Form N-CSR SIT U S GOVERNMENT SECUR For: Mar 31

May 24, 2022 6:30 AM EDT

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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: 811-04995

 

 

Sit U.S. Government Securities Fund, Inc.

(Exact name of registrant as specified in charter)

 

 

3300 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

(Address of principal executive offices)

 

 

Paul E. Rasmussen, VP Treasurer

Sit Mutual Funds, Inc.

3300 IDS Center

80 South Eighth Street

Minneapolis, MN 55402

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code:

(612) 332-3223

Date of fiscal year end: March 31, 2022

Date of reporting period: March 31, 2022

 

 

 


Item 1: Reports to Stockholders

 


 

 

Annual Report

 

March 31, 2022

 
   

 

U.S. Government Securities Fund

      
   

 

Quality Income Fund

 
   

 

Tax-Free Income Fund

 
   

 

Minnesota Tax-Free Income Fund

 
      

 

LOGO

 

 

 

Sit Mutual Funds

 

 

 


Sit Mutual Funds
BOND FUNDS ANNUAL REPORT

TABLE OF CONTENTS

 

 

       Page  

Chairman’s Letter

       2  

Fund Review and Schedules of Investments

               

U.S. Government Securities Fund

       4  

Quality Income Fund

       12  

Tax-Free Income Fund

       20  

Minnesota Tax-Free Income Fund

       42  

Statements of Assets and Liabilities

       56  

Statements of Operations

       57  

Statements of Changes in Net Assets

       58  

Financial Highlights

       60  

Notes to Financial Statements

       66  

Report of Independent Registered Public Accounting Firm

       73  

Expense Example

       74  

Federal Tax Information

       75  

Information About Directors and Officers

       76  

Additional Information

       78  

 

This document must be preceded or accompanied by a Prospectus.


 

CHAIRMAN’S LETTER

May 5, 2022

Dear fellow shareholders:

 

Over the last twelve months, the global economy has continued to distance itself from the Covid-19 pandemic. The waves of surging Covid-19 case counts and new variants that were top of mind a year ago have failed to derail the recovery to date, but the economy is still grappling with the supply chain disruptions and high inflation left in their wake.

The Delta variant emerged as the first major Covid-19 variant of concern last spring, but accommodative monetary policy, fiscal stimulus, consumer demand, and improving global vaccination rates buoyed risk assets despite the virus. While inflation and supply chain disruptions worsened throughout the summer, Federal Reserve (Fed) Chair Jerome Powell remained content attributing 5% year-over-year CPI inflation levels to transitory factors.

The Fed’s willingness to live with high inflation ended in November 2021, the month Jerome Powell was nominated for a second term and coincidentally just days before news of the Omicron variant emerged. While appearing before the Senate Banking committee, Powell surprised the market with his intention to remove pandemic support faster than expected. Furthermore, the Fed discontinued using the word “transitory” with regards to high inflation levels. Despite the fact that it took the Fed several months to raise rates, this hawkish approach was a pivotal moment and signaled that inflation was now the Fed’s highest priority.

After investors became more comfortable with Omicron’s risks in December 2021, attentions shifted to re-evaluating the speed and magnitude to which monetary policy would become less accommodative. As a result, all bond yields rose rapidly to start the new year and the U.S. Treasury yield curve flattened dramatically in the first quarter of 2022. Russia’s invasion of Ukraine in late February 2022 and the resulting economic sanctions introduced even more global inflationary pressures and only restrained the rise in yields temporarily. Finally, in mid-March 2022, the Fed hiked rates by 0.25 percent, its first rate hike since 2018.

At the end of the first quarter, of 2022, the 2-Year Treasury yield was 2.34 percent, a level 2.17 percentage points higher than the at the same time the year prior. The 10-Year Treasury yield also ended the first quarter of 2022 at 2.34 percent, flat to the 2-Year note and 0.60 percentage points higher than at the same time the year prior. Annual Real U.S. gross domestic product (GDP) growth closed 2021 at 5.7 percent. Economic growth forecasts for 2022 are more subdued given the inflationary and rising rate environment, with economists expecting 3.2 percent GDP growth for 2022.

Fed Begins to Tighten with Balance Sheet Reduction Coming

Now that the Fed has initiated a tightening policy, investors are focusing on the pace and magnitude of both rate increases and balance sheet reduction. The Fed considers a target fed funds rate of about 2.5% to be “neutral” and, to slow inflation, the federal funds rate would need to be higher than a neutral rate. Consequently, we forecast a Fed funds rate of 1 percent by June 2022 and at least 2 percent by year-end.

Regarding the Fed’s balance sheet, the Fed had been buying bonds to push yields lower. The Fed recently ended its purchase program, but not before amassing a record balance sheet of nearly $9 trillion. With the purchase program completed, we expect the Fed to announce the actual reduction of the balance sheet in May or June 2022. We estimate the Fed will begin to reduce its balance sheet at a pace of about $25 billion per month and, after a few months, accelerate the pace to an annual rate of one half of a trillion dollars per year.

The Fed has been buying both U.S. Treasury bonds and mortgage securities. The Fed intends to only hold U.S. Treasury bonds in the long term. The Fed currently holds $2.7 trillion in mortgage securities. As a result, the balance sheet reduction will likely drive mortgage rates higher as the Fed eliminates its mortgage holdings. 30-year mortgage rates have already risen above 5 percent and we expect them to rise further. Overall, we expect that, the reduction in the Fed’s balance sheet should equate to an additional rate increase of 0.25 to 0.50 percent. We forecast that the Fed’s balance sheet will eventually be reduced to about $5 trillion and consist entirely of Treasury bonds.

Inflation Persists as Labor Shortages Continue

The accelerated pace of rate increases and balance sheet reduction plans highlight the Fed’s sense of urgency in fighting the highest levels of inflation in more than 40 years. Inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI), increased 1.2 percent in March 2022 compared with the prior month. The CPI rose 8.5 percent over the 12-month period ended March 31, 2022, a level not seen since the early 1980s. Like previous periods of accelerating inflation, food and energy have had an out-sized contribution. Core CPI (excluding food and energy) levels also rose significantly during the 12-month period ended March 31, 2022 increasing 6.5 percent. High labor costs, exacerbated by labor shortages, a rebound in energy prices, supply constraints as well as excess cash in the financial system are contributing factors.

 

 

   
2    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

The spike in inflation will likely negatively impact economic growth as we forecast wage growth will not be sufficient to offset the erosion in real incomes caused by the rapid escalation in consumers’ expenses. We expect that the labor force participation rate will eventually increase from the current 62.4 percent figure to the pre-pandemic, February 2020, level of 63.4 percent, which translates into about 2.6 million additional workers. These additional workers will likely help ease some of the supply chain related shortages. However, major economic headwinds will remain. We expect a decline in federal budget spending (including transfer payments), depleting consumer savings, higher corporate taxes, tightening of monetary policy and elevated, inflation-driven, consumer costs to cause reduced demand and result in both economic growth and inflation slowing significantly by the second half of 2023.

Strategy

Given the variables regarding the economy, government fiscal and monetary policy, and the war in Ukraine, we expect near-term performance in fixed income markets to be more volatile than usual. However, we believe that the sharp rise in short-term to intermediate term bond values reflects investors are already factoring in their expectations for at least an additional 2.0 percentage points of rate increases by the Fed. Our forecast for mounting head winds to economic growth puts into doubt how much the Fed will be able to raise rates beyond another 2.0 percentage points. As a result, we expect yields to begin to stabilize after what could be another couple of bumpy quarters. Furthermore, six months from now, investors will have had time to digest and understand the Fed’s plan for balance sheet reduction and its impact on financial markets.

While we believe the markets have priced in much of the Fed’s future rate increases, we continue to employ strategies that protect investors from future rate increases. In the Sit Quality Income Fund, we have maintained portfolio durations below benchmarks while reducing exposure to bonds maturing between two and five years, as we had expected that such bonds would be most negatively impacted by rising interest rates. The Fund added positions in floating rate securities and increased holdings in U.S. Treasury Inflation Protected Securities, which benefit from elevated levels of inflation. Furthermore, the Fund has reduced its investments in cyclical sectors to lower exposure to potential losses from rising inflation and a continuation of the Russia-Ukraine conflict.

With respect to the Sit U.S. Government Securities Fund, we expect further weakness in mortgage-backed securities in conjunction with the Fed’s intention to reduce mortgage holdings, although we believe the worst is now behind us. The seasoned, high coupon mortgages in the Fund generally benefit from rising interest rates and reduced mortgage refinancing activity, making them less sensitive to rising

rates than most mortgage-backed securities. Over the long term, we believe that the Fund’s sustained income advantage and conservative interest rate positioning should drive out-performance relative to benchmarks.

We anticipate the tax-exempt bond yields will continue to be heavily influenced by U.S. Treasury bond yields. The rapid increase in rates this year has led to nearly $30 billion of tax-exempt mutual fund outflows, and tax-exempt bond yields have increased more than comparable maturity Treasuries. However, underlying credit fundamentals for municipal securities are as strong as they have been in decades, and higher yield levels are increasingly interesting for crossover buyers and traditional municipal market participants. When combined with historical and seasonal patterns, we believe that we could be reaching the end of this outflow cycle. In terms of portfolio strategy, many underlying bond durations extended modestly with the sharp increase in bond yields. As a result, in addition to maintaining our hedge, we plan to reposition the Funds over the next several months as more attractively priced short and intermediate-duration bonds become available.

In conclusion, investors should maintain a diversified portfolio of stocks and bonds underpinned by strong fundamentals to help manage risk in challenging market conditions. We appreciate your continued interest in the Sit family of funds. Please see our complete Outlook and Strategy research paper at www.sitfunds.com.

With best wishes,

 

LOGO

Roger J. Sit

Chairman and President Sit Mutual Funds

 

 

   
MARCH 31, 2022    3


 

Sit U.S. Government Securities Fund - Class S and Class Y

 

OBJECTIVE & STRATEGY

The objective of the U.S. Government Securities Fund is to provide high current income and safety of principal, which it seeks to attain by investing solely in debt obligations issued, guaranteed or insured by the U.S. government or its agencies or its instrumentalities. Agency mortgage securities and U.S. Treasury securities are the principal holdings in the Fund. The mortgage securities that the Fund purchases consist of pass-through securities including those issued by Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC).

 

Fund Performance

The Sit U.S. Government Securities Fund (Class S) provided a return of -2.16% during the 12-month period ended March 31, 2022, compared to the return of the Bloomberg Intermediate Government Bond Index of -4.16% for the same period. The Fund’s 30-day SEC yield was 1.66% and its 12-month distribution rate was 0.91%.

Factors that Influenced the Fund’s Performance

During the 12-month period, the Fund benefited from the consistent, relatively high level of income provided by its holdings in higher coupon government agency mortgages. Yields on U.S. Treasury securities were higher across all maturities for the period. The Fund reduces interest rate risk by using options on Treasury securities. The use of options was effective in providing stability to the Fund’s net asset value during the period and partially offset the negative price performance as it relates to the increase in U.S. Treasury yields. In addition, the Fund continued to experience relatively stable prepayment rates as its mortgage holdings are generally well seasoned and have been through many refinancing cycles. The Fund’s opportunistic holdings in Treasury Inflation Protected Securities benefited performance during the period as the economy experienced higher than expected inflation metrics.

Outlook and Positioning

One of the prevailing themes of 2021 was the resurgence of the Covid-19 virus with both the Delta variant as well as the Omicron variant. Despite the increase in cases, consumers’ demand continued to increase causing demand-pull inflationary pressures. The global reopening of economies caused bottlenecks and labor shortages, which impeded significantly on growth. The subsequent supply chain issues have resulted in a cost-push inflationary environment. The pent-up savings of consumers allowed companies to have unprecedented pricing power, which resulted in increased input costs being directly passed onto the consumer. Supply chain constraints are unlikely to be resolved until the end of this year, if not later. As the pent-up savings begin to deplete, we expect that more workers should begin to re-enter the workforce alleviating some of the supply chain constraints. To combat inflationary pressures, the Federal Reserve has begun to increase short term interest rates, albeit at a cautious rate. If not for the war in Ukraine, the Federal Reserve likely would have been more aggressive, but the consequences to the economy are still uncertain. The Federal Reserve has also given estimates to

HYPOTHETICAL GROWTH OF $10,000

 

LOGO

The chart above illustrates the total value of a hypothetical $10,000 investment in the Fund over the past 10 years (or for the life of the Fund if shorter) as compared to the performance of the Bloomberg Intermediate Government Bond Index. Past performance does not guarantee future results. Returns include the reinvestment of distributions. The chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

1 The Bloomberg Intermediate Government Bond Index is a sub-index of the Bloomberg Government Bond Index covering issues with remaining maturities of between three and five years. The Bloomberg Government Bond Index is an index that measures the performance of all public U.S. government obligations with remaining maturities of one year or more. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index. This is the Fund’s primary index.

 

 

its balance sheet normalization program, which we believe are unobtainable given the recent acceleration in mortgage rates. The Federal Reserve’s reduction in asset purchases will likely be systematic and predictable, however, we expect heightened volatility as the market digests the changes.

We continue to position the Fund opportunistically as concerns regarding inflationary pressures and geopolitical risks mount, while maintaining the Fund’s focus on seasoned, high coupon agency mortgage securities which provide a high level of income with relatively stable prices. This high level of income and stability of principal has been a fundamental focus of the Fund since its inception.

 

Bryce A. Doty, CFA

  

Mark H. Book, CFA

Senior Portfolio Manager

  

Portfolio Manager

 

 

Information on this page is unaudited.   
   
4    SIT MUTUAL FUNDS ANNUAL REPORT 


    

 

COMPARATIVE RATES OF RETURNS

 

as of March 31, 2022

 

    Sit U.S. Government        
   

    Securities Fund      

       
     Class S   Class Y  

Bloomberg
Intermediate

Gov’t. Bond

Index1

 

Lipper U.S.

Gov’t Fund

Index2

One Year       -2.16 %       -1.91 %       -4.16 %       -3.81 %
Five Year       1.49       n/a       1.34       1.70
Ten Year       1.16       n/a       1.28       1.69
Since Inception-Class S (6/2/87)       4.84       n/a       4.98       4.91
Since Inception-Class Y (1/1/20)       n/a       0.87       -0.18       -0.07
                                         

Performance figures are historical and do not guarantee future results. Investment returns and principal value will vary, and you may have a gain or loss when you sell shares. Current performance may be lower or higher than the performance data quoted. Contact the Fund for performance data current to the most recent month-end. Returns include changes in share price as well as reinvestment of all dividends and capital gains and all fee waivers. Without the fee waivers total return and yield figures would have been lower. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Management fees and administrative expenses are included in the Fund’s performance. Returns for periods greater than one year are compounded average annual rates of return.

1 The Bloomberg Intermediate Government Bond Index is a sub-index of the Bloomberg Government Bond Index covering issues with remaining maturities of between three and five years. The Bloomberg Government Bond Index is an index that measures the performance of all public U.S. government obligations with remaining maturities of one year or more. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index.

2 The Lipper returns are obtained from Lipper Analytical Services, Inc., a large independent evaluator of mutual funds.

 

FUND DIVERSIFICATION         

Collateralized Mortgage Obligations

     60.0%  

Federal National Mortgage Association

     14.0  

Government National Mortgage Association

     8.1  

U.S. Treasury / Federal Agency Securities

     6.0  

Federal Home Loan Mortgage Corporation

     3.0  

Asset-Backed Securities

     1.2  

Small Business Administration

     0.5  

Other Net Assets

     7.2      

Based on net assets as of March 31, 2022.

PORTFOLIO SUMMARY                 

Class S:

             

Net Asset Value 3/31/22:

    $10.83 Per Share     

Net Asset Value 3/31/21:

    $11.17 Per Share     

Net Assets:

    $318.4 Million     

Class Y:

    

Net Asset Value 3/31/22:

    $10.83 Per Share     

Net Asset Value 3/31/21:

    $11.17 Per Share     

Net Assets:

    $109.3 Million     

Effective Duration 3 :

    1.2 Years     

3 Duration is a measure of estimated price sensitivity relative to changes in interest rates. Portfolios with longer durations are typically more sensitive to changes in interest rates. For example, if interest rates rise by 1%, the fair value of a security with an effective duration of 5 years would decrease by 5%, with all other factors being constant. The correlation between duration and price sensitivity is greater for securities rated investment-grade than it is for securities rated below investment-grade. Duration estimates are based on assumptions by the Adviser and are subject to a number of limitations. Effective duration is calculated based on historical price changes of securities held by the Fund, and therefore is a more accurate estimate of price sensitivity provided interest rates remain within their historical range.

 

ESTIMATED AVERAGE LIFE     

0-1 Year

   7.2%    

1-5 Years

   89.3        

5-10 Years

   2.1        

10-20 Years

   1.4        
      

The table represents the Adviser’s estimates of the dollar weighted average life of the portfolio’s securities, which differ from their stated maturities. The Fund’s average stated maturity was 18.4 years as of March 31, 2022.

 

 

Information on this page is unaudited.   
   
MARCH 31, 2022    5


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit U.S. Government Securities Fund

 

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
 

Mortgage Pass-Through Securities - 25.6%

 
 

Federal Home Loan Mortgage Corporation - 3.0%

 
  372,531         3.00                     1/1/44           373,655  
  39,938         4.00         7/1/25           41,122  
  327,043         5.00         5/1/42           346,134  
  1,071,599         5.50         8/1/49           1,176,353  
  48,464         5.82         10/1/37           51,711  
  255,754         6.50         12/1/34           272,917  
  145,374         6.88         2/17/31           155,717  
  31,606         7.00         8/1/27           31,948  
  357,282         7.00         4/1/28           374,113  
  2,535,347         7.00         12/1/31           2,740,011  
  358,763         7.00         2/1/37           378,527  
  239,867         7.00         4/1/37           272,154  
  3,511,801         7.00         10/1/37           3,861,593  
  1,895,041         7.00         10/1/38           2,130,675  
  14,606         7.38         12/17/24           14,669  
  36,629         7.50         1/1/31           37,020  
  236,591         7.50         1/1/32           259,261  
  186,883         7.50         8/1/32           196,663  
  4,834         7.95         10/1/25           4,852  
  13,137         8.00         5/1/31           13,188  
  51,170         8.00         11/1/36           56,949  
  83,026         8.00         1/1/37           93,554  
  60,820         8.50         6/20/27           65,769  
  14,224         8.50         12/1/29           15,063  
  64,247         8.50         3/1/31           70,116  
  11,539         9.00         3/20/27           11,601  
  27,695         9.00         2/17/31           27,434  
  17,468         9.00         5/1/31           17,639  
  778         10.00         7/1/30           781  
         

 

 

 
                    13,091,189  
         

 

 

 
 

Federal National Mortgage Association - 14.0%

 
  6,275,000         0.65         4/1/32           6,276,961  
  3,100,000         2.48         2/1/35           2,894,504  
  3,100,000         2.68         2/1/35           2,960,480  
  1,665,968         4.50         4/1/48           1,747,097  
  1,141,444         5.00         9/1/43           1,256,913  
  8,286,270         5.00         2/1/49           9,029,587  
  485,482         5.00         6/1/51           536,662  
  346,639         5.50         6/1/33           364,000  
  3,904,137         5.50         12/1/41           4,345,206  
  2,276,878         5.50         1/1/49           2,508,886  
  1,227,381         5.50         5/1/49           1,312,501  
  654,013         5.50         4/1/50           696,521  
  825,382         5.93         5/1/35           824,644  
  349,457         6.00         11/1/34           381,727  
  62,536         6.00         5/1/37           66,796  
  51,711         6.00         9/1/37           53,776  
  1,257,164         6.00         4/1/38           1,404,668  
  397,904         6.00         2/1/40           431,996  
  3,723,772         6.00         5/1/41           4,154,008  
  847,176         6.50         2/1/29           909,698  
  111,464         6.50         3/1/29           114,946  
  2,271,643         6.50         12/1/30           2,439,293  
  117,544         6.50         6/1/31           125,559  
  48,226         6.50         8/1/34           51,243  
  315,813         6.50         11/1/34           335,776  
  161,819         6.50         1/1/39           168,491  
  787,631         6.75         6/1/32           869,319  

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  579,252         6.86                     6/1/40           627,057  
  1,185         7.00         6/1/22           1,186  
  15,507         7.00         2/1/26           16,088  
  46,381         7.00         9/1/27           48,306  
  21,390         7.00         10/1/27           22,362  
  89,976         7.00         11/1/27           94,885  
  21,815         7.00         1/1/28           22,787  
  15,995         7.00         10/1/32           16,736  
  2,558,200         7.00         12/1/32           2,875,164  
  76,910         7.00         7/1/33           82,374  
  67,569         7.00         7/1/34           71,954  
  10,507         7.00         12/1/37           11,181  
  3,139,790         7.00         1/1/40           3,455,772  
  448,686         7.00         9/1/47           459,704  
  89         7.50         6/1/22           89  
  2,359         7.50         12/1/22           2,370  
  39,315         7.50         4/1/32           40,791  
  120,783         7.50         1/1/34           130,064  
  2,288,552         7.50         10/1/38           2,541,533  
  972,301         7.50         11/1/38           1,093,258  
  6,961         7.75         7/20/30           7,042  
  3,618         7.97         8/20/25           3,654  
  81,747         8.00         6/1/25           84,988  
  3,327         8.00         7/20/28           3,361  
  52,612         8.00         2/1/31           57,178  
  103,226         8.00         1/1/32           109,712  
  51,496         8.00         11/1/37           57,619  
  283,130         8.00         3/1/38           322,425  
  47,401         8.15         11/15/31           51,423  
  56,230         8.50         11/1/26           58,080  
  41,414         8.50         3/1/28           42,091  
  24,681         8.50         10/1/28           26,486  
  68,973         8.50         4/1/29           73,627  
  30,063         8.50         10/1/29           30,163  
  55,642         8.50         7/1/30           61,340  
  36,473         8.50         8/1/30           41,238  
  125,616         8.50         4/1/32           144,420  
  110,375         8.50         1/1/37           118,608  
  1,443         9.00         6/15/25           1,459  
  18,674         9.00         5/15/28           18,878  
  14,232         9.00         6/1/30           14,418  
  7,374         9.00         10/1/30           7,749  
  65,793         9.00         2/1/31           67,734  
  18,292         9.00         7/1/31           18,350  
  23,635         9.00         10/1/31           25,876  
  56,777         9.00         8/1/37           58,826  
  154,470         9.00         2/1/38           164,930  
  12,103         9.50         8/1/24           12,188  
  92,877         9.50         5/1/29           100,965  
  9,848         9.50         4/1/30           10,483  
  32,423         9.50         8/1/31           33,212  
  12,958         10.00         2/1/28           12,965  
  68,896         10.00         6/1/30           74,917  
         

 

 

 
                    59,791,324  
         

 

 

 
 

Government National Mortgage Association - 8.1%

 
  77,664         4.00         12/15/24           79,740  
  361,912         4.00         10/20/30           383,511  
  6,509,422         4.00         8/20/31           6,792,500  
  654,652         4.00         12/20/31           694,142  
  514,902         4.25         10/20/31           546,581  
  323,409         4.25         3/20/37           337,737  
 

 

See accompanying notes to financial statements.   
   
6    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  1,554,974         4.75                   9/20/31           1,690,308  
  5,470,791         5.00         12/15/45           6,170,962  
  608,473         5.00         7/20/49           638,226  
  44,923         5.50         9/15/25           45,732  
  601,089         5.50         5/15/29           651,735  
  1,494,484         5.75         2/15/29           1,593,841  
  573,324         5.75         10/20/31           617,061  
  355,542         6.00         9/15/33           377,537  
  209,925         6.00         2/20/47           232,942  
  2,160,938         6.00         7/20/47           2,397,894  
  16,104         6.25         12/15/23           15,903  
  490,299         6.25         4/15/29           522,576  
  33,098         6.50         11/15/23           33,807  
  112,079         6.50         4/15/24           114,563  
  529,242         6.50         2/20/28           563,807  
  205,423         6.50         2/20/29           213,014  
  338,913         6.50         7/20/34           375,597  
  1,816,822         6.50         2/15/35           1,977,469  
  15,991         6.50         12/20/38           16,567  
  178,337         6.50         1/20/39           198,664  
  108,109         6.50         2/20/39           122,705  
  227,695         6.50         4/20/39           254,389  
  230,070         6.50         6/20/39           253,764  
  420,736         6.50         8/20/39           472,412  
  239,979         6.50         4/20/43           263,987  
  2,584,082         7.00         8/15/29           2,809,179  
  2,766,196         7.00         10/15/29           3,009,445  
  110,384         7.00         10/15/36           113,945  
         

 

 

 
                    34,582,242  
         

 

 

 
 

Small Business Administration - 0.5%

 
  1,285,284         5.33         8/25/36           1,311,987  
  656,367         5.33         9/25/36           670,149  
         

 

 

 
            1,982,136  
         

 

 

 
 

Total Mortgage Pass-Through Securities

    109,446,891  
         

 

 

 
 

    (cost: $111,451,998)

       
 

U.S. Treasury / Federal Agency Securities - 6.0%

 
 

U.S. Treasury Inflation Indexed Bonds:

 
  15,302,611         0.63         1/15/24           16,107,492  
 

U.S. Treasury Notes:

 
  600,000         1.88         2/28/27           584,813  
  9,400,000         1.88         2/15/32           9,028,406  
         

 

 

 
 

Total U.S. Treasury / Federal Agency Securities

      25,720,711  
         

 

 

 
 

    (cost: $26,048,937)

       
 

Collateralized Mortgage Obligations - 60.0%

 
 

Federal Home Loan Mortgage Corporation - 10.7%

 
  46,792         5.00         2/15/23           47,011  
  2,979,976         5.00         11/25/50           3,345,514  
  2,247,047         5.00         11/25/50     1      2,447,367  
  5,523,889         5.50         6/25/51           6,215,811  
  341,195         5.53         5/15/38     1      352,313  
  1,518,802         6.00         1/15/33           1,662,180  
  1,476,068         6.00         5/15/36           1,617,154  
  1,339,883         6.00         9/15/42           1,468,656  
  14,959         6.25         5/15/29           15,405  
  28,434         6.50         9/15/23           29,227  
  14,261         6.50         3/15/24           14,774  
  272,784         6.50         7/15/27           293,421  

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  279,215         6.50                   2/15/28           296,881  
  362,562         6.50         3/15/29           389,723  
  9,961         6.50         2/15/30           10,648  
  292,382         6.50         1/15/31           315,193  
  601,017         6.50         8/15/31           647,689  
  134,930         6.50         1/15/32           146,623  
  49,164         6.50         3/15/32           53,839  
  320,416         6.50         6/25/32           350,581  
  156,516         6.50         7/15/32           171,683  
  3,408,321         6.50         5/15/33           3,754,649  
  698,987         6.50         5/15/35           784,507  
  350,332         6.50         8/15/39           391,743  
  726,525         6.50         2/25/43           825,117  
  422,210         6.50         3/25/43           466,179  
  586,454         6.50         7/25/43           655,574  
  522,841         6.50         10/25/43           568,007  
  1,893,558         6.50         8/15/45           2,181,362  
  344,872         6.50         2/15/49           374,755  
  3,994         6.70         9/15/23           4,087  
  330,417         6.75         3/15/28           356,215  
  296,753         6.95         3/15/28           318,272  
  1,901         7.00         10/15/22           1,918  
  741         7.00         11/15/22           748  
  19,419         7.00         3/25/23           19,637  
  1,894         7.00         4/15/23           1,931  
  10,134         7.00         7/15/23           10,402  
  31,226         7.00         1/15/24           32,193  
  17,098         7.00         3/15/24           17,603  
  42,760         7.00         8/15/25           44,894  
  30,494         7.00         9/15/26           32,315  
  76,436         7.00         6/15/29           83,161  
  193,020         7.00         8/15/29           211,101  
  249,541         7.00         10/20/29           274,045  
  39,353         7.00         1/15/30           43,601  
  139,640         7.00         10/15/30           155,993  
  108,194         7.00         7/15/31           119,583  
  52,904         7.00         4/15/32           57,250  
  356,044         7.00         5/15/32           398,465  
  1,839,701         7.00         8/15/41                     2,042,678  
  3,081,378         7.00         2/25/43           3,424,532  
  555,138         7.00         3/25/43           617,197  
  764,448         7.00         7/25/43           868,103  
  563,785         7.00         3/15/49           628,417  
  272         7.50         7/15/22           273  
  14,921         7.50         3/15/23           15,224  
  69,184         7.50         4/15/23           70,600  
  24,173         7.50         9/20/26           25,854  
  125,513         7.50         3/15/28           137,220  
  214,329         7.50         9/15/29           239,150  
  70,620         7.50         12/15/29           77,115  
  128,767         7.50         6/15/30           144,219  
  200,995         7.50         8/15/30           222,632  
  267,921         7.50         9/15/30           302,392  
  69,623         7.50         11/15/30           77,349  
  2,021,617         7.50         6/15/34           2,333,043  
  1,201,977         7.50         8/25/42     1      1,374,220  
  683,860         7.50         9/25/43           747,424  
  73,011         8.00         2/15/23           74,470  
  8,086         8.00         4/25/24           8,329  
  76,400         8.00         2/15/27           83,476  
  93,935         8.00         11/20/29           104,454  
 

 

See accompanying notes to financial statements.   
   
MARCH 31, 2022    7


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit U.S. Government Securities Fund (Continued)

 

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  105,361         8.00                 1/15/30           118,436  
  233         8.25         6/15/22           234  
  50,807         8.50         3/15/25           54,638  
  18,247         8.50         3/15/32           20,664  
         

 

 

 
                    45,889,343  
         

 

 

 
 

Federal National Mortgage Association - 15.8%

 
  388,909         1.56         7/25/37     1      358,754  
  418,948         2.92         8/25/43     1      427,602  
  181,723         4.55         6/25/43           187,147  
  1,700,635         5.00         7/25/40           1,801,531  
  322,331         5.00         11/25/41           341,566  
  531,895         5.00         6/25/43           553,729  
  2,090,488         5.00         11/25/50           2,283,055  
  2,475,703         5.00         12/25/50           2,768,427  
  1,964,663         5.08         2/25/42     1      2,025,879  
  1,348,531         5.17         10/25/42     1      1,456,537  
  494,625         5.36         6/25/42           526,548  
  2,324,374         5.41         12/25/42     1      2,304,428  
  636,224         5.50         9/25/33           679,492  
  2,935,910         5.50         6/25/40           3,141,015  
  859,830         5.62         12/25/53     1      945,826  
  609,301         5.81         8/25/43           642,610  
  895,405         6.00         5/25/30           957,654  
  1,633,356         6.00         5/25/36           1,813,175  
  213,343         6.00         6/25/36           232,920  
  1,689,550         6.00         11/25/43           1,817,181  
  753,731         6.00         9/25/46           792,683  
  989,525         6.00         2/25/48           1,086,109  
  861,276         6.30         8/25/47     1      916,134  
  194,793         6.49         2/25/45     1      216,330  
  154,707         6.50         8/20/28           162,162  
  905,113         6.50         1/25/32           984,013  
  148,029         6.50         3/25/32           161,996  
  226,319         6.50         6/25/32           248,344  
  189,620         6.50         7/25/36           212,487  
  50,465         6.50         9/25/36           56,229  
  1,639,444         6.50         11/25/41           1,772,432  
  193,862         6.50         3/25/42           207,844  
  945,898         6.50         5/25/42           1,066,686  
  2,349,554         6.50         7/25/42           2,482,042  
  231,223         6.50         9/25/42           250,980  
  561,040         6.50         11/25/42           609,104  
  313,992         6.50         7/25/44           323,066  
  287,865         6.64         9/25/37     1      345,289  
  1,843,827         6.75         6/25/32           2,060,305  
  431,509         6.75         4/25/37           451,853  
  295,198         6.84         8/25/37     1      306,136  
  41,870         6.85         12/18/27           44,087  
  54         7.00         7/25/22           54  
  1,930         7.00         11/25/22           1,929  
  1,228         7.00         12/25/22           1,239  
  3,475         7.00         6/25/23           3,553  
  144,834         7.00         4/25/24           148,798  
  102,133         7.00         9/18/27           109,672  
  1,097,608         7.00         5/25/31           1,135,604  
  992,923         7.00         12/25/33           1,091,920  
  100,525         7.00         9/25/40           110,229  
  363,039         7.00         10/25/41           392,578  
  133,088         7.00         11/25/41           150,975  
  258,283         7.00         12/25/41           284,730  
  816,544         7.00         7/25/42           911,308  

Principal

Amount ($)

         Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  1,638,416         7.00                 2/25/44           1,811,450  
  81,425         7.00         8/25/44           90,915  
  19,713         7.50         8/20/27           21,140  
  172,584         7.50         10/25/40           184,302  
  1,206,768         7.50         11/25/40           1,239,572  
  657,886         7.50         6/19/41     1      724,748  
  1,159,019         7.50         7/25/41           1,295,482  
  676,572         7.50         8/25/41           735,424  
  238,148         7.50         11/25/41           271,582  
  441,364         7.50         1/25/42           493,029  
  2,929,011         7.50         5/25/42           3,290,526  
  263,436         7.50         6/25/42           293,167  
  2,743,700         7.50         8/25/42     1      3,155,545  
  944,505         7.50         2/25/44           1,050,196  
  406,402         7.50         3/25/44           446,360  
  610,137         7.50         5/25/44           695,255  
  39,525         7.50         10/25/44           44,512  
  3,711,624         7.50         1/25/48           4,193,586  
  1,237         8.00         7/25/22           1,243  
  22,474         8.00         7/18/27           24,266  
  288,413         8.00         7/25/44           313,942  
  375,144         8.01         11/25/37     1      422,031  
  35,125         8.11         10/25/42     1      40,235  
  191,197         8.12         11/25/37     1      215,910  
  4,014         8.50         1/25/25           4,256  
  338,375         8.50         6/25/30           385,251  
  13         9.00         8/25/22           13  
  36,658         9.00         11/25/28           40,645  
  241,278         9.00         6/25/30           279,492  
  44,811         9.00         10/25/30           51,831  
  59,141         9.43         6/25/32     1      66,413  
  56,128         9.50         11/25/31           64,513  
  174,959         9.50         12/25/41           199,555  
  215,598         10.19         6/25/44     1      229,515  
  791,254         11.32         9/25/42     1      958,565  
  11,780         23.38         3/25/39     1      17,202  
         

 

 

 
                    67,715,645  
         

 

 

 
 

Government National Mortgage Association - 32.3%

 
  1,374,762         4.78         5/20/51     1      1,477,504  
  1,718,021         4.81         5/20/51     1      1,851,069  
  3,759,811         4.85         8/20/51     1      4,055,774  
  2,568,113         4.91         7/20/51     1      2,779,231  
  4,376,334         4.93         4/20/51     1      4,712,758  
  3,263,340         5.00         12/20/50           3,563,080  
  20,772,611         5.00         2/20/51           22,913,645  
  500,000         5.50         9/20/39           548,802  
  7,066,988         5.50         10/20/50           7,837,315  
  1,972,713         5.50         11/20/50           2,252,052  
  3,438,146         5.50         1/20/51           3,882,541  
  15,730,593         5.50         5/20/51           17,284,700  
  3,327,314         5.50         6/20/51           3,695,729  
  12,283,599         5.50         7/20/51           13,580,381  
  5,843,435         5.50         11/20/51           6,559,872  
  278,413         5.54         4/20/48     1      297,014  
  3,864,199         5.60         4/20/40     1      4,180,865  
  4,075,564         5.80         3/20/45     1      4,416,298  
  8,537,185         5.84         2/20/51     1      9,904,819  
  708,241         5.91         10/20/40     1      770,502  
  400,291         5.99         11/20/43     1      437,138  
  1,376,694         6.00         11/20/33           1,442,599  
  411,531         6.00         12/20/35           448,169  
 

 

See accompanying notes to financial statements.   
   
8    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

Principal

Amount ($)

   

       

  Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
  260,008         6.00                 3/20/42           282,499  
  350,373         6.00         3/20/48           376,405  
  1,772,018         6.00         3/20/49           1,885,304  
  539,393         6.00         5/20/49           569,706  
  1,606,987         6.13         1/20/39     1      1,765,218  
  279,009         6.45         4/20/37     1      296,529  
  1,415,839         6.46         6/20/41     1      1,544,369  
  971,598         6.50         7/20/32           969,129  
  964,190         6.50         2/20/37           1,042,622  
  193,605         6.50         9/16/38           206,349  
  1,705,560         6.50         8/20/48           1,866,819  
  742,526         6.50         10/20/48           807,665  
  1,186,503         6.50         1/20/49           1,269,094  
  474,842         6.54         7/20/39     1      520,661  
  414,761         6.65         4/20/39     1      459,646  
  703,536         6.85         8/20/40     1      776,716  
  355,468         6.99         6/20/45     1      387,725  
  99,261         7.00         9/16/33           105,122  
  272,538         7.00         5/20/42           300,763  
  709,573         7.00         10/20/48           757,116  
  398,867         7.08         2/20/45      1      453,491  
  825,080         7.10         12/20/38     1      918,047  
  456,158         7.15         12/20/33     1      500,618  
  1,153,176         7.31         8/20/38     1      1,284,626  
         

 

 

 
                138,238,096  
         

 

 

 
 

Vendee Mortgage Trust - 1.2%

 
  899,691         6.02         3/15/25     1      963,754  
  591,596         6.50         2/15/24           610,078  
  1,260,681         6.50         8/15/31           1,325,846  
  611,784         6.50         10/15/31           673,547  
  434,117         6.75         2/15/26           462,925  
  499,239         7.00         3/15/28           525,183  
  18,241         7.25         9/15/22           18,285  
  122,381         7.25         9/15/25           130,231  
  47,572         7.75         5/15/22           47,545  
  136,444         7.75         9/15/24           142,638  
  62,920         8.00         2/15/25           65,624  
  52,782         8.29         12/15/26           56,572  
         

 

 

 
            5,022,228  
         

 

 

 
 

Total Collateralized Mortgage Obligations
(cost: $266,164,816)


 
    256,865,312  
         

 

 

 
 

Asset-Backed Securities - 1.2%

 
 

Federal Home Loan Mortgage Corporation - 0.2%

 
  326         6.09         9/25/29     1      323  
  605,471         7.16         7/25/29           656,215  
         

 

 

 
            656,538  
         

 

 

 
 

Federal National Mortgage Association - 0.6%

 
  9,114         1 Mo. Libor + 0.17%, 0.53         11/25/32     1      8,941  
  454,823         4.40         11/25/33     14      468,373  
  302,495         4.61         9/26/33     14      307,377  
  98,285         4.82         10/25/33     14      109,790  
  1,556,373         5.75         2/25/33     14      1,757,321  
  2,836         6.00         5/25/32     14      3,036  
  70,310         6.09         10/25/31     14      73,318  
  3,051         7.80         6/25/26     1      3,235  
         

 

 

 
            2,731,391  
         

 

 

 
 

Small Business Administration - 0.4%

 
  161,776         5.78         8/1/27           167,503  

Principal

Amount ($)

       Coupon Rate (%)       

Maturity

Date    

   

Fair        

Value ($)    

 
713,189       5.87                 7/1/28           739,854  
638,664       6.02         8/1/28           667,363  
         

 

 

 
            1,574,720  
         

 

 

 

Total Asset-Backed Securities

    4,962,649  
         

 

 

 

    (cost: $4,754,451)

       

Put Options Purchased 19 - 1.2%
(cost: $2,000,183)

      4,955,313  
         

 

 

 
                       
Quantity   Name of Issuer                

Fair

Value ($)

 

Short-Term Securities - 7.0%

 
30,016,042   Fidelity Inst. Money Mkt. Gvt. Fund, 0.12%

 

    30,016,042  
         

 

 

 

(cost: $30,016,042)

       

Total Investments in Securities - 101.0%
(cost: $440,436,427)

              431,966,918  
         

 

 

 

Other Assets and Liabilities - (1.0)%

      (4,222,476
         

 

 

 

Net Assets - 100.0%

          $427,744,442  
         

 

 

 

 

 

 

1

Variable rate security. Rate disclosed is as of March 31, 2022. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions, or, for mortgage-backed securities, are impacted by the individual mortgages which are paying off over time. These securities do not indicate a reference rate and spread in their descriptions.

14

Step Coupon: A bond that pays a coupon rate that increases on a specified date(s). Rate disclosed is as of March 31, 2022.

Numeric footnotes not disclosed are not applicable to this Schedule of Investments.

 

 

See accompanying notes to financial statements.   
   
MARCH 31, 2022    9


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit U.S. Government Securities Fund (Continued)

 

19 Options outstanding as of March 31, 2022 were as follows:

 

Description    Contracts      Exercise
Price ($)
       Expiration
Date
       Counterparty        Notional
Amount ($)
       Cost/
Premiums ($)
       Value ($)      

Put Options Purchased - U.S. Treasury Futures:

                             

5-Year

   1,570        117.75          May 2022          StoneX Financial, Inc.          184,867,500          2,000,183          4,955,313      

A summary of the levels for the Fund’s investments as of March 31, 2022 is as follows (see Note 2 - significant accounting policies in the notes to financial statements):

 

     Investment in Securities
    

Level 1

Quoted
    Prices ($)    

  

Level 2

Other significant
    observable inputs ($)    

 

Level 3

Significant
    unobservable inputs ($)    

  Total ($)          

Mortgage Pass-Through Securities

            109,446,891                         109,446,891  

U.S. Treasury / Federal Agency Securities

            25,720,711             25,720,711  

Collateralized Mortgage Obligations

            256,865,312             256,865,312  

Asset-Backed Securities

            4,962,649             4,962,649  

Put Options Purchased

     4,955,313                    4,955,313  

Short-Term Securities

     30,016,042                    30,016,042  

Total:

     34,971,355        396,995,563             431,966,918  

There were no transfers into or out of level 3 during the reporting period.

 

See accompanying notes to financial statements.   
   
10    SIT MUTUAL FUNDS ANNUAL REPORT 


 

 

 

[This page is intentionally left blank.]

 

 

 

  
   
MARCH 31, 2022    11


 

 

    Sit Quality Income Fund

 

OBJECTIVE & STRATEGY

The objective of the Quality Income Fund is to provide high current income and safety of principal, which it seeks to attain by investing at least 80% of its assets in debt securities issued by the U.S. government and its agencies, debt securities issued by corporations, and mortgage and other asset-backed securities. The Fund invests at least 50% of its assets in U.S. government debt securities, which are securities issued, guaranteed or insured by the U.S. government, its agencies or instrumentalities.

 

 

Fund Performance

The Sit Quality Income Fund provided a return of +0.92% during the 12-month period ended March 31, 2022, compared to the return of the Bloomberg 1-3 Year Government/Credit Index of -2.91% for the same period. The Fund’s 30-day SEC yield was 1.38% and its 12-month distribution rate was 1.62%.

Factors that Influenced the Fund’s Performance

The primary goal of the Fund is to maintain a high credit quality portfolio with stable principal values, while generating a relatively high level of income. Yields of U.S. Treasury securities were higher across all maturities for the 12-month period, causing large price declines across most sectors. The Fund’s strong income advantage was able to partially offset some of the price declines but not all. The Fund reduces interest rate risk by using futures and options on Treasury securities. The use of futures and options was effective in providing stability to the Fund’s net asset value and provided a positive return for the period. The Fund’s U.S. Treasury holdings outperformed the Fund’s benchmark, as the securities held by the Fund were generally inflation protected securities, which benefited from higher-than-expected inflation measures. The Fund’s allocation to corporate securities, asset-backed securities, and taxable municipal securities outperformed the Fund’s benchmark for the period despite its absolute negative returns. The Fund’s mortgage-backed securities underperformed for the period as yield spreads widened on these securities and there was a slight uptick in prepayments.

Outlook and Positioning

One of the prevailing themes of 2021 was the resurgence of the Covid-19 virus with both the Delta variant as well as the Omicron variant. Despite the increase in cases, consumers’ demand continued to increase, causing demand-pull inflationary pressures. The global reopening of economies caused bottlenecks and labor shortages, which impeded significantly on growth. The subsequent supply chain issues have resulted in a cost-push inflationary environment. The pent-up savings of consumers allowed companies to have unprecedented pricing power, which resulted in increased input costs being directly passed onto the consumer. Supply chain constraints are unlikely to be resolved until the end of this year, if not later. As the pent-up savings begin to deplete, we expect that more workers should begin to re-enter the workforce, alleviating some of the supply chain constraints. To combat inflationary pressures, the Federal Reserve has begun to increase short term interest rates, albeit at

HYPOTHETICAL GROWTH OF $10,000

 

LOGO

The chart above illustrates the total value of a hypothetical $10,000 investment in the Fund over the past 10 years as compared to the performance of the Bloomberg 1-3 Year Government/Credit Index. Past performance does not guarantee future results. Returns include the reinvestment of distributions. The chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

1 The Bloomberg 1-3 Year Government/Credit Index is an unmanaged index of Treasury or government agency securities and investment grade corporate debt securities with maturities of one to three years. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index. This is the Fund’s primary index.

 

 

a cautious rate. If not for the war in Ukraine, the Federal Reserve likely would have been more aggressive, but the consequences to the economy are still uncertain. The Federal Reserve has also given estimates to its balance sheet normalization program, which we believe are unobtainable given the recent acceleration in mortgage rates. The Federal Reserve’s reduction in asset purchases will likely be systematic and predictable, however, we expect heightened volatility as the market digests the changes.

We have positioned the Fund opportunistically in terms of credit quality and defensively with respect to an inflationary environment and geopolitical risks in order to maximize return potential while preserving principal. We focus on a mix of Treasury, agency and credit sectors that provide relatively high levels of income and stable prices.

 

Bryce A. Doty, CFA    Chris M. Rasmussen, CFA
Senior Portfolio Manager    Mark H. Book, CFA
   Portfolio Managers
 

 

Information on this page is unaudited.   
   
12    SIT MUTUAL FUNDS ANNUAL REPORT 


    

 

COMPARATIVE RATES OF RETURNS

 

as of March 31, 2022

 

    

Sit Quality

Income Fund

   

Bloomberg

1-3 Year
Government/

Credit Index1

   

Lipper Short

Investment

Grade Bond

Index2

 

One Year

    0.92     -2.91     -2.48

Five Year

    1.84       1.26       1.72  
Since Inception (12/31/12)     1.21       1.09       1.45  

 

 

Performance figures are historical and do not guarantee future results. Investment returns and principal value will vary, and you may have a gain or loss when you sell shares. Current performance may be lower or higher than the performance data quoted. Contact the Fund for performance data current to the most recent month-end. Returns include changes in share price as well as reinvestment of all dividends and capital gains and all fee waivers. Without the fee waivers total return and yield figures would have been lower. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Management fees and administrative expenses are included in the Fund’s performance. Returns for periods greater than one year are compounded average annual rates of return.

1 The Bloomberg 1-3 Year Government/Credit Index is an unmanaged index of Treasury or government agency securities and investment grade corporate debt securities with maturities of one to three years. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index.

2 The Lipper returns are obtained from Lipper Analytical Services, Inc., a large independent evaluator of mutual funds.

FUND DIVERSIFICATION

 

 

U.S. Treasury / Federal Agency Securities

     35.9

Corporate Bonds

     25.8  

Mortgage Pass-Through Securities

     14.6  

Taxable Municipal Bonds

     13.8  

Collateralized Mortgage Obligations - Non Agency

     5.9  

Asset-Backed Securities - Non Agency

     2.2  

Other Net Assets

     1.8      

 

Based on net assets as of March 31, 2022.

PORTFOLIO SUMMARY

 

 

Net Asset Value 3/31/22:

  $9.98 Per Share

Net Asset Value 3/31/21:

  $10.04 Per Share            

Net Assets:

  $135.2 Million

Average Maturity:

  7.6 Years

Effective Duration:3

  1.1 Years

3 Duration is a measure of estimated price sensitivity relative to changes in interest rates. Portfolios with longer durations are typically more sensitive to changes in interest rates. For example, if interest rates rise by 1%, the fair value of a security with an effective duration of 5 years would decrease by 5%, with all other factors being constant. The correlation between duration and price sensitivity is greater for securities rated investment-grade than it is for securities rated below investment-grade. Duration estimates are based on assumptions by the Adviser and are subject to a number of limitations. Effective duration is calculated based on historical price changes of securities held by the Fund, and therefore is a more accurate estimate of price sensitivity provided interest rates remain within their historical range.

QUALITY RATING (% of Net Assets)

 

 

LOGO

Lower of Moody’s, S&P, Fitch or Duff & Phelps ratings used.

 

 

Information on this page is unaudited.   
   
MARCH 31, 2022    13


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit Quality Income Fund

 

         
Name of Issuer    Principal
Amount ($)
    

Coupon

    Rate (%)

    

Maturity

Date

    

Fair

Value ($)

Asset-Backed Securities - 2.8%

           

Agency - 0.6%

           

FNMA Grantor Trust, Series 2004-T5, Class A11 1

     468,566        0.77        5/28/35        458,902  

Small Business Administration, Series 2006-20D, Class 1

     99,670        5.64        4/1/26        102,300  

Small Business Administration, Series 2007-20B, Class 1

     83,349        5.49        2/1/27        85,262  

Small Business Administration, Series 2007-20J, Class 1

     159,901        5.57        10/1/27        165,130  
           

 

 

 

              811,594  
           

 

 

 

Non-Agency - 2.2%

           

ACE Securities Corp. Manufactured Housing Trust, Series 2003-MH1, Class M2 1, 4

     499,642        6.50        8/15/30        503,229  

Bayview Opportunity Master Fund, Series 2017-SPL5, Class A 1, 4

     165,636        3.50        6/28/57        164,839  

Centex Home Equity Loan Trust, Series 2004-A, Class AF4 14

     102,684        5.01        8/25/32        100,055  

Centex Home Equity Loan Trust, Series 2004-A, Class AF5 14

     310,000        5.43        1/25/34        298,576  

Home Equity Mortgage Loan Asset-Backed Trust, Series 2003-A, Class AV2, 1 Mo. Libor + 0.86% 1

     181,858        1.32        10/25/33        179,963  

Mill City Mortgage Loan Trust, Series 2017-3, Class A1 1, 4

     102,358        2.75        1/25/61        102,620  

OSCAR US Funding Trust IX, LLC, Series 2018-2A, Class A4 4

     279,425        3.63        9/10/25        280,781  

Towd Point Mortgage Trust, Series 2019-MH1, Class A2 1, 4

     800,000        3.00        11/25/58        785,097  

Towd Point Mortgage Trust, Series 2020-MH1, Class A1A 1, 4

     578,497        2.18        2/25/60        559,804  
           

 

 

 

              2,974,964  
           

 

 

 

Total Asset-Backed Securities
(cost: $3,881,566)

                    3,786,558    
           

 

 

 

Collateralized Mortgage Obligations - 8.3%

           

Agency - 2.4%

           

FHLMC REMICS, Series 2528, Class KM

     3,007        5.50        11/15/22        3,030  

FHLMC REMICS, Series 3104, Class BY

     50,959        5.50        1/15/26        52,788  

FHLMC REMICS, Series 3806, Class JA

     76,961        3.50        2/15/26        77,979  

FHLMC REMICS, Series 4246, Class PT

     283,937        6.50        2/15/36        314,723  

FHLMC REMICS, Series 4759, Class NA

     148,675        3.00        8/15/44        148,958  

FHLMC Structured Pass-Through Certificates, Series T-60, Class 1A2

     601,112        7.00        3/25/44        662,800  

FNMA Grantor Trust, Series 2004-T1, Class 2A 1

     300,979        2.92        8/25/43        307,196  

FNMA REMICS, Series 2009-13, Class NX

     155        4.50        3/25/24        156  

FNMA REMICS, Series 2009-71, Class MB

     4,909        4.50        9/25/24        4,957  

FNMA REMICS, Series 2013-74, Class AD

     13,508        2.00        7/25/23        13,511  

FNMA REMICS, Series 2017-97, Class DP

     41,586        3.50        10/25/46        41,302  

FNMA REMICS, Series 2018-1, Class TE

     33,755        3.50        3/25/44        33,978  

FNMA REMICS, Series 2018-25, Class AG

     232,889        3.50        4/25/47        229,694  

FRESB Mortgage Trust, Series 2018-SB45, Class A5H 1

     409,621        2.96        11/25/37        410,889  

FRESB Mortgage Trust, Series 2018-SB46, Class A5H 1

     686,642        2.88        12/25/37        688,801  

Seasoned Credit Risk Transfer Trust, Series 2019-4, Class M55D

     298,620        4.00        2/25/59        304,486  

Vendee Mortgage Trust, Series 1993-1, Class ZB

     7,884        7.25        2/15/23        8,034  
           

 

 

 

              3,303,282  
           

 

 

 

Non-Agency - 5.9%

           

JP Morgan Mortgage Trust, Series 2021-1, Class A4 1, 4

     619,690        2.50        6/25/51        594,875  

JP Morgan Mortgage Trust, Series 2021-12, Class A4 1, 4

     521,798        2.50        2/25/52        500,947  

JP Morgan Mortgage Trust, Series 2021-13, Class A4 1, 4

     890,210        2.50        4/25/52        855,148  

JP Morgan Mortgage Trust, Series 2021-6, Class A4 1, 4

     1,264,420        2.50        10/25/51        1,213,893  

JP Morgan Mortgage Trust, Series 2021-7, Class A4 1, 4

     559,368        2.50        11/25/51        537,320  

JP Morgan Mortgage Trust, Series 2022-1, Class A11 1, 4

     2,457,662        0.90        7/25/52        2,398,479  

New Residential Mortgage Loan Trust, Series 2017-2A, Class A4 1, 4

     286,366        4.00        3/25/57        286,853  

New Residential Mortgage Loan Trust, Series 2017-3A, Class A1 1, 4

     302,783        4.00        4/25/57        303,878  

New Residential Mortgage Loan Trust, Series 2017-5A, Class A1, 1 Mo. Libor + 1.50% 1, 4

     104,125        1.96        6/25/57        104,978  

New Residential Mortgage Loan Trust, Series 2018-1A, Class A1A 1, 4

     222,291        4.00        12/25/57        224,259  

New Residential Mortgage Loan Trust, Series 2018-4A, Class A1S, 1 Mo. Libor + 0.75% 1, 4

     307,464        1.21        1/25/48        305,466  

Sequoia Mortgage Trust, Series 2020-4, Class A5 1, 4

     317,426        2.50        11/25/50        312,750  

 

See accompanying notes to financial statements.   
   
14    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

         
Name of Issuer   

Principal
Amount ($)

     Coupon
    Rate (%)
     Maturity
Date
    

Fair

Value ($)

 

Wells Fargo Mortgaged Backed Securities Trust, Series 2020-5, Class A3 1, 4

     276,761        2.50        9/25/50        264,900  
           

 

 

 
              7,903,746  
           

 

 

 

Total Collateralized Mortgage Obligations
(cost: $11,607,777)

                  11,207,028  
           

 

 

 

Corporate Bonds - 25.8%

           

American Equity Investment Life Holding Co.

     950,000        5.00        6/15/27        992,576  

Bank OZK (Subordinated) 1

     1,000,000        2.75        10/1/31        971,900  

BGC Partners, Inc.

     900,000        4.38        12/15/25        907,170  

British Airways 2020-1 Class B Pass Through Trust 4

     365,380        8.38        11/15/28        403,743  

Brown & Brown, Inc.

     350,000        4.20        9/15/24        357,196  

Cabot Corp.

     850,000        3.40        9/15/26        847,402  

Cadence Bank (Subordinated), 3 Mo. Libor + 3.03% 1

     1,200,000        4.75        6/30/29        1,224,764  

Cadence Design Systems, Inc.

     500,000            4.38        10/15/24        513,131  

Canadian Natural Resources, Ltd.

     1,000,000        3.85        6/1/27        1,012,593  

CenterState Bank Corp. (Subordinated) 1

     650,000        5.75        6/1/30        685,454  

CVS Pass-Through Trust Series 2009 4

     888,352        8.35        7/10/31        1,066,390  

Delta Air Lines 2015-1 Class AA Pass Through Trust

     358,603        3.63        7/30/27        355,370  

Duke Energy Florida Project Finance, LLC

     1,185,000        2.54        9/1/29        1,158,781  

El Paso Natural Gas Co., LLC

     500,000        7.50        11/15/26        584,961  

Equinor ASA

     224,000        7.15        11/15/25        254,718  

F&G Global Funding 4

     600,000        0.90        9/20/24        566,121  

First Midwest Bancorp, Inc. (Subordinated)

     1,000,000        5.88        9/29/26        1,081,540  

First-Citizens Bank & Trust Co. (Subordinated) 1

     1,250,000        4.13        11/13/29        1,253,966  

Hyundai Capital America 4

     895,000        2.38        10/15/27        820,763  

Jackson National Life Insurance Co. (Subordinated) 4

     1,000,000        8.15        3/15/27        1,200,325  

JetBlue 2019-1 Class B Pass Through Trust

     833,016        8.00        11/15/27        899,422  

JPMorgan Chase & Co. 1

     600,000        0.77        6/1/25        594,069  

JPMorgan Chase & Co., 3 Mo. Libor + 0.80% 1

     900,000        1.17        5/10/23        901,572  

Metropolitan Life Insurance Co. (Subordinated) 4

     750,000        7.80        11/1/25        861,036  

Minnesota Life Insurance Co. (Subordinated) 4

     925,000        8.25        9/15/25        1,057,592  

Nationwide Mutual Insurance Co. (Subordinated), 3 Mo. Libor + 2.29% 1, 4

     1,300,000        3.12        12/15/24        1,300,882  

Old Republic International Corp.

     1,338,000        4.88        10/1/24        1,382,657  

Orange & Rockland Utilities, Inc.

     700,000        6.50        12/1/27        802,717  

PennantPark Investment Corp.

     1,000,000        4.00        11/1/26        950,354  

PPL Electric Utilities Corp., 3 Mo. Libor + 0.25% 1

     333,000        1.22        9/28/23        331,377  

Reliant Bancorp, Inc. (Subordinated) 1

     1,250,000        5.13        12/15/29        1,279,927  

RenaissanceRe Finance, Inc.

     725,000        3.45        7/1/27        728,238  

TIAA FSB Holdings, Inc. (Subordinated)

     1,080,000        5.75        7/2/25        1,120,395  

Tosco Corp.

     500,000        7.80        1/1/27        590,014  

Toyota Motor Credit Corp. 1

     1,791,000        0.56        9/13/24        1,775,666  

Tyco Intl. Finance

     1,000,000        3.90        2/14/26        994,139  

United Airlines 2014-1 Class A Pass Through Trust

     899,515        4.00        4/11/26        903,561  

United Financial Bancorp, Inc. (Subordinated)

     300,000        5.75        10/1/24        313,370  

VeriSign, Inc.

     550,000        4.75        7/15/27        561,910  

West Loop BC (Subordinated), 3 Mo. Libor + 1.87 1

     1,300,000        4.00        12/1/27        1,315,513  
           

 

 

 

Total Corporate Bonds
(cost: $36,195,662)

              34,923,275  
           

 

 

 

Mortgage Pass-Through Securities - 14.6%

           

Federal Home Loan Mortgage Corporation - 3.8%

           

Freddie Mac

     351,207        2.00        11/1/31        342,468  

Freddie Mac

     449,418        2.00        8/1/32        438,618  

Freddie Mac

     57,454        3.00        9/1/27        58,098  

Freddie Mac

     620,962        3.00        1/1/35        630,460  

Freddie Mac

     1,549,811        3.00        1/1/36        1,554,930  

Freddie Mac

     11,411        3.50        7/1/26        11,674  

Freddie Mac

     844,870        3.50        8/1/31        875,932  

 

See accompanying notes to financial statements.   
   
MARCH 31, 2022    15


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit Quality Income Fund (Continued)

 

         
Name of Issuer   

Principal
Amount ($)

     Coupon
    Rate (%)
     Maturity
Date
    

Fair

Value ($)

 

Freddie Mac

     307,246        3.50        9/1/32        315,751  

Freddie Mac

     74,462        4.00        7/1/26        76,831  

Freddie Mac

     77,179        4.00        1/1/27        79,696  

Freddie Mac

     2,608        4.50        7/1/26        2,677  

Freddie Mac

     347,125        4.50        10/1/34        361,185  

Freddie Mac

     5,004        5.00        10/1/25        5,268  

Freddie Mac

     303,396        5.00        5/1/28        319,303  
           

 

 

 
              5,072,891  
           

 

 

 

Federal National Mortgage Association - 9.3%

           

Fannie Mae

     1,208,465        2.35        5/1/23        1,210,460  

Fannie Mae

     1,642,873        2.50        6/1/31        1,627,505  

Fannie Mae

     543,300        2.50        2/1/35        537,884  

Fannie Mae

     87,015        3.00        8/1/28        87,807  

Fannie Mae

     517,622        3.00        9/1/32        516,168  

Fannie Mae

     549,884        3.00        4/1/40        550,678  

Fannie Mae

     1,363,230        3.00        6/1/40        1,376,651  

Fannie Mae

     187,036        3.50        1/1/26        191,130  

Fannie Mae

     561,075        3.50        2/1/32        568,592  

Fannie Mae

     1,332,765        3.50        8/1/33        1,371,976  

Fannie Mae

     482,498        3.50        5/1/35        488,912  

Fannie Mae

     4,234        4.00        9/1/24        4,353  

Fannie Mae

     40,624        4.00        6/1/25        41,828  

Fannie Mae

     9,849        4.00        10/1/31        10,213  

Fannie Mae

     603,945        4.00        10/1/34        622,649  

Fannie Mae

     2,088,584        4.00        1/1/39        2,207,823  

Fannie Mae

     27,985        4.50        4/1/25        28,774  

Fannie Mae

     501,045        5.50        8/1/40        562,940  

Fannie Mae

     627,080        5.50        2/1/42        688,505  
           

 

 

 
                  12,694,848  
           

 

 

 

Government National Mortgage Association - 0.4%

           

Ginnie Mae, US Treasury + 1.50% 1

     20,857        1.88        4/20/33        21,492  

Ginnie Mae, US Treasury + 1.50% 1

     5,291        1.88        4/20/42        5,463  

Ginnie Mae

     1,646        5.00        12/20/23        1,681  

Ginnie Mae

     1,979        5.00        9/15/24        1,990  

Ginnie Mae

     13,939        5.00        6/20/26        14,360  

Ginnie Mae

     445,482        6.00        7/20/37        494,473  
           

 

 

 
              539,459  
           

 

 

 

Other Federal Agency Securities - 1.1%

           

Small Business Administration Pools, PRIME - 2.50% 1

     378,227        0.75        5/25/43        384,551  

Small Business Administration Pools, PRIME + 0.81% 1

     728,735        4.06        2/25/28        764,362  

Small Business Administration Pools, PRIME + 0.82% 1

     230,779        4.07        3/25/30        245,263  
           

 

 

 
              1,394,176  
           

 

 

 

Total Mortgage Pass-Through Securities
(cost: $20,401,029)

              19,701,374  
           

 

 

 

Taxable Municipal Bonds - 13.8%

           

Borough of Naugatuck CT G.O.

     190,000        1.40        9/15/27        177,053  

California Municipal Finance Authority

     725,000        2.19        11/15/26        701,959  

Charleston County School District

     800,000        1.05        9/15/26        759,960  

Chino, CA Public Financing Authority

     215,000        1.70        9/1/26        200,874  

City & County Honolulu HI Wastewater System

     1,000,000        3.20        7/1/26        1,008,890  

City of Cleveland OH

     125,000        1.28        10/1/26        115,015  

City of Encinitas CA

     500,000        1.45        9/1/27        461,895  

Colorado Housing & Finance Authority

     5,000        4.00        11/1/31        5,076  

Columbus Metropolitan Housing Authority

     1,000,000        1.25        11/1/24        957,240  

County of Cook IL

     1,200,000        5.79        11/15/29        1,307,268  

County of Yamhill OR

     455,000        4.50        10/1/30        468,900  

 

See accompanying notes to financial statements.   
   
16    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

Name of Issuer   

 

Principal
Amount ($)

     Coupon
    Rate (%)
     Maturity
Date
    

Fair

Value ($)

 

Duluth Independent School District No. 709

     250,000        2.00        2/1/24        246,043  

Florida Capital Projects Finance Authority

     800,000        4.00        10/1/24        774,448  

Illinois Finance Authority

     500,000        3.25        5/15/27        484,225  

Jersey City, NJ G.O.

     335,000        1.13        9/1/26        306,344  

Kansas City Industrial Development Authority

     500,000        1.75        3/1/26        471,845  

Kentucky Higher Education Student Loan Corp.

     1,000,000        2.52        6/1/35        937,230  

Massachusetts Educational Financing Authority

     140,000        4.00        1/1/32        142,478  

Massachusetts Educational Financing Authority

     275,000        4.41        7/1/34        283,462  

Massachusetts Educational Financing Authority

     1,000,000        2.64        7/1/37        927,030  

Michigan State Housing Development Authority

     500,000        2.90        6/1/52        448,165  

Michigan Strategic Fund 9

     1,100,000        1.91        10/15/23        1,089,011  

New Hampshire Housing Finance Authority

     90,000        4.00        7/1/35        91,094  

New Mexico Educational Assistance Foundation

     1,000,000        2.11        9/1/51        965,110  

New York Liberty Development Corp. 9

     450,000        1.41        11/15/26        417,861  

New York State Housing Finance Agency

     1,000,000        3.25        5/1/27        994,590  

North Dakota Housing Finance Agency

     565,000        2.86        7/1/24        564,629  

Oregon School Boards Association

     1,000,000        5.53        6/30/28        1,074,230  

Redondo Beach Community Financing Authority 9

     750,000        1.60        5/1/27        688,988  

St. Charles Parish School District No. 1

     250,000        2.00        3/1/27        239,470  

Tennessee Housing Development Agency

     25,000        3.50        7/1/31        25,240  

Warm Springs Reservation Confederated Tribe 4

     760,000        2.02        11/1/25        723,695  

Wisconsin Housing & Economic Development Authority 8

     410,000        3.50        3/1/46        415,920  

Zachary Community School District No. 1

     285,000        2.00        3/1/27        274,389  
           

 

 

 

Total Taxable Municipal Bonds
(cost: $19,546,545)

              18,749,627  
           

 

 

 

U.S. Treasury / Federal Agency Securities - 32.9%

           

Federal Agency Issues - 1.9%

           

Federal Agricultural Mortgage Corp., 3 Mo. Libor + 0.37% 1

     250,000        1.01        3/9/23        250,823  

Pershing Road Development Co., LLC, 3 Mo. Libor + 0.40% 1, 4

     1,666,296        0.92        9/1/26        1,607,991  

U.S. Department of Housing and Urban Development

     690,000        4.28        8/1/27        695,197  
           

 

 

 
              2,554,011  
           

 

 

 

U.S. Treasury - 31.0%

           

U.S. Treasury Bill 6

     3,400,000        0.06        4/12/22        3,399,849  

U.S. Treasury Floating Rate Notes, 3 Mo. U.S. Treasury + 0.06% 1

     1,300,000        0.15        10/31/22        1,301,221  

U.S. Treasury Floating Rate Notes, 3 Mo. U.S. Treasury + 0.02% 1

     2,150,000        0.59        1/31/24        2,152,259  

U.S. Treasury Inflation Indexed Bonds

     11,560,600        0.13        4/15/22        11,604,855  

U.S. Treasury Inflation Indexed Bonds

     3,178,708        0.13        7/15/22        3,265,378  

U.S. Treasury Inflation Indexed Bonds

     12,277,742        0.13        1/15/23        12,711,780  

U.S. Treasury Inflation Indexed Bonds

     925,983        0.13        10/15/26        974,471  

U.S. Treasury Inflation Indexed Bonds

     2,295,409        0.38        7/15/23        2,410,718  

U.S. Treasury Inflation Indexed Bonds

     1,393,425        0.50        4/15/24        1,465,518  

U.S. Treasury Inflation Indexed Bonds

     2,530,353        0.63        1/15/24        2,663,444  
           

 

 

 
              41,949,493  
           

 

 

 

Total U.S. Treasury / Federal Agency Securities
(cost: $44,284,615)

                  44,503,504  
           

 

 

 

 

See accompanying notes to financial statements.   
   
MARCH 31, 2022    17


 

SCHEDULE OF INVESTMENTS

March 31, 2022

Sit Quality Income Fund (Continued)

 

Name of Issuer    Quantity                                         

 

Fair

Value ($)

 

Short-Term Securities - 3.2%

           

Fidelity Inst. Money Mkt. Gvt. Fund, 0.12%
(cost: $4,305,081)

     4,305,081              4,305,081  
           

 

 

 

Total Investments in Securities - 101.4%
(cost: $140,222,275)

              137,176,447  
           

 

 

 

Other Assets and Liabilities, net - (1.4)%

              (1,930,901
           

 

 

 

Net Assets - 100.0%

            $ 135,245,546  
           

 

 

 

 

 

1

Variable rate security. Rate disclosed is as of March 31, 2022. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions, or, for mortgage-backed securities, are impacted by the individual mortgages which are paying off over time. These securities do not indicate a reference rate and spread in their descriptions.

4

144A Restricted Security. The total value of such securities as of March 31, 2022 was $19,908,654 and represented 14.7% of net assets. These securities have been determined to be liquid by the Adviser in accordance with guidelines established by the Board of Directors.

6

Zero coupon or convertible capital appreciation bond, for which the rate disclosed is either the effective yield on purchase date or the coupon rate to be paid upon conversion to coupon paying.

8

Securities the income from which is treated as a tax preference that is included in alternative minimum taxable income for purposes of computing federal alternative minimum tax (AMT). At March 31, 2022, 0.3% of net assets in the Fund was invested in such securities.

9

Municipal Lease Security. The total value of such securities as of March 31, 2022 was $2,195,860 and represented 1.6% of net assets. These securities have been determined to be liquid by the Adviser in accordance with guidelines established by the Board of Directors.

14

Step Coupon: A bond that pays a coupon rate that increases on a specified date(s). Rate disclosed is as of March 31, 2022.

Numeric footnotes not disclosed are not applicable to this Schedule of Investments.

Short futures contracts outstanding as of March 31, 2022 were as follows:

 

Type          Contracts        

    Expiration    

Date

   Notional
      Amount ($)      
 

Value/

Unrealized

Appreciation

        (Depreciation) ($)        

Short Futures: 10

                 

U.S. Treasury 2-Year

       106            June 2022        (22,463,719)           253,399

U.S. Treasury 5-Year

       206       June 2022        (23,625,625)           508,072
                    761,471

 

10

The amount of $600,000 in cash was segregated with the broker to cover margin requirements for derivative transactions as of March 31, 2022.

 

See accompanying notes to financial statements.   
   
18    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

A summary of the levels for the Fund’s investments as of March 31, 2022 is as follows (see Note 2 - significant accounting policies in the notes to financial statements):

 

     Investment in Securities  
    

Level 1

Quoted

Prices ($)

    

Level 2

Other significant

observable inputs ($)

    

Level 3

Significant
unobservable inputs ($)

   Total ($)      

Asset-Backed Securities

            3,786,558           3,786,558  

Collateralized Mortgage Obligations

            11,207,028           11,207,028  

Corporate Bonds

            34,923,275           34,923,275  

Mortgage Pass-Through Securities

            19,701,374           19,701,374  

Taxable Municipal Bonds

            18,749,627           18,749,627  

U.S. Treasury / Federal Agency Securities

            44,503,504           44,503,504  

Short-Term Securities

         4,305,081                  4,305,081  

Futures

     761,471                  761,471  

Total:

     5,066,552        132,871,366           137,937,918      

There were no transfers into or out of level 3 during the reporting period.

 

See accompanying notes to financial statements.   
   
MARCH 31, 2022    19


Sit Tax-Free Income Fund - Class S and Class Y

OBJECTIVE & STRATEGY

The objective of the Tax-Free Income Fund is to provide a high level of current income that is exempt from federal income tax, consistent with preservation of capital, by investing primarily in investment-grade municipal securities. Such municipal securities generate interest income that is exempt from both federal regular income tax and federal alternative minimum tax. During normal market conditions, the Fund invests 100% of its net assets in such tax-exempt municipal securities.

 

Fund Performance

The Sit Tax-Free Income Fund (Class S) provided a return of -4.62% during the 12-month period ended March 31, 2022, versus a return of -4.48% for its benchmark, the Bloomberg 5-year Municipal Bond Index, for the same period. As of March 31, 2022, the Fund’s 30-day SEC yield was 2.61%, compared to the yield of 2.25% for the benchmark index. The Fund’s 12-month distribution rate was 2.69%.

Factors that Influenced the Fund’s Performance

The tax-exempt yield curve shifted much higher and flattened during the period, with short yields rising most. Yields for short maturities rose approximately 145-160 basis points during the period, most of which took place in 2022. Meanwhile, yields for intermediate and long maturities rose by approximately 100 basis points and 80 basis points, respectively, during the period, also moving up aggressively in 2022. Net positive inflows for tax-exempt funds exceeded $48 billion for the period as tax-exempt fund flows provided strong support for the municipal market throughout 2021, before abruptly turning negative in early 2022. Municipal issuance for the period was about $460 billion, which trailed the prior year by about 9%, and became challenging for the market to absorb once fund flows turned negative. Credit spreads for tax-exempt bonds tightened in 2021 for A-rated and BBB-rated credits before reversing course in 2022 and widening to push municipal bond prices lower.

The Fund’s performance for the period was dampened in part because of a larger weighting of long duration bonds relative to the Fund’s benchmark, as longer duration bonds underperformed shorter duration bonds. However, the Fund’s hedge in U.S. Treasury futures partially offset this deficit as Treasury yields rose significantly, especially on the short end, after the hedge was reinstated in late April 2021. Further, the Fund’s significant weighting in single-family mortgage revenue bonds significantly lagged the Fund’s benchmark largely due to low coupon structures. In terms of credit quality, BBB-rated bonds were the best performing part of the index during the period and AAA-rated bonds the worst. Along the same lines, the Fund’s significant allocation to non-rated bonds, which performed relatively better with generally higher coupons, contributed positively to Fund performance during the period. The Fund also benefited from holdings in education/student loan revenue bonds and other revenue bonds.

Outlook and Positioning

The Fund’s core strategy continues to emphasize current income as the primary driver of returns over the long run. Given the increase in short

HYPOTHETICAL GROWTH OF $10,000

 

LOGO

The chart above illustrates the total value of a hypothetical $10,000 investment in the Fund over the past 10 years as compared to the performance of the Bloomberg 5-Year Municipal Bond Index. Past performance does not guarantee future results. Returns include the reinvestment of distributions. The chart does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

1 The Bloomberg 5-Year Municipal Bond Index is the 5 year (4-6) component of the Municipal Bond Index, an unmanaged, rules-based, market-value-weighted index for the long-term tax-exempt bond market. The index includes bonds with a minimum credit rating of BBB. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index. This is the Fund’s primary index.

 

 

rates, we can now purchase shorter duration tax-exempt bonds at acceptable yields, and such bonds seem likely to become increasingly attractive. We are also buying bonds with expected average lives that are meaningfully shorter than their stated maturities at attractive average life yields. Housing-related sectors continue to remain a meaningful percentage of the Fund because of strong underlying fundamentals, totaling more than 45% of Fund assets as of the end of the period. Further, over 25% of the Fund remains invested in non-rated bonds, which provide an attractive income advantage. We plan to increase the Fund’s allocation to higher coupon bonds and focus deeply on credit analysis to differentiate opportunities as they arise. The Fund remains diversified on a geographic and issuer basis to mitigate credit and liquidity risk, and we believe the Fund is well-positioned to achieve attractive risk-adjusted returns going forward.

Paul J. Jungquist, CFA

Senior Portfolio Manager

 

 

Information on this page is unaudited.   
   
20    SIT MUTUAL FUNDS ANNUAL REPORT 


    

 

COMPARATIVE RATES OF RETURNS

 

as of March 31, 2022

 

     Sit Tax-Free Income
Fund
          
      Class S     Class Y      Bloomberg
5-Year Muni
Bond Index1
  Lipper
General
Muni Bond
Fund Index2
One Year      -4.62     n/a          -4.48 %          -4.08 %     
Five Year      2.61       n/a          1.51       2.78  
Ten Year      3.53       n/a          1.78       3.21  
Since Inception-Class S (9/29/88)      4.82       n/a          4.55       5.17  
Since Inception-Class Y (6/1/21)      n/a       -6.06          -4.92       -6.89  
                                   

Performance figures are historical and do not guarantee future results. Investment returns and principal value will vary, and you may have a gain or loss when you sell shares. Current performance may be lower or higher than the performance data quoted. Contact the Fund for performance data current to the most recent month-end. Returns include changes in share price as well as reinvestment of all dividends and capital gains. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Management fees and administrative expenses are included in the Fund’s performance. Returns for periods greater than one year are compounded average annual rates of return.

1 The Bloomberg 5-Year Municipal Bond Index is the 5 year (4-6) component of the Municipal Bond Index, unmanaged rules-based, market-value-weighted index for the longterm tax-exempt bond market. The index includes bonds with a minimum credit rating of BBB. The returns include the reinvestment of income and do not include any transaction costs, management fees or other costs. It is not possible to invest directly in an index.

2 The Lipper returns are obtained from Lipper Analytical Services, Inc., a large independent evaluator of mutual funds.

FUND DIVERSIFICATION

 

 

Multifamily Mortgage

     27.8

Single Family Mortgage

     19.3  

Other Revenue Bonds

     14.3  

Education/Student Loan

     9.0  

Insured

     5.4  

Sectors less than 5%

     20.2  

Cash & Other Net Assets

     4.0  

Based on net assets as of March 31, 2022.

PORTFOLIO SUMMARY

 

 

Class S:

  

Net Asset Value 3/31/22:

   $9.20 Per Share                

Net Asset Value 3/31/21:

   $9.91 Per Share

Net Assets:

   $185.2 Million

Class Y:

  

Net Asset Value 3/31/22:

   $9.20 Per Share

Net Asset Value 6/1/21:3

   $10.04 Per Share

Net Assets:

   $169.3 Million

Average Maturity:

   20.4 Years

Effective Duration:4

   5.3 Years

3 The inception date of Class Y Shares was June 1, 2021.

4 Duration is a measure of estimated price sensitivity relative to changes in interest rates. Portfolios with longer durations are typically more sensitive to changes in interest rates. For example, if interest rates rise by 1%, the fair value of a security with an effective duration of 5 years would decrease by 5%, with all other factors being constant. The correlation between duration and price sensitivity is greater for securities rated investment-grade than it is for securities rated below investment-grade. Duration estimates are based on assumptions by the Adviser and are subject to a number of limitations. Effective duration is calculated based on historical price changes of securities held by the Fund, and therefore is a more accurate estimate of price sensitivity provided interest rates remain within their historical range.

QUALITY RATINGS (% of Net Assets)

 

 

LOGO

Lower of Moody’s, S&P, Fitch or Duff & Phelps ratings used.

 

Adviser’s Assessment of Non-Rated Securities

 

AA

    0.2  

A

    0.1    

BBB                                         

    1.5    

BB

    21.2                             

<BB

    2.6    
 

 

 

 

 

Total

    25.6  
 

 

Information on this page is unaudited.   
   
MARCH 31, 2022    21


 

SCHEDULE OF INVESTMENTS (Unaudited)

March 31, 2022

Sit Tax-Free Income Fund

 

 

 
Name of Issuer    Principal
    Amount ($)    
      

Coupon

Rate (%)

     Maturity
Date
     Fair
    Value ($)    
 

 

 

Municipal Bonds - 91.2%

             

Alabama - 0.3%

             

Clio Water & Sewer Rev. (AGM Insured)

     340,000          3.10        1/1/33        340,581  

Mobile Co. Limited Obligation Warrants Rev. (Gomesa Proj.) 4

     500,000          4.00        11/1/45        453,740  

Stadium Trace Village Improvement District Rev.

     485,000          3.63        3/1/36        424,487  
             

 

 

 
                1,218,808  
             

 

 

 

Alaska - 0.3%

             

AK Hsg. Finance Corp. Rev. (State Capital Proj.)

     355,000          4.00        6/1/36        370,421  

AK Industrial Dev. & Export Auth. Rev. (Boys & Girls Home) 2, 5,15

     250,000          5.50        N/A        10,313  

AK Industrial Dev. & Export Auth. Rev. (GTR Fairbanks Community Hospital Foundation)

     250,000          5.00        4/1/33        256,957  

AK Industrial Dev. & Export Auth. Rev. (Tanana Chiefs Conference Proj.)

     300,000          4.00        10/1/49        314,154  
             

 

 

 
                951,845  
             

 

 

 

Arizona - 2.3%

             

AZ Health Facs. Auth. Rev. (Scottsdale Lincoln Hospital Proj.) 1

     250,000          4.00        12/1/39        250,052  

AZ Industrial Dev. Auth. Rev. (Legacy Cares, Inc. Proj.) 4

     750,000          6.75        7/1/30        825,322  

AZ Industrial Dev. Auth. Rev. (Legacy Cares, Inc. Proj.) 4

     100,000          5.50        7/1/31        102,385  

AZ Industrial Dev. Auth. Rev. (Legacy Cares, Inc. Proj.) 4

     750,000          7.75        7/1/50        849,038  

AZ Industrial Dev. Auth. Rev. (Legacy Cares, Inc. Proj.) 4

     200,000          6.00        7/1/51        207,338  

AZ Industrial Dev. Auth. Rev. (Social Bond Equitable School Revolving Fund)

     500,000          4.00        11/1/45        518,130  

Glendale Industrial Dev. & Auth. Rev. (Beatitudes Campus Proj.)

     300,000          5.00        11/15/36        304,971  

La Paz Co. Industrial Dev. Auth. (Charter School Solutions Harmony Public Proj.)

     750,000          5.00        2/15/48        805,253  

Maricopa Co. Industrial Dev. Auth. Rev. (Legacy Traditional School Proj.)

     500,000          4.00        7/1/50        515,765  

Maricopa Co. Industrial Dev. Auth. Rev. (Paradise School Proj.)

     1,000,000          4.00        7/1/54        1,042,910  

Phoenix City Industrial Dev. Auth. Rev. (Northwest Christian School Proj.) 4

     600,000          5.00        9/1/45        612,354  

Phoenix City Industrial Dev. Auth. Rev. (Vista College Preparatory Proj.)

     400,000          4.13        7/1/38        414,260  

Pima Co. Industrial Dev. Auth. Education Rev. (American Leadership Academy Proj.) 4

     1,000,000          5.38        6/15/35        1,044,180  

Quechan Indian Tribe of Fort Yuma Rev. (Tribal Economic Dev.)

     275,000          9.75        5/1/25        279,719  

Tempe Industrial Dev. Auth. Rev. (Mirabella at ASU Proj.) 4

     430,000          4.70        10/1/24        430,009  
             

 

 

 
                8,201,686  
             

 

 

 

Arkansas - 0.6%

             

Mountain Home City Sales & Use Tax Rev.

     495,000          2.00        9/1/38        402,475  

Rogers City Rev.

     1,000,000          3.88        11/1/39        1,058,110  

Springdale City Sales & Use Tax Rev. Ref. (BAM Insured)

     500,000          3.60        4/1/41        506,760  
             

 

 

 
                1,967,345  
             

 

 

 

California - 4.2%

             

CA Health Facs. Financing Auth. Rev. (On Lok Senior Health Services)

     500,000          5.00        8/1/50        558,615  

CA Municipal Finance Auth. Rev. (Caritas Proj.)

     250,000          4.00        8/15/56        215,822  

CA Public Finance Auth. Rev. (Enso Village Proj.) 4

     350,000          3.13        5/15/29        337,715  

CA Public Finance Auth. Rev. (Green Bond-Enso Village Proj.) 4

     500,000          5.00        11/15/46        521,295  

CA Public Finance Auth. Rev. (Green Bond-Enso Village Proj.) 4

     250,000          5.00        11/15/56        258,473  

CA School Facs. Finance Auth. Rev. (Azusa Unified School District) (AGM Insured) 6

     500,000          6.00        8/1/29        579,320  

Carlsbad Unified School District G.O. Capital Appreciation 6

     400,000          6.13        8/1/31        508,308  

Colton Joint Unified School District G.O. (AGM Insured) 6

     1,000,000          5.80        8/1/35        1,157,720  

Encinitas Union School District G.O. Capital Appreciation 6

     500,000          7.00        8/1/35        663,170  

Hartnell Community College G.O. 6

     500,000          7.00        8/1/34        595,755  

Healdsburg Unified School District G.O. 6

     1,250,000          5.00        8/1/37        1,331,700  

 

See accompanying notes to financial statements.   
   
22    SIT MUTUAL FUNDS ANNUAL REPORT 


 

    

    

 

    

 

 

 
Name of Issuer    Principal
    Amount ($)    
       Coupon
Rate (%)
     Maturity
Date
    

Fair

    Value ($)    

 

 

 

Imperial Community College District G.O. Capital Appreciation (AGM Insured) 6

     250,000          6.75        8/1/40        287,055  

Los Alamitos Unified School District Capital Appreciation C.O.P. 6

     1,100,000          6.00        8/1/34        1,184,689  

Martinez Unified School District G.O. 6

     250,000          6.13        8/1/35        273,815  

Orange Co. Community Facs. District No. 2017-1 Special Assessment (Village of Esencia)

     500,000          4.00        8/15/45        507,935  

Redondo Beach School District G.O. 6

     600,000          6.38        8/1/34        708,240  

Reef-Sunset Unified School District (BAM Insured) 6

     750,000          4.85        8/1/38        811,260  

Ripon Unified School District G.O. (BAM Insured) 6

     80,000          4.50        8/1/30        82,828  

Sacramento Co. Water Financing Auth. Rev. (NATL-RE FGIC Insured) 1

     500,000          0.92        6/1/39        468,330  

San Jose Financing Auth. Rev. (Civic Center Garage Proj.) 9

     400,000          5.00        6/1/39        416,548  

South Tahoe Joint Powers Financing Auth. Tax Allocation Ref. (South Tahoe Redev. Proj.) (AGM Insured)

     500,000          5.00        10/1/30        532,925  

Sulphur Springs Union School Dist. C.O.P. (AGM Insured) 6

     205,000          6.50        12/1/37        236,822  

Sulphur Springs Union School Dist. C.O.P. (AGM Insured) 6

     245,000          6.50        12/1/37        280,515  

Tracy Joint Unified School District G.O. Capital Appreciation 6

     600,000          7.00        8/1/41        613,188  

Upland Unified School District G.O. Capital Appreciation 6

     1,000,000          7.00        8/1/41        1,157,950  

Val Verde Unified School District G.O. Capital Appreciation (AGM Insured) 6

     500,000          6.00        8/1/34        622,305  
             

 

 

 
                14,912,298  
             

 

 

 

Colorado - 5.1%

             

Baseline Metropolitan District No. 1 G.O.

     280,000          5.00        12/1/51        276,990  

Brighton Crossing Metropolitan District No. 6 G.O.

     515,000          5.00        12/1/40        531,732  

Buffalo Highlands Metropolitan District G.O.

     350,000          5.25        12/1/38        359,618  

Chambers Highpoint Metropolitan District No. 2 G.O.

     515,000          5.00        12/1/41        503,927  

CO Educational & Cultural Facs. Auth. Rev. (CO Springs Charter Academy Proj.)

     250,000          5.60        7/1/34        250,575  

CO Educational & Cultural Facs. Auth. Rev. (STEM School Proj.)

     350,000          4.00        10/1/61        336,714  

CO Health Facs. Auth. Rev. (Aberdeen Ridge)

     400,000          3.50        5/15/30        378,260  

CO Health Facs. Auth. Rev. (Aberdeen Ridge)

     415,000          5.00        5/15/44        400,442  

CO Health Facs. Auth. Rev. (Aberdeen Ridge)

     850,000          5.00        5/15/58        787,312  

CO Health Facs. Auth. Rev. (Covenant Living Community)

     500,000          4.00        12/1/50        529,540  

CO Health Facs. Auth. Rev. (Covenant Retirement Community)

     650,000          5.00        12/1/48        712,504  

Colliers Hill Metro District No. 2 G.O.

     600,000          6.00        12/15/47        572,730  

Copperleaf Metro District No. 4 G.O.

     750,000          5.00        12/1/49        764,160  

Crystal Crossing Metro District G.O.

     500,000          5.25        12/1/40        513,285  

Denver City & County Housing Auth. Rev. (Sustainability Bonds - Thrive Proj.)

     500,000          2.05        2/1/39        428,265  

DIATC Metropolitan District G.O. 4

     500,000          5.00        12/1/49        509,455  

Green Valley Ranch East Metropolitan District No. 6 G.O.

     1,000,000          5.88        12/1/50        1,031,680  

Haskins Station Metropolitan District G.O.

     500,000          5.00        12/1/49        505,850  

Hunters Overlook Metropolitan District No. 5 G.O.

     500,000          5.00        12/1/49        518,660  

Johnstown Village Metropolitan District No. 2. G.O.

     500,000          5.00        12/1/50        502,560  

Lambertson Farms Metro District No. 1 G.O.

     500,000          5.00        12/15/25        457,485  

Legato Community Auth. Rev.

     500,000          5.00        12/1/51        494,475  

Mirabelle Metropolitan District. No. 2 G.O.

     500,000          5.00        12/1/49        501,755  

Peak Metropolitan District No. 1 G.O. 4

     500,000          5.00        12/1/41        511,700  

Peak Metropolitan District No. 1 G.O. 4

     500,000          5.00        12/1/51        502,005  

Raindance Metropolitan District No. 2 G.O.

     330,000          5.00        12/1/39        337,247  

Reunion Metropolitan District Rev.

     600,000          3.63        12/1/44        490,026  

St. Vrain Lakes Metropolitan District No. 2 G.O.

     500,000          5.00        12/1/37        518,200  

STC Metropolitan District No. 2 G.O.

     500,000          5.00        12/1/49        511,330  

 

See accompanying notes to financial statements.     
MARCH 31, 2022    23


 

SCHEDULE OF INVESTMENTS (Unaudited)

March 31, 2022

Sit Tax-Free Income Fund (Continued)

 

 

 
Name of Issuer   

Principal

    Amount ($)    

       Coupon
Rate (%)