THE KENWOOD FUNDS
THE KENWOOD GROWTH & INCOME FUND
SEMI-ANNUAL REPORT
OCTOBER 31, 1997
Shareholder Letter 1-2
Performance Summary 3
Statement of Assets and Liabilities 4
Statement of Operations 5
Statement of Changes in Net Assets 6
Financial Highlights 7
Schedule of Investments 8
Notes to the Financial Statements 9-10
This report is authorized for distribution only when preceded or accompanied by
a current prospectus.
(THE KENWOOD LOGO)
THE KENWOOD FUNDS
10 S. LaSalle Street, Suite 3610
Chicago, Illinois 60603
TEL 312-368-1666
FAX 312-368-1769
12/15/97
Dear Fellow Shareholders:
The preceding twelve months, particularly the seemingly always perilous month of
October, have tested and affirmed the value-oriented, low risk investment
strategy employed by The Kenwood Group. We are pleased to report that the
Fund's one year return of 30.71% through October 31, 1997 ranked 175 out of 589
mutual fund managers with a growth and income objective as measured by Lipper
Analytical Services. The average return of this universe was 28.26%. During
this same period the S&P 500 and the S&P 400 Midcap returned 32.1% and 32.7%
respectively.
In accordance with the Fund's long-term objectives, our goal is to provide you,
our shareholders, with a high total rate of return consisting of capital
appreciation and current income while assuming relatively low risks. The
portfolio had a dividend yield of 1.63% compared to 1.62% for the S&P 500 and
1.19% for the S&P Midcap Indices. Top performing stocks during the quarter were
Adobe Systems, First Brands Corporation and LCI International.
The highly cyclical and over valued issues that dominated the rise in
performance of the S&P 500 and S&P 400 Midcap Indices during the third calendar
quarter of 1997 (the energy service group rose by 41% during the quarter) were
underweighted in The Kenwood Growth & Income Fund. While this adversely
affected our relative performance through September, our strategy of investing
in companies that are well managed yet under-researched and undervalued, helped
to dampen the impact of the brief and sudden market decline during October.
We realize the present market scenario of low inflation, low interest rates and
strong earnings expectations, makes the market well poised to climb even higher.
However, we will not succumb to complete market euphoria and will maintain a
portfolio which is lower in risk and more reasonably valued than the overall
market. We are cautious yet fully invested. As long-term equity investors, our
goal is to remain fully invested. Typically, a 5% cash position is ideal for
liquidity purposes. Yet as shown by the most recent October experience, our
conservative profile provides an element of insurance during market declines.
We are happy to report that the recent changes in the tax laws enacted by the
Taxpayer Relief Act of 1997 are encouraging to mutual fund investors with a
long-term investment philosophy. First of all, there has been a reduction in
the capital gains tax. The maximum tax rate on long-term capital gains has been
reduced from 28 percent to 20 percent for investments with a minimum holding
period of eighteen months versus the previously required shorter holding period
of one year. Furthermore, beginning in the year 2001, the maximum rate is again
reduced to 18 percent for net capital gains on investments purchased after
December 31, 2000 and held or more than five years. Please consult your tax
accountant for additional information regarding these issues.
The new legislation greatly benefits the holders of IRA accounts and makes this
retirement vehicle considerably more attractive to a larger pool of investors.
For regular IRA account holders, the income limits for fully deductible IRA
accounts will be increased incrementally over the next ten years until income
thresholds are doubled to $50,000 for singles and $80,000 for couples. Also, an
individual's eligibility to contribute to a deductible IRA is no longer affected
by the spouse's coverage under an employer pension plan providing the couple's
adjusted income does not exceed $150,000. Additionally, the new law provides
for penalty-free distributions from deductible IRA's and tax-free withdrawals
from non-deductible IRA's if certain requirements are met. The benefit to
mutual fund holders should be clearly stated.
We are pleased to serve as your Fund manager and appreciate your continued vote
of confidence. As we approach a new year we wish you the best and look forward
to assisting you in meeting your personal financial goals.
Sincerely,
/s/ Barbara L. Bowles
Barbara L. Bowles, CFA
President
PERFORMANCE SUMMARY
Kenwood Growth & S&P MidCap
Date Income Fund 400 Index
4/96 10,000 10,000
5/96 10,330 10,135
6/96 10,390 9,983
7/96 9,600 9,307
8/96 9,850 9,844
9/96 10,400 10,273
10/96 10,290 10,303
11/96 10,890 10,883
12/96 10,815 10,895
1/97 11,220 11,304
2/97 11,372 11,211
3/97 11,302 10,733
4/97 11,352 11,013
5/97 12,335 11,974
6/97 12,660 12,310
7/97 13,237 13,529
8/97 13,308 13,513
9/97 13,866 14,290
10/97 13,450 13,668
SIX MONTHS ENDED AVERAGE ANNUAL
TOTAL RETURN OCTOBER 31, 1997 ONE YEAR SINCE INCEPTION 5/1/96
- ------------ ---------------- -------- ----------------------
The Kenwood Growth
& Income Fund 18.48% 30.71% 21.78%
S&P MidCap 400
Stock Index* <F1> 24.13% 32.67% 23.10%
*<F1>The Standard & Poor's MidCap 400 Index (S&P MidCap) is a capital-weighted
index, representing the aggregate market value of the common equity of 400
stocks chosen by Standard & Poor's with a medium capitalization of approximately
$700 million. This chart assumes an initial investment of $10,000 made on May 1,
1996 (commencement of operations). Returns shown include the reinvestment of all
dividends. Past performance is not predictive of future performance. Investment
return and prinicpal value will fluctuate, so that your shares, when redeemed,
may be worth more or less than the original cost.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
(Unaudited)
ASSETS:
Investments, at value (cost $1,764,520) $1,886,672
Income receivable 2,153
Receivable for securities sold 14,863
Prepaid expenses 10,486
Receivable from Adviser 46,737
-----------
Total Assets 1,960,911
-----------
LIABILITIES:
Accrued expenses and other liabilities 53,574
Payable for securities purchased 4,991
-----------
Total Liabilities 58,565
-----------
NET ASSETS $1,902,346
==========
NET ASSETS CONSIST OF:
Capital stock $1,611,075
Undistributed net investment income 15,018
Undistributed accumulated net realized gains
on investments 154,101
Unrealized net appreciation on investments 122,152
-----------
Total Net Assets $1,902,346
===========
Shares outstanding (unlimited amount of shares authorized) 143,359
Net asset value and redemption price per share $13.27
======
See notes to the financial statements.
STATEMENT OF CHANGES IN NET ASSETS
Six months Year
ended ended
October 31, 1997 April 30,1997
---------------- -------------
(Unaudited)
OPERATIONS:
Net investment income $10,689 $8,370
Net realized gain on investments 139,085 17,142
Change in unrealized appreciation
on investments 98,930 23,222
--------- --------
Net increase in net assets
resulting from operations 248,704 48,734
--------- --------
CAPITAL SHARE TRANSACTIONS:
Shares sold 383,180 1,125,873
Shares issued to owners in
reinvestment of dividends 0 5,927
Shares redeemed (140) (3,774)
--------- --------
Net increase in net assets resulting
from capital share transactions 383,040 1,128,026
--------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income 0 (4,041)
Distributions from net capital gains 0 (2,127)
--------- --------
Total distributions 0 (6,168)
--------- --------
TOTAL INCREASE
IN NET ASSETS 631,744 1,170,592
NET ASSETS:
Beginning of period 1,270,602 100,010
--------- --------
End of period (including undistributed
net investment income of $15,018) $1,902,346 $1,270,602
========== ==========
See notes to the financial statements.
STATEMENT OF OPERATIONS
(Unaudited)
Six months
ended
October 31, 1997
----------------
INVESTMENT INCOME:
Dividend income $15,356
Interest income 3,644
---------
19,000
---------
EXPENSES:
Investment advisory fees 6,339
Administration fees 10,083
Shareholder servicing fees 10,580
Fund accounting fees 11,095
Distribution fees 2,113
Custody fees 2,116
Federal and state registration fees 6,495
Professional fees 9,075
Reports to shareholders 3,018
Trustees' fees and expenses 4,784
Other 607
---------
Total expenses before waiver and reimbursement 66,305
Less: Waiver of expenses and reimbursement
from Adviser (57,994)
---------
Net expenses 8,311
---------
NET INVESTMENT INCOME 10,689
---------
REALIZED AND UNREALIZED GAINS:
Net realized gain on investments 139,085
Change in unrealized appreciation
on investments 98,930
---------
Net gain on investments 238,015
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $248,704
=========
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
Six months Year
ended ended
October 31, 1997 April 30, 1997
---------------- --------------
(Unaudited)
PER SHARE DATA:
Net asset value, beginning of period $11.20 $10.00
Income from investment operations:
Net investment income 0.07 0.14
Net realized and unrealized gains
on securities 2.00 1.21
-------- -------
Total from investment operations 2.07 1.35
-------- -------
Less distributions:
Dividends from net investment income 0.00 (0.10)
Distributions from capital gains 0.00 (0.05)
-------- -------
Total distributions 0.00 (0.15)
-------- -------
Net asset value, end of period $13.27 $11.20
======== =======
Total return (1)<F2> 18.48% 13.52%
Supplemental data and ratios:
Net assets, end of period $1,902,346 $1,270,602
Ratio of net expenses to average net assets (2)<F3> 0.98% 0.92%
Ratio of net investment income
to average net assets (2)<F3> 1.26% 1.85%
Portfolio turnover rate (1)<F2> 41.65% 31.21%
Average commission rate paid $0.0604 $0.0600
(1)<F2>Not annualized for the period ended October 31, 1997.
(2)<F3>Annualized. Without expense reimbursements of $57,994 for the period,
the ratio of expenses to average net assets would have been 7.84% and the ratio
of net investment income to average net assets would have been (5.60)%.
See notes to the financial statements.
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1997
(UNAUDITED)
Number of Market
Shares Value
- ---------- -------
COMMON STOCKS 97.2%
AUTOS & TRANSPORTATION 6.3%
145 AMR Corporation *<F4> $16,883
410 Federal Express Corporation *<F4> 27,367
1,310 Illinois Central Corporation 46,669
945 Kansas City Southern Industries, Inc. 28,823
---------
119,742
---------
BANKING 2.8%
1,000 Colonial BancGroup, Inc. 29,687
1,300 Sovereign Bancorp, Inc. 23,075
---------
52,762
---------
COMPUTERS 1.9%
500 Computer Sciences Corporation *<F4> 35,469
---------
COSMETICS & SOAP 3.0%
3,435 Dial Corporation 57,966
---------
CONSUMER DISCRETIONARY 6.0%
605 American Greetings Corporation - Class A 20,986
300 First Brands Corporation 7,650
550 Mattel, Inc. 21,381
1,650 The Limited, Inc. 38,878
1,020 Tupperware Corporation 25,563
---------
114,458
---------
CONSUMER STAPLE 2.7%
525 CPC International, Inc. 51,975
---------
ELECTRONIC EQUIPMENT 4.0%
500 Avnet, Inc. 31,469
3,966 CommScope, Inc. *<F4> 43,626
---------
75,095
---------
FINANCIAL SERVICES 10.0%
700 Beneficial Corporation 53,681
200 First Chicago NBD Corporation 14,550
670 First Commerce Corporation 43,047
1,050 The PMI Group, Inc. 63,459
200 St. Paul Companies, Inc. 15,988
---------
190,725
---------
FOOD & BEVERAGES 2.5%
1,000 Quaker Oats Company 47,875
---------
FUNERAL SERVICES 2.5%
1,900 The Loewen Group, Inc. 47,025
---------
HEALTHCARE 8.5%
205 Baxter International, Inc. 9,481
1,088 Foundation Health Corporation *<F4> 31,280
1,700 Maillinckrodt, Inc. 63,750
2,261 MedPartners, Inc. *<F4> 57,514
---------
162,025
---------
INTEGRATED OILS 7.2%
1,070 Occidental Petroleum Corporation 29,826
1,570 Ultramar Diamond Shamrock Corporation 48,474
1,400 Unocal Corporation 57,750
---------
136,050
---------
LEISURE & ENTERTAINMENT 5.8%
1,650 Callaway Golf Company 53,213
2,000 Hasbro, Inc. 58,000
---------
111,213
---------
MATERIALS & PROCESSING 8.0%
310 Ball Corporation 10,850
1,350 Fluor Corporation 55,519
1,050 Nalco Chemical Company 42,000
1,800 Rubbermaid, Inc. 43,313
---------
151,682
---------
PRINTING 2.6%
2,200 John H. Harland Company 49,363
---------
RETAIL 1.8%
2,600 Kmart Corporation *<F4> 34,288
---------
SECURITY SERVICES 3.0%
1,600 Pittston Brink's Group 57,800
---------
SOFTWARE 0.0%
4 Siebel Systems, Inc. *<F4> 170
---------
TECHNOLOGY 7.0%
1,265 Adobe Systems, Inc. 60,404
1,960 DSC Communications Corporation *<F4> 47,775
3,005 Novell, Inc. *<F4> 25,355
---------
133,534
---------
TELECOMMUNICATIONS 2.5%
3,500 NextLevel Systems, Inc. *<F4> 47,250
---------
UTILITIES 9.1%
1,085 Century Telephone Enterprises 46,044
2,300 Entergy Corporation 56,206
800 LCI International, Inc. *<F4> 20,700
1,710 WPL Holdings, Inc. 49,911
---------
172,861
---------
Total Common Stocks (Cost $1,727,176) 1,849,328
---------
Principal
Amount
- ----------
SHORT-TERM INVESTMENTS 2.0%
VARIABLE RATE DEMAND NOTES 2.0%
$1,218 American Family Financial Services, Inc. 1,218
2,090 Johnson Controls, Inc. 2,090
34,036 Wisconsin Electric Power Company 34,036
---------
Total Short-Term Investments (Cost $37,344) 37,344
---------
Total Investments (Cost $1,764,520) 99.2% 1,886,672
---------
Other Assets, less Liabilities 0.8% 15,674
---------
TOTAL NET ASSETS 100.0% $1,902,346
===========
*<F4>non-income producing
NOTES TO THE FINANCIAL STATEMENTS
(Unaudited)
1). ORGANIZATION
The Kenwood Growth & Income Fund (the "Fund") is a mutual fund created by
The Kenwood Funds (the "Trust") which was organized as a business trust under
the laws of Delaware on January 9, 1996. The Fund is the sole series issued by
the Trust, which is an open-end management investment company registered under
the Investment Company Act of 1940 ("1940 Act"), as amended. The Fund issued
and sold 10,001 shares of its capital stock at $10 per share on April 11, 1996.
The Fund commenced operations on May 1, 1996. The objective of the Fund is
capital appreciation and current income.
2). SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
a). Investment Valuation - Securities which are traded on a securities exchange
(including options on indexes so traded) or securities listed on the NASDAQ
National Market are valued at the last sale price on the exchange or market
where primarily traded or listed or, if there is no recent sale price available,
at the last current bid quotation. Securities not so traded or listed are
valued at the last current bid quotation if market quotations are available.
Debt securities maturing in 60 days or less are normally valued at amortized
cost. Debt securities having maturities over 60 days or for which amortized cost
is not deemed to reflect fair value, may be priced by independent pricing
services that use prices provided by market makers or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics. Other securities, including restricted securities, and other
assets are valued at fair value as determined in good faith by the Board of
Trustees.
b). Federal Income Taxes - No provision for federal income taxes or excise
taxes has been made since the Fund has elected to be taxed as a "regulated
investment company" and intends to distribute substantially all taxable income
to its shareowners and otherwise comply with the provisions of the Internal
Revenue Code applicable to regulated investment companies.
c). Expenses - The Fund is charged for those expenses that are directly
attributable to the portfolio, such as advisory, administration and certain
shareowner service fees.
d). Distributions to Shareowners - Dividends from net investment income are
declared and paid at least annually. Distributions of net realized capital
gains, if any, will be declared at least annually.
e). Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
f). Other - Investment and shareowner transactions are accounted for no later
than the first business day after trade date. The Fund determines the gain or
loss realized from the investment transactions by comparing the original cost of
the security lot sold with the net sales proceeds. Dividend income is
recognized on the ex-dividend date and interest income is recognized on an
accrual basis.
3). CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
Six months ended Year ended
October 31, 1997 April 30, 1997
------------------ -----------------
Amount Shares Amount Shares
-------- ------ ------- -------
Shares sold $383,180 29,887 $1,125,873 103,258
Shares issued to owners in
reinvestment of dividends 0 0 5,927 555
-------- ------- --------- -------
383,180 29,887 1,131,800 103,813
Shares redeemed (140) (10) (3,774) (332)
-------- ------- --------- -------
Net increase $383,040 29,877 $1,128,026 103,481
======== ======= ========= =======
4). INVESTMENT TRANSACTIONS
The aggregate purchases and sales of equity securities, excluding short-
term investments, for the Fund for the six months ended October 31, 1997, were
as follows:
Purchases Sales
--------- --------
U. S. Government -- --
Other $1,239,658 $631,757
At October 31, 1997, gross unrealized appreciation and depreciation of
investments for federal income tax purposes was as follows:
Appreciation $207,180
(Depreciation) 85,861
--------
Net unrealized appreciation
on investments $121,319
========
At October 31, 1997, the cost of investments for federal income tax
purposes was $1,765,353.
5). INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Trust has entered into an investment advisory agreement with The
Kenwood Group, Inc. (the "Adviser"). Pursuant to its Advisory Agreement with
the Fund, the Adviser is entitled to receive a fee, calculated daily and payable
monthly, at the annual rate of 0.75% on the first $500 million of average net
assets, 0.70% on the next $500 million of average daily net assets, and 0.65% on
the average daily net assets over $1 billion. The Adviser waived the
management fee for the Fund's first fiscal year. The Adviser has also
reimbursed certain other expenses to the extent that total operating expenses
(exclusive of interest, taxes, brokerage commissions and other costs incurred in
connection with the purchase or sale of portfolio securities and extraordinary
items) exceeded the annual rate of 1.00% of the average net assets of the Fund,
computed on a daily basis. The total amount of fees waived and reimbursed by
the Adviser for the six months ended October 31, 1997 was $57,994.
The Trust has entered into a distribution agreement with AmeriPrime
Financial Securities, Inc. (the "Distributor"). Pursuant to the Distribution
Plan adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act
of 1940, the Fund is authorized to expend up to 0.25% annually of the Fund's
average daily net assets to pay distribution fees and to cover certain expenses
incurred in connection with the distribution of the Fund's shares. Rule 12b-1
permits an investment company to finance, directly or indirectly, any activity
which is primarily intended to result in the sale of its shares only if it does
so in accordance with the provisions of the Rule. The Fund accrued $2,113 for
the six months ended October 31, 1997, pursuant to the Plan.
6). RELATED PARTIES
Officers and Trustees of the Trust held 17,238 shares or 12.0% of the
outstanding shares of the Fund as of October 31, 1997.
