changesof securities held by the Fund. The Adviser believes that the portfolio'simplied duration is a more accurate estimate of price sensitivity pro-vided interest rates remain within their historical range. If interest ratesexceed the historical range, the estimated average life duration maybe a more accurate estimate of price sensitivity.

Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returns includechanges in share price as well as reinvestment of all dividends andcapital gains. Management fees and administrative expenses areincluded in the Fund's performance; however, fees and expenses arenot incorporated in the Lehman 5-Year Municipal Bond Index. TheLipper averages and indices are obtained from Lipper AnalyticalServices, Inc., a large independent evaluator of mutual funds.

Lipp

er M

inne

sota

Mun

icip

al B

ond

Fund

Ave

rage

Assessment ofNon-Rated Securities

AAA 4.0%AA 3.1

A 5.1BBB 14.0

BB 9.5<BB 0.7

Total 36.4%

20,000

16,000

12,000

8,00012/1/93 6/30/03

$16,790

Sit MN Tax-Free Income FundLehman 5-Yr Muni. Bond Fund


The Minnesota Tax Free Income Fundreturned +1.4% for the quarter ended June30, 2003, compared to a +1.8% return for theLehman 5-Year Municipal Bond Index.

Yields remain attractiveThe Fund’s 30-day SEC yield was 4.72% as

of June 30th and its 12-month distributionrate was 4.57%. The Fund’s taxable equiva-lent yield of 7.88% for investors in the high-est federal tax bracket compares favorablywith the taxable bond market’s yield levels.

Structured for higher bond yields aheadMunicipal bond yields reached record

lows in mid-June, and then rose sharply,giving up approximately half the decline sincethe beginning of the quarter. The Fund’sduration remains longer than its benchmarkand has been relatively stable over the past12 months. Issuance in Minnesota declined20% over the first half of 2003, but additionalinvestments in the health care (+3.0%) andindustrial revenue (+1.4%) sectors helped toreduce cash during the quarter. The portfoliononetheless remains poised to take advan-tage of higher reinvestment opportunities asinterest rates rise. The Fund’s weightings insecurities rated A or better decreased by7.8% reflecting additional purchases of lowerrated, investment-grade securities as well asrating downgrades on tobacco settlementrevenue bonds.

Strong returns across major sectorsThe Fund benefited from strong perfor-

mance in the health care sector, insuredbonds and other revenue bonds, for both thequarter and year-to-date. The Fund’s hold-ings in multifamily housing bonds also con-tributed positively to performance. Laggingperformance in the industrial revenue sectorreflected the negative impact of tobaccosettlement revenue bonds which stabilizednear the end of the quarter while holdings inthe single family housing sector continuedto lag due to their more stable price charac-teristics.

Improving economic conditions expectedWe anticipate more rapid economic growth

during the second half of this year, withcontinuing improvement through next year.This growth is expected to diminish con-cerns about possible deflation. While theFederal Reserve is not expected to raiseshort-term interest rates until some time in2004, investors are likely to anticipate higherinterest rates as economic growth becomesmore rapid.


Lower of Moody's, S&P, Fitch or Duff & Phelpsratings used.

Govt.AgencyBacked

Securities30.7%


3.9%

1 Year 5.91% 10.40% 9.99%

3 Years 27.61 33.39 29.45

5 Years 33.99 43.87 36.99

Inception 82.64 96.48 82.16

*As of 6/30/03 **Not annualized.

3 Month** 2.13% 2.50% 2.73%

6 Month** 3.21 3.93 n/a

1 Year 5.91 10.40 9.99

3 Years 8.47 10.08 8.99

5 Years 6.03 7.55 6.49

Inception 6.49 7.30 6.46

(12/1/93)

Sit Bond Fund (SIBOX)

Growth of $10,000

Total Returns (%)



1. U.S. Treasury Bond, 5.50%, 8/15/28 2. CA Rural HMFA SF Mtg. Series

2003A, 5.25%, 12/1/24 3. Amresco Residential Sec. Mtg.

Loan Trust, 7.07%, 10/25/27 4. Residential Asset Sec. Trust,

6.86%, 8/25/29 5. American Strategic Income

Portfolio (II)

Total Holdings: 107

Sit Bond FundTop Five Holdings

Asset-Backed Securities


7.8

5.3

24.5

27.2

5.2

26.1

3.9

Collateralized MortgageObligations

Corporate Bondsand Notes



Mortgage Pass Through

Taxable Municipal

A21.1%

BB0.3%

AAA25.3%

BBB14.3%

Sit

Bon

d F

und

Lehm

anA

ggre

gate

Bon

d In

dex

Senior Portfolio Managers Michael C. Brilley and Bryce A. Doty, CFA and Portfolio Manager Mark H. Book, CFA

Inception 12/1/93

Lipp

er I

nter

.In

vest

. G

rade

Bon

d Fu

nd A

vg.

Net Asset Value 6/30/03: $9.99 Per Share

3/31/03: $9.89 Per Share


30-day SEC Yield: 4.57%

12-Mth Distribution Rate: 5.05%

Average Maturity: 19.5 Years

Effective Duration: 3.8 Years(1)

(1) Effective duration is a measure which reflects estimated pricesensitivity to a given change in interest rates. For example, for aninterest rate change of 1.0%, a portfolio with a duration of 5 yearswould be expected to experience a price change of 5%. Effectiveduration is based on current interest rates and the Adviser's assumptionsregarding the expected average life of individual securities held in theportfolio.

Performance figures are historical and do not guarantee future results.Investment returns and principal value will vary, and you may have again or loss when you sell shares. Average annual total returns includechanges in share price as well as reinvestment of all dividends andcapital gains. Management fees and administrative expenses areincluded in the Fund's performance; however, fees and expenses arenot incorporated in the Lehman Aggregate Bond Index. The Lipperaverages and indices are obtained from Lipper Analytical Services,Inc., a large independent evaluator of mutual funds.

U.S.Treasury

4.4%

20,000

16,000

12,000

8,00012/1/93 6/30/03

$18,264Sit Bond Fund

Lehman Agg. Bond Index


The Sit Bond Fund returned a +2.4% sec-ond quarter 2003 return and a six-monthreturn of +3.2%. The Lehman AggregateBond Index returned +2.5% and +3.9% forthose periods, respectively. The Fund’s 30-day SEC yield was 4.57% and its 12-monthdistribution rate was 5.05%.

A wild ride for yieldsU.S. Treasury yields declined throughout

much of the quarter despite the end of the warwith Iraq, a strong stock market, and upcom-ing income tax cuts. Yields reached historiclows in June for several issues; specifically,the 2-year, 5-year and 30-year maturity U.S.Treasuries fell to 1.08%, 2.02%, and 4.17%respectively. Speculation that the FederalReserve might purchase long bonds was amajor factor driving the historic low yields.However, when they cut rates by 25 basispoints on June 25th, the Fed made no men-tion of purchasing U.S. Treasuries. Conse-quently, intermediate and long-term yieldsrose sharply, ending the month roughly 40basis points above their lows, although stilldown for the quarter.

Sector bets offsetLong duration securities provided the great-

est total return in 2Q 2003, particularly forcorporates and treasuries. Mortgages faredpoorly due to their price stability and recordhigh level of prepayments. The Fund ben-efited from its underweighting of mortgages,but was hindered by its relatively shorterduration and underweighting in U.S. Trea-suries.

Finally at the bottom of the cycle?This year, corporate profits and equity

markets rose meaningfully, which we expectwill contribute to economic growth. Therecent interest rate and tax cuts will furtherstimulate the economy and we expect +3% to+4% GDP growth over the next 12 months.As a result, we believe that last month’s lowsin yields marked the bottom of the currentinterest rate cycle and that interest rates willcontinue to rise as the economy improvesand fears of deflation fade. Accordingly, theportfolio’s duration remains shorter than itsbenchmark. The Fund will continue to focuson securities that provide the most attractivetotal return opportunities, particularly thoseoffering high current income.

1 Year 0.98% 1.33% 0.72%

3 Years 8.63 9.11 7.87

5 Years 20.02 20.56 18.59

Inception 49.91 52.40 47.54


3 Month** 0.18% 0.26% 0.12%

6 Month** 0.38 0.56 n/a

1 Year 0.98 1.33 0.72

3 Years 2.80 2.95 2.56

5 Years 3.72 3.81 3.47

Inception 4.28 4.45 4.11

(11/1/93)

Sit Money Market Fund (SNIXX)

Growth of $10,000

Total Returns (%)



Asset-backedSecurities


18.9

6.3

9.4

9.5

9.7

14.4

9.5

12.1

0.5

ConsumerNon-Durables

Diversified Finance



U.S. Govt. Securities

Financial Services


Lower of Moody's, S&P, Fitch or Duff & Phelpsratings used.

Communications

Senior Portfolio Managers Michael C. Brilley and Paul J. Jungquist, CFA

Inception 11/1/93



Performance is historical and assumes reinvestment of all dividendsand capital gains. Money funds are neither insured nor guaranteed bythe U.S. Government. There is no assurance that a fund will maintaina $1 share value. Yield fluctuates. Past performance is not aguarantee of future results. Management fees and administrativeexpenses are included in the Fund's performance; however, fees andexpenses are not incorporated in the 3-Month U.S. Treasury Bill. TheLipper averages and indices are obtained from Lipper AnalyticalServices, Inc., a large independent evaluator of mutual funds.

(1)Lipper Analytical Services, Inc., a large independent evaluator ofmutual funds, rankings reflect historical performance returns through6/30/03. Sit Money Market Fund rankings for the 3-month, 3- and5-year and since inception periods were 90th of 412 funds, 125th of348 funds, 92nd of 273 funds and 43rdof 164 funds, respectively.

Sit

Mon

eyM

arke

tF

und

3-M

onth

U.S

. T

reas

ury

Bill

Lipp

erM

oney

Mar

ket

Ave

rage

First TierSecurities

100%

16,000

14,000

12,000

10,000 11/1/93 6/30/03

$14,991

Sit Money Market Fund

3-Month U.S. Treasury Bill

Insurance

Sit Money MarketMaturity Ranges

29.1% 27.2%

17.6%

13.4%

0 - 15Days

16 - 30 Days

31 - 45Days

46 - 60Days

12.7%

61+Days

% o

f A

sset

s


9.7

Health Technology

The Sit Money Market Fund returned+0.2% for the second quarter 2003, comparedto +0.3% for the U.S. Treasury Bill. The Fundagain outperformed its Lipper category for allreported time periods(1). As of June 30, 2003,the Fund’s 7-day compound yield was 0.63%and its average maturity was 33 days.

Fed Eases AgainThe Federal Reserve Board lowered the

federal funds rate by 25 basis points to 1.00%on June 25, recognizing that the economy isstill sputtering and that concerns about de-flation, while minor, currently exceed thoseabout inflation. Three-month Treasury billyields fell over the past quarter, ranging from1.17% in early April, and finishing at 0.85%on June 30th. Current yield levels imply thatthe market is expecting one additional easingmove by the Fed in the second half of 2003.While we do not believe this is likely, Chair-man Greenspan has made it clear that the Fedwill do whatever it can to help the economygrow. With recent economic data showingsome firming in the economy, and with 2003tax cut effects to come, we believe marketforces will drive growth from this point for-ward.

Historically Low YieldsThe Fed’s accommodative monetary

policy has resulted in historically low yieldsfor money market funds. In fact, some fundshave experienced difficulty maintaining apositive yield after expenses. The Fund hasmaintained its high credit quality standardswhile attempting to optimize returns throughtargeting its average maturity near 30 days.We anticipate that the average maturity willremain near 30 days for the foreseeable fu-ture, until a tightening begins to appear likely,perhaps some time in 2004, at which time theFund will shorten its average maturity inanticipation of earning higher yields on fu-ture investments. The Fund will not compro-mise on credit quality to earn higher yields.As fundamentals improve, we expect thecredit quality of top tier commercial paperissuers to strengthen. However, given thecurrent interest rate environment, it is likelythat the yield on the Fund, while it will remainpositive, will remain below 1.00% for the nextyear.

In This IssueA Few Words From Gene Sit : Annual Shareholder Meeting Questions and Answers •Investment Outlook and Strategy Summary • 2002 Distribution Estimates • Top Ten Funds'Holdings • Did you know...?

postal indicia

In This IssueA Few Words From Gene Sit • Natural Gas Industry • Investment Outlook and Strategy Summary •Proposed Retirement Changes • Sit Featured Associate • P/E vs. PEG • Shareholder Meetings

Shareholder Services

90 South Seventh Street, Suite 4600Minneapolis, MN 55402-4130

Website ImprovementsHave you seen the new Sit Mutual Fundswebsite lately? Not only does it have a newlook, we've expanded our coverage of theFunds as well. Go to www.sitfunds.com to seefor yourself.

View Statements Online

Sit Mutual Funds Annual ShareholderMeeting will return to the Edina CountryClub on Monday, October 20, 2003, butthe format and timing will change in re-sponse to your suggestions.

To facilitate parking, we will return tothe suburbs and shift the meeting to lateafternoon to accommodate growing at-tendance and avoid tight lunch sched-ules.

We will hold a reception at 4:00 p.m. andyou will be able to visit with Sit Invest-ment Associates staff and fellow share-holders. Hors d’oeuvres and beverageswill be served during this time.

The main presentations will follow at5:00 p.m. Speakers will be Eugene Sit,Congressman Bill Frenzel, and Dr. SidneyJones. After the presentations, PeterMitchelson, Roger Sit, and Mike Brilleywill join the speakers for a question andanswer session as we have done in previ-ous years. An official business meetingwill follow.

For those who arrive early, an optionalseminar on charitable giving is scheduledat 3:00 p.m. at the same location. See boxat right for details.

Annual ShareholderMeeting is Moving

RegionalShareholder Meetings

Sit Mutual Funds is taking its share-holder meetings on the road. Chief Oper-ating Officer Todd Berkley is hosting din-ner and lunch meetings around the coun-try. Shareholders attending these eventshave an opportunity to discuss Sit Mu-tual Funds' view of the investment envi-ronment, ask questions and meet othershareholders in their area.

Thus far, we have held meetings inNaples and Boca Raton, Florida, Dallas,Houston and Austin, Texas, and Chicago,Illinois.

Locations for the meetings are deter-mined by the number of Sit Mutual Fundsshareholders in various cities. We tenta-tively plan to hold regional meetings inWashington, D.C., New York, Ohio, Michi-gan, California, and Washington state inthe fall. Invitations will be mailed to share-holders several weeks prior to each meet-ing when plans are finalized.

Todd is eager to meet shareholdersthroughout the country. These meetingsare a great way to meet and thank our loyalshareholders.

Online statements are now available atsitfunds.com. You can view your statementsanytime through our website by accessing youraccount (click on “My Accounts”) and thenclicking on “Statements." Your existing per-sonal identification number (PIN) will allowyou to access your statements. If you need a PIN,please call an Investor Services Representativeat 800-332-5580.

This fall, Steve Benjamin, Manager of RetirementPlan Services at Sit Mutual Funds, will lead threeinvestment seminars at the Edina Country Club.

November 5th, 7:30 – 8:30 a.m.Investing and Mutual Funds• Types of investments and funds• Asset allocation• Portfolio management

November 18th, 7:30 – 8:30 a.m.Getting Ready to Retire• Social Security• Distributions options and taxes• Estate planning considerations

December 4th, 7:30 - 8:30 a.m.College funding strategies• Investment products• Financial aid• Loans and grants

Seminars are free, and you may attend as many asyou like. A continental breakfast will be served.RSVP to Steve Benjamin at: 612-359-2554 or800-332-5580, ext. 554 or [email protected].

Investment Seminars

Charitable GivingSeminar

Mike Eckert, Vice President of Sit Mutual Funds, willhold a charitable giving seminar and discuss the SitCharitable Endowment Program at the Edina Coun-try Club on October 20, 2003 from 3:00 to 4:00p.m., before the Annual Shareholder Meeting.

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mutual funds newsletter · portunity to maximize your support for charitable causes. more important...

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