<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MARCH 31, 1999
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
[MORNINGSTAR RATINGS LOGO]
KEMPER SMALL CAP RELATIVE VALUE FUND
"... We are conservative in valuing stocks and
we will not overpay. ... Our research demonstrates that
these disciplines [diversification and valuation]
have added value over time. ..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
8
INDUSTRY SECTORS
9
LARGEST HOLDINGS
10
PORTFOLIO OF INVESTMENTS
14
FINANCIAL STATEMENTS
16
NOTES TO FINANCIAL STATEMENTS
19
FINANCIAL HIGHLIGHTS
20
SHAREHOLDERS' MEETING
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER SMALL CAP RELATIVE
VALUE FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE SIX MONTH PERIOD ENDING MARCH 31, 1999.
(UNADJUSTED FOR ANY SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A -1.32%
CLASS B -1.59%
CLASS C -1.72%
LIPPER SMALL CAP FUNDS CATEGORY AVERAGE 12.53%
- --------------------------------------------------------------------------------
</TABLE>
RETURNS ARE HISTORICAL AND DO NOT GUARANTEE FUTURE PERFORMANCE. INVESTMENT
RETURNS AND PRINCIPAL VALUES WILL FLUCTUATE SO THAT SHARES, WHEN REDEEMED, MAY
BE WORTH MORE OR LESS THAN ORIGINAL COST.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
AS OF AS OF
3/31/99 9/30/98
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS A $7.47 $7.57
- --------------------------------------------------------------------------------
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS B $7.42 $7.54
- --------------------------------------------------------------------------------
KEMPER SMALL CAP
RELATIVE VALUE FUND CLASS C $7.42 $7.55
- --------------------------------------------------------------------------------
</TABLE>
*LIPPER ANALYTICAL SERVICES, INC. RETURNS ARE BASED UPON CHANGES IN NET ASSET
VALUE WITH ALL DIVIDENDS REINVESTED AND DO NOT INCLUDE THE EFFECT OF SALES
CHARGES. IF THEY HAD, RESULTS MAY HAVE BEEN LESS FAVORABLE.
TERMS TO KNOW
YOUR FUND'S STYLE
- --------------------------------------------------------------------------------
MORNINGSTAR EQUITY STYLE BOX
- --------------------------------------------------------------------------------
[MORNINGSTAR EQUITY STYLE BOX]
Source: Morningstar, Inc. Chicago, IL (312) 696-6000. The Equity Style Box
placement is based on two variables: a fund's market capitalization relative to
the movements of the market, and a fund's valuation, which is calculated by
comparing the stocks in the fund's portfolio with the most recent of the three
market-cap groups.
THE STYLE BOX REPRESENTS A SNAPSHOT OF THE FUND'S PORTFOLIO ON A SINGLE DAY.
PLEASE NOTE THAT STYLE BOXES DO NOT REPRESENT AN EXACT ASSESSMENT OF RISK AND DO
NOT REPRESENT FUTURE PERFORMANCE. THE FUND'S PORTFOLIO CHANGES FROM DAY-TO-DAY.
A LONGER-TERM VIEW IS REPRESENTED BY THE FUND'S MORNINGSTAR CATEGORY, WHICH IS
BASED ON ITS ACTUAL INVESTMENT STYLE AS MEASURED BY ITS UNDERLYING PORTFOLIO
HOLDINGS. PLEASE CONSULT THE PROSPECTUS FOR A DESCRIPTION OF INVESTMENT
POLICIES.
VALUE STOCKS Value stocks are considered to be bargain stocks because they are
perceived as undervalued and attractively priced relative to a measure of their
true worth, such as earnings potential, book value, cash flow or dividend yield.
GROWTH STOCKS Growth stocks are expected to experience rapid growth resulting
from strong sales, talented management and a dominant market position. Because
these stocks are in demand, you'll find that they're generally more expensive
than value stocks.
PRICE/EARNINGS RATIO A company's stock price divided by its earnings for the
past four quarters. The P/E ratio, also known as the multiple, is a measure of
how much an investor is paying for a company's earning power.
SECTOR Stocks usually found in related industries. Stocks within a market sector
may be similarly affected by financial, economic, business and other
developments.
<PAGE> 3
ECONOMIC OVERVIEW
[SILVIA PHOTO]
DR. JOHN E. SILVIA IS A MANAGING DIRECTOR OF SCUDDER KEMPER INVESTMENTS, INC.
HIS PRIMARY RESPONSIBILITIES INCLUDE ANALYSIS, MODELING AND FORECASTING OF
ECONOMIC DEVELOPMENTS AND FEDERAL RESERVE ACTIVITY THAT AFFECT FINANCIAL
MARKETS, ESPECIALLY INTEREST RATE TRENDS. THIS EFFORT INCLUDES CLOSE
COLLABORATION WITH BOTH INCOME AND EQUITY MUTUAL FUND MANAGERS AND PENSION FUND
MANAGERS.
SILVIA HOLDS A BACHELOR'S DEGREE AND PH.D. IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND A MASTER'S DEGREE IN ECONOMICS FROM BROWN UNIVERSITY IN
PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER INVESTMENTS, HE WAS WITH
THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, THE INVESTMENT MANAGER FOR KEMPER FUNDS, IS ONE OF
THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS IN THE
WORLD, MANAGING MORE THAN $280 BILLION IN ASSETS FOR INSTITUTIONAL AND CORPORATE
CLIENTS, RETIREMENT AND PENSION PLANS, INSURANCE COMPANIES, MUTUAL FUND
INVESTORS AND INDIVIDUALS. SCUDDER KEMPER INVESTMENTS OFFERS A FULL RANGE OF
INVESTMENT COUNSEL AND ASSET MANAGEMENT CAPABILITIES BASED ON A COMBINATION OF
PROPRIETARY RESEARCH AND DISCIPLINED, LONG-TERM INVESTMENT STRATEGIES.
DEAR KEMPER FUNDS SHAREHOLDER:
Throughout April, investor enthusiasm drove the market to its second milestone
in a year -- the Dow Jones Industrial Average rose to 11,000 just a month after
it broke 10,000 for the first time. But those gains don't tell the whole story
- -- investors in the first four months of the year have endured significant
volatility. What drove the climb to 11,000 and what, at the same time, has led
to investor anxiety?
Driving the market, in part, was consumer confidence. In the first quarter of
1999, consumer spending surged 6.7 percent -- the largest rise in 11 years. The
market's rise seems to have buoyed consumer confidence, which rose for the sixth
consecutive month in April. And, the resilience of the economy has bolstered
more optimistic expectations for the next six months.
Inspiring consumer confidence also were the lowest levels of inflation in a
generation. As measured by the consumer price index (CPI), inflation has been
between 1 1/2 and 2 percent, compared to approximately 4 percent in the
beginning of the 1990s and 10-12 percent in the beginning of the 1980s. Still,
inflation worries have been seeping into the market. The growing conviction that
Asian and Latin American economies are recovering is raising commodity prices,
particularly oil. The price of West Texas Intermediate oil surged from less than
$12 in February to almost $19 in early May. That alone almost guarantees a rise
in the "headline" inflation rate this year, which is the rate of inflation as
measured by the entire CPI. But it's important to note that the Federal Reserve
Board looks primarily at the core inflation rate, which is the CPI minus food
and energy -- and the core inflation rate looks as if it will remain low at
about 2 percent this year.
Also contributing to consumer confidence, short-term and long-term interest
rates remained low over the first quarter, and can be expected to remain so.
Today's Fed policy is reactive, not proactive, which means that the Fed tends to
respond to inflation only when it picks up. Consequently, we expect no changes
in short-term interest rates during May and June, and there's only a small
chance that the Fed will raise interest rates in the second half of the year.
Moreover, the federal budget surplus continues to benefit from good revenue
gains (which are based on good income gains, especially from households), good
capital gains and continued restraint in federal spending. The surplus this year
is expected to approach $100 billion.
Such a positive environment is exactly what poses risk for investors, and is
key to understanding recent volatility in the market. A stronger economy has the
potential to feed inflation fears and drive up interest rates. Events on April
30 illustrated the domino effect of investors reacting to positive economic
news, which they consider troubling at this point, more than eight years into
the economic expansion. The steady stream of positive economy's news prompted a
sell-off in the markets based on fears that the strong pace of economic growth
will eventually lead to higher inflation. The benchmark 30-year Treasury bond
fell nearly 2 points (close to $20 for a bond with a $1,000 face amount) as the
yield shot up to 5.657 percent. It was the biggest one-day plunge in bonds in
two months. Bonds, in turn, pulled stocks lower.
Where can we expect to go from here? The fundamentals by which we judge the
health of the economy suggested continued growth as we moved into the second
quarter of 1999. For example, the gross domestic product (GDP), the value of all
goods and services produced in the U.S., rose at an annual rate of 4.5 percent
in the first quarter, following a tremendous fourth-quarter surge of 6 percent.
This is very much in line with what we've grown accustomed to over the past year
- -- over the four quarters of 1998, the U.S. economy expanded by 4.3 percent.
Some people aren't surprised at all by strong GDP growth that once would have
alarmed them. That's partially because we've grown accustomed to a strong
economy in the past three or four years. But it's also because we've been able
to absorb growth without driving up inflation. That's important for investors.
If prices were rising as the economy was growing, the Fed would most likely
raise short-term interest rates, which would change the financial market
outlook. But again, that isn't happening right now.
However, we do see some vulnerability. Trade is a weak spot in the economy
right now. Exports of U.S. goods and services dropped in the first quarter while
imports soared. This reflects the fact that the U.S. is one of the few countries
financially fit enough to buy goods produced elsewhere in the world. But for as
long as less vibrant international economies are unable to buy U.S. goods, the
profitability of U.S. companies trying to export will be challenged.
When you think about it, vulnerability in regard to the international economy
is nothing new. Globally, the outlook is slightly more positive than it was a
few months ago. For example, the European markets are slowing down, which will
most likely lead to the central bank lowering interest rates in order to boost
domestic spending. In many countries in Europe, there are no fixed-rate
mortgages, only adjustable-rate mortgages. When interest rates go down,
mortgages are reduced and homeowners
3
<PAGE> 4
ECONOMIC OVERVIEW
- --------------------------------------------------------------------------------
ECONOMIC GUIDEPOSTS
- --------------------------------------------------------------------------------
ECONOMIC ACTIVITY IS A KEY INFLUENCE ON INVESTMENT PERFORMANCE AND SHAREHOLDER
DECISION-MAKING. PERIODS OF RECESSION OR BOOM, INFLATION OR DEFLATION, CREDIT
EXPANSION OR CREDIT CRUNCH HAVE A SIGNIFICANT IMPACT ON MUTUAL FUND PERFORMANCE.
THE FOLLOWING ARE SOME SIGNIFICANT ECONOMIC GUIDEPOSTS AND THEIR INVESTMENT
RATIONALE THAT MAY HELP YOUR INVESTMENT DECISION-MAKING. THE 10-YEAR TREASURY
RATE AND THE PRIME RATE ARE PREVAILING INTEREST RATES. THE OTHER DATA REPORT
YEAR-TO-YEAR PERCENTAGE CHANGES.
[BAR GRAPH]
(1) FALLING INTEREST RATES IN RECENT YEARS HAVE BEEN A BIG PLUS FOR FINANCIAL
ASSETS.
(2) THE INTEREST RATE THAT COMMERCIAL LENDERS CHARGE THEIR BEST BORROWERS.
(3) INFLATION REDUCES AN INVESTOR'S REAL RETURN. IN THE LAST FIVE YEARS,
INFLATION HAS BEEN AS HIGH AS 6 PERCENT. THE LOW, MODERATE INFLATION OF THE
LAST FEW YEARS HAS MEANT HIGH REAL RETURNS.
(4) CHANGES IN THE EXCHANGE VALUE OF THE DOLLAR IMPACT U.S. EXPORTERS AND THE
VALUE OF U.S. FIRMS' FOREIGN PROFITS.
(5) THESE INFLUENCE CORPORATE PROFITS AND EQUITY PERFORMANCE.
(6) AN INFLUENCE ON FAMILY INCOME AND RETAIL SALES.
*DATA AS OF MARCH 31, 1999.
SOURCE: ECONOMICS DEPARTMENT, SCUDDER KEMPER INVESTMENTS, INC.
spend money elsewhere. This has a huge impact on consumer spending, and will
help European equities in the long term. Additionally, the situation in Japan
remains unchanged. And, problems in the emerging markets haven't had the
negative impact many people expected -- both the Mexican and Brazilian stock
markets have actually risen in the past two months.
But don't forget that international crises have the potential to affect the
U.S. markets drastically. An increase in military spending on Kosovo by the 11
European Monetary Union (EMU) countries could force them to spend less in other
areas, which could have economic implications, including higher interest rates.
That's because many European countries have small economies and little leeway in
their budgets. Consequently, those countries finance unplanned military
expenditures by selling government bonds -- which, in Europe's small bond
market, typically raises interest rates.
The international situation alone, however, is by no means an indicator of a
U.S. slowdown -- and without any such indications, complacency may be our
greatest concern. It's easy to look at the current economic situation and behave
as if no risk exists. But when you see the market soaring and are tempted to
jump in, note that the bull market grew to records on the strength of just a few
dozen stocks, while most other stock prices were flat or actually declined.
In summary, there are concerns that the current economy is unsustainable and
we soon could see an abrupt end. In many cases, however, people are looking for
a slowdown because they are fearful growth will drive up inflation -- these are
particularly older investors who are accustomed to inflation accompanying
growth. But we currently just don't see the pressure toward inflation at all, so
there's no reason to want a slowdown. The best approach now, as in any market,
is to diversify and invest for the long term.
Thank you for your continued support. We appreciate the opportunity to serve
your investment needs.
Sincerely,
/s/ JOHN E. SILVIA
John E. Silvia
THE INFORMATION CONTAINED IN THIS PIECE HAS BEEN TAKEN FROM SOURCES BELIEVED TO
BE RELIABLE, BUT THE ACCURACY OF THE INFORMATION IS NOT GUARANTEED. THE OPINIONS
AND FORECASTS EXPRESSED ARE THOSE OF DR. JOHN SILVIA AS OF MAY 5, 1999, AND MAY
NOT ACTUALLY COME TO PASS. THIS INFORMATION IS SUBJECT TO CHANGE. NO PART OF
THIS MATERIAL IS INTENDED AS AN INVESTMENT RECOMMENDATION.
TO OBTAIN A KEMPER FUNDS PROSPECTUS, DOWNLOAD ONE FROM WWW.KEMPER.COM, TALK TO
YOUR FINANCIAL REPRESENTATIVE OR CALL SHAREHOLDER SERVICES AT (800) 621-1048.
THE PROSPECTUS CONTAINS MORE COMPLETE INFORMATION, INCLUDING MANAGEMENT FEES AND
EXPENSES. PLEASE READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
4
<PAGE> 5
PERFORMANCE UPDATE
[EYSENBACH PHOTO]
JAMES (MAC) EYSENBACH IS THE LEAD PORTFOLIO MANAGER FOR KEMPER SMALL CAP
RELATIVE VALUE FUND. EYSENBACH JOINED SCUDDER KEMPER INVESTMENTS, INC. IN 1991.
HE IS A CHARTERED FINANCIAL ANALYST.
[FORTUNA PHOTO]
PHILIP FORTUNA IS A PORTFOLIO MANAGER OF THE FUND AND A MANAGING DIRECTOR OF
SCUDDER KEMPER INVESTMENTS, INC. HE DIRECTS THE COMPANY'S QUANTITATIVE GROUP.
[YOUNG PHOTO]
CALVIN YOUNG IS A PORTFOLIO MANAGER OF THE FUND. HE JOINED THE ORGANIZATION IN
1990.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGERS ONLY
THROUGH THE END OF THE PERIOD OF THE REPORT, AS STATED ON THE COVER. THE
MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME, BASED ON MARKET AND OTHER
CONDITIONS.
KEMPER SMALL CAP RELATIVE VALUE FUND LEAD PORTFOLIO MANAGER JAMES (MAC)
EYSENBACH EXPLAINS HOW THE FUND FARED AMIDST GREAT DISPARITY IN THE MARKET
DURING ITS SEMIANNUAL PERIOD -- OCTOBER 1, 1998 THROUGH MARCH 31, 1999. HE ALSO
BELIEVES A TURNAROUND FOR SMALL-CAP STOCKS IS COMING AND EXPLAINS WHAT'S BEHIND
HIS POSITIVE OUTLOOK.
Q TELL US ABOUT THE FUND'S PERFORMANCE DURING THE LAST SIX MONTHS.
A The last six months were very difficult for small-cap value stocks. The
fund declined 1.32 percent (Class A shares, unadjusted for any sales charge) for
the six months ended March 31, 1999. The table below illustrates the disparity
that existed in the U.S. stock market between large- and small-company stocks as
well as between value and growth stocks. As you can see, large-cap,
growth-oriented stocks dominated the market during this period.
- --------------------------------------------------------------------------------
LARGE-CAP GROWTH STOCKS DOMINATED THE MARKET
- --------------------------------------------------------------------------------
BENCHMARK RETURNS FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
6-MONTH
TOTAL RETURN
REPRESENTATIVE 10/1/98 -
OF INDEX 3/31/99
- --------------------------------------------------------------------------------
<S> <C> <C>
RUSSELL 1000 GROWTH Large-Cap Growth 34.79%
- -------------------------------------------------------------------------------
RUSSELL 1000 VALUE Large-Cap Value 18.27
- --------------------------------------------------------------------------------
RUSSELL 1000 Large-Cap Blend (Growth and Value) 26.90
- --------------------------------------------------------------------------------
RUSSELL 2000 GROWTH Small-Cap Growth 21.56
- --------------------------------------------------------------------------------
RUSSELL 2000 VALUE Small-Cap Value -1.50
- --------------------------------------------------------------------------------
RUSSELL 2000 Small-Cap Blend (Growth and Value) 10.00
- --------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The fund performed slightly better than the Russell 2000 Value Index, the
benchmark for small value stocks. Although the current disparity between small
value and large growth is disappointing, we believe it only represents a
short-term cycle. We remain optimistic that the market will shift and that small
value stocks will come back.
Q WHAT CAUSED THIS DISPARITY IN THE MARKET?
A The U.S. stock market began to weaken in the spring of 1998, amid growing
concerns that the Asian economic crisis would trigger a slowdown in the U.S. The
small-cap market peaked in April 1998, followed by large-cap stocks in July. As
investors focused their attention on the perceived quality and liquidity of
large-cap stocks, the disparity in returns grew.
Unnerved by the problems in Asia, which had spread to other emerging
markets and Russia, investors shunned small-cap stocks and increasingly
concentrated their investments on large growth stocks such as Microsoft,
Wal-Mart and Dell. Even as the market recovered in the fall, this focus
continued. As a result, 1998 ended with the largest disparity of small-cap to
large-cap returns of any year since 1929.
The flight to large growth stocks gained momentum in 1999. Rather than
broadening out, the number of market leaders continued to dwindle. Among the
current market leaders, the strongest returns have come from Internet companies
such as America Online and Yahoo!, further extending the valuation spread.
5
<PAGE> 6
PERFORMANCE UPDATE
Q HOW HAVE YOU MANAGED THE FUND IN THIS NARROW MARKET?
A It's been difficult to watch a handful of large growth stocks dominate the
rest of the market. However, we remain committed to our small-cap focus and
relative-value investment approach. We will not adjust our investment
disciplines due to short-term shifts in market sentiment. In fact, over time, it
is not unusual to have periods when small-cap value stocks underperform. While
it's difficult to be patient during these periods, we believe our perseverance
will pay off when the market shifts and small-cap value stocks come back into
favor.
For investors with a long-term focus, holding on to small-cap value stocks
may make sense. Over time, small-cap value stocks have outperformed their growth
counterparts. From 1963 to 1995, small-cap value stocks returned 18 percent
annually, substantially outperforming the 12 percent annual return of small-cap
growth stocks.*
* SOURCE: LOUGHRAN, TIM, "BOOK TO MARKET ACROSS FULL SIZE, EXCHANGE AND
SEASONALITY: IS THERE AN EFFECT?," JFQA, SEPTEMBER 1997.
Q WHAT WOULD THE CATALYST BE FOR A SHIFT IN MARKET SENTIMENT TO FAVOR
SMALL-CAP STOCKS AGAIN?
A It's difficult to predict the precise catalyst for a shift in sentiment,
but the extraordinary disparity in valuations sets the backdrop for a shift
towards smaller cap stocks. It may come about as investors gain confidence in
the broader economy, perhaps combined with a few negative surprises from today's
leaders. Given their record high valuations, large-cap growth cannot afford any
disappointments in earnings. Ironically, the current economic
environment -- robust U.S. economic growth, low inflation and low
unemployment -- is a favorable one for small-cap stocks.
We're beginning to see a reversal in other areas that were affected by
last year's flight to liquidity and this is positive news. Several major asset
classes that were under pressure in 1998 -- including high yield bonds, Japanese
stocks and emerging market stocks -- began to recover in early 1999. This may be
a promising signal that other areas of the market, perhaps small-cap stocks, may
also begin to provide favorable returns. It also reminds us that the markets are
truly cyclical. If this shift reflects a renewed focus on valuation and
willingness to take a long-term perspective, it is a promising sign for other
undervalued segments of the market such as small-cap stocks.
- --------------------------------------------------------------------------------
A REVERSAL OF FORTUNE -- MARKETS ARE CYCLICAL
- --------------------------------------------------------------------------------
ASSET CLASS RETURNS FOR 1998 AND FIRST QUARTER 1999
<TABLE>
<CAPTION>
FIRST
1998 ASSET QUARTER
CLASS 1999
TOTAL RETURN TOTAL RETURN
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. BONDS LONG-TERM U.S. TREASURIES 8.4% -1.6%
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUNDS -0.5 2.8
- --------------------------------------------------------------------------------
INTERNATIONAL STOCKS INTERNATIONAL FUNDS 12.7 1.9
- --------------------------------------------------------------------------------
EMERGING MARKET FUNDS -26.8 7.8
- --------------------------------------------------------------------------------
EUROPEAN STOCK FUNDS 22.6 -2.6
- --------------------------------------------------------------------------------
PACIFIC REGION STOCK FUNDS -6.1 6.5
- --------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
SOURCE: LIPPER ANALYTICAL SERVICES, INC., BASED ON INVESTMENT OBJECTIVE RETURNS.
If you're wondering whether it makes sense to remain invested in small-cap
stocks, consider the table shown. Those reversals occurred just as investors
were beginning to question their decision to invest in these out-of-favor areas.
By chasing yesterday's gains you may lose the opportunity to participate in
tomorrow's rally.
Q PLEASE EXPLAIN YOUR RELATIVE VALUE INVESTMENT APPROACH.
A Certainly. The fund seeks long-term capital appreciation through a
diversified portfolio of undervalued, small-company stocks. We use a relative
value strategy to select investments from each major sector of the small-cap
market as part of a well-diversified, risk-managed portfolio. We seek
attractively priced stocks in each sector based on sales, earnings, book values
and other measures of firm value, measured in relation to companies within the
same economic sector. Using this relative-value approach, we choose only those
stocks that we believe represent the best values within each sector. We do not
attempt to forecast which sectors are going to perform best or forecast the
direction of the overall market. To limit individual security risk, we diversify
among a large number of securities (185 as of March 31, 1999) and typically
limit positions to less than 2 percent of assets.
Q DID THE FUND'S INVESTMENT STRATEGY HELP THIS PERIOD?
A Within certain sectors, yes, but overall there was little reward for
paying attention to valuation and diversification during the six-month period.
In fact diversification was counter-productive, as you would expect in a very
narrow market in which gains were
6
<PAGE> 7
PERFORMANCE UPDATE
concentrated among a small number of stocks.
Our strict stock-valuation discipline also limited performance. We are
conservative in valuing stocks and will not overpay. We look for profitable
companies with stable or improving fundamentals that sell at discounted
price-to-earning (P/E) multiples. Remember, the lower the P/E, the less
investors are paying for each dollar of earnings. This approach has made it
difficult to participate in the market leaders during this period. Nearly all of
the small-cap market's gains were earned by a small group of high-P/E stocks,
many of which were unprofitable Internet companies. In contrast, the fund's
median price-to-earnings multiple (P/E) was lower than even the Russell 2000
Value Index.
Despite weaker short-term results, we remain committed to our
diversification and valuation disciplines because our research demonstrates that
these disciplines have added value over time.
Q WHICH OF THE FUND'S INDUSTRY SECTORS HELD UP BEST OVER THE LAST SIX
MONTHS?
A Our value discipline paid off in the energy and consumer cyclicals
sectors, where our holdings outperformed. Buoyed by rising oil prices, the
fund's energy holdings were up 9 percent for the six-month period, versus the
index, which was down 13 percent in the energy sector. The fund's energy sector
outperformed the index five months out of the six-month period.
The fund's consumer cyclical stocks gained 13 percent versus the 5 percent
sector gain made by the Russell 2000. Retail department stores and home
furnishing companies led the fund's performance in this sector, as earnings were
higher than anticipated.
What worked here was that we were able to find companies with stable or
improving fundamentals selling at a substantial discount. As these values were
recognized, the stocks outperformed their peers. As market leadership broadens,
we believe the fund's performance relative to the Russell 2000 Index should
improve.
Q WHERE WERE THE DISAPPOINTMENTS?
A The fund on the whole underperformed the Russell 2000 Index by a little
over 11 percentage points. More than 9 percent of that underperformance came
from just two sectors -- technology and commercial services. Both of those
sectors have a disproportionate number of high-P/E, Internet-related growth
companies, which do not fit our valuation criteria. In that sector, some stocks
had phenomenal returns -- some as high as 600 percent. While the Russell 2000
Index gained 22 percent in technology, the fund declined 5 percent in the
sector. Likewise, commercial services stocks in the Russell 2000 Index gained 33
percent, while the fund declined 16 percent in the sector. This is a classic
example of what happened in the broader market -- Internet-oriented technology
stocks outperformed those companies without an Internet-based business.
Q WHAT'S YOUR OUTLOOK FOR THE SMALL-CAP MARKET AND KEMPER SMALL CAP RELATIVE
VALUE FUND?
A We strongly believe in the long-term prospects of small-cap stocks, and
specifically, small-cap value stocks, despite their underperformance during this
six-month period. As market leadership broadens in recognition of the valuation
disparities, the fund's strategy should position it to have solid performance.
Admittedly it's difficult for investors to remain committed to small cap stocks
after their recent underperformance. But small-cap stocks are an important part
of a well-balanced, long-term portfolio. We urge you to keep your investment
portfolio allocated among small-cap, large-cap, value and growth stocks. Kemper
Small Cap Relative Value Fund can play an important part in your balanced
portfolio.
7
<PAGE> 8
INDUSTRY SECTORS
A SIX-MONTH COMPARISON
Data shows the percentage of the common stocks in the portfolio that each sector
represented on March 31, 1999, and on September 30, 1998.
[BAR GRAPH]
<TABLE>
<CAPTION>
KEMPER SMALL CAP RELATIVE KEMPER SMALL CAP RELATIVE
VALUE FUND ON 3/31/99 VALUE FUND ON 9/30/98
<S> <C> <C>
FINANCE 14.1% 13.4%
CONSUMER DISCRETIONARY 12.5% 12.0%
TECHNOLOGY 11.6% 11.8%
SERVICE INDUSTRIES 11.9% 10.6%
MANUFACTURING 8.7% 8.9%
HEALTH 9.0% 8.3%
CONSTRUCTION 8.3% 8.0%
CONSUMER STAPLES 5.6% 6.2%
DURABLES 5.5% 6.1%
UTILITIES 5.3% 4.7%
METALS & MINERALS 0.9% 3.5%
ENERGY 3.0% 3.3%
COMMUNICATIONS 2.0% 1.9%
TRANSPORTATION 1.6% 1.3%
</TABLE>
8
<PAGE> 9
LARGEST HOLDINGS
THE FUND'S 10 LARGEST HOLDINGS*
REPRESENTING 12.8 PERCENT OF THE FUND'S TOTAL COMMON STOCK HOLDINGS ON
MARCH 31, 1999
<TABLE>
<CAPTION>
NAME OF COMPANY DESCRIPTION OF BUSINESS PERCENTAGE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------
1. FLORIDA ROCK INDUSTRIES Regional materials company that 1.4%
concentrates in construction
aggregates and concrete products.
- ------------------------------------------------------------------------------------------
2. DEXTER Produces specialty materials and 1.4%
supporting services to aerospace,
electronics, food packaging, and
medical industries.
- ------------------------------------------------------------------------------------------
3. FOREMOST CORPORATION OF Engaged in writing property and 1.4%
AMERICA casualty insurance, life and
credit accident and health
insurance mostly for owners of
mobile homes, recreational
vehicles and automobiles.
- ------------------------------------------------------------------------------------------
4. HARMON INDUSTRIES Supplies sophisticated signal and 1.3%
train control products and systems
to railroads, both freight and
transit, throughout the world.
- ------------------------------------------------------------------------------------------
5. SOUTHWEST SECURITIES GROUP Provides fully disclosed 1.3%
securities clearing and related
services, investment banking,
securities brokerage and asset
management services.
- ------------------------------------------------------------------------------------------
6. CTS CORP. Designs, manufactures, and markets 1.2%
electronic components such as
resistor networks, variable
resistors, frequency control
devices, microcircuits, electronic
connectors, switches, automotive
control sensors and loudspeakers.
- ------------------------------------------------------------------------------------------
7. FOODMAKER Owns, operates, and franchises the 1.2%
Jack In the Box restaurant
concept.
- ------------------------------------------------------------------------------------------
8. CEC Operates Chuck E. Cheese 1.2%
ENTERTAINMENT restaurants in 44 states.
- ------------------------------------------------------------------------------------------
9. SEACOR SMIT, INC. The company owns and operates 1.2%
offshore supply and towing vessels
primarily serving the oil and gas
industry.
- ------------------------------------------------------------------------------------------
10. P.H. GLATFELTER Engaged in the manufacture of 1.2%
printing, writing and technical
specialty paper including
cigarette papers and uncoated
ground wood paper.
- ------------------------------------------------------------------------------------------
</TABLE>
*Portfolio composition and holdings are subject to change.
9
<PAGE> 10
Portfolio of INVESTMENTS
KEMPER SMALL CAP RELATIVE VALUE FUND
PORTFOLIO OF INVESTMENTS AT MARCH 31, 1999 (unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
COMMON STOCKS SHARES VALUE($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS--2.0%
CFW Communications Co. 800 17,300
(a) General Communication, Inc. 2,400 10,950
North Pittsburgh Systems, Inc. 2,600 35,750
(a) Plantronics, Inc. 100 6,256
----------------------------------------------------------------------------
70,256
- --------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION--8.3%
(a) Del Webb Corp. 600 13,013
Florida Rock Industries, Inc. 1,500 51,187
Granite Construction, Inc. 300 7,013
(a) Holophane Corp. 1,300 28,600
Lone Star Industries, Inc. 1,300 40,300
(a) NCI Building Systems, Inc. 1,000 23,500
(a) NVR, Inc. 800 33,700
(a) Nortek, Inc. 1,100 27,225
Ryland Group, Inc. 1,500 37,969
Skyline Corp. 800 22,200
(a) U.S. Home Corp. 400 13,050
----------------------------------------------------------------------------
297,757
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--12.5%
Aaron Rents, Inc. 1,100 17,187
(a) Acclaim Entertainment 1,400 12,512
(a) Ames Department Stores 800 29,700
Applebee's International 1,100 27,294
(a) CEC Entertainment, Inc. 1,200 43,050
CPI Corp. 700 15,662
(a) Foodmaker, Inc. 1,700 43,350
Haverty Furniture Company, Inc. 1,400 35,525
(a) Inacom Corp. 800 6,200
(a) Just For Feet, Inc. 900 11,250
Marcus Corp. 600 7,200
(a) Media Arts Group, Inc. 1,400 12,600
Norrell Corp. 1,000 13,063
Oneida Ltd. 1,000 17,000
(a) Rent-Way, Inc. 1,400 33,600
Ruby Tuesday, Inc. 700 12,163
Russ Berrie & Co. 1,100 28,738
(a) Shopko Stores, Inc. 400 11,950
(a) Sonic Corp. 850 22,897
(a) Syms Corp. 3,300 24,544
Thomas Industries, Inc. 1,100 20,625
----------------------------------------------------------------------------
446,110
- --------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES--5.6%
(a) Chattem, Inc. 600 18,750
Dexter Corp. 1,600 50,400
(a) Hartmarx Corp. 4,500 21,938
HEICO Corp. 400 9,600
Imperial Sugar Co. 2,900 17,581
Michael Foods, Inc. 1,300 24,781
Pilgrim's Pride Corp. 1,300 21,369
(a) Sola International, Inc. 1,600 19,300
(a) VWR Scientific Products Corp. 800 18,000
----------------------------------------------------------------------------
201,719
</TABLE>
10
<PAGE> 11
PORTFOLIO OF Investments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DURABLES--5.5%
AAR Corp. 1,800 32,062
(a) Banner Aerospace, Inc. 2,300 16,962
(a) Budget Group, Inc. 1,200 14,700
Curtiss-Wright Corp. 100 3,106
Ducommun, Inc. 2,200 20,625
Intermet Corp. 2,200 29,425
Kaman Corp. 3,200 41,000
(a) Leasing Solutions, Inc. 600 1,388
Manitowoc Company 800 33,500
Wynn's International, Inc. 300 5,231
----------------------------------------------------------------------------
197,999
- --------------------------------------------------------------------------------------------------------------------------
ENERGY--3.0%
(a) Oceaneering International, Inc. 1,000 15,125
(a) Patterson Energy 2,000 11,125
RPC, Inc. 500 3,219
(a) Seacor Smit, Inc. 800 43,050
(a) Tesoro Petroleum Corp. 1,900 20,900
(a) UTI Energy Corp. 1,200 12,750
----------------------------------------------------------------------------
106,169
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL--14.1%
(a) Acceptance Insurance Companies, Inc. 500 6,750
Advest Group, Inc. 1,700 31,450
American Heritage Investment Corp. 1,100 25,644
ARM Financial Group, Inc. 900 13,444
Arthur J. Gallagher & Co. 300 13,800
(a) Columbia Banking System, Inc. 1,000 15,000
Corus Bankshares, Inc. 200 6,425
Downey Financial Corp. 1,700 31,131
Fidelity National Financial 850 12,750
(a) First Federal Financial Corp. 2,150 34,534
(a) First Republicbank Corp. 700 16,887
Foremost Corporation of America 2,500 50,312
Guarantee Life Companies, Inc. 1,300 22,100
Hilb, Rogal & Hamilton Co. 1,100 18,631
JSB Financial, Inc. 800 40,100
Landamerica Financial Group 300 8,700
Presidential Life Corp. 1,600 28,700
RLI Corp. 800 23,400
Resource Bancshares Mortgage Group, Inc. 1,200 15,450
Riggs National Corp. 1,900 32,063
(a) Silicon Valley Bancshares 600 12,413
Stewart Information Services 300 10,069
Trust Company of N.J. 1,500 36,375
----------------------------------------------------------------------------
506,128
- --------------------------------------------------------------------------------------------------------------------------
HEALTH CARE--9.0%
(a) Acuson Corporation 500 7,469
(a) American Oncology Resources 1,800 16,200
Ballard Medical Products 200 4,875
Bindley Western Industries, Inc. 766 21,879
(a) Biomatrix, Inc. 200 15,600
(a) Bio-Rad Laboratories, Inc. 1,800 36,450
(a) Bio-Technology General Corp. 1,400 8,356
(a) CareMatrix Corp. 600 11,400
(a) Cooper Cos. 800 12,300
(a) Curative Health Services, Inc. 1,000 11,500
(a) DVI, Inc. 1,200 17,850
(a) Datascope Corp. 600 16,200
(a) Hanger Orthopedic Group, Inc. 1,000 13,500
(a) MAXXIM Medical 1,100 20,763
</TABLE>
11
<PAGE> 12
Portfolio of INVESTMENTS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) NBTY, Inc. 3,500 17,063
(a) OEC Medical Systems, Inc. 1,100 25,300
(a) Prime Medical Services, Inc. 500 3,688
(a) Priority Healthcare Corp. 253 11,448
(a) Province Healthcare Co. 600 11,100
(a) Res-Care, Inc. 1,300 29,331
West Pharmaceutical Services, Inc. 300 9,544
----------------------------------------------------------------------------
321,816
- --------------------------------------------------------------------------------------------------------------------------
MANUFACTURING--8.7%
(a) Benchmark Electronics, Inc. 900 27,000
(a) Brightpoint 1,100 6,497
Chart Industries, Inc. 1,500 9,844
(a) Gardner Denver Inc. 1,300 20,637
General Binding Corp. 1,100 28,531
Gleason Corp. 1,400 23,712
Huffy Corporation 300 3,600
(a) Kronos, Inc. 600 14,700
L.S. Starrett Corp. 100 2,700
(a) National R.V. Holdings, Inc. 800 17,700
P.H. Glatfelter Company 3,800 42,513
(a) RTI International Metals 1,100 10,313
Reliance Steel & Aluminum Co. 1,200 34,575
(a) SPS Technologies, Inc. 900 35,325
(a) Shaw Group, Inc. 400 5,575
Stepan Co. 200 4,450
Varlen Corp. 1,150 25,300
----------------------------------------------------------------------------
312,972
- --------------------------------------------------------------------------------------------------------------------------
METALS AND MINERALS--.9%
(a) Armco, Inc. 3,400 15,087
Roanoke Electric Steel Corp. 1,000 11,125
(a) Shiloh Industries, Inc. 400 4,750
----------------------------------------------------------------------------
30,962
- --------------------------------------------------------------------------------------------------------------------------
SERVICE INDUSTRIES--11.9%
ABM Industries, Inc. 700 21,350
(a) ADVO, Inc. 1,500 28,969
(a) Borg-Warner Security Corp. 1,400 23,450
Bowne & Co., Inc. 1,500 17,531
(a) Computer Horizons Corp 600 6,562
(a) Computer Task Group, Inc. 1,100 23,512
(a) Cort Business Services Corp. 900 20,812
(a) Cotelligent, Inc. 900 7,987
Dames & Moore, Inc. 500 5,594
(a) Dycom Industries, Inc. 900 39,150
(a) Electro Rent Corp. 1,700 15,512
(a) Franklin Covey Co. 1,100 9,900
McGrath RentCorp 1,500 27,375
Merrill Corp. 1,200 16,050
Olsten Corp. 2,400 14,850
(a) Personnel Group of America, Inc. 2,400 17,250
(a) Pomeroy Computer Resources, Inc. 1,200 15,600
Southwest Securities Group, Inc. 1,600 45,200
Unifirst Corporation 800 16,900
(a) Veritas DGC Inc. 1,900 26,956
(a) Volt Information Sciences, Inc. 1,100 18,081
(a) Westaff, Inc. 1,200 6,225
----------------------------------------------------------------------------
424,816
</TABLE>
12
<PAGE> 13
PORTFOLIO OF Investments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
SHARES VALUE($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TECHNOLOGY--11.6%
(a) Aavid Thermal Technologies, Inc. 500 6,875
(a) Actel Corp. 200 3,287
(a) Activision, Inc. 400 4,950
(a) Black Box Corp. 600 18,600
(a) CACI International, Inc. 200 3,387
(a) CHS Electronics, Inc. 1,400 4,462
CTS Corp. 900 44,494
(a) Cable Design Technologies 1,100 12,100
Cubic Corp. 500 7,875
(a) Data General Corp. 800 8,100
(a) Esterline Technologies 2,100 27,169
Gerber Scientific, Inc 400 8,075
Harmon Industries, Inc. 2,400 48,150
(a) IDT Corp. 500 9,000
Innovex, Inc. 1,100 14,713
(a) MTI Technology Corp. 1,900 10,509
MTS Systems Corp. 2,700 27,338
(a) MAPICS, Inc. 1,500 11,531
(a) Mentor Graphics Corp. 600 8,100
(a) Metamor Worldwide, Inc. 700 9,800
(a) Moog Inc. 900 27,450
National Computer Corp. 400 9,800
(a) NeoMagic Corp. 1,000 9,938
Park Electrochemical Corp. 300 7,050
Pioneer-Standard Electronics 1,800 11,813
(a) Platinum Software Corp. 1,700 12,538
(a) Siliconix, Inc. 300 6,300
(a) Smart Modular Technologies, Inc. 600 8,963
(a) Structural Dynamics Research Corp. 1,200 22,875
Technitrol, Inc. 500 11,531
----------------------------------------------------------------------------
416,773
- --------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--1.6%
(a) Avondale Industries, Inc. 900 26,550
Roadway Express, Inc. 1,700 29,006
----------------------------------------------------------------------------
55,556
- --------------------------------------------------------------------------------------------------------------------------
UTILITIES--5.3%
Black Hills Corp. 700 14,919
Central Hudson Gas & Electric Co. 400 14,325
(a) El Paso Electric Co. 5,300 40,412
NUI Corp. 1,800 38,813
Northwestern Corp. 1,600 41,500
TNP Enterprises, Inc. 1,350 38,813
----------------------------------------------------------------------------
188,782
----------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost: $3,904,001) $3,577,815
----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a) Non-income producing security.
Based on the cost of investments of $3,904,001 for federal income tax purposes
at March 31, 1999, the gross unrealized appreciation was $227,280, the gross
unrealized depreciation was $553,466 and the net unrealized depreciation on
investments was $326,186.
See accompanying Notes to Financial Statements.
13
<PAGE> 14
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------
Investments, at value
(Cost: $3,904,001) $3,577,815
- --------------------------------------------------------------------------
Cash 58,231
- --------------------------------------------------------------------------
Receivable for:
Investments sold 26,100
- --------------------------------------------------------------------------
Dividends 2,346
- --------------------------------------------------------------------------
Reimbursement from Adviser 59,328
- --------------------------------------------------------------------------
Deferred organization expense 6,132
- --------------------------------------------------------------------------
TOTAL ASSETS 3,729,952
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- --------------------------------------------------------------------------
Custodian and transfer agent fees and related expenses 13,391
- --------------------------------------------------------------------------
Trustees' fees and other 67,191
- --------------------------------------------------------------------------
Total liabilities 80,582
- --------------------------------------------------------------------------
NET ASSETS $3,649,370
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- --------------------------------------------------------------------------
Paid-in capital $4,007,477
- --------------------------------------------------------------------------
Accumulated net realized loss on investments (31,921)
- --------------------------------------------------------------------------
Net unrealized depreciation on investments (326,186)
- --------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $3,649,370
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
THE PRICING OF SHARES
- --------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share ($1,787,251
/ 239,088 shares outstanding) $7.47
- --------------------------------------------------------------------------
Maximum offering price per share (net asset value, plus
6.10% of net asset value or 5.75% of offering price) $7.93
- --------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($1,176,589 /
158,590 shares outstanding) $7.42
- --------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price (subject to
contingent deferred sales charge) per share ($685,530 /
92,382 shares outstanding) $7.42
- --------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE> 15
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------
INVESTMENT INCOME
- -------------------------------------------------------------------------
Dividends $ 19,115
- -------------------------------------------------------------------------
Interest 3,628
- -------------------------------------------------------------------------
Total investment income 22,743
- -------------------------------------------------------------------------
Expenses:
Management fee 12,008
- -------------------------------------------------------------------------
Distribution services fee 5,722
- -------------------------------------------------------------------------
Administrative services fee 4,003
- -------------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 39,631
- -------------------------------------------------------------------------
Professional fees 11,300
- -------------------------------------------------------------------------
Reports to shareholders 10,000
- -------------------------------------------------------------------------
Trustees' fees and other 6,760
- -------------------------------------------------------------------------
Amortization of organization expenses 3,955
- -------------------------------------------------------------------------
Total expenses before expense waiver 93,379
- -------------------------------------------------------------------------
Less expenses waived and absorbed by investment manager 62,525
- -------------------------------------------------------------------------
Total expenses after expense waiver 30,854
- -------------------------------------------------------------------------
NET INVESTMENT LOSS (8,111)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
- -------------------------------------------------------------------------
Net realized loss on sales of investments (31,921)
- -------------------------------------------------------------------------
Change in net unrealized depreciation on investments (77,694)
- -------------------------------------------------------------------------
Net loss on investments (109,615)
- -------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(117,726)
- -------------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MAY 6, TO
MARCH 31, 1999 SEPTEMBER 30,
(UNAUDITED) 1998
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------
OPERATIONS AND CAPITAL SHARE ACTIVITY
- -------------------------------------------------------------------------------------------------------
Net investment loss $ (8,111) (1,923)
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) (31,921) 885
- -------------------------------------------------------------------------------------------------------
Change in net unrealized depreciation (77,694) (248,492)
- -------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (117,726) (249,530)
- -------------------------------------------------------------------------------------------------------
Net increase from capital share transactions 2,009,711 2,005,715
- -------------------------------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 1,891,985 1,756,185
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------
Beginning of period 1,757,385 1,200
- -------------------------------------------------------------------------------------------------------
END OF PERIOD $3,649,370 1,757,385
- -------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1
DESCRIPTION OF THE
FUND Kemper Small Cap Relative Value Fund (the fund) is
a diversified series of Kemper Securities Trust
(the trust), an open-end management investment
company organized as a business trust under the
laws of Massachusetts. The fund currently offers
three classes of shares. Class A shares are sold to
investors subject to an initial sales charge. Class
B shares are sold without an initial sales charge
but are subject to higher ongoing expenses than
Class A shares and a contingent deferred sales
charge payable upon certain redemptions. Class B
shares automatically convert to Class A shares six
years after issuance. Class C shares are sold
without an initial sales charge but are subject to
higher ongoing expenses than Class A shares and a
contingent deferred sales charge payable upon
certain redemptions within one year of purchase.
Class C shares do not convert into another class.
Differences in class expenses will result in the
payment of different per share income dividends by
class. All shares of the fund have equal rights
with respect to voting, dividends and assets,
subject to class specific preferences.
- --------------------------------------------------------------------------------
2 SIGNIFICANT
ACCOUNTING POLICIES SECURITY VALUATION. Investments are stated at
value. Portfolio securities which are traded on a
U.S. stock exchange are valued at the most recent
sale price reported on the exchange on which the
security is traded most extensively. If no sale
occurred, the security is then valued at the
calculated mean between the most recent bid and
asked quotations. If there are no such bid and
asked quotations, the most recent bid quotation is
used. Securities quoted on the Nasdaq Stock Market
(Nasdaq), for which there have been sales, are
valued at the most recent sale price. If there are
no such sales, the value is the most recent bid
quotation. Securities which are not quoted on the
Nasdaq but are traded in another over-the-counter
market are valued at the most recent sale price on
such market. If no sale occurred, the security is
then valued at the calculated mean between the most
recent bid and asked quotations. If there are no
such bid and asked quotations, the most recent bid
quotation shall be used. All other securities are
valued at their fair market value as determined in
good faith by the Valuation Committee of the Board
of Trustees.
INVESTMENT TRANSACTIONS AND INVESTMENT
INCOME. Investment transactions are accounted for
on the trade date. Dividend income is recorded on
the ex-dividend date, and interest income is
recorded on the accrual basis and includes discount
amortization on all money market instruments.
Realized gains and losses from investment
transactions are reported on an identified cost
basis.
FUND SHARE VALUATION. Fund shares are sold and
redeemed on a continuous basis at net asset value
(plus an initial sales charge on most sales of
Class A shares). Proceeds payable on redemption of
Class B and Class C shares will be reduced by the
amount of any applicable contingent deferred sales
charge. On each day the New York Stock Exchange is
open for trading, the net asset value per share is
determined as of the close of the Exchange. The net
asset value per share is determined separately for
each class by dividing the fund's net assets
attributable to that class by the number of shares
of the class outstanding.
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
16
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
shareholders. Accordingly, the fund paid no federal
income taxes and no federal income tax provision
was required.
DIVIDENDS TO SHAREHOLDERS. The fund declares and
pays dividends of net investment income and net
realized capital gains annually, which are recorded
on the ex-dividend date. Dividends are determined
in accordance with income tax principles which may
treat certain transactions differently from
generally accepted accounting principles.
ORGANIZATIONAL COSTS. Costs incurred by the fund in
connection with its organization and initial
registration of shares have been deferred and are
being amortized on a straight-line basis over a
five-year period.
- --------------------------------------------------------------------------------
3 TRANSACTIONS WITH
AFFILIATES MANAGEMENT AGREEMENT. The fund has a management
agreement with Scudder Kemper Investments, Inc.
(Scudder Kemper) and pays a monthly investment
management fee of 1/12 of the annual rate of .75%
of the first $250 million of average daily net
assets declining to .62% of average daily net
assets in excess of $12.5 billion. However, the
fund incurred a management fee of $8,005 for the
six months ended March 31, 1999, after an expense
waiver by Scudder Kemper. In addition, Scudder
Kemper temporarily agreed to absorb certain
operating expenses of the fund. Under these
arrangements, Scudder Kemper waived and absorbed
expenses of $62,525 for the six months ended March
31, 1999.
UNDERWRITING AND DISTRIBUTION SERVICES
AGREEMENT. The fund has an underwriting and
distribution services agreement with Kemper
Distributors, Inc. (KDI). Underwriting commissions
retained by KDI in connection with the distribution
of Class A shares for the six months ended March
31, 1999 are $2,445.
For services under the distribution services
agreement, the fund pays KDI a fee of .75% of
average daily net assets of the Class B and Class C
shares pursuant to separate Rule 12b-1 plans for
the Class B and Class C shares. Pursuant to the
agreement, KDI enters into related selling group
agreements with various firms at various rates for
sales of Class B and Class C shares. In addition,
KDI receives any contingent deferred sales charges
from redemptions of Class B and Class C shares. The
fund incurred no distribution services fees for the
six months ended March 31, 1999, after an expense
waiver by Scudder Kemper.
ADMINISTRATIVE SERVICES AGREEMENT. The fund has an
administrative services agreement with KDI. For
providing information and administrative services
to shareholders, the fund pays KDI a fee at an
annual rate of up to .25% of average daily net
assets of each class. KDI in turn has various
agreements with financial services firms that
provide these services and pays these firms based
on assets of fund accounts the firms service. The
fund incurred no administrative services fees for
the six months ended March 31, 1999, after an
expense waiver by Scudder Kemper.
SHAREHOLDER SERVICES AGREEMENT. Kemper Service
Company, a subsidiary of Scudder Kemper, is the
transfer, dividend paying and shareholder service
agent for the fund. The fund incurred shareholder
services fees of $2,977 for the six months ended
March 31, 1999.
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation, a subsidiary of Scudder Kemper, is
responsible for determining the daily net asset
value per share and maintaining the portfolio and
general accounting records of the fund.
17
<PAGE> 18
NOTES TO FINANCIAL STATEMENTS
The fund incurred no accounting fees for the six
months ended March 31, 1999 after an expense waiver
by Scudder Kemper.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the fund are also officers or directors of
Scudder Kemper. For the six months ended March 31,
1999, the fund made no payments to its officers and
incurred trustees' fees of $2,069 to independent
trustees, all of which is unpaid.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the six months ended March 31, 1999, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $2,444,236
Proceeds from sales 440,115
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the fund:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 6 TO
MARCH 31, 1999 SEPTEMBER 30, 1998
---------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
SHARES SOLD
------------------------------------------------------------------------------
Class A 186,777 $1,474,572 141,649 $1,224,836
------------------------------------------------------------------------------
Class B 97,609 767,607 84,568 714,490
------------------------------------------------------------------------------
Class C 97,909 767,305 26,291 233,118
------------------------------------------------------------------------------
------------------------------------------------------------------------------
SHARES REDEEMED
------------------------------------------------------------------------------
Class A (88,376) (713,990) (1,004) (8,872)
------------------------------------------------------------------------------
Class B (18,258) (145,510) (5,371) (49,282)
------------------------------------------------------------------------------
Class C (18,155) (140,273) (13,705) (108,575)
------------------------------------------------------------------------------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS $2,009,711 $2,005,715
------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
------------------------------- -------------------------- ----------------------------
CLASS A CLASS B CLASS C
------------------------------- -------------------------- ----------------------------
Six Six Six
months May 6 months May 6 months May 6
ended to ended to ended to
March 31, Sept. 30, March 31, Sept. 30, March 31, Sept. 30,
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------- -------------------------- ----------------------------
PER SHARE OPERATING PERFORMANCE
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Net asset value, beginning of period $7.57 9.50 7.54 9.50 7.55 9.50
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Income from investment operations:
Net investment loss -- -- (.04) (.03) (.04) (.03)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Net realized and unrealized loss (.10) (1.93) (.08) (1.93) (.09) (1.92)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Total from investment operations (.10) (1.93) (.12) (1.96) (.13) (1.95)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Net asset value, end of period $7.47 7.57 7.42 7.54 7.42 7.55
- ---------------------------------------------------------------------- -------------------------- ----------------------------
TOTAL RETURN (NOT ANNUALIZED) (1.32)% (20.32) (1.59) (20.63) (1.72) (20.53)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Expenses 1.51% 1.52 2.38 2.40 2.37 2.37
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Net investment loss (.10)% (.15) (.97) (1.03) (.96) (1.00)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Expenses 5.47% 12.36 6.58 16.91 5.52 12.43
- ---------------------------------------------------------------------- -------------------------- ----------------------------
Net investment loss (4.06)% (10.99) (5.17) (15.54) (4.11) (11.06)
- ---------------------------------------------------------------------- -------------------------- ----------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MAY 6
MARCH 31, TO SEPT. 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net assets at end of period $3,649,370 1,757,385
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 14% 7
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Data for
the six months ended March 31, 1999 is unaudited. Scudder Kemper Investments,
Inc. has agreed to temporarily waive its management fee and absorb certain
operating expenses of the fund. The other ratios to average net assets are
computed without this expense waiver or absorption. Per share data were
determined based on average shares outstanding.
19
<PAGE> 20
SHAREHOLDERS' MEETING
SPECIAL SHAREHOLDERS' MEETING
On December 17, 1998, a special shareholders' meeting was held. Kemper Small Cap
Relative Value Fund shareholders were asked to vote on two separate issues:
approval of the new Investment Management Agreement between the fund and Scudder
Kemper Investments, Inc., and to modify or eliminate certain policies and to
eliminate the shareholder approval requirement as to certain other matters. The
following are the results.
1) Approval of the new Investment Management Agreement between the fund and
Scudder Kemper Investments, Inc. This item was approved.
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C>
149,758 0 5,648
</TABLE>
2) To modify or eliminate certain policies and to eliminate the shareholder
approval requirements as to certain other matters. These items were approved.
Diversification
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Borrowing
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,241 2,430 7,526 34,208
</TABLE>
Senior securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Concentration
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Underwriting of securities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Investment in real estate
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Purchase of commodities
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Lending
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Margin purchases and short sales
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,354 2,317 7,526 34,208
</TABLE>
Pledging of assets
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Votes
<S> <C> <C> <C>
111,241 2,430 7,526 34,208
</TABLE>
20
<PAGE> 21
NOTES
21
<PAGE> 22
NOTES
22
<PAGE> 23
NOTES
23
<PAGE> 24
TRUSTEES&OFFICERS
<TABLE>
<S> <C> <C>
TRUSTEES OFFICERS
JAMES E. AKINS MARK S. CASADY ANN M. MCCREARY
Trustee President Vice President
ARTHUR R. GOTTSCHALK PHILIP J. COLLORA CORNELIA SMALL
Trustee Vice President and Vice President
Secretary
FREDERICK T. KELSEY LINDA J. WONDRACK
Trustee JOHN R. HEBBLE Vice President
Treasurer
KATHRYN L. QUIRK MAUREEN E. KANE
Trustee and LORI J. ENSINGER Assistant Secretary
Vice President Vice President
CAROLINE PEARSON
FRED B. RENWICK JAMES M. EYSENBACH Assistant Secretary
Trustee Vice President
ELIZABETH C. WERTH
JOHN G. WEITHERS THOMAS W. LITTAUER Assistant Secretary
Trustee Vice President
BRENDA LYONS
Assistant Treasurer
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------
LEGAL COUNSEL VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 North LaSalle Street
Chicago, IL 60601
- ----------------------------------------------------------------------------------------------
TRANSFER AGENT AND KEMPER SERVICE COMPANY
SHAREHOLDER SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- ----------------------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street
Boston, MA 02109
- ----------------------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
</TABLE>
KEMPER FUNDS LOGO
Long-term investing in a short-term world(SM)
Printed on recycled paper in the U.S.A.
This report is not to be distributed
unless preceded or accompanied by a
Kemper Equity Style/Value Style prospectus.
KSRVF - 3 (5/27/99) 1074080
