<PAGE> 1
SEMIANNUAL REPORT TO
SHAREHOLDERS FOR THE PERIOD
ENDED MAY 31, 1998
LONG-TERM INVESTING IN A SHORT-TERM WORLD(SM)
SEEKS LONG-TERM CAPITAL APPRECIATION
KEMPER-DREMAN
FINANCIAL SERVICES FUND
"...If the sector cools off momentarily,
that should give us a chance to
be more aggressive and really add
potential value to the portfolio..."
[KEMPER FUNDS LOGO]
<PAGE> 2
CONTENTS
3
ECONOMIC OVERVIEW
5
PERFORMANCE UPDATE
7
INDUSTRY SECTORS
8
LARGEST HOLDINGS
9
PORTFOLIO OF
INVESTMENTS
11
FINANCIAL STATEMENTS
13
NOTES TO
FINANCIAL STATEMENTS
16
FINANCIAL HIGHLIGHTS
AT A GLANCE
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL SERVICES
FUND TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD STARTED MARCH 9, 1998 THROUGH MAY 31, 1998 (UNADJUSTED FOR ANY
SALES CHARGE)
[BAR GRAPH]
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CLASS A 2.84%
CLASS B 2.53%
CLASS C 2.74%
LIPPER FINANCIAL SERVICES
FUNDS CATEGORY AVERAGE* 4.72%
- --------------------------------------------------------------------------------
</TABLE>
Returns are historical and do not guarantee future performance. Returns and net
asset value fluctuate. Shares are redeemable at current net asset value, which
may be more or less than original cost.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF AS OF
5/31/98 3/9/98+
- --------------------------------------------------------------------------------
<S> <C> <C>
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS A $9.77 $9.50
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS B $9.74 $9.50
- --------------------------------------------------------------------------------
KEMPER-DREMAN FINANCIAL
SERVICES FUND CLASS C $9.76 $9.50
- --------------------------------------------------------------------------------
</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 and, if they had, results may have been less favorable. The Lipper
Financial Services Funds Category Average is based on a three month period from
March 1, 1998 through May 31, 1998.
+The fund commenced operations on March 9, 1998.
TERMS TO KNOW
PRICE/EARNINGS MULTIPLE A company's stock price divided by its earnings for the
past four quarters, also referred to as its P/E.
TOTAL RETURN A fund's total return measures both the net investment income and
any realized and unrealized appreciation or depreciation of the underlying
investments in its portfolio for the period. Total return calculations assume
that dividends are reinvested. Total return represents the aggregate percentage
or dollar value change over the period.
VALUE INVESTING An investment strategy that seeks to identify strongly financed,
growing companies whose stocks sell at low multiples of earnings (P/Es). This
strategy is also described as contrarian because such stocks are typically out
of favor.
<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. HE IS ALSO A MEMBER OF THE INVESTMENT POLICY AND STRATEGY COMMITTEE
FOR KEMPER FUNDS.
SILVIA HOLDS BACHELOR OF ARTS AND PH.D. DEGREES IN ECONOMICS FROM NORTHEASTERN
UNIVERSITY IN BOSTON AND HAS A MASTER'S DEGREE IN ECONOMICS FROM BROWN
UNIVERSITY IN PROVIDENCE, R.I. PRIOR TO HIS CAREER AT SCUDDER KEMPER, HE WAS
WITH THE HARRIS BANK AND ALSO TAUGHT AT INDIANA UNIVERSITY.
SCUDDER KEMPER INVESTMENTS, INC. IS THE INVESTMENT MANAGER FOR KEMPER FUNDS. IT
IS ONE OF THE LARGEST AND MOST EXPERIENCED INVESTMENT MANAGEMENT ORGANIZATIONS
WORLDWIDE, MANAGING MORE THAN $218 BILLION IN ASSETS GLOBALLY FOR MUTUAL FUND
INVESTORS, RETIREMENT AND PENSION PLANS, INSTITUTIONAL AND CORPORATE CLIENTS,
INSURANCE COMPANIES AND PRIVATE, FAMILY AND INDIVIDUAL ACCOUNTS. IT IS ONE OF
THE 10 LARGEST MUTUAL FUND COMPLEXES IN THE UNITED STATES.
DEAR SHAREHOLDERS,
Stable economic growth, low interest rates and sustained low inflation continued
to produce a beneficial market environment for investors in the second quarter
of 1998. Despite heightened sensitivity to earnings estimates and announcements,
the economy continued to support financial assets. We expect this favorable
climate to continue -- in spite of the sensitivity -- at least over the shorter
term.
As always, expectations have been at the heart of the actions and reactions
that move the markets. Expectations appear to be high, as demonstrated by a
record flow of new cash into mutual funds. As of April 30, 1998, a record $5
trillion in mutual fund assets surpassed total assets of the nation's banks,
according to the Investment Company Institute, a trade organization that
monitors the mutual fund industry, and the Federal Reserve Bank in Washington.
Unfortunately, high expectations often combine with high anxiety -- today's
investors are attuned to even the smallest hint of economic change. The result
is volatility. Many who believe that our long-running bull market is too good to
be true or that stock prices are too high are wondering when the market will
reverse.
While a reversal may not be on the immediate horizon, investors are wise to
watch for several signs that change is underway: rising prices, indicating
higher inflation; repercussions of the Asian economic crisis on American
business, which could appear in the form of reduced earnings; and a continued
widening of our trade deficit, a serious imbalance caused by heightened American
demand for foreign goods and services.
But at its monetary policy meeting at the end of the second quarter, the
Federal Reserve Board (the Fed) again chose to leave interest rates alone. In
the coming months, the Fed could raise interest rates if inflation accelerates
or if growth appears to be too rapid compared to the Fed's expectations.
Our positive outlook for the short term is based primarily on the current
resiliency of our marketplace. The United States appears to be firmly planted in
the middle of an economic cycle, with no evidence of detrimental pressures that
might be associated with the market's phenomenal growth. We are not seeing
widespread price increases for goods and services or a downturn in the housing
market, both of which we might expect late in an economic cycle.
Equities have continued to reward investors. The U.S. stock market, as
measured by the Standard & Poor's 500, gained nearly 18 percent in the first
half of 1998 but just 3.5 percent in the second quarter as profit concerns moved
front and center. Bonds in 1998 have also rewarded investors in terms of real
return, which is total return less the rate of inflation. The Treasury and high
yield debt markets have performed particularly well.
U.S. economic growth, as measured by the gross domestic product (GDP) growth
rate, was slightly above 5 percent for the first quarter. Our general
expectation for the year is that growth in all of 1998 will increase between 2.5
and 3 percent over last year. In other words, the economy will remain strong,
but will continue to slow down as the year progresses.
Consumer spending and corporate fixed investment have fueled the economy's
solid growth. Spending on both capital goods and high technology has been
strong. Corporate profit growth has continued to slow, which appears to be
acceptable to investors in an environment of stable interest rates. U.S.
employment growth has ranged from 2 to 2.25 percent, continuing to exceed
expectations. Consumer confidence has remained at all-time highs. The increase
in output prices, an indicator of inflation measured by the Consumer Price Index
(CPI), has stayed at 1.5 to 2 percent.
Adding to the good news, all seems to be quiet on the domestic policy front.
At the end of February, the U.S. federal budget deficit essentially vanished.
Recent efforts to reduce the deficit, combined with higher federal revenues due
to the robust economy, have left us with an expected budget surplus of $60
billion to $80 billion for fiscal 1998. To date, our Democratic president and
Republican Congress have not agreed on any significant legislation regarding tax
credits, spending cuts or health care that could threaten the newfound federal
budget surplus.
Can we expect a little more excitement from overseas? A full-scale global
recession from last year's Asian economic crisis seems unlikely at this point.
Although the crisis has impacted exporters in particular, it has yet to hurt
most U.S. businesses and investors. Quite the
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]
<TABLE>
<CAPTION>
NOW (6/30/98) 6 MONTHS AGO 1 YEAR AGO 2 YEARS AGO
<S> <C> <C> <S> <C>
10-YEAR TREASURY RATE(1) 5.5 5.54 6.22 6.87
PRIME RATE(2) 8.5 8.5 8.5 8.25
INFLATION RATE(3)* 1.75 1.7 2.3 2.82
THE U.S. DOLLAR(4) 9.54 9.32 7.32 8.35
CAPITAL GOODS ORDERS(5)* 10.51 14.37 8.58 2.44
INDUSTRIAL PRODUCTION(5)* 4.42 5.74 3.91 3.99
EMPLOYMENT GROWTH(6) 2.62 2.88 2.56 2.23
</TABLE>
(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 May 31, 1998.
contrary. While the mere threat of repercussions from the Asian crisis added to
the anxiety mentioned earlier, it has also had the effect of keeping U.S.
interest rates and prices in check, making the U.S. economy all the more
attractive to investors around the world.
In the global economy, the U.S. dollar continues to appreciate in value
compared to other currencies. In fact, more capital is flowing into U.S.
markets as investors generally avoid Asia. Europe also has been benefiting from
the crisis. Canada, which is a commodity-producing exporter, has been somewhat
negatively affected as commodity prices have fallen. Political unrest in
Indonesia, nuclear tests in India and Pakistan and economic turmoil in Russia
have been keeping international investors on the edges of their seats.
Other major developments abroad include the final selection of
countries to participate in Europe's single currency next year. Many European
countries are adopting more restrictive fiscal policy and reducing inflation in
anticipation of their momentous entry into the European Economic and Monetary
Union (EMU). But after the EMU is established in 1999, tensions may indeed
mount as countries work to adapt to the new structure.
As we approach the turn of the century, one caveat remains: Don't
underestimate the potential of the Year 2000 computer code problem. It appears
that a significant number of federal government agencies will not meet the
criteria necessary to avoid the problem. Many businesses are revealing that
billions of dollars are being spent on the situation. Some experts say a global
recession is in store. Others adamantly disagree. In any event, we may indeed
see a reduction in capital spending toward the of 1998 and the first half of
next year as companies focus on fixing existing computers rather than on
purchasing new equipment. We'll keep you posted!
Thank you for your continued support. We appreciate the opportunity to
serve your investment needs.
Sincerely,
/s/ John E. Silvia
JOHN E. SILVIA
July 10, 1998
4
<PAGE> 5
PERFORMANCE UPDATE
[DREMAN PHOTO]
DAVID N. DREMAN IS CHAIRMAN OF DREMAN VALUE MANAGEMENT, L.L.C., INC. AND
PORTFOLIO MANAGER OF KEMPER-DREMAN FINANCIAL SERVICES FUND. HE HAS MORE THAN
30 YEARS OF EXPERIENCE AS AN INVESTMENT ANALYST, ADVISOR AND MANAGER.
DREMAN HOLDS A BACHELOR OF COMMERCE DEGREE FROM THE UNIVERSITY OF MANITOBA,
WINNIPEG, MANITOBA, CANADA. DREMAN IS ALSO THE AUTHOR OF SEVERAL BOOKS ON
CONTRARIAN INVESTING AND IS A REGULAR COLUMNIST IN FORBES.
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.
IN THE FUND'S INITIAL SHAREHOLDER REPORT, PORTFOLIO MANAGER DAVID DREMAN
DISCUSSES THE FINANCIAL SERVICES SECTOR, AND HOW HE PLANS TO USE HIS CONTRARIAN
STRATEGY TO UNCOVER PARTICULARLY GOOD VALUES.
Q SINCE THE FUND OPENED ON MARCH 9, WHAT'S BEEN HAPPENING IN THE FINANCIAL
SERVICES SECTOR?
A Well, as you may know, the financial services sector was one of the best
performing areas of the stock market over the last year as measured by the S&P
Financial Index. Primarily, merger activity among banks and insurance companies
has fueled the advance. In March and April of this year, the sector continued to
outpace the market, but it took a breather in May as investors became more
concerned about the prospect of higher interest rates. However, such a short
time period really doesn't give one the proper sense of the potential inherent
in the sector. A lot of these stocks still offer investors significant value,
and we're looking for the ones that may provide good upside potential, but
relatively little downside risk.
Q HOW HAS THE SECTOR'S STRONG PERFORMANCE AFFECTED THE FUND?
A Actually, it's ironic that the sector's advance has forced us to buy when
the market is rising, which we'd rather not do. We're more value-conscious
contrarian investors, and we prefer to be opportunistic and look for stocks that
have been beaten down for short-term reasons. Unfortunately, there haven't been
too many unloved financial stocks available to buy during the first few months
of the fund's operation. However, we're just about through "Round 1," when our
main objective was to position the portfolio. We've bought a lot of attractive
stocks, and if the sector cools off a little, that should give us a chance to be
more aggressive and really add potential value to the portfolio.
Q HAVE YOU CONCENTRATED PURCHASES IN ANY SPECIFIC AREAS?
A Yes, we've been emphasizing regional banks, which we believe will be the
primary beneficiaries as the banking industry continues to consolidate. There
has been a lot of press lately about huge mega-mergers like BankAmerica and
NationsBank, but we really don't see a lot of upside in such mergers. They may
be able to gain some economies of scale, but they don't gain products or
services. We like the regionals because their mergers tend to be more symbiotic
- -- for example, each bank may be able to quickly gain services or outlets that
they previously lacked. So their mergers provide more long-lasting return
potential.
We've also been looking at a few smaller insurance companies with good
track records. They tend to be a little harder to buy, but we're slowly
establishing meaningful positions in the ones we like.
Q YOU MENTIONED THAT THE FINANCIAL SERVICES SECTOR WAS ONE OF THE BEST
PERFORMING AREAS OF THE MARKET LAST YEAR. IN FACT, IT HAS BEEN ONE OF THE BEST
PERFORMING OF THE '90S. AS A VALUE-CONSCIOUS INVESTOR, DO YOU BELIEVE THE SECTOR
STILL CONTAINS A LOT OF OVERLOOKED VALUE?
A Most definitely. Even though the sector has undeniably en-
5
<PAGE> 6
PERFORMANCE UPDATE
joyed a strong run, the reasons for its performance have evolved. During the
first half of the 90's, these companies were coming off the bottom. If you
recall, in 1990 the country was in a recession, real estate was getting hammered
and there was serious talk of huge banks like Citicorp and Chase Manhattan
actually going out of business. Many banking and insurance stocks were available
at dirt cheap prices. As the economy improved, these stocks outpaced the market
by a wide margin.
Now mergers and acquisitions are fueling the sector. There are several
thousand banks in the United States today, compared to only a few dozen in
Canada, for example. There is a lot of room for consolidation, and there may be
substantial gains to be realized by the mergers that make sense. And not just in
banking, but in brokerages, insurance companies and financial asset managers. So
we think there's a lot of opportunity, especially for value-conscious investors
like us who want to buy near the bottom and wring every last drop of value from
these companies.
Q WHY DO YOU THINK THE FINANCIAL SERVICES SECTOR IS A GOOD MATCH FOR YOUR
VALUE APPROACH?
A The financial services sector offers many of the characteristics that
attract value managers. First you have firms whose stock prices are low relative
to their earnings -- so-called "low P/E" stocks. Many of these stocks' P/Es are
substantially cheaper than the market. That's the first ingredient: INHERENT
VALUE. Then you have financially solid companies that are well run and have good
track records, so you have the second ingredient: WELL-FINANCED, ESTABLISHED
FIRMS. And finally, you have a sector that has historically been relatively
volatile. The situation in the early '90s was an extreme case, but there have
been other times when even slight concerns about the economy have caused these
stocks to move significantly in price. So you have the third ingredient:
OPPORTUNITY.
In our case, we look to find companies that are out of favor with
investors for short-term reasons. What happened in May was a good example, when
fears of higher interest rates prompted a sell-off among banking stocks. Modest
changes in interest rates don't tend to have a negative effect on these
stocks. That's more perception than reality. So the moderate correction
actually helped us because it gave us better opportunities to buy.
Q WHAT'S YOUR OUTLOOK FOR THE SECTOR IN THE COMING MONTHS?
A We'll probably see more volatility rather than less in coming months. The
weakness in the Japanese yen may prompt an additional round of currency
devaluations in Asia, and perhaps spook the U.S. market again. We're
underweighting big money center banks for that reason. But again, volatility
will simply mean more chances for us to buy stocks that have been unfairly
tarred with the same brush. For example, many of the banks we own are domestic
firms that don't do business internationally. So if they go down in sympathy
with bigger banks, we have a chance to snap them up at low prices.
Overall, we intend to apply our strict valuation criteria and look for
those financial services companies that offer the best opportunity for limited
downside but very strong upside.
6
<PAGE> 7
INDUSTRY SECTORS
KEMPER-DREMAN FINANCIAL SERVICES FUND'S SECTOR COMPOSITION*
Data shows the percentage of the common stocks in the portfolio that each sector
represented on May 31, 1998.
[EQUITY PORTION BAR GRAPH]
<TABLE>
<S> <C>
BANKS/MONEY CENTER 27.7%
BANKS/MAJOR REGIONALS 27.1%
FINANCIAL DIVERSIFIED 14.2%
MULTI-LINE INSURANCE 11.0%
PROPERY-CASUALTY INSURANCE 9.1%
INVESTMENT BANKING/BROKERAGE 3.1%
SAVINGS AND LOANS 1.8%
LIFE/HEALTH INSURANCE 1.6%
OTHER 1.4%
CONSUMER FINANCE 1.3%
INSURANCE BROKERS 1.0%
INVESTMENT MANAGEMENT .7%
</TABLE>
*Portfolio composition and holdings are subject to change.
7
<PAGE> 8
LARGEST HOLDINGS
THE FUND'S 10 LARGEST COMMON STOCK HOLDINGS*
Representing 47.6 percent of the fund's total net assets on May 31, 1998
<TABLE>
<CAPTION>
HOLDINGS PERCENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. AMERICAN INTERNATIONAL GROUP The leading U.S.-based international insurance 6.9%
organization and among the largest underwriters of
commercial and industrial coverages in the U.S.
- --------------------------------------------------------------------------------------------------------
2. FEDERAL NATIONAL Often referred to as "Fannie Mae", this is a private 6.7%
MORTGAGE ASSOCIATION corporation federally chartered to provide financial
products and services that increase the availability
and affordability of housing to low, moderate and
middle-income Americans.
- --------------------------------------------------------------------------------------------------------
3. NATIONSBANK Provides financial services in nine states and the 6.0%
District of Columbia.
- --------------------------------------------------------------------------------------------------------
4. FIRST UNION Engaged in commercial, investment and mortgage 5.8%
banking.
- --------------------------------------------------------------------------------------------------------
5. FIRST CHICAGO A multi-bank holding company engaged in consumer 5.2%
NBD banking, commercial banking, trust and investment
services, investment management, real estate
operations, lease financing, and international
banking.
- --------------------------------------------------------------------------------------------------------
6. FEDERAL HOME Often referred to as "Freddie Mac", this corporation 3.8%
LOAN MORTGAGE CORP. provides for the transfer of capital between mortgage
lenders and mortgage security investors, enabling
mortgage lenders to provide a continuous flow of funds
to borrowers.
- --------------------------------------------------------------------------------------------------------
7. AMERICAN EXPRESS A leader in charge and credit cards, investment 3.6%
products, insurance and international banking.
- --------------------------------------------------------------------------------------------------------
8. CITICORP A worldwide bank holding company which provides a 3.4%
broad array of financial services.
- --------------------------------------------------------------------------------------------------------
9. PNC BANK One of the largest banking organizations in the U.S. 3.2%
It operates community banking offices across the
eastern United States and mortgage origination offices
in 30 states.
- --------------------------------------------------------------------------------------------------------
10. KEYCORP Engaged in commercial banking operations and related 3.0%
financial activities.
- --------------------------------------------------------------------------------------------------------
</TABLE>
*The fund's holdings are subject to change.
8
<PAGE> 9
PORTFOLIO OF INVESTMENTS
KEMPER-DREMAN FINANCIAL SERVICES FUND
PORTFOLIO OF INVESTMENTS AT MAY 31, 1998 (unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT ($)/
(a)REPURCHASE AGREEMENTS--.9% SHARES VALUE ($)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
State Street Bank and Trust Company
dated 5/29/98, 5.55%, due 6/1/98
(Cost $1,594) 1,594 1,594
----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS--99.1%
- ------------------------------------------------------------------------------------------------------------------------------
BANKS--55.7% Banc One Corp. 34,000 1,874
BankAmerica Corp. 58,500 4,837
BankBoston Corp. 8,200 864
Bankers Trust New York Corp. 11,100 1,371
Bank Rhode Island 12,500 203
Chase Manhattan Corp. 32,500 4,418
Citicorp 39,300 5,861
Corus Bankshares, Inc. 39,600 1,668
Firstar Corp. 30,700 1,126
First Chicago NBD Corp. 102,500 8,962
First Citizens BancShares, Inc. "A" 2,500 265
First Hawaiian, Inc. 58,500 2,201
First Union Corp. 181,798 10,056
Fleet Financial Group Inc. 54,900 4,502
H.F. Ahmanson & Co. 11,500 877
J.P. Morgan & Co., Inc. 18,300 2,273
KeyCorp 136,700 5,186
Mellon Bank Corp. 33,500 2,259
National Bank of Canada 86,000 1,753
NationsBank Corp. 137,400 10,408
North Fork Bancorporation, Inc. 12,495 301
Norwest Corp. 104,100 4,047
PNC Bank Corp. 93,600 5,405
People's Heritage Financial Group, Inc. 38,100 857
Popular, Inc. 29,900 2,074
Provident Financial Group 5,500 282
Republic New York Corp. 19,700 2,530
Summit Bancorp. 35,600 1,785
SunTrust Banks, Inc. 40,200 3,176
Valley National Bank 5,000 156
Washington Federal, Inc. 32,000 890
Washington Mutual, Inc. 12,000 848
Wells Fargo & Co. 8,500 3,072
----------------------------------------------------------------------------------
96,387
BUSINESS FINANCE--.1% Heller Financial Inc. 6,300 176
----------------------------------------------------------------------------------
CONSUMER FINANCE--4.6% American Express Company 60,800 6,240
Associates First Capital Corp. 1,500 112
SLM Holding Corp. 41,400 1,653
----------------------------------------------------------------------------------
8,005
</TABLE>
9
<PAGE> 10
PORTFOLIO OF INVESTMENTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SHARES VALUE ($)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INSURANCE--20.6% Allstate Corp. 53,500 5,036
American International Group, Inc. 95,700 11,849
Chubb Corp. 21,800 1,734
Cigna Corp. 26,300 1,802
General Re Corp. 12,100 2,660
Jefferson-Pilot Corp. 12,350 707
Lincoln National Corp. 14,900 1,339
Marsh & McLennan Companies, Inc. 19,900 1,742
Ohio Casualty Corp. 59,300 2,891
Safeco Corp. 20,100 935
St. Paul Companies, Inc. 63,200 2,805
Torchmark Corp. 22,700 973
Transamerica Corp. 9,200 1,058
----------------------------------------------------------------------------------
35,531
SERVICE INDUSTRIES--3.8% Lehman Brothers Holdings, Inc. 9,900 702
Merrill Lynch & Co., Inc. 46,300 4,144
Raymond James Financial, Inc. 15,350 465
T. Rowe Price & Associates, Inc. 36,100 1,279
----------------------------------------------------------------------------------
6,590
OTHER FINANCIAL
COMPANIES--14.3% Federal Home Loan Mortgage Corp. 145,500 6,620
Federal National Mortgage Association 192,000 11,496
Golden West Financial Corp. 7,900 853
Household International, Inc. 12,700 1,719
Travelers Group, Inc. 66,900 4,081
----------------------------------------------------------------------------------
24,769
----------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $175,438) 171,458
----------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO--100%
(Cost $177,032) 173,052
----------------------------------------------------------------------------------
</TABLE>
------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
------------------------------------------------------------------------------
(a) Repurchase agreements are fully collateralized by U.S. Treasury or
Government agency securities. The collateral is monitored daily by the Fund so
that its market value exceeds the carrying value of the repurchase agreement.
Based on the cost of investments of $177,032,000 for federal income tax purposes
at May 31, 1998, the gross unrealized appreciation was $1,043,000, the gross
unrealized depreciation was $5,023,000 and the net unrealized depreciation on
investments was $3,980,000.
See accompanying Notes to Financial Statements.
10
<PAGE> 11
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1998 (unaudited)
(IN THOUSANDS)
<TABLE>
<S> <C>
- ------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------
Investments, at value
(Cost: $177,032) $173,052
- ------------------------------------------------------------------------
Deferred organization expense 11
- ------------------------------------------------------------------------
Receivable for:
Fund shares sold 3,808
- ------------------------------------------------------------------------
Dividends and interest 204
- ------------------------------------------------------------------------
TOTAL ASSETS 177,075
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
LIABILITIES AND NET ASSETS
- ------------------------------------------------------------------------
Payable for:
Investments purchased 4,187
- ------------------------------------------------------------------------
Fund shares redeemed 78
- ------------------------------------------------------------------------
Distribution services fee 78
- ------------------------------------------------------------------------
Administrative services fee 14
- ------------------------------------------------------------------------
Other payables and accrued expenses 255
- ------------------------------------------------------------------------
Total liabilities 4,612
- ------------------------------------------------------------------------
NET ASSETS $172,463
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
- ------------------------------------------------------------------------
Paid-in capital $176,213
- ------------------------------------------------------------------------
Undistributed net realized gain on investments 253
- ------------------------------------------------------------------------
Net unrealized depreciation on investments (3,980)
- ------------------------------------------------------------------------
Accumulated net investment loss (23)
- ------------------------------------------------------------------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING $172,463
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
THE PRICING OF SHARES
- ------------------------------------------------------------------------
CLASS A SHARES
Net asset value and redemption price per share
($87,325 / 8,939 shares outstanding) $9.77
- ------------------------------------------------------------------------
Maximum offering price per share
(net asset value, plus 6.10% of
net asset value or 5.75% of offering price) $10.37
- ------------------------------------------------------------------------
CLASS B SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($74,543 / 7,652 shares outstanding) $9.74
- ------------------------------------------------------------------------
CLASS C SHARES
Net asset value and redemption price
(subject to contingent deferred sales charge) per share
($10,595 / 1,086 shares outstanding) $9.76
- ------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 12
FINANCIAL STATEMENTS
FOR THE PERIOD FROM MARCH 9, 1998 (commencement of operations) TO MAY 31,
1998 (unaudited)
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------
INVESTMENT INCOME
- -----------------------------------------------------------------------
Dividends $ 362
- -----------------------------------------------------------------------
Interest 31
- -----------------------------------------------------------------------
Total investment income 393
- -----------------------------------------------------------------------
Expenses:
Management fee 175
- -----------------------------------------------------------------------
Distribution services fee 85
- -----------------------------------------------------------------------
Administrative services fee 58
- -----------------------------------------------------------------------
Custodian, accounting and transfer agent fees and related
expenses 208
- -----------------------------------------------------------------------
Reports to shareholders 5
- -----------------------------------------------------------------------
Professional fees 9
- -----------------------------------------------------------------------
Registration fees 33
- -----------------------------------------------------------------------
Amortization of organizational expense 1
- -----------------------------------------------------------------------
Other 2
- -----------------------------------------------------------------------
Total expenses before expense waiver 576
- -----------------------------------------------------------------------
Less expenses waived and absorbed by investment manager 160
- -----------------------------------------------------------------------
Total expenses after expense waiver 416
- -----------------------------------------------------------------------
NET INVESTMENT LOSS (23)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -----------------------------------------------------------------------
Net realized gain on sales of investments 253
- -----------------------------------------------------------------------
Change in net unrealized depreciation of investments (3,980)
- -----------------------------------------------------------------------
Net loss on investments (3,727)
- -----------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(3,750)
- -----------------------------------------------------------------------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------
OPERATIONS AND CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------
Net investment loss $ (23)
- --------------------------------------------------------------------------------
Net realized gain 253
- --------------------------------------------------------------------------------
Change in net unrealized depreciation (3,980)
- --------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (3,750)
- --------------------------------------------------------------------------------
Net increase from capital share transactions 176,113
- --------------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS 172,363
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------
NET ASSETS
- --------------------------------------------------------------------------------
Beginning of period 100
- --------------------------------------------------------------------------------
END OF PERIOD $172,463
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 DESCRIPTION OF
THE FUND Kemper-Dreman Financial Services Fund (the Fund) is
a diversified series of Kemper Equity Trust (the
Trust), an open-end management investment company
organized as a business trust under the laws of
Massachusetts. The Fund commenced operations on
March 9, 1998. 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. Portfolio securities which are
traded on U.S. or foreign stock exchanges 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
reported on Nasdaq. If there are no such sales, the
value is the most recent bid quotation. Securities
which are not quoted on 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.
Portfolio debt securities other than money market
securities with an original maturity over sixty
days are valued by pricing agents approved by the
officers of the Fund, which quotations reflect
broker/dealer-supplied valuations and electronic
data processing techniques. If the pricing agents
are unable to provide such quotations, the most
recent bid quotation supplied by a bona fide market
maker shall be used. Money market instruments
purchased with an original maturity of sixty days
or less are valued at amortized cost. 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. 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
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
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 has complied with
the special provisions of the Internal Revenue Code
available to investment companies for the period
ended May 31, 1998.
DIVIDENDS TO SHAREHOLDERS. The Fund declares and
pays dividends of net investment income
semi-annually 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 MANAGEMENT AGREEMENT. The Fund has a management
AFFILIATES agreement with Scudder Kemper Investments, Inc.
(the Adviser) and pays a management fee at an
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. The Fund incurred a management fee of
$66,000 for the period ended May 31, 1998, after a
expense waiver by the Adviser. In addition, the
Adviser has temporarily agreed to absorb certain
operating expenses of the Fund. Under these
arrangements, the Adviser waived and absorbed
expenses of $160,000 for the period ended May 31,
1998. Dreman Value Management, L.L.C. serves as
sub-adviser with respect to the investment and
reinvestment of assets in the Fund, and is paid by
the Adviser for its services.
UNDERWRITING AND DISTRIBUTION SERVICES AGREEMENT.
The Fund has an underwriting and distribution
services agreement with Kemper Distributors, Inc.
(KDI) a subsidiary of the Adviser. Underwriting
commissions paid in connection with the
distribution of Class A shares are as follows:
<TABLE>
<CAPTION>
COMMISSIONS
RETAINED BY COMMISSIONS ALLOWED BY
KDI KDI TO FIRMS
----------- ---------------------------
<S> <C> <C>
Period ended May 31, 1998 $3,000 825,000
</TABLE>
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 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 (CDSC) from redemptions of
Class B and Class C shares. Distribution fees, CDSC
and commissions related to Class B and Class C
shares are as follows:
<TABLE>
<CAPTION>
DISTRIBUTION FEES AND CDSC COMMISSIONS AND
RECEIVED (AFTER EXPENSE DISTRIBUTION FEES PAID
WAIVER) BY KDI BY KDI TO FIRMS
-------------------------- ----------------------
<S> <C> <C>
Period ended May 31, 1998 $106,000 2,902,000
</TABLE>
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
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
assets of Fund accounts the firms service.
Administrative services fees (ASF) paid are as
follows:
<TABLE>
<CAPTION>
ASF PAID BY
THE FUND TO KDI ASF PAID BY
(AFTER EXPENSE WAIVER) KDI TO FIRMS
---------------------- ------------
<S> <C> <C>
Period ended May 31, 1998 $ 14,000 213,000
</TABLE>
TRANSFER AGENT/SHAREHOLDER SERVICES AGREEMENT.
Kemper Service Company, a subsidiary of the
Adviser, is the transfer, dividend paying and
shareholder service agent for the Fund. The Fund
incurred transfer agent fees of $61,000 for the
period ended May 31, 1998, all of which is unpaid.
FUND ACCOUNTING AGENT. Scudder Fund Accounting
Corporation, a subsidiary of the Adviser, is
responsible for determining the daily net asset
value per share and maintaining the portfolio and
general accounting records of the Fund. The Fund
incurred accounting fees of $22,000 for the period
ended May 31, 1998, all of which is unpaid.
OFFICERS AND TRUSTEES. Certain officers or trustees
of the Fund are also officers or directors of the
Adviser. For the period ended May 31, 1998, the
Fund made no payments to its officers or trustees.
- --------------------------------------------------------------------------------
4 INVESTMENT
TRANSACTIONS For the period ended May 31, 1998, investment
transactions (excluding short-term instruments) are
as follows:
Purchases $175,975
Proceeds from sales 791
- --------------------------------------------------------------------------------
5 CAPITAL SHARE
TRANSACTIONS The following table summarizes the activity in
capital shares of the Fund (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
MAY 31, 1998
------------
SHARES AMOUNT
<S> <C> <C>
---------------------------------------------------------------------------
SHARES SOLD
---------------------------------------------------------------------------
Class A 9,124 $ 90,987
---------------------------------------------------------------------------
Class B 7,812 77,823
---------------------------------------------------------------------------
Class C 1,101 11,015
---------------------------------------------------------------------------
SHARES REDEEMED
---------------------------------------------------------------------------
Class A (188) (1,884)
---------------------------------------------------------------------------
Class B (164) (1,635)
---------------------------------------------------------------------------
Class C (19) (193)
---------------------------------------------------------------------------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS $176,113
---------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
FOR THE PERIOD FROM MARCH 9, 1998 (COMMENCEMENT OF OPERATIONS) TO MAY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $9.50 9.50 9.50
- ----------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income (loss) -- (.01) (.01)
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain .27 .25 .27
- ----------------------------------------------------------------------------------------------------------
Total from investment operations .27 .24 .26
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.77 9.74 9.76
- ----------------------------------------------------------------------------------------------------------
TOTAL RETURN (NOT ANNUALIZED) 2.84 2.53 2.74
- ----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
Expenses absorbed by the Fund 1.36% 2.24 2.21
- ----------------------------------------------------------------------------------------------------------
Net investment income (loss) .33% (.55) (.52)
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
OTHER RATIOS TO AVERAGE NET ASSETS (ANNUALIZED)
- ----------------------------------------------------------------------------------------------------------
Expenses 2.07% 2.82 3.40
- ----------------------------------------------------------------------------------------------------------
Net investment loss (.38)% (1.13) (1.71)
- ----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA FOR ALL CLASSES
- -----------------------------------------------------------------------------------------------------------------
Net assets at end of period $172,463
- -----------------------------------------------------------------------------------------------------------------
Portfolio turnover rate (annualized) 3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: Total return does not reflect the effect of any sales charges. Scudder
Kemper Investments, Inc. has agreed to temporarily waive a portion of 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.
16
<PAGE> 17
NOTES
17
<PAGE> 18
NOTES
18
<PAGE> 19
NOTES
19
<PAGE> 20
TRUSTEES & OFFICERS
TRUSTESS OFFICERS
DANIEL PIERCE PHILIP J. COLLORA
Chairman and Trustee Vice President and Secretary
JAMES E. AKINS FREDERICK L. GASKIN
Trustee Vice President
MARK S. CASADY JERARD K. HARTMAN
President and Trustee Vice President
ARTHUR R. GOTTSCHALK THOMAS W. LITTAUER
Trustee Vice President
FREDERICK T. KELSEY ANN M. MCCREARY
Trustee Vice President
KATHRYN L. QUIRK LINDA J. WONDRACK
Vice President and Trustee Vice President
FRED B. RENWICK JOHN R. HEBBLE
Trustee Treasurer
JOHN B. TINGLEFF MAUREEN E. KANE
Trustee Assistant Secretary
JOHN G. WEITHERS CAROLINE PEARSON
Trustee Assistant Secretary
ELIZABETH C. WERTH
Assistant Secretary
- --------------------------------------------------------------------------------
LEGAL COUNSEL DECHERT PRICE & RHOADS
Ten Post Office Square South
Boston, MA 02109
- --------------------------------------------------------------------------------
SHAREHOLDER KEMPER SERVICE COMPANY
SERVICE AGENT P.O. Box 419557
Kansas City, MO 64141
- --------------------------------------------------------------------------------
CUSTODIAN STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
PRINCIPAL UNDERWRITER KEMPER DISTRIBUTORS, INC.
222 South Riverside Plaza Chicago, IL 60606
www.kemper.com
- --------------------------------------------------------------------------------
[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 Funds/Value Style prospectus.
KDFSF - 3 (7/98) 1047080
