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Deutsche Investment Trust – ‘N-30D’ for 12/31/02

On:  Friday, 2/28/03, at 4:10pm ET   ·   Effective:  2/28/03   ·   For:  12/31/02   ·   Accession #:  88053-3-279   ·   File #:  811-00043

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/28/03  Deutsche Investment Trust         N-30D      12/31/02    1:330K                                   Deutsche Int’l Fd, Inc.

Document/Exhibit                   Description                      Pages   Size 

 1: N-30D       Annual Report                                       HTML    316K 

[Scudder Investments logo]

Scudder Investments is part of Deutsche Asset Management, which is the marketing name in the US for the asset management activities of Deutsche Bank AG, Deutsche Investment Management Americas Inc., Deutsche Asset Management Inc., Deutsche Bank Securities Inc., Deutsche Asset Management Investment Services Ltd., Deutsche Bank Trust Company Americas and Scudder Trust Company.

This report must be preceded or accompanied by a prospectus.

Please see the fund's prospectus for more complete information, including a complete description of the fund's investment policies. To obtain a prospectus, download one from aarp.scudder.com (Class AARP) or myScudder.com (Class S), talk to your financial representative or call Shareholder Services at 1-800-253-2277 (Class AARP) or 1-800-SCUDDER (Class S). The prospectus contains more complete information, including management fees and expenses. Please read it carefully before you invest or send money.

Fund shares are not FDIC-insured and are not deposits or other obligations of, or guaranteed by, any bank. Fund shares involve investment risk, including possible loss of principal.

Dear Shareholder,

The past year was very challenging for investors in stock mutual funds. After two down years in 2000 and 2001, most investors felt that a rebound in 2002 was inevitable. Instead, worries about weak corporate earnings, sluggish global growth and geopolitical turmoil sparked further declines in stock prices. This marked the first time since World War II that the US market lost ground in three consecutive years.

In the wake of this lengthy downturn, many investors may be asking themselves, "What should I do next?" The natural temptation is to sell your stock funds and seek more conservative investments. However, it is important to remember that it is often when the market outlook appears to be most bleak that opportunities may in fact be most compelling. This is because investor anxiety drives down the prices of virtually all companies regardless of their fundamental strengths. As a result, values often emerge among the market's highest quality companies. We believe such an environment exists at the present time, creating fertile ground for unearthing individual stocks selling at potentially bargain prices.

Risks remain in place, of course. It is likely that short-term market downturns will be commonplace in the months ahead. Nevertheless, stocks remain an attractive option for those seeking long-term growth of assets. We therefore encourage you to maintain a long-term focus so that you will be able to reap the benefits when the stock market ultimately begins to recover.

Sincerely,

William F. Glavin, Jr.
President
Scudder S&P 500 Index Fund

Sources: Lipper, Inc. and Deutsche Asset Management

Rankings are historical and do not guarantee future results. Rankings are based on total return with distributions reinvested.

Source: Lipper, Inc.

Growth of an Assumed $10,000 Investment*

[] Scudder S&P 500 Index Fund - Class S [] S&P 500 Index+

Yearly periods ended December 31

The growth of $10,000 is cumulative.

All performance is historical, assumes reinvestment of all dividends and capital gains, and is not indicative of future results. Investment return and principal value will fluctuate, so an investor's shares, when redeemed, may be worth more or less than when purchased. Performance figures do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance of share classes may vary, expense ratios are the same.

Investments in funds involve risk. Some funds have more risk than others. These include funds that allow exposure to or otherwise concentrate investments in certain sectors, geographic regions, security types, market capitalization or foreign securities (e.g., political or economic instability, which can be accentuated in emerging market countries). Please read this fund's prospectus for specific details regarding its investments and risk profile.

Please call (800) 728-3337 for the fund's most up-to-date performance.

Scudder S&P 500 Index Fund: A Team Approach to Investing

Deutsche Asset Management, Inc. ("DeAM, Inc." or the "Advisor"), which is part of Deutsche Asset Management, is the investment advisor for Equity 500 Index Portfolio, in which the fund invests all of its assets. DeAM, Inc. provides a full range of investment advisory services to institutional and retail clients. DeAM, Inc. is also responsible for selecting brokers and dealers and for negotiating brokerage commissions and dealer charges.

Deutsche Asset Management is a global asset management organization that offers a wide range of investing expertise and resources. This well-resourced global investment platform brings together a wide variety of experience and investment insight across industries, regions, asset classes and investing styles.

DeAM, Inc. is an indirect, wholly owned subsidiary of Deutsche Bank AG. Deutsche Bank AG is a major global banking institution that is engaged in a wide range of financial services, including investment management, mutual funds, retail, private and commercial banking, investment banking and insurance.

A group of investment professionals is responsible for the day-to-day management of the portfolio.

In the following interview, the Equity 500 Index Portfolio's portfolio management team discusses the market environment during the 12-month period ended December 31, 2002 and offers an outlook for the months ahead.

Q: How did Scudder S&P 500 Index Fund perform in 2002?

A: Scudder S&P 500 Index Fund tracked its benchmark, the Standard & Poor's 500 Index¹, for the 12 months ended December 31, 2002. The fund produced a return of -22.33% (Class S shares) for the fiscal year, as compared to -22.10% for the benchmark. The fund modestly underperformed the Lipper S&P 500 Index Objective Funds Average² annual return of -22.60%. The broad-based S&P 500 Index is a group of large-company stocks that is not available for direct investment.

Q: What were the primary factors affecting the US equity markets during the past year?

A: US equities declined for the third consecutive year, something that has not occurred for the broad market in more than 60 years. However, the S&P 500 Index exhibited a wide range of performance within the annual period.

During the first quarter, the S&P 500 Index rose 0.28%, as equities struggled to maintain the momentum of the fourth quarter of 2001. Equities declined soon after the beginning of the first quarter with the decline continuing through mid-February. A rally then started, as the prospects for renewed economic growth rose. Equities responded favorably to statistics that showed the US economy growing at a 1.7% rate during the fourth quarter of 2001 fueled by consumer and government spending. The equity rally lasted into March before faltering during the last two weeks of the first quarter. In the aftermath of the Enron collapse, a credit crunch impacted many companies associated with aggressive accounting practices, including some of the information technology and telecommunications leaders of the late 1990s.

During the second quarter, the S&P 500 Index was down 13.40%, as equities generally declined to levels not seen since lows reached last September after the terrorist attacks on the US. The second quarter decline continued almost unabated with only a slight bounce in early May. Equity markets were severely affected by the growing scandal over corporate accounting practices and continuing credit concerns. Ongoing threats of terrorism, geopolitical instability and questions about the reliability of corporate earnings reports also hung over the markets. With first quarter US Gross Domestic Product (GDP) growth revised up to 6.1%, expectations for a "double-dip" recession abated, yet investors shrugged off the improving economic climate and concentrated on the almost daily doses of negative headlines.

The S&P 500 Index was down 17.28% for the third quarter, as equities continued their broad-based decline. Equity markets had to endure the one-year anniversary of the September 11th attacks, the threat of war with Iraq, and lowered earnings forecasts from high-profile companies in multiple industries. After bottoming in early October, US equities rebounded sharply in the fourth quarter, with the S&P 500 Index up 8.44%. Even with the powerful rally, the debate continued about whether a true bottom had been reached. Uncertainty about the strength of the economic recovery acted as an overhang along with the growing expectation of imminent hostilities with Iraq. After three years of declines, general expectations at the end of the year were that most of the excesses of the 1990s had been erased, but that any sustained rally would require evidence of continued economic recovery and a dramatic absence of additional corporate scandals.

For the annual period overall, large-cap stocks, as measured by the S&P 500 Index, underperformed mid-cap and small-cap stocks, as measured by the S&P MidCap 400 Index³ and the Russell 2000 Index⁴, respectively. Within the large-cap sector, value-oriented stocks outperformed growth-oriented stocks by approximately 2.74%, as measured by the S&P 500 Barra Value Index⁵ versus the S&P 500 Barra Growth Index⁶.

Note: An index is not available for direct investment.

Q: Which sectors within the S&P 500 Index were the best and worst performers?

A: For the 12 months ended December 31, all sectors of the S&P 500 Index produced negative returns. Information technology and telecommunications services led the decline. Consumer staples, materials, energy, financials, and health care each declined, but outperformed the S&P 500 Index as a whole. The financials sector grew in weight within the S&P 500 Index through the annual period, accounting at December 31, 2002 for 20.5% of the Index's market capitalization. In the fourth quarter, sector performance was positive across the board, with telecommunications services and information technology providing the best performance.

Q: What were the major changes to the S&P 500 Index during the annual period?

A: In all, there were just 25 additions and deletions to the S&P 500 Index for the year, the fewest number of changes since 1996. To name just a few, Worldcom was deleted from the S&P 500 Index on May 14, 2002, having its stock price drop more than 91% from December 31, 2001 through its deletion date. Apollo Group, a firm providing higher education programs for working adults, replaced Worldcom. The third quarter saw a major change to the S&P 500 Index, as non-domiciled companies (companies whose headquarters are overseas) were finally removed from the benchmark, effective the close of business July 19, 2002. The changes resulted in almost a 2% turnover concentrated in seven stocks. The deleted stocks included European and Canadian domiciled companies, such as Nortel, Unilever, and Royal Dutch Petroleum, which had been "grandfathered" in this domestic index. This generated some controversy, as there are other companies headquartered in Bermuda, such as Tyco, which stayed in the Index. Also of note on the same July day was the addition of eBay, as it is classified as a technology company.

Q: What is your outlook for US equities into 2003?

A: As managers of an index fund, which seeks to replicate as closely as possible (before deduction of expenses) the broad diversification and returns of the S&P 500 Index, we neither evaluate short-term fluctuations in the fund's performance nor manage according to a given outlook for the equity markets or the economy in general. Still, we will continue monitoring economic conditions and how they affect the financial markets, as we seek to closely track the performance of the stock market.

That said, the US economic recovery has been modest, restrained by the unwinding of the excesses of the late 1990s boom and, more recently, by heightened geopolitical uncertainty. Looking ahead, we expect the economic recovery to gradually gather momentum in the second half of the year. Critical to this improvement is our assumption that no major adverse geopolitical shocks occur. We are also expecting macroeconomic policy to remain aggressively stimulative, with the Federal Reserve Board keeping interest rates low well into the new year, and federal tax cuts and spending hikes offsetting cutbacks at the state and local levels. Businesses should respond to diminished geopolitical uncertainty, improving profits, and the fading of corporate scandals by picking up the rate of hiring and investing. Further, we believe consumer spending is likely to be sustained by improving labor markets, solid income growth, low interest rates and tax cuts. We expect deflation concerns to fade as the recovery solidifies and inflation to remain tame.

Equity markets, in our view, have returned to a range of plausible valuation, largely purging the excesses of the late 1990s. But equity markets are still not cheap, even if profits continue to recover as we expect. Indeed, at current valuations, equities are unlikely to come close on a sustained basis to providing the heady returns of the 1980s and 1990s.

The views expressed in this report reflect those of the portfolio manager only through the end of the period of the report as stated on the cover. The manager's views are subject to change at any time, based on market and other conditions and should not be construed as a recommendation.

Asset allocation and sector diversification are subject to change.

For more complete details about the fund's investment portfolio, see page 28. A quarterly Fund Summary and Portfolio Holdings are available upon request.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

The accompanying notes are an integral part of the financial statements.

Scudder S&P 500 Index Fund

A. Significant Accounting Policies

Scudder S&P 500 Index Fund (the "Fund") is a diversified series of Investment Trust (the "Trust") which is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company organized as a Massachusetts business trust. The Fund seeks to achieve its investment objective by investing substantially all of its assets in the Equity 500 Index Portfolio (the "Portfolio"), an open-end management investment company advised by Deutsche Asset Management, Inc. ("DeAM, Inc."). At December 31, 2002, the Fund's investment in the Portfolio represented approximately 23% of the Portfolio's total assets.

The Fund offers multiple classes of shares which provide investors with different purchase options. Shares of Class AARP are designed for members of AARP. Class S shares of the Fund are generally not available to new investors.

Investment income, realized and unrealized gains and losses, and certain fund-level expenses and expense reductions, if any, are borne pro rata on the basis of relative net assets by the holders of both classes of shares. All shares of the Fund have equal rights with respect to voting subject to class-specific arrangements.

The Fund's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require the use of management estimates. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements. The financial statements of the Portfolio, including the Schedule of Investments, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements.

Security Valuation. The Fund records its investments in the Portfolio at value, which reflects its proportionate interest in the net assets of the Portfolio. Valuation of the securities held by the Portfolio is discussed in the notes to the Portfolio's financial statements included elsewhere in the report.

Federal Income Taxes. The Fund's policy is to comply with the requirements of the Internal Revenue Code, as amended, which are applicable to regulated investment companies, and to distribute all of its taxable income to its shareholders. Accordingly, the Fund paid no federal income taxes and no federal income tax provision was required.

At December 31, 2002, the Fund had a net tax basis capital loss carryforward of approximately $277,161,000 which may be applied against any realized net taxable capital gains of each succeeding year until fully utilized or until December 31, 2006 ($3,502,000), December 31, 2007 ($51,000), December 31, 2009 ($159,908,000), and December 31, 2010 ($113,700,000) the respective expiration dates, whichever occurs first.

In addition, from November 1, 2002 through December 31, 2002, the Fund incurred approximately $18,283,000 of net realized capital losses. As permitted by tax regulations, the Fund intends to elect to defer these losses and treat them as arising in the fiscal year ended December 31, 2002.

Distribution of Income and Gains. Distributions of net investment income, if any, are made quarterly. Net realized gains from investment transactions, in excess of available capital loss carryforwards, would be taxable to the Fund if not distributed, and, therefore, will be distributed to shareholders at least annually.

The timing and characterization of certain income and capital gains distributions are determined annually in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. As a result, net investment income (loss) and net realized gain (loss) on investment transactions for a reporting period may differ significantly from distributions during such period. Accordingly, the Fund may periodically make reclassifications among certain of its capital accounts without impacting the net asset value of the Fund.

At December 31, 2002, the Fund's components of distributable earnings (accumulated losses) on a tax basis are as follows:

In addition, the tax character of distributions paid to shareholders by the Fund is summarized as follows:

Other. The Fund records daily its pro rata share of the Portfolio's income, expenses and realized and unrealized gains and losses. In addition, the Fund accrues its own expenses.

B. Related Parties

On April 5, 2002, 100% of Zurich Scudder Investments, Inc. ("ZSI") was acquired by Deutsche Bank AG with the exception of Threadneedle Investments in the U.K. Upon the closing of this transaction, ZSI became part of Deutsche Asset Management and changed its name to Deutsche Investment Management Americas Inc. ("DeIM" or the "Advisor"). Effective April 5, 2002, the investment management agreement with ZSI was terminated and DeIM became the investment advisor for the Fund. The management fee rate paid by the Fund under the new Investment Management Agreement (the "Management Agreement") is the same as the previous investment management agreement.

Management Agreement. Under the Management Agreement, the Advisor monitors the Fund's investment in the Portfolio. The Advisor currently receives no fee for providing these monitoring services. In the event the Board of Trustees determines it is in the best interest of the Fund's shareholders to withdraw its investment in the Portfolio, the Advisor would become responsible for directly managing the assets of the Fund. In such event, the Fund would pay the Advisor an annual fee of 0.15% of the Fund's average daily net assets, accrued daily and paid monthly.

Administrative Services Agreement. The Fund also has an Administrative Services Agreement with the Advisor, under which the Advisor provides shareholder and administrative services to the Fund. The Advisor receives a fee (the "Administrative Services Fee") of 0.10% of the Fund's average daily net assets, accrued daily and paid monthly. Accordingly, for the year ended December 31, 2002, the amount imposed aggregated $754,055, of which $59,432 is unpaid at December 31, 2002.

Administrative Fee. Under the Administrative Agreement (the "Administrative Agreement"), the Advisor provides or pays others to provide substantially all of the administrative services required by the Fund (other than those provided by each class of the Advisor under its Administrative Services Agreement with the Fund, as described above) in exchange for the payment by each class of the Fund of an administrative services fee (the "Administrative Fee") of 0.25% of average daily net assets for Class AARP and S shares, respectively, computed and accrued daily and payable monthly.

Various third-party service providers, some of which are affiliated with the Advisor, provide certain services to the Fund under the Administrative Agreement. Scudder Fund Accounting Corporation, a subsidiary of the Advisor, computes the net asset value for the Fund and maintains the accounting records of the Fund. Scudder Service Corporation, also a subsidiary of the Advisor, provides subaccounting and recordkeeping services for shareholders in certain retirement and employee benefit plans. In addition, other service providers, not affiliated with the Advisor provide certain services (i.e., shareholder services, custody, legal and audit) to the Fund under the Administrative Agreement. The Advisor pays the service providers for the provision of their services to the Fund and pays other Fund expenses, including insurance, registration, printing and postage fees. Certain expenses of the Fund are not borne by the Advisor under the Administrative Agreement, such as taxes, brokerage, interest and extraordinary expenses, and the fees and expenses of the Independent Trustees (including the fees and expenses of their independent counsel). For the year ended December 31, 2002, the Administrative Fee was as follows:

Trustees' Fees and Expenses. The Fund pays each Trustee not affiliated with the Manager retainer fees plus specified amounts for attended board and committee meetings.

Other Related Parties. AARP through its affiliates monitors and approves the AARP Investment Program from the Advisor. The Advisor has agreed to pay a fee to AARP and/or its affiliates in return for the use of the AARP trademark and services relating to investments by AARP members in Class AARP shares of the Fund. This fee is calculated on a daily basis as a percentage of the combined net assets of the AARP classes of all funds managed by the Advisor. The fee rates, which decrease as the aggregate net assets of the AARP classes become larger, are as follows: 0.07% for the first $6,000,000,000 of net assets, 0.06% for the next $10,000,000,000 of such net assets and 0.05% of such net assets thereafter. These amounts are used for the general purposes of AARP and its members.

C. Line of Credit

The Fund and several other affiliated Funds (the "Participants") share in a $1.3 billion revolving credit facility administered by J.P. Morgan Chase Bank for temporary or emergency purposes, including the meeting of redemption requests that otherwise might require the untimely disposition of securities. The Participants are charged an annual commitment fee which is allocated, pro rata based upon net assets, among each of the Participants. Interest is calculated at the Federal Funds Rate plus 0.5 percent. The Fund may borrow up to a maximum of 33 percent of its net assets under the agreement.

D. Share Transactions

The following table summarizes share and dollar activity in the Fund:

To the Trustees of Investment Trust and the Shareholders of Scudder S&P 500 Index Fund:

In our opinion, the accompanying statement of assets and liabilities, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Scudder S&P 500 Index (the "Fund") at December 31, 2002, and the results of its operations, the changes in its net assets and the financial highlights for each of the periods indicated therein, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

For corporate shareholders, 100% of the income dividends paid during the Fund's fiscal year ended December 31, 2002 qualified for the dividends received deduction.

Please consult a tax advisor if you have any questions about federal and state income tax laws, or on how to prepare your tax returns. If you have specific questions about your account, please call 1-800-SCUDDER.

A Special Meeting of Shareholders (the "Meeting") of Scudder S&P 500 Index Fund, a series of Investment Trust (the "Trust"), was held on July 30, 2002, at the office of Deutsche Investment Management, Inc., Two International Place, Boston, Massachusetts.

As a "feeder" fund in a master-feeder fund arrangement, the fund seeks to achieve its investment objective by investing substantially all of its assets in the Equity 500 Index Portfolio, the "master" fund, which has the same investment objective. At the meeting, the following matters were voted upon by the shareholders of the fund:

1. To elect eleven Trustees of the Equity 500 Index Portfolio.

2. To approve a new investment advisory agreement between the Equity 500 Index Portfolio and Deutsche Asset Management, Inc. ("DeAM, Inc.").